Report: Public bank could require billions in investment, take decades to break even

A final report from a task force established last year to study the feasibility of launching a public bank identifies three financial models The City could follow, but makes no recommendation on whether to pursue them.

Cities around the nation are exploring the creation of publicly-owned banks to divest from Wall Street banks. Instead of profit-driven banks driven beholden to shareholders, a public bank would seek to invest profits back into the San Francisco’s neighborhoods, through increased affordable housing development loans or small business loans, according to advocates.

The Municipal Bank Feasibility Task Force Report, which Treasurer José Cisneros will officially release Friday, provides the most comprehensive analysis yet of what would be involved in launching a public bank, also called a municipal bank. While it does not recommend a particular path, it does outline next steps to take, should Mayor London Breed and the Board of Supervisors decide to move forward launching a public bank.

“I understand the urgency of the public banking movement: Wall Street banks have been bad for all but the wealthiest Americans,” Cisneros said in a statement. “As the City’s banker and chief investment officer, I am proud that this Task Force successfully balanced fiduciary responsibility and visionary leadership. Now, our policymakers and the public have clear financial models for municipal banks to help them determine how best to proceed.”

The three models identified in the task force’s final report are: “A reinvestment entity that focuses on affordable housing and small business lending to achieve community goals, a divestment bank that performs the City’s cash management, and a combination bank that performs both the City’s cash management and affordable housing and small business lending.”

The report said that it “seeks to inform the dialogue around municipal banking by offering concrete figures regarding the endeavor.”

For each of the three models, the report identifies costs associated with implementing them and length of time before each model can break even.

“All three bank models must grow to a large size to break even and all would require significant subsidy and capital investment, though the amounts vary significantly from model to model,” the report said.

The reinvestment model, or model 1, focuses “on lending and reinvestment in areas that are underserved by the traditional banking industry.”

This model would break even after 10 years and require an investment of $184 million, which includes start up costs, operational subsidy and capital investment. It would not require a “bank charter or deposit insurance, because the bank would not accept deposits or serve as the City’s banker, but it would need similar capitalization to a traditional bank.”

The divestment model, or model 2, would “create a public bank that can take over the City’s cash management and commercial banking functions currently performed by Bank of America and U.S. Bank.” It would also handle “the 1.2 million checks deposited per year by the City, the 323,000 credit card transactions, and 847,000 outgoing payments per year.”

Model 2 would break even after 31 years and take a $1.6 billion investment.

Model 3 is a combination of Model 1 and 2. It would take $3.9 billion in investment and breakeven after 56 years.

Model 3 is “a municipal bank that accepts deposits, performs the City’s cash management and commercial banking, as well as affordable housing and small business lending.”

The startup costs for each model, which are a portion of the total investment, would be $6 million for Model 1 and $119 million each for models 2 and 3.

The task force does not specify funding sources to launch any of the models but “recognized that General Fund appropriations would likely be critical to the banks’ success.”

The report notes that “the financial and time commitments required to create a municipal bank are quite significant” and that “this demand for City resources raises a series of policy questions regarding the fiscal responsibility of creating a municipal bank.”

None of the models assume offering “traditional retail banking services for personal or business clients (such as cash management, debit cards, ACH payments etc.), because it is difficult to perform retail banking well, and retail banking greatly increases infrastructure and staffing costs,” the report said.

The report notes that there are two public banks in the United States, the Bank of North Dakota and the Territorial Bank of American Samoa.

“To succeed, a municipal bank must maintain solvency and liquidity and achieve sustainability or make a profit (if growth is the goal), while also adhering to its mission and principles,” the report said. “In this sense, a municipal bank is trying to achieve a double bottom line: meet community goals while still making a profit that can be reinvested to serve the bank’s mission.

Some task force members submitted letters in response to the report.

One letter, signed by such task force members as Sushil C. Jacob, an attorney with the Lawyers’ Committee for Civil Rights, and former Supervisor John Avalos, a coordinator with National Union of Healthcare Workers, suggested the report overestimates costs associated with models 2 and 3 and recommends the next steps The City should take.

“We think that the next steps are to develop additional models which consider more factors, convene all internal City actors tasked with lending, and hire a consultant to develop a business plan for San Francisco’s Public Bank,” the letter reads.

They also recommend what they called “Model 1.5” “which would be a depository institution that could grow to become the City’s primary banker.”

“This ‘Model 1.5’ as we have termed it, would be a bank that holds City funds that are not required for daily operations or that are currently invested in the Treasurer’s Pooled Funds. Its primary function would be lending for community reinvestment,” the letter said.

A Board of Supervisors committee is expected to hold a hearing on the report in the coming weeks.

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