How to start a public bank: A Modeled Exercise

2. Low interest on loans

3. High annual dividend to city/state & no int. bearing deposits till equity repaid

4. Swift repayment of Initial Equity to pension funds (Note: this will reduce ROA & ROE)

5. Community support (e.g. no securitization)

Interest costs for accounts with interest-bearing deposits are based on the current low-interest environment but I left these rates near zero because it is all the city's money and the city is already getting dividends, which are higher anyway (there is a nominal cost just to maintain the account). If the bank is required to pay interest on deposits, dividends and profits will be correspondingly lower.

There is no need for private investment, borrowing through bonds, or for any other money-raising activity.

And as you can see in the final picture from year 8, the Operating Ratios and Performance, ROE and dividends meet regulatory standards, at least as specified by the original Moore sample bank. Return on Assets (ROA) is unusually low, under 1%, and ROE is as low as 5.74% in year 8, but that is because we are paying off the initial equity with such a high dividend. The bank can optionally, pay off the Initial Equity over a longer period, say, 25 years, or increase the ROA and ROE by decreasing the dividend after the Initial Equity is paid off in year 17 (or really, as discussed, sooner, because it becomes possible to pay higher dividends in every year subsequent to year 8). If the pension fund managers are willing, the fund need not be repaid at all, and would then just collect higher annual dividends in perpetuity.

The figures for ROE (19.20%) and ROA (1.32%) below reflect what happens if there is no dividend payout. These figures compare favorably to the initial values of Moore's dividendless sample spreadsheet of ROE (19.92%) and ROA (1.60%) respectively, especially considering the low interest environment today.

Taking the Model to Another Political Entity: New Hampshire

A few months after completing the model for Oakland I gave a presentation on the model on a monthly conference call for about 30 of the Public Banking Institute's coalition members. The archive is here: bit.ly/1UUQveA.

Shortly after that, the New Hampshire chapter of PBI contacted me to workup the figures for that state. With the model already worked out, I was able to do this with only minor modifications.

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