PHILADELPHIA—In the classic film It’s a wonderful life, a small community savings, building and loan association dedicated to serving people in the community looking to buy a home, is nearly destroyed financially by the jealous owner of a commercial bank. Fortunately, at the end of the film, the neighbors and townspeople unite in a form of financial “people power”, combining their resources in order to save the “Banque Populaire”.
Unfortunately, life does not always imitate art. Today, small neighborhood community savings banks, savings and credit associations and mutual savings banks are increasingly being taken over by competing companies. Perhaps the greatest obstacle to achieving social and economic justice for all is the lack of financial resources available to those who need them most. This is especially true when it comes to commercial and corporate banking, where the greatest allocation of funds goes to those who already own an extremely disproportionate share of the nation’s wealth.
With all the hurdles to public banking, a small but significant step was taken in Philadelphia last March. The Philadelphia City Council, with one exception, voted unanimously to create the Philadelphia Public Finance Authority. Its objective is to provide lines of credit for the granting of loans intended to help small businesses unable to obtain regular loans from private financial institutions. Many of these businesses are started by people who don’t have access to capital, usually members of the working class and people of color.
Although not a bank in the traditional sense (the Authority is unable to accept deposits from private sources), it still uses the city’s financial resources to facilitate loans that benefit the community and help stimulate the local economy.
The Financial Authority will operate in partnership with private financial institutions. Private lenders will accept applications from qualified small businesses, who will issue loans that will be secured by letters of credit from the Financial Authority. Providing additional capital to small businesses will allow them to grow and hire additional workers. Given the multiplier effect, the additional financial resources available to small business employees will help circulate more money in the city’s economy.
Current state legislation does not allow public institutions to receive deposits and issue private loans. Yet nothing prevents the Financial Authority from issuing letters of credit in the name of small business borrowers to guarantee their loans from private lenders. This should boost the provision of loans to qualified small businesses, thereby injecting more money into the local economy.
The Finance Authority’s long-term goal is to work with the city to establish a separate facility to receive city deposits and issue loans to local businesses as a commercial bank would. This might require state approval, which is doubtful, but the city can proceed with creating such an entity and then let the courts decide what the city can and cannot do.
Until then, the mayor of Philadelphia will appoint a nine-member council, for a six-year term, to oversee the general operations of the Financial Authority. Once established, this Board of Directors will create an Executive Committee to coordinate the day-to-day functions and activities of the facility. The Executive Committee will be comprised of a CEO and other leaders with valuable experience in finance, capital markets and banking, as well as an academic background, but will also reflect the diversity and needs of the surrounding community.
The next step for the city in creating a public financial institution would be to allocate funds in its next budget to allow the issuance of letters of credit for private banks to guarantee loans to qualified businesses. Once these resources have been budgeted, the mayor will then have to officially launch operations by appointing the council. Municipal officials, activists and other supporters of public finances are very hopeful that the Finance Authority will be fully operational by the end of the year.
Meanwhile, other states and municipalities are advancing their own plans for state and local public banks. The Bank Of North Dakota, a state-owned public bank for nearly a century, has enjoyed tremendous success over the years in providing significant financial assistance and resources to disadvantaged residents of this state who otherwise would not would not have access to financial services for their benefit. .
In New Jersey, Governor Phil Murphy proposed a state bank that would use state deposits for loans and grants to various projects and businesses supporting community and economic development.
California has passed legislation allowing counties and municipalities in that state to create their own public banks, while other states, such as New York, have introduced various bills to facilitate public banking.
Legislative proposals for public and public banks are highly unlikely to progress in the near future. Until then, Philadelphia’s approach appears to have the best chance of putting in place a mechanism to help community businesses and residents access financial support they wouldn’t otherwise have.
The fastest way for this concept to grow would be for the Philadelphia Public Finance Authority to affiliate with smaller community financial institutions such as credit unions, financial cooperatives, savings and credit unions and mutual savings banks. Anything that gave borrowers an alternative to commercial and business banking would be an improvement. Of It’s a wonderful lifewe can see the benefits of community and cooperative banking where the people, not the business owners, are in the driver’s seat.