Public bank proposal meets much criticism

Public bank proposal meets much criticism
Banking industry members offered a critical appraisal of a state bank at a Feb. 21 public hearing of the Senate Financial Institutions, Economic Development & Trade Committee. Photo: freepik.com

The notion of a public bank in Washington state received a critical appraisal at a Feb. 21 public hearing of the Senate Financial Institutions, Economic Development & Trade Committee. While Majority Caucus Vice Chair Bob Hasegawa (D-11) pitched the idea as an innovative and cost-efficient way to fund public infrastructure, banking industry representatives warned that it could lead to politically-motivated lending decisions that require further taxpayer dollars to bail out.

Others say legislators should wait until consultants are finished developing a proposal for a public bank.

“Maybe a more prudent step is to wait for the study to be finished and reported back to the legislature,” Washington Bankers Association lobbyist Trent House told committee members.

If passed by the legislature, SB 5949 and its proposed substitute would create a commission to run the bank consisting of five statewide elected officials. However, House warned the commission “would be influenced by the political pressures of Olympia and not make business decisions based on sound banking principles but rather have the influences of day to day life in Olympia on their minds.”

Hasegawa, who has introduced similar bills since 2009, argued that a state bank could help solve funding problems for public infrastructure that often involves bonding. The state also has constitutionally-imposed restrictions on debt.

A state bank would save money by eliminating the interest paid through bonding, Hasegawa said. “We just don’t have the capacity within our current system to be able to finance the infrastructure that we have to finance. That has seriously impacted our ability to maintain our current infrastructure, let alone to build new infrastructure. If we were to, for instance, have our own bank owned by the people of the state…there’s millions of different ways we can capitalize.

“That’s not to say that the bank is going to immediately relieve of a bonding need,” he added. “But it will build over time. This is a generational thing, because we can’t even imagine what our future generations are going to need with regard to what type of infrastructure.”

Among those opposed to a state bank is Washington State Treasurer Duane Davidson, whose office last year released a study of the studies other states have conducted on possibly creating their own public bank. Instead of a bank, Davidson says there are already 80 existing programs available. He’s also recommended further investment in the Public Works Program, which has been raided by the legislature to cover new education spending.

Aside from political influences, the challenges of a public bank also include expensive capital investment and lending risks, according to Lewis County Treasurer Arny Davis. He added that the bill’s language allowing the use of public pension funds to finance the bank “is a scary thought for us.” House noted that although the public bank would include an 11-member investment advisory board, only six would be required to have any kind of banking experience.

Along with the Bank of North Dakota – the only public bank operating in the U.S. – proponents point to Germany’s public banks as successful examples of state banking providing needed financing for local or national infrastructure. Yet, Brad Tower with the Community Bankers of Washington told the committee that the banks have significant opportunity costs for taxpayers. That was the conclusion of a 2006 report by the International Monetary Fund on Germany’s public banks, which noted that a taxpayer would earn 2.5 times if they invested the same amount of money in a regular bank (page 84).

Other groups opposed to the bill are Washington Mortgage Bankers Association and the Association of Washington Businesses.

No further action is scheduled for SB 5949 at this time.

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