Public Banking: From Feasibility to Implementation

The purpose of this study is to explore the obstacles towards implementation of a public banking system within the United States through a review of the literature on public banking. A review of the literature on public banking demonstrates fluidity in the definition of public banking as legislative efforts attempt to take the path of least resistance towards implementation. This study provides macro and micro benefits and challenges for formation. Global examples of public banking systems are reviewed along with political challenges in coordination and cooperation learned from the COVID-19 pandemic. This literature review concludes with practitioner observations at the micro level on the potential impact in forming a public bank along with future research opportunities. The study also includes narrative around implementation challenges in determining capitalization requirements in the formation of a public bank.


Introduction
On March 10, 2018, in Loveland, Colorado a retreat on the topic of Public Banking was convened through an anonymous donation to the Public Banking Institute. This small group consisted of scholars, bankers, elected officials, public servants, and activists from all over the United States. The objectives of the retreat were to share best practices, identify strategies, and discuss potential obstacles towards implementation of public banks throughout the United States of America (USA). As a participant in the retreat, the experience provided foundational context, varied perspectives on the obstacles for implementation, and incentive towards future research opportunities. The strategies regarding implementation of a public bank require proficiencies in public policy, money, and banking, along with political savvy and/or agility.
In a study by Fairlie et al. (2022), data from the restricted-access version of the Kaufmann Firm Survey (KFS) was compared to the credit ratings from Dun and Bradstreet reports for black-owned businesses. Large racial differences in the sources and amounts of financial capital used to start a business continue with black-owned start-ups continuing to experience disparities in alternative sources of capital (Fairle et al., 2022). Minority entrepreneurship continues to experience barriers to acquiring work experience or corresponding education, access to debt and equity capital, and access to markets for their products and services (Bates et al., 2018). As large banks change their business models to larger and more profitable loan amounts, many small-business borrowers find themselves without viable options for bank funding (Zhu, 2022). Although the Community Reinvestment Act (CRA) and the Community Development Financial Institution Fund (CDFI Fund) were established as reforms to address the challenges of low-income communities with high minority populations, these reforms have had limited success in closing the access to credit gap for minority entrepreneurs (Zhu, 2022).
Public Banking has been a point of discussion throughout the United States as a resource for closing the gap on access to credit for small businesses and minority entrepreneurs. Firms owned by minorities continue to show a heavy reliance on debt capital and lower approval rates including the pandemic driven Paycheck Protection Program (PPP) loans (Wiersch & Misera, 2022;Wiersch & Shane, 2013). This review of the literature provides the conduit towards future research regarding implementation strategies around the creation and funding of a public bank.  , 2010). Stakeholder theory is defined by assigning an economic unit of measure to stakeholders such as employees, customers, suppliers, financiers, and even competitors (Parmar et al., 2010).
Although there is agreement that public banks are publicly funded and therefore publicly owned, there are discrepancies around whether the bank is controlled by a municipality, city, or state or run privately through a holding company (HR&A Advisors, 2020;Scherrer, 2017). In a feasibility study for the City of Philadelphia, HR&A Advisors (2020)

Problem or Challenge
There is empirical analysis around three different countries that share the commonality of a significant public sector in banking (Scherrer, 2017). Brazil, Germany, and India have significant differences with India having significant numbers of unbanked households, and Germany representing a mature financial market and one of the places where public banking started (Scherrer, 2017). Brazil provides an opportunity to research how public banking can provide stabilization to a financial market through anticyclical interventions (Scherrer, 2017).
Most of the activist driven research and narrative around public banking looks to solve the challenges of access to capital in underserved or unbanked communities (Beitel, 2016;HR&A, 2020), but there is research that demonstrates an opportunity for public banks to play a role in macroeconomic policies or economic development strategies (Scherrer, 2017). Flögel and Gärtner (2018) in their qualitative study found significant differences between banking systems in the United Kingdom (UK), Germany, and Spain. Of particular interest is the elimination of savings banks in 2017 along with failures of small and regional banks in the UK (Flögel & Gärtner, 2018). Comparatively, 3,400 U.S. based financial institutions have failed since the mid-1980s as of 2012, with 457 representing community banks (Parsons, 2013). The study by Flögel and Gärtner (2018) is a focus on centralized banking systems vs decentralized banking systems with a recommendation for the UK to consider a network of local and public banks. Restructuring of the Royal Bank of Scotland into a network of local and public banks is mentioned in the article as a potential strategy (Flögel & Gärtner, 2018). One of the challenges in   (Beitel, 2016). Profits that can be reinvested back into the community for challenges such as infrastructure, education, and public safety.

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The worldwide public health emergency of COVID-19 has emerged as a global economic crisis as countries continue to struggle with the socioeconomic challenges in the short-term and long-term objectives of macroeconomic policies (Loayza & Pennings, 2020

Solution/Results
The recession of 2017 demonstrated the cyclical behavior of markets and the corresponding regional or sector inequalities that could be reduced through the alternative of a public bank (Falk & Blaylock, 2012;Scherrer, 2017). The impact of the COVID-19 pandemic has shown that businesses owned by people of color continue to experience disparity in access to capital (Wiersch & Misera, 2022). The definition of what constitutes a public bank appears to be fluid as control of the bank fluctuates depending upon the audience or legislative steps required for implementation (HR&A, 2020;& Public Banking Institute, 2021). There is agreement among the eighteen public bank bills that the bank is publicly funded (Public Banking Institute, 2022), but inconsistency as to the control of the bank. Feasibility studies fluctuate as to whether the proposed public bank be privately run, under government control, or a quasi-government agency.
There is research that suggests the answers to these questions depends on whether the objective of the bank is to allocate resources to segments of the economy that will generate income and employment, or to meet the credit demands in underserved economic segments and geographical areas (Scherrer, 2017).  Opportunities for additional research are needed for the implementation of a public bank.

Conclusion/Future Research
Scherrer (2017) discusses the how microfinance institutions and financial credit cooperatives share the experience of public ownership but with a focus on stakeholder objectives as opposed to shareholder objectives. There is a need for research that explores the targeted capital or funding requirements for a public bank and the projected community impact of said capitalization. The study by HR&A (2020) and Beitel (2016) projects the financial impact of a 1% ROA, but what should be the initial capital need and will it require legislative approval.