Public Banking – The Basics
Banking in the Public Interest
What is it? – Who has it? – Why we need it? – How we can get it?
Public Banks are public welfare-oriented institutions and, instead of profit maximisation, their aim is the sustainable development of the real economy within their business territories. 40% of all Banks in the world are Public Banks mainly in prosperous & emerging countries like Germany, Brazil, Russia, India & China. The BRIC countries have grown 92% in the last decade compared with 15% for the west. The West is now in decline while the BRICs continue to prosper. Less than 10% of all loans granted by our current banking system are given to businesses.
There are basically four models: The German Savings Bank model, the
Co-op model, the Japan Post Bank model & the Bank of North Dakota model.
The German Savings Banks Founded 1778, have 40% of the total German market and provide 42.7 per cent of all finance to German businesses.
The German Public Savings Banks are
1. Operated on commercial principles with the aim of maximising sustainable lending and not on maximising profits.
2. Operated on the Principle of “Local deposits into local loans” keeping capital in their own area.
3. Surpluses remain with the Bank & within the region: Profits are used to increase equity and for non-profit purposes (the public benefit principle).
4. Banned from engaging in financial speculation.
5. Only allowed to lend only to local people and businesses in its designated catchment area.
6. Controlled by stakeholders from the local community.
7. Independent of political influence and control.
8. The Joint Liability Scheme provides protection for all Savings Bank Branches.
In the current recession between 2008 & 2011 German Public Banks increased lending to Small & Medium Size Enterprises (SME’s) by 17%.
Co-op Banks Founded 1840
“Volksbank” (German for “people’s bank”). There are Volksbank networks in at least ten countries. Germany has 1,099 independent local Volksbanken with 13,211 branches making up 24% of the German banking market.
Japan Post Bank – Postal savings was introduced to Japan in 1875
Japan Post Bank (JPB), now the largest depository bank in the world. Not only is it a convenient place for Japanese citizens to save their money, but the government has succeeded in drawing on JPB’s massive deposit base to fund a major portion of the federal budget. Rather than using its deposits to back commercial loans as most banks do, Japan Post invests them in government securities. That means the government is borrowing from its own bank and its own people rather than from foreign bondholders. The Japanese government can borrow 10-year money at 1 percent and lend it to the U.S. at 1.6 percent (the going rate on U.S. 10-year bonds), making a tidy spread.
Although theoretically privatized in 2007, it has been a political football, and 100 percent of its stock is still owned by the government. To keep the system stable and sustainable, the money just needs to come from the nation’s own government and its own people, and needs to return to the government and people. Ellen Browne
The Bank of North Dakota Established 1919.
The BND is similar to a Public Central Bank i.e. creates its own credit. It is a depository for all state tax collections and fees. It pays a competitive rate to the state treasurer. It plows those deposits back into the state of North Dakota in the form of loans. It invests back into the state in economic development type of activities.
What make these types of Public Savings/Lending Institution so successful?
In all cases the profit & the interest on lending is returned to the institution to boost its capital & returned to the community in new loans. This amount of interest can be from a few percent on short term loans to as much as 150% in the case of mortgages. All this is returned to the institution & the community. Under our current system the Interest and profit is taken out of the community & economy. This lack of adequate currency in the economy causes a slow down or a recession.
These Public Institutions also benefit the economy by the type of loan they offer i.e. loans that support SME’s. This is the type of loan that Big Banks will not offer as they do not know their customers and tend to only lend where there is an asset involved they can repossess and sell off if there is a problem with repayment.
This type of lending over the long term does not support the economy or those who create jobs. It just fuel Boom-Bust cycles as was the case with our property bubble.
If we refuse to allow our government to make money through public enterprises, we will be destined to bear the burden of supporting government with our taxes, while we watch countries such as China, Korea and Japan, which do allow public industries, enjoy the fruits of that efficient people-serving arrangement. Ellen Browne
How we can get it?
The German Savings Banks, The Sparkassen offer their system.
Public Savings Banks can be formed as Co-ops or Foundations.
A huge opportunity exists for our Credit Unions and the Post Offices to becoming a major part of a comprehensive Public Savings Banking Service.
The 99.2% State owned PTSB is about to be split into a Good & Bad bank and sold off. Why not retain the Good bank and convert its network of 70 odd branches to Public Banks. This alone would be a major start.
What are the consequences of not putting a Public Banking system in place?
A public banking system can be put in place at a minimal cost while the cost through Bail-outs or Bail-ins of getting our current banks back to their original state of “not serving the real economy” could be as much as 50bn? 100bn? Who knows? “Ireland Exits Troika Bailout To Prepare For Bail-ins” Reggie Middleton. Michael Noonan passed the Bail-in process into EU law during our EU Presidency.
Banking in the Public Interest
A post-bank alliance with social credits – Prof Ray Kinsella
An alliance between credit unions and the post office network could provide the most innovative and far- reaching initiative in Irish retail financial services for more than a generation.
