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Voters to decide if Los Angeles will create a city-owned bank

Last Updated Nov 5, 2018 5:05 PM EST

Ten years after Wall Street banks sparked a financial crisis that nearly wiped out the U.S. economy, the idea of nationalizing banks briefly came into vogue. Now, one city is on the verge of making a public bank a reality.

Los Angeles on Tuesday will vote on whether to amend the city charter to allow it to own a financial institution. The ballot initiative, called Proposition B, marks the first time the issue of a public bank will come up for a popular vote.

But the concept has been gaining some ground. Washington state passed a bill this summer to create a public bank. New Jersey Democratic Governor Phil Murphy made the issue part of his campaign. San Francisco and Oakland are doing feasibility studies. And the Territorial Bank of American Samoa, which is backed by the government, began functioning this past April when it was approved to access the U.S. payments system.

“The purpose of all this is to bring democracy to finance, in a way that respects the public trust. No longer, at least in Los Angeles, do we think city borrowing should be the basis for the investment industry,” said David Jette, legislative director for Public Bank LA, a volunteer effort backing Proposition B. PBLA was among the activist groups that succeeded in making Los Angeles pull city money out of Wells Fargo after its bogus-accounts scandal and subsequent public shaming.

There’s even hope that a state-chartered bank could service the state’s burgeoning cannabis industry. While a bill specifically aimed at boosting banking options for recreational marijuana industries failed to pass in the current legislative session, any such legislation would require the existence of an institution like the Los Angeles public bank in order to work.

Money-saver or unfair competition?

The idea is simple: Instead of paying for a private institution to hold the city’s money, the city would own the institution — saving on fees and reinvesting the profits into public works. While activists support the plan as a money-saver, the banking industry opposes the measure, saying it would create unfair competition.

Los Angeles currently spends upward of $1 billion a year on finance fees, a figure that could be reduced substantially, advocates said. Proponents also said a public bank could underwrite city bonds at a cheaper rate than Wall Street institutions offer.

“You improve the efficiencies, because you don’t have Wall Street holding on to billions of dollars in customer deposits, taxpayer deposits, and then lending it back to you when you need to put out municipal bonds,” said Marc Armstrong, a co-founder of the Public Banking Institute, which studies the issue.

Proponents also hope a state-owned bank will make loans that a private institution might find insufficiently profitable, such as funding public projects and investing in housing and clean energy efforts. It could create access to banks for the 20 percent of Los Angeles households whose neighborhoods offer no traditional consumer-banking services, according to an analysis from the city’s legislative analyst.

Another potential benefit: Because such a bank engages in the conservative business of holding deposits and lending out money, it will be less likely to overextend itself, collapse and tank the economy in the manner of Wall Street around 2008.

“Because it doesn’t engage in speculative ventures that generate short-term fee income — think derivatives — a public bank is a return to more conservative banking,” said Armstrong. “This creates an incentive for good behavior, a return to the community-banking model that used to be so prevalent.”

To Read The Rest Of This Article By Irina Ivanova on CBS News Market Watch

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Published: November 05, 2018

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