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Philadelphia is set to become the first city in the nation to create a public bank, with the city council set to vote March 2 on creating a Philadelphia public finance authority.
Proponents believe it would help black and brown entrepreneurs and provide much-needed financial services to disadvantaged residents. Critics worry about set-up costs and whether funds deployed by a public bank would be truly independent of political influence.
One of the promoters of the idea is Brittany Alston, director of research at the Center for Action on Race and the Economy, one of the organizations that formed the Philadelphia Public Banking Coalition.
“[This could] fundamentally reshape the way we think about financial systems,” Alston told Billy Penn, “and introduce a level of democracy that does not exist in any traditional banking system.”
The PPFA would not yet be a place for personal banking. It would take a few more steps, said council member Derek Green, who leads the initiative.
But it would be able to provide loans to entrepreneurs and other financial services in economically distressed neighborhoods, with the goal of “improving access to credit” for small businesses run by black and brown residents, Green told Billy Penn.
Lending discrimination has long existed in the US private banking system. philadelphia cream sued Wells Fargo for discriminatory lending practices as recently as 2017, ultimately receiving a $10 million settlement.
The discrimination is reflected in business ownership rates for black and brown Philadelphians. African-American-owned businesses with employees make up just 6% of similar businesses in the city, while Latino-owned businesses make up 4%. That’s only one-tenth of all Philadelphia businesses with employees, yet those demographics make up nearly 60% of the city’s residents.
This is one of the reasons why the PPFA will have “preferential guidance to meet the financial needs of underserved residents, small businesses and economically distressed areas”, according to current legislation.
The aid will allow businesses to close deals, developers to secure projects without having to sell properties to meet equity requirements, and entrepreneurs to be better prepared to handle business-related cash flow issues, a said Green.
Board members Jamie Gauthier and Katherine Gilmore Richardson co-sponsor The law project to create the PPFA, with Green.
Pennsylvania law does not allow cities to directly charter a bank, so the PPFA is part of a legal pathway around the ban, Green said.
It was formed under the provisions of Pennsylvania Economic Development Financing Actwhich allows municipalities to constitute an authority that borrows public and private money and grants loans or provides letters of credit to residents.
The PPFA could buy and sell properties and securities, and design projects that further its goal of community economic development.
It would also have the authority to coordinate financial initiatives with other organizations concerned with economic development, such as implementing a program in tandem with community development financial institutions, or putting funds towards a grant for a CDC.
Proponents say its financial structure has the potential to save taxpayers’ money, as the government can borrow capital funds without paying interest to another institution.
Eventually, once it is fully capitalized, the PPFA could create an affiliated institution that could go beyond lending and provide personal banking services, which supporters are calling for.
Supporters say the effort will be even more effective once it can deliver services to the many Philadelphians who live in unbanked or underbanked households, 10% and 22% of city households, respectively.
Not having access to banking services or not using them is what makes an individual unbanked, without access to credit. Being underbanked means having limited access to credit or primary access to predatory financial services with high rates and fees, like payday loans, Western Union wire transfers, and check cashing services.
“We want to create communities that have the services and resources that people need. I think, you know, the public bank offers that alternative to that because the focus isn’t on profit,” Alston said.
With a different objective, public banks may make different choices, such as choosing to locate a branch in an area of town that private banks deem too risky, and coordinating with community financial institutions to incentivize community members to use banking services.
As currently defined in Council legislation, the PPFA will be overseen by a nine-person board of directors, appointed by the mayor.
The directors will then appoint a separate board of directors that will be directly responsible for establishing the guidelines that govern day-to-day activities and interactions. The board will be comprised of a “diverse mix of people” with financial, business and community backgrounds, Green said.
For example, at least five board members should have five years of experience and a dedicated commitment to these issues:
- environmental justice
- racial justice
- public economy education and health
- cooperative development
- neighborhood small business development
- gender justice
- public transport
The board would hold at least one public meeting a year, where it would present audits and reports on its activities and holdings to the public, with time for open feedback. To ensure overlapping terms, those initially appointed will serve on three different timescales, with termination dates ending in 2023, 2025 and 2027. From there, individuals will be appointed for six-year terms.
As for the Policy Board, this body would develop lending and investment policy, lead the approval process for letters of credit, and fine-tune the strategic financial decisions of the PPFA. Membership in this council comes with qualifications that you are unlikely to find at a private institution.
When the mayor selects new candidates for the board, the council will recommend qualified candidates who also have similar qualifications.
Other board qualifications include a board member who is an officer of the CDFI Network of Pennsylvania – a coalition of community development financial institutions – an individual who is a board member or officer of a minority-owned bank, and someone “from an organization that has represented consumer or community economic interests for at least two years.
Some people have expressed concern that Philadelphia, which is not known for its exceptional financial management, is taking control of another financial authority.
Although the PPFA is beholden to all the ethical requirements of other city departments and civil servants, critics counter that these requirements have not stopped enough civil servants from acting unethically to allay their fears.
It’s even better than the private sector, argued Conni Billé, co-founder of the Philadelphia Public Banking Coalition.
“What checks and balances were there on Wall Street in 2008?” Bille wrote in a refuting email a critical piece of the Philly proposal published in the Citizen.Public, suggesting that it was doubtful that “private bankers are fairer than those who can be hired and fired by us citizens”.
Can PPFA raise enough capital to get started? The cost of setting it up has not been publicly announced, even as the vote to create the entity approaches.
Several critics have pointed the finger a study conducted by the city of San Francisco in 2019who estimated that a bank would need an investment of between $184 million and $3.9 billion depending on its stated goals, and could take up to 56 years to break even.
Is a municipal bank even the best way to achieve the goal? Several other nonprofits have new initiatives to provide loans to black and brown business owners, such as the new GRIT funds.
Green said the many conversations his office had with financial advisers and legal regulators in the city and state made him confident the initiative would be successful.
“I understand any type of new idea, you’re going to have resistance and challenge,” Green said. “You get better legislation and better policy when you’re open and willing to have real conversations, even with people who totally disagree with your idea.”