California bill to create state-chartered public banks criticized by the industry as 'misguided'

Key Points
  • Two California lawmakers proposed legislation this week that would allow municipalities to create their own local or regional banks, calling it a way "to fight income inequality through public banking."
  • In announcing the measure, the two Democratic legislators took aim at big banks, private corporations and Wall Street.
  • The plan doesn't sit well with the California Banking Association, which called it "misguided."
Assemblyman David Chiu, D-San Francisco
Rich Pedroncelli | AP

LOS ANGELES — Two California lawmakers proposed legislation this week that would allow municipalities to create their own local or regional banks, calling it a way "to fight income inequality through public banking."

The idea of a public bank isn't new since North Dakota formed a state-owned one in 1919. But California Assembly Bill 857 would focus on municipalities and allow these state-chartered banks to participate in banking and partner with local financial institutions.

"It is time that banks start working on behalf of people, not Wall Street investors," said Assemblyman David Chiu, D-San Francisco, co-sponsor of AB 857. He said the new institutions could make loans and invest depositors money in funds or companies and organizations that comport with local values.

Chiu added, "Time and time again, we have seen big banks invest our money in institutions most Californians are opposed to — oil pipelines, gun manufacturers, private prisons, and companies with unfair labor practices. This legislation allows us to take a first step towards ensuring the public's money is used for public good."

But the legislation doesn't sit well with the state's banking association.

"We are opposed to the bill," said Beth Mills, a spokesperson for the California Bankers Association. "We think it's misguided, and proponents of the measure have failed to identify how the current financial system is not meeting the needs of our cities and communities, and frankly why there is a need for this bill."

Mills continued, "With nearly 200 banks serving the state of California, there is much choice in the current marketplace. California banks are also tremendous partners to the many community organizations that operate in the regions where they do business."

Under AB 857, California's local or regional banks could provide everything from financing for low-income housing and urban farming to loans for community kitchens. But the state-chartered banks wouldn't be allowed to compete directly with national banks, the bill's backers say.

Critics have suggested the new banks could expose California taxpayers to financial risk. However, the legislation mandates that the new banks would need to obtain and maintain deposit insurance from the Federal Deposit Insurance Corp. or others, such as private share insurance or self-insurance.

The FDIC didn't immediately respond to a request for comment.

As a candidate, Democratic Gov. Gavin Newsom showed support for the idea of the state taking a bigger role in banking. "We must break Wall Street's choke hold on state finance and develop our own state bank," Newsom said last year prior to winning the governorship.

"As is the case with all proposed legislation, should the bill reach the Governor's desk it would be evaluated on its own merits," Brian Ferguson, a spokesman for Newsom said via email.

The proposed bill allows the state-chartered banks to engage in both banking and retail activities that are not already provided by existing local financial institutions. The new banks also wouldn't be allowed to compete directly with state-chartered credit unions.

"Instead of making rich men even richer, our resources should be invested in community development: parks and green spaces, free community college, new schools, smooth roads, and cleaner air," said Assemblyman Miguel Santiago, D-Los Angeles, co-sponsor of AB 857.

"Private corporations are not meant to do the business of public good, which is why we need a public bank that can determine how to use all the money saved on fees for the public good."