The contraction of the Irish banking network is irreversible and gaining in momentum. The footprint of the bank networks has already shrunk massively and in Britain it is also estimated that five branches will close every week, for as far ahead as it is reasonable to estimate.
There are two forces driving this process. In Ireland the immediate one is brute economics. In the case of Ulster Bank, even after the injection of over £10bn (€12bn) by its British parent RBS, the bank still recorded an operating loss of over £700m last year. Low interest rates hit interest income and a stressed domestic economy provided little scope for optimism on the lending front. Pruning the branch system is an inevitable response to the need for cost reduction.
But there is an even more fundamental force at work; online banking and the proliferation of internet-based platforms for carrying out banking transactions are now mainstream. In Britain, the Lloyds group recorded one billion ‘click-on’ transactions in 2011.
Irish banks have invested heavily in internet platforms. The cost of a transaction has plummeted, while the flexibility and functionality of the new systems is enormous and growing.
We are witnessing the birth of a new banking model, where smartphones can serve multiple transaction and payment functions, though not without some glitches.
The transition will not eliminate the branch. The management and staff and support systems will remain a major competitive resource, but in a more limited manner than five or 10 years ago.
What we are witnessing is the ‘push’ of cost reduction and the ‘pull’ of increased flexibility and functionality, which is ‘crowding out’ the traditional role of the bank branch.
There is another side to all this. The contraction of the branch network represents a major erosion of the commercial infrastructure of smaller towns and of ‘social capital’ in low population density communities.
In these areas the branch was a ‘go-to’ resource, part of the cement holding the community and local economy together. That is now under pressure, and at the worst possible time.
This is not nostalgia; these are not marginal issues. The local bank branch is a very big deal especially in rural areas. A round trip of 30 miles to the next town, or an additional ATM, are no substitutes for a welcoming and well-staffed branch.
Many customers want a personal service, with or without high-tech services.
The banks know this. They just can’t sustain what was once their bread and butter; the interface with their customers. It’s simply the pressure of a business model driven by shareholders and profitability.
There is an alternative. The two potential pillars are the post office network and the credit unions. Each is undergoing its own quiet revolution. But there are enormous synergies to be gained from an alliance (not a merger), including a whole new way of building a distinctively Irish banking model — one that should have been an outcome of the re-imagining of banking, after ‘The Fall’.
Consultants Grant Thornton point out: ‘The post office network plays an important role in the community and offers vital services to many that would be difficult to replace. The decline of the network could have many unintended social and economic consequences, notably in rural areas.”
Bank closures will exacerbate these problems in some parts of the country. But a key difference, compared with banks, is that the post office network is not under the guillotine of shareholder value. There is a specifically ‘social’ purpose. The same is true of credit unions.
Moreover, the Grant Thornton report highlights the scale of the post office network. It is larger than the bank or any of the big retailers. Like the credit unions, it commands trust. It has a highly competitive, if somewhat old-fashioned, range of saving products that actually complement the lending products and credit risk systems of the credit unions.
It also has the capacity to provide profitable new payments services, ranging from motor tax to hospital charges. Its service provision has been greatly enhanced by the acquisition last year by its subsidiary One Direct of the personal motor insurance business of Aviva.
All of this constitutes a strong platform for service provision that is profitable, highly cost effective but that has primarily a social purpose. It has enormous relevance to contemporary Ireland at a time when the domestic and international service capabilities of commercial banks have been cut back and when their commercial mandate has put them under real pressure in terms of their social purpose.
In the aftermath of the AIB branch closures last year, the bank engaged with An Post to distribute its products. It was a sensible move to mitigate the impact of the closures and, probably, to relieve some of the political heat. But it was, essentially, a tactical rather than a strategic arrangement. The bank continues to have a highly circumscribed commercial agenda. The post office needs to be commercial, but it serves a social purpose.
So too do credit unions. The movement has well over 400 branches and the Credit Union Bill 2012 provides a new framework for strengthening regulation, enhancing governance and management, as well as extending the systems and services of the credit unions.
Its product portfolio is deep, extensive and capable of being expanded to embrace new technology platforms. It is investing heavily in training and education and last year UCC developed a whole suite of accredited programmes in collaboration with the ILCU.
An alliance — a sharing of ideas and capabilities and visions — could hardly be more timely.
© Irish Examiner Ltd. All rights reserved
Professor Richard Werner
BSc (Econ), D.Phil. (Oxon) University of Southampton.
Chair in International Banking , Director, Director of Int’l Development
Prof Werner has been at the University of Southampton since 2004. He is Director of International Development and founding Director of the Centre for Banking, Finance and Sustainable Development. Richard is also a member of the Southampton Management School’s Executive Board, as well as its Advisory Board.
Prof Richard Werner – The Case for Local Banking – RESPONDER
Councils should “bring local banks into being” so they can become “powerful partners” and promote economic, social and environmental benefits to their communities.
Alex Templeton Speaking at the 2nd European Conference on Banking and the Economy (ECOBATE) in Winchester, Alex Templeton, Director of