Across the United States, credit unions and community banks support public banking.
As states across the US pursue and pass public banking bills, credit unions and community banks are recognizing the added value public banks bring not only to regional economic stability but also to their own ability to make loans and increase their lines of business. It is common for community banks and credit unions to partner with larger financial institutions to provide business loans and other products, and public banks provide yet another source of liquidity and financial partnership, and at lower interest rates.
Oregon public banking is envisioned as a commercial lending institution that focuses public funding on the needs of the state and its communities, including economic & infrastructure development, affordable housing, and other public programs. Public banks following this business model won’t have a retail presence, won’t hold consumer or business deposits, and won’t make any consumer loans that can be provided through an existing institution. Credit unions are primarily retail operations serving individual members and their banking needs, including personal deposits, personal loans and small business loans.
The main overlap of the public bank’s services and credit unions is in the local commercial loan segment, which stems from the public bank’s economic development goal. This is a space of collaboration, not competition. Credit unions and local community banks will continue to offer loan origination services to their membership through their retail presence. The public bank will be a ready partner with local financial institutions to participate in loans or purchase loans in their entirety.
Credit unions are generally subject to commercial lending regulations (12 CFR § 723.8) designed to safeguard their members’ assets, which necessarily limits their capacity for making commercial loans. A municipal bank will increase credit unions’ capacity to make commercial loans in the aggregate by purchasing commercial loans from credit unions. It will also allow credit unions to originate larger loans by being a participant in loans that exceed the credit union’s commercial lending authority.
While credit unions already engage in loan participation practices, a municipal bank will be a ready and agile partner in this process to increase credit unions’ commercial lending capacity. The Bank of North Dakota’s collaboration with community banks demonstrates this point (here). Credit unions and community banks in North Dakota have found that it’s easier to find a participation in a loan at the public bank, so they can make more loans without having to increase their staff.
The collaboration between a municipal bank, credit unions and community banks will create a more vibrant local economy. This will create more wealth in the community, bringing more business to credit unions’ core businesses of consumer deposits and consumer loans.
Credit unions are limited in the size of loans that can be made. A public bank will be able to underwrite larger loans that can be participated in by the credit unions, enabling credit unions to form relationships with larger businesses. The public bank will also develop the ability to serve the financial needs of municipalities for public infrastructure projects and public services, such as transportation, housing, schools, and parks. A public bank could also underwrite bonds or replace bonds with loans from the bank.
No. The deposits held within a public bank largely come from public entities. Credit union members and the general public wouldn’t generally have access to the public bank as a consumer, except under certain, very limited circumstances.
We conceive of a public bank as a low overhead venture in order to best use public money for the common good. Serving consumer deposits carries an enormous overhead: physical branches, sophisticated technologies, large staffs, and FDIC insurance. Since most consumers and communities are well served by existing community banks and credit unions, there is limited need for a public bank to provide these services.