Gerald Epstein

There is a potential new partner just over the horizon for Massachusetts’ community banks, community development financial institutions, small businesses, farms and underserved communities. It is the proposed Massachusetts Public Bank.

A coalition of Massachusetts groups and institutions, including Massachusetts Public Banking, The Boston Foundation, The Boston Ujima Project, The Metropolitan Area Planning Council and many others have found legislative sponsors to file legislation in the Massachusetts House of Representatives (H.975) and Senate (S.632) that would create a Massachusetts Public Bank.

The proposed bank would partner – not compete – with Massachusetts banking institutions to channel funds to deserving customers that Massachusetts financial institutions find to be too costly or risky to fund on their own. The bottom line is that the Massachusetts Public Bank will help smaller and community financial institutions contribute more to their communities while also helping them expand their customer base. And this can happen with virtually no cost to Massachusetts taxpayers.

Deposits from Municipal Deposit Trust

Too good to be true? Well, this is how the Massachusetts Public Bank would work.

First, the bank would not take deposits from the public. It would be capitalized with a legislative appropriation of $200 million spread over four years. It would also receive $1.4 billion in deposits transferred by the state treasurer from funds that are not used for the state’s day-to-day operations and which are currently invested in the Massachusetts Municipal Deposit Trust, where they are invested in funds across the globe.

Bringing these funds back to Massachusetts, the Public Bank would be able to make up to $1.3 billion in loans to meet the shortfall in credit to Massachusetts small businesses, farms and underserved communities.

Second, the bank will follow the “partnership bank” model utilized by the state-owned Bank of North Dakota. It will work collaboratively with local banks and community development financial institutions (CDFIs). It will partner with these institutions to provide loans to productive and underserved individuals, institutions and communities. The banking partners will benefit from lower-cost credit provided by the Public Bank, as well as training and other learning skills the bank will provide to borrowers, that will expand the clientele that local banks can reach and which can enhance the viability and safety of the loans provided.

Third, the Public Bank will have significant savings that it can pass on to borrowers and thereby widen the client base for local banks. These savings stem from several factors: one, the bank will not have to pay returns to equity holders; two, the bank will be servicing one large depositor rather than thousands of smaller ones; and three, the bank will pay public servant-level salaries to its employees, being able to attract skilled employees who are committed to the concept of Public Banking.

Partner, Not Competitor

Not only will the Public Bank not compete for depositors with local banks, it is designed to not compete with local banks for borrowers. It aims to service clients who, for structural reasons, have not been able to borrow from for-private local institutions.

These customers’ businesses might be too small, they might have insufficient collateral, lack a sufficient credit history or utilize an institutional framework, such as being a cooperative enterprise, that makes it difficult for them to get traditional bank credit. In fact, the partnership model will allow local banks to broaden their customer base to these groups in a profitable and safe way.

The Public Bank will be responsibly and skillfully governed and managed. Current regulatory requirements will ensure the soundness of the public bank, and it will be supervised by the Massachusetts Division of Banks and the Federal Reserve Bank of Boston, basically according to the same principles that apply to other state banks.

A Safe, Sound Institution

In addition, the bank’s institutional structure will ensure both rigorous accountability for its operations, as well as inclusive participation in its decision making. The Public Bank legislation creates rigorous reporting requirements, including to State Treasurer Deborah Goldberg. Its board of directors will include the state treasurer and it will have a board of advisors that will include the lieutenant governor and the Boston Fed’s director of community development.

Inclusive and representative governance will be facilitated by the structure of the Public Bank’s board of directors which, in addition to the state treasurer, will be made up of representatives of CDFIs, local banks, credit unions, co-ops, small businesses and those working in the areas of public finance, economic development and environmentally conscious financing.

Furthermore, the bank’s board will reflect geographic, racial and gender diversity, as well as the rural/urban structure of the state. The board will appoint a CEO who will serve at the pleasure of the Board. The 18-member advisory board, already mentioned, will include a diversity of the bank’s intended loan and training recipients.

Perhaps the biggest reason that many local banks and tradespeople will want to support the Massachusetts Public Bank is that it will help your neighbors and improve your communities, goals which most of us support and work towards. Many of our neighbors and institutions have legitimate, productive credit needs, but cannot access private credit. A new Massachusetts Public Bank can help to overcome these credit gaps efficiently and cheaply, and we can all benefit from having an environmentally cleaner, fairer and more prosperous commonwealth.

Gerald Epstein is a professor of economics and the co-director of the Political Economy Research Institute at University of Massachusetts Amherst and author of the new book, “Busting the Bankers’ Club: Finance for the Rest of Us.”