Los Angeles looks into what it would take to create a municipal bank
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Customers in Southern California already have plenty of banking options, such as Wells Fargo, Bank of America and Chase. If one local politician has his way, Angelenos may one day also be able to stash their money with a municipal bank, funded by the city.
LA City Council President Herb Wesson believes commercial banks are all about the bottom line, but that a city-run bank would be different. “Its mission statement would be to make the city of Los Angeles a better place,” he said. The bank would accomplish that mission by making loans to support local entrepreneurs and affordable housing, according to Wesson.
The idea came to him from constituents, frustrated by situations like the one at Wells Fargo – where millions of fraudulent accounts were opened without customer consent. “If there was ever a right time,” he said, “I do believe that time is now.”
But creating such a bank would take some time and a lot of money. LA City Council member Paul Krekorian heads a committee tasked with fleshing out this idea to see if it’s feasible.
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He’s considering everything from the legalities to the funding. “A bank has to be capitalized,” he said. “The only real source of capitalization for a municipal bank would be the city’s own cash deposits as well as the general fund.”
Krekorian added that the city council won’t move forward unless there will be a return on investment for local taxpayers.
Other cities like San Francisco and Seattle have been looking at the idea of a municipal bank, too. But not everyone thinks it’s a wise idea.
Rodney Ramcharan teaches banking at University of Southern California’s Marshall school of Business. “I think the motivation is noble,” he said. But despite best intentions, Ramcharan believes the municipal bank idea is rife with problems. “Once the government is involved in banking.” he said, “It’s very difficult to insulate the direction of loans from the politics.”
For example, the only state-run bank in this country is the Bank of North Dakota. It opened in 1919 to help local farmers. But concentrating so much of its business in one industry did not pan out well. Ramcharan said, “When farm prices fell in 1920 and 1921, those farmers went bankrupt.”
But since then, the bank of North Dakota has gotten back on its feet … reporting record profits for the past 13 years.
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