by: Megan Olson, President & CEO, ICBSD

Community banks in South Dakota and nationwide have been instrumental in sustaining small businesses and local communities throughout the coronavirus pandemic, but proponents of taxpayer-funded banking in certain states and municipalities threaten to undermine this system and its benefits to consumers.

While public banking advocates support relying on taxpayer funds to finance small-business and consumer loans, policymakers don’t need to recreate the wheel when there are 5,000 community banks at 50,000 locations across the nation with a proven track record.

Meeting Local Needs

As locally based small businesses, community banks channel their loans to the neighborhoods where they and their depositors live and work. Their relationship-based business model and timely decision-making is exemplified by their leadership in the Small Business Administration’s Paycheck Protection Program, which supports small businesses that use the forgivable loans to retain their workers.

According to SBA data, community banks made more than 60 percent of PPP loans supporting the retention of over 33.7 million employees nationwide in 2020. In addition, community banks made most PPP loans to minority-owned (72.6 percent), women-owned (71.5 percent), and veteran-owned small businesses (63.4 percent).

Community banks participate heavily in this program not because of political pressure, but to best serve struggling small businesses and communities in dire need of economic support. Holding more than $5 trillion in assets, nearly $4 trillion in deposits, and more than $3.4 trillion in loans to consumers, small businesses and the agricultural community, community banks only thrive when their customers and communities flourish.

Public Displacement

Unfortunately for the communities that community banks serve, several states and local municipalities are considering establishing taxpayer-funded public banks. 

While the plan is partly designed to remove government deposits from large Wall Street banks, 53 percent of state and local deposits and 31 percent of federal deposits are held by community banks. These deposits comprise over 10 percent of total assets for nearly half of community banks, meaning public banking would also displace locally based community banks and their ability to extend credit to local communities.

Bureaucratic Banking

Further, public banking wouldn’t create a safer and more efficient way to allocate credit. A public bank established today would be subject to the same bureaucratic inefficiencies of any other public entity.

What’s more, lending decisions currently based on localized knowledge and creditworthiness of the borrower would be replaced by political mandates, with public bank executives answering to the elected officials that appoint them and the politics of the day.

Regulatory Risk

Neither is public banking a “safer” place for consumers to park their money. Public banks are likely to be less regulated than private banks because they would not be supervised by a federal banking regulator.

Further, deposits of a public bank that forgoes FDIC insurance would be backed by the full faith and credit of a state or municipality, shifting the risk of loan losses or the bank’s failure to taxpayers. The FDIC’s Deposit Insurance Fund, by contrast, is fully funded by the banking industry. No depositor has ever lost one cent of an FDIC-insured deposit.

Under public banking, a cash-strapped state or municipality would provide little support against unexpected losses at the bank or, worse, could be tempted to draw on the bank’s capital cushion.

Simply put, public banking poses excessive risks to taxpayers. To further empower consumers, small businesses and agriculture borrowers, policymakers should focus on ways to support the 5,000 community banks meeting their needs today.