San Francisco is one step closer to having a city-owned public bank that would invest in affordable housing, small businesses, and green technology in a keep-it-local cycle of deposits and loans.
According to its backers, the bank would fill a financial gap left by commercial banks, a gap potentially made worse by the recent failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, which have created ongoing worries about other regional lenders.
But there’s disagreement whether the current climate will open a door for a public option. Consultants who advised the city on its plan said regulators, who must approve whatever final version SF lawmakers produce, are “slow[ing] down their review of [new] bank applications.”
For more than a year, a nine-person committee has been crafting a detailed plan. At the end of a lengthy meeting Thursday afternoon, the committee, with one member absent, voted unanimously to send the plan to the Board of Supervisors, where one of its champions, Sup. Dean Preston, will try to craft complicated legislation, then shepherd it to a vote — and into existence — before the end of the year. (The committee’s plan is only a recommendation; the supervisors are not required to stick to it.)
“In many ways, we’ve seen the limits of a traditional banking economy,” Preston told The Frisc. “The potential of a public bank is the only thing that is being put on the table that offers the possibility of scaling up to make a dent” in the city’s climate and affordable housing goals. “This is exactly when we should be having this conversation and moving it forward.”
A long-standing progressive dream, a San Francisco public bank is only possible because of a California law signed by Gov. Gavin Newsom in 2019, before the pandemic rearranged social patterns and exacerbated economic disparities — and before another banking system hiccup rattled financial markets.
According to the plan, a San Francisco public bank would partner with existing local financial institutions such as community banks and credit unions to expand loan options in three areas: affordable housing, small businesses in historically disadvantaged communities, and technology that addresses climate change.
The plan calls for an early infusion of $90 million in funding and capital — $40 million would come from SF’s general fund, and $50 million would likely come from the city as well, although other sources might be available. It would need the supervisors’ and Mayor London Breed’s approval.
The $90 million would fund the first phase. That first phase, to last about three years, would be a kind of trial run to show state and federal regulators that it’s running according to plan.
If the trial is successful and regulators give their blessing, the city could charter an FDIC-insured public bank, which could then bolster its capital with deposits from local government agencies. At no point could the public bank accept personal deposits from consumers.
Sup. Myrna Melgar, who’s previously worked in community development, said the $90 million could be an investment in the long-term health of the city, but cautioned that she has not read the plans and doesn’t know if she would support them.
Before a California law that allowed for public banks, San Francisco’s treasurer was thinking through some possibilities. Its 2019 report laid out three scenarios, all at much larger scale than the current proposal, and noted that while a public bank “presents an opportunity to achieve community goals … in a sustainable and creative fashion,” it would incur “significant short-term costs, in terms of money, time, and energy” and have “significant, but uncertain, payout in the long-term.”
With City Hall embroiled in a long-unfolding corruption scandal, it’s reasonable to raise an eyebrow about a city-run bank doling out loans. Its two-tiered governing structure, modeled on a public bank in Costa Rica, is intended to insulate the bank from political influence and ease approval from state and federal regulators.
But public banking expert Dr. Thomas Marois, a researcher at SOAS University of London, told The Frisc that the proposed structure — a large oversight commission with advisory powers only and a smaller board of directors — is flawed and would “have no way to hold the bank to account.” Marois, who was brought in to consult on the project, warned the committee that the structure would lack accountability.
In a surprise move at Thursday’s meeting that seemed to acknowledge Marois’ concerns, the committee voted 5 to 3 to recommend that the Board of Supervisors, which is the plan’s next stop, modify the governance structure to give the oversight commission the power to set policy and hire and fire the bank’s board members “to the extent this is allowable by regulators.”
Amanda Fried, the director of policy and communications for the San Francisco Treasurer and a committee member, was one of three votes against the recommendation. She said that it “weakened” the proposal, and suggested the process should be paused.
That’s just one of the significant differences of opinion looming over the plan.
The FDIC has questions
At first, the entity would only make indirect loans. In this initial three-year phase, known as a municipal finance corporation or MFC, it can lend money to local institutions such as credit unions but not directly to businesses or projects. It is also barred from taking deposits.
The MFC also would operate as a “green bank,” a designation that will allow it to receive funds from the federal Environmental Protection Agency to invest in projects that reduce greenhouse gas emissions. Congress appropriated these funds as part of the Inflation Reduction Act.
