Challenging the Systems That Perpetuate Racism: A Case for Public Banking

Written by Andrea Batista Schlesinger and Mary Jiang
City leaders are being called upon to use the power they have to make systemic changes. One power examined far too infrequently comes in the form of the billions of dollars that flow through city coffers and then through the commercial banks that manage local government transactions. The actions of commercial banks shape cities and their economies more than any mayor’s economic development policy. Historically, these actions have reinforced White ownership and Black poverty.
The relationship between banking and inequity consistently surfaces in our work. For example, the average loan approval rate for White business owners is 19% higher than for Black business owners and only 49% of Black-owned firms survived the past recession, compared to 60% of White-owned firms. As Black protestors have argued in response to the looting that has coincided with the peaceful protests of George Floyd’s murder at the knees of police, “[These buildings are] not ours. We don’t own anything. We don’t own anything.”
The lack of Black ownership, even in Black communities, is not a coincidence. The role of private finance in the perpetuation of racial disparity did not end with redlining—race and racism remain encoded in seemingly neutral concepts, such as financial “opportunity” and “risk.” The wholesale purchase of financially distressed homes in low-income Black communities presents an “opportunity.” Yet Black and Latinx households are less likely to qualify for conventional mortgages than White applicants even when controlling for income and loan size, because they pose a greater “risk.” Predatory lending to Black communities presents an “opportunity.” Yet because of historical and structural bias amounting to perceived “risk,” Black and Latinx entrepreneurs receive lower levels of conventional business financing, are discouraged from entering capital markets, and are underrepresented in business ownership.
These patterns intensify in the aftermath of natural and economic disasters. In the Paycheck Protection Program’s first round, businesses owned by people of color were disproportionately and functionally excluded from federal aid because they did not have relationships, or large payrolls, with mainstream banking institutions. Only 12% of Black and Latino business owners who applied for COVID-19 relief aid from the Small Business Administration reported receiving what they had asked for. These barriers have had lasting effects on the second round of funding, compounding the challenges of recovery. Despite these gaps in service, banks have profited from being the only options for their services: in the PPP’s first round alone, banks earned $10 billion in fees for processing essentially zero-risk loans with reduced vetting requirements.
We cannot make cities more equitable until we confront the role of private capital in perpetuating racism. As banking reform advocate Ameya Pawar argues, every decision a bank makes to lend or not lend, invest or not invest, serve or not serve, amounts to an economic development policy. Cities can influence these decisions by committing to full transparency about the accounts they hold with commercial banks, leveraging the scale of their accounts to influence commercial banks to reform lending practices, diverting public funds to local and regional banks and Community Development Financial Institutions (CDFIs) that meet the gaps left by large commercial banks, and providing essential technical assistance to build financial capacity in underserved communities.
Beyond these steps, some have urged local governments to create an alternative to commercial banking altogether by depositing government funds in, and processing their transactions through, public banks that are owned and operated by cities or states, oriented toward the public good, and directly accountable to publicly elected bodies. In the U.S., advocates have argued that public banks could serve as alternatives to commercial banks while collaborating with mission-aligned financial institutions such as local banks, credit unions, and CDFIs. Public banks could resist the prevailing risk/return principles defined by private loan terms to drive low-interest loans and investments in Black and Brown communities that have been disqualified from the most basic levels of financial support.
We have begun to explore how public banking might work in cities across the country. We evaluated the feasibility of a public bank for the City of Seattle and are currently doing so for the City of Philadelphia. In Seattle, the primary motivation to explore an alternative to commercial banking was to divest from Wells Fargo, which had been instrumental in funding the Dakota Access Pipeline. In Philadelphia, where we estimated a small business lending gap far greater than any suite of public programs could fill and where only 5% of bank and credit union branches are located in low-income, majority-minority neighborhoods, city leaders are interested in addressing deeply entrenched, racialized poverty by seeing how their dollars could leverage investment in local businesses that would create local jobs.
Setting up public banks is not easy, and while advocates for public banks inspire us to think boldly, oversimplifying the feasibility of establishing such institutions will not advance racial and economic equity. The credit rating agencies emerged powerfully from the 1970s’ urban fiscal crises to limit government risk, effectively exerting a stranglehold on city spending and making it difficult for cities to secure the initial dollars to capitalize a bank. The heralded Bank of North Dakota, the country’s longest running and most successful public bank, took 30 years to become profitable and owes much of its initial momentum to the state’s agriculture and oil industries. Many jurisdictions, particularly cities, are fighting for a public bank in fundamentally different economies. The U.S. still lacks a precedent for a City-owned public bank, and many cities face state-level preemption challenges and limited scale of deposits, compared to state counterparts.
Local, state, and federal banking policy change will be necessary to facilitate the creation of public banks. Change is necessary because we are committed to helping cities become less dependent on private actors, such that they have a choice about how to conduct business in ways that are consistent with their values. In this way, we see our ongoing public banking work as a way of advancing the autonomy and creativity of municipal governments, and the possibility of those who live in cities to hold them accountable. Which is to say, the case for public banks is as much about supporting the use of banking powers in the public interest and challenging a commercial banking system that has profoundly failed—at scale—to move capital to advance racial and economic justice, as it is about actually setting up such banks. Perhaps even the rhetorical threat of a public bank might inspire commercial banks to embrace an anti-racist future for the cities they serve. If it doesn’t, more and more cities will begin to take their financial power elsewhere.