Insight: Exploring the idea of a public bank

AUSTIN (KXAN) — How would you feel about putting your money in a bank operated by the City of Austin? It could eventually be an option.

The city council recently gave the OK for a study examining the legality of a public bank in Texas and the pros and cons. North Dakota is the only state in the U.S. with an operating public bank.

David Flynn, an economics and finance professor at the University of North Dakota, spoke with KXAN’s Mike Rush about what a public bank is and how it works.

Read an edited transcript of the conversation below or use the video player above to watch.

FLYNN: The most obvious distinction is that it does not have private shareholders that, at the end of the day, receive the profits from the banking enterprise. Functionally, it is a bank that takes deposits and makes some kind of loan, just like any other bank. The end result is that you have the public interest at the end that receives any profit, not private shareholders.

RUSH: So banks that are you know, federally run are regulated by several agencies in the federal government, including the FDIC, which ensures the money that's in those banks in the case of a state or city running a bank, how is that money insured?

FLYNN: There are a couple of different ways that could happen. California, when they allowed for the creation of public banks, said they had to go and get FDIC insurance. So you could pursue that other situations could have essentially the full faith and credit of the government backing, much like we do in North Dakota, where the government is essentially the backer in case there were any problems at the financial institution?

RUSH: Are you referring to the government of North Dakota? The state government, okay, okay. Government. So if it's a city run, if this sort of happened in the City of Austin, would that be a case where it might be on the hook? If anything goes wrong? Would they be able to handle that?

FLYNN: Depending on how they would structure it depending on the legalities within the state of Texas? Yes, there would be the city that would have to sit there and somehow develop the backing in case things would go wrong at the financial institution. Gotcha.

RUSH: Tell me about some of the pros of having a public bank.

FLYNN: Well, I think there are some designs around the notion that you can direct towards economic goals that some might deem less profitable. That is commercial banks might not pursue goals that a city government might rightly have, such as affordable housing, such as small business lending, these risks might be too high for private institutions, and perhaps public institutions are willing to step in and pursue a slightly riskier or more informationally opaque venture.

RUSH: And one of the council members that I spoke with recently was saying that also a benefit that she sees is that the city-run bank would be able to set its own rates for loans, which may be lower than what you would get at a national bank. Is that accurate?

FLYNN: Well, I think that's something that you could pursue, although, at the same time, you'd have to be very careful about that. Because of course, if you just offer low, low interest rates, lots of borrowers will pursue you, your your lending opportunity, and that might increase your risk, you might get bad risks looking to come in, and you'd have a much harder time simply doing that. And at some level, if you're just offering lower rates, you could be accused of leaving money on the table. If private rates are much higher. why would why would why would you not take the extra interest for the public? In that case?

RUSH: I see. Okay, so let's let's switch gears now and talk about the cons of having a public bank.

FLYNN: I think that one of the things that you have to be very careful here is how you define that interest. What is the public interest? What are the specific goals or policies that you have for this, they might be things that we would, generally speaking, decide were laudable goals such as affordable housing, but you have to carefully define these things. You have to carefully define the groups that you would expect to receive benefits and you'd have to be very careful about how you would measure those to demonstrate to the public that you're meeting those goals, but also being fiscally prudent with the funds of the public.