After three years, if all goes well, the Federal Deposit Insurance Corporation (FDIC) and the California Department of Financial Protection and Innovation (DFPI) could approve the city’s plan to convert the MFC into a properly chartered public bank. In the current banking environment, however, regulatory approval is uncertain, and that gives SF’s newest supervisor pause.
“The FDIC has questioned whether a public bank can operate without political interference [and] whether the board of a public bank can retain its responsibility and authority for financial decisions,” Sup. Joel Engardio told The Frisc. “If the FDIC is asking these questions, we must pay attention.”
Advisors identified the long-standing failure of commercial banks to deliver fair and affordable financial services to SF’s low-income communities and communities of color. Fewer than 25 percent of SF Black and Latino households are homeowners.
Regulatory approval is needed to charter a public bank but not an MFC because a public bank may accept deposits from city agencies, which are then insured by the FDIC. For example, the San Francisco Municipal Transportation Agency could deposit parking ticket fees with the public bank and earn interest on those deposits. Those deposits would, in turn, increase the capital available for the public bank to help finance local projects.
Currently, when city agencies deposit money into commercial banks, those funds can be used to finance loans anywhere in the world and on projects that run counter to the city’s goals and values, like oil and gas development or private prisons.
The California public bank movement gained steam in 2019 with the passage of AB 857, the Public Banking Law. Under AB 857, a public bank must be a nonprofit corporation and may accept deposits from local government agencies, but not from individuals or private businesses. With those funds, a public bank then collaborates with local financial institutions to make loans for community-focused projects.
AB 857 forbids public banks from offering products that directly compete with local institutions. So, in the wake of the recent bank meltdowns, if lenders stop offering startup loans to mom-and-pop stores in the Excelsior or Bayview, the public bank could step in.
Once AB 857 opened the door, SF supervisors created the nine-member committee to come up with a plan that could focus on city residents and businesses underserved by commercial banks.
The working group tapped the assistance and advice of economic development and banking advisors, local community financial institutions, affordable housing developers, green investment experts, and public banking advocates.
Early in the process, advisors identified the long-standing failure of commercial banks to deliver fair and affordable financial services to SF’s low-income communities and communities of color. For example, fewer than 25 percent of Black and Latino households in the city are homeowners, compared with the 37 percent home ownership rate citywide. Similar gaps exist in small businesses, which Black and Latino residents own at rates significantly below their population percentage in the city.
Credit unions and other community financial organizations offer loans and other banking products that seek to address these disparities. But there are limits to the length and dollar amount of the loans they offer. A public bank would partner with the local financial organizations to fill those gaps.
One example could be short-term loans to help affordable housing developers cover pre-development costs, then longer-term loans to those same developers during the long permitting and construction process. (SF is slowly waking up to the damage caused by its years-long development timeline.)
A public bank might also lend directly to local financial organizations to give them flexibility to invest small amounts of start-up capital (less than $150,000) and large amounts of expansion capital ($1 million or more) to small businesses and environmental projects in the city.
Sticking points
With hundreds of millions of taxpayer dollars potentially at risk, oversight will be crucial, underscored by the last-minute wrangling before the working group sent its recommendations to the Board of Supervisors Thursday.
Oversight commission members would serve staggered terms, with the Board of Supervisors, mayor, treasurer, controller, and city attorney appointing different members. Only SF residents and those who conduct business in SF would be eligible to serve on the oversight commission and the board.
How the Board of Supervisors deals with the differences of opinion on oversight will likely be a key to the legislation that creates the bank. Other sticking points could be the $90 million price tag over three years during a budget deficit, and legal questions about potentially amending the city charter. (The city attorney’s office has yet to weigh in.)
At the end of the debate, the final bill doesn’t just need to pass the board, it needs the mayor’s signature — or a veto-proof 8 to 3 majority. The mayor’s staff did not respond to questions for this story.
The Board of Supervisors will first take up the plan at the July 20 meeting of the Government Audit and Oversight Committee. Preston, who chairs this committee, anticipates it will take the board three to five months to draft the legislation and push it to the finish line.
Correction 5/19/23: This story has been updated to clarify the source of the bank’s three-year startup costs, as recommended by the working group.
Wendy Thurm is a writer and former lawyer. Her work has appeared in the New Yorker, San Francisco magazine, and the Athletic, among other outlets. She also writes a thrice-weekly baseball newsletter at hangingsliders.substack.com.