S.F. Should Not Get in Banking Business

San Francisco is constantly being asked to take on new responsibilities in pursuit of worthy goals. Many of these proposals are thoughtful and respond to genuine needs. But, the work of governing requires more than identifying a problem and proposing a solution. It requires looking beyond what sounds good on paper and asking what will actually work, what government is equipped to do well, and where limited public resources can do the most good.

That is the lens through which we should consider the proposal for a public bank.

The goals behind it are laudable. San Francisco needs more affordable housing, stronger small businesses, better infrastructure and greater access to capital for communities that have historically struggled to obtain it.

But, worthy goals do not, by themselves, make a particular solution the right one.

Creating a public bank would put San Francisco into an entirely new and highly specialized business. Banking requires expertise in lending, credit, compliance, capitalization, liquidity, governance and risk management. It also requires substantial capital. When loans underperform or financial assumptions prove wrong, the losses have to be absorbed. In a privately owned bank, shareholders assume that risk. With a City-owned bank, however, taxpayers would ultimately be responsible for the losses when investments underperform.

That makes how the bank manages and spreads its risk especially important. Yet its mission would focus lending within San Francisco and in a relatively narrow range of areas, including below market rate housing, small businesses that may not qualify for conventional financing and environmental projects. Concentrating a loan portfolio in one geographic market and a limited set of investments creates a significant financial vulnerability. A disruption in the City’s real estate market, a local economic downturn or problems affecting one of these areas could trigger losses across the bank’s portfolio at once, with problems in one area compounding losses elsewhere and rippling across its balance sheet.

Diversification is meant to protect against exactly that problem. By spreading investments across different industries and geographic markets, losses in one part of a portfolio can be offset by strength elsewhere. A bank concentrated in San Francisco would have fewer ways to absorb a downturn that hits the City broadly. That makes it especially important to understand how a bank built around these priorities would manage concentration risk and protect the public capital behind it.

That question takes on greater importance given San Francisco’s current fiscal challenges. We are already making difficult decisions about existing programs and services, and City departments are being asked to do more with increasingly constrained resources. Creating a new financial institution would add another complex responsibility to a government that already has no shortage of them.

Public banking is not a new idea in this country. A number of states experimented with state-owned or state-controlled banks in the nineteenth century. Their experiences varied, but many struggled or disappeared, and by the end of that century most of those early institutions were gone.

Despite that history, proponents point to modern examples of successful public banks as evidence that the model can work. Those examples deserve a closer look.

The Bank of North Dakota is the most frequently cited American example, and it has operated successfully for more than a century. But it is a state bank serving a statewide economy, with lending spread across multiple sectors. State funds are required by law to be deposited with the bank, providing a large and reliable deposit base and its deposits are backed by the full faith and credit of the state. These are important structural features of the North Dakota model, not incidental details.

San Francisco, by contrast, is a city and county, not a state. It has neither the same financial structure, economic reach nor institutional foundation as North Dakota. North Dakota is a useful model only to the extent that the features behind its success can actually be replicated here.

The international examples present the same challenge. Germany’s public savings banks operate within a nationwide network built around mutual support, with mechanisms designed to protect member institutions when they run into financial trouble. China’s enormous state-owned banks operate with the resources of the national government behind them and have required major government recapitalizations when losses accumulated. While these examples demonstrate that public banking can work, they also show that success depends heavily on the financial and institutional structures surrounding the bank, not simply on public ownership.

But even where elements of these models could be adapted to San Francisco, that would not by itself make creating a public bank the right choice. We would still have to ask whether doing so makes sense for San Francisco given the cost, complexity and financial risk involved. Yet important questions about how the bank would be funded, how its risks would be managed, and what financial obligations the City could ultimately assume remain unresolved. These are not details that should be worked out later, but fundamental considerations in deciding whether the City should take on this responsibility in the first place.

Beyond those questions, we should also consider whether San Francisco needs to create its own bank to achieve these goals at all.

San Francisco already has institutions doing much of this work. Community lenders, credit unions, nonprofit loan funds, community development financial institutions and other financial partners are already putting capital into our neighborhoods. They lend to small businesses, affordable housing developers, immigrant entrepreneurs, and borrowers who can struggle to obtain conventional financing.

Before building an entirely new City bureaucracy, we should look seriously at how we can strengthen and expand the institutions we already have. Public resources can help existing lenders reach more borrowers, leverage additional private and philanthropic capital and fill financing gaps where the market is falling short. Building on existing institutions may allow us to pursue the same goals without recreating an entire banking infrastructure inside City government.

That is not an argument for doing less. San Francisco should be ambitious about affordable housing, neighborhood businesses, infrastructure and economic opportunity. But ambition does not require creating a new institution every time we confront a difficult problem. Government should be judged by the problems it solves, not by the number of institutions it creates.

Good goals still require good judgment. Before San Francisco takes on the responsibility and risk of running a bank, we should be clear about what it can accomplish that our existing institutions cannot, what it will require of the City and what financial risks the public will be asked to assume.

Supervisor Alan Wong represents District 4 on the San Francisco Board of Supervisors. Reach his office at wongstaff@sfgov.org or 415-554-7460.