There is also the big money local governments lose to Wall Street just in fees. A 2013 study found that the city of Los Angeles spends over $200 million annually on big bank fees and management -- more than its budget to maintain its extensive streets and highways.
In a recent press conference, Mayor Javier Gonzalez of Santa Fe raised provocative questions facing all elected officials today. He said:
Right now our bank is Wells Fargo. They serve the City according to our contract. But they also take city revenues, taxpayer dollars, and they use those taxpayer dollars as part of their loan portfolio that goes to places outside of Santa Fe and certainly outside of New Mexico. And when you think of that most basic concept of taxpayer money being used to earn revenues for national banks that have reduced their small business lending by 53%, you have to pause and wonder -- is this the best structure for our community?
Addressing these concerns, Mayor Gonzalez has launched a formal process to study the feasibility of a city-owned bank of Santa Fe. Public banking efforts are also underway in other cities and states.
How to Start a Bank Overnight
Forming a state or municipal public bank need not be slow or expensive. An online bank could be run out of the Treasurer's office and operational in a few months. And the bank could be turning a profit immediately -- without spending the local government's own revenues.
How? The way Wall Street does it with our public deposits and investments: by leveraging. We could reclaim those funds and put them to work for our local economies.
The bank could be capitalized with a bond issue (borrowing from the public), and this capital could be leveraged into a loan portfolio that is about eight times the capital base. The bond issue could be financed with 1/8th of the interest accruing from this portfolio. The remaining 7/8th could be pocketed as profit.
This profit could be earned immediately and without risk, by buying municipal bonds rather than issuing loans. That move could also help municipalities, by guaranteeing that their bond rates remain low in the face of threatened interest rate rises on the private market.
How to Start a Bank at Virtually No Cost or Risk
To demonstrate the safety and viability of the model, the bank can start small and build from there. For startup capital, a new bank needs anywhere from a few million to $20 million nationwide. (The amount varies from state to state.) To be cautious and conservative, however, let's say $40 million.
Many cities have this money available in "rainy day" or reserve funds. Many others have substantial investments, often underperforming, that could be more responsibly invested as an equity position in a bank. In California, for example, a whopping $55 billion is languishing in the Treasurer's Pooled Money Investment Account, earning a mere 0.23% interest.
Moving a portion of those funds into the state's own bank would just be good portfolio management. State pension funds are another investment option.
If surplus funds are not available, capital can be raised with a bond issue. (That is how the Bank of North Dakota got its start in 1919.) Assume the interest due on these bonds is 3%. The local government's cost of funds will be $1.2 million annually.
At a 10% capital requirement, $40 million is sufficient to capitalize $400 million in loans. But again assume the bank is started conservatively at a 20% capitalization, for a loan portfolio of $200 million.
To make those loans, the bank will need deposits. These can be acquired without advertising or other costs, by moving $200 million out of the local government's existing deposit account at JPMorgan Chase or another Wall Street bank. (In North Dakota, all of the state's revenues are deposited by law in its state-owned bank.) Assume the new bank pays 0.3% interest on these deposits, or $0.6 million annually as its cost of funds.
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