Banking and Finance Law Daily California allows formation of ‘public banks’
Thursday, October 3, 2019

California allows formation of ‘public banks’

By J. Preston Carter, J.D., LL.M.

Governor Newsom approved AB 857, which authorizes the formation of a limited number of public banks in the state to support community development.

Legislation signed by Governor Gavin Newsom on October 2 authorizes the creation of "public banks." The new law (AB 857) allows California counties and cities to establish public banks, which are intended to provide loans for the purpose of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities. The law limits the number of public bank licenses to two in a calendar year, and no more than 10 at one time. The law expires seven years after regulations under the law are promulgated.

California Assembly analysis of the measure quotes the California Public Bank Alliance as saying, "Unlike a privately-owned bank, which prioritizes shareholder returns, public banks leverage their deposit base and lending power to benefit the public. This allows public banks to focus on pressing local needs, like affordable housing, small business loans, and public infrastructure projects such as rebuilding after wildfires." The summary also quotes the California Bankers Association as stating that "Proponents for the creation of a public bank have failed to identify how the current marketplace is not meeting the public's financial needs Commercial banks, particularly community banks, will be harmed by the taking of local agency deposits which would otherwise be used as a source of liquidity by these banks to make loans into their communities."

The law defines the term "bank" for purposes of the Financial Institutions Law and the Banking Law to include a public bank. It defines the term "public bank" to mean a corporation, organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, or a joint powers authority.

The law requires a public bank to obtain a certificate of authorization to transact business as a bank from the Commissioner of Business Oversight and to obtain and maintain insurance, subject to specified requirements. A local agency must conduct and approve a study of the viability of a public bank containing specified elements before submitting an application to the Commissioner.

Also, the law requires a local agency that is not a charter city to obtain voter approval of a motion to submit an application to the Commissioner. A county may lend its available funds to a public bank. A local agency may deposit funds in a public bank, and invest in a public bank. A public bank is authorized to make distributions to its members, and a public bank can conduct retail activities in partnership with local financial institutions. The law prohibits a public bank from competing with local financial institutions.

Companies: California Bankers Association; California Public Bank Alliance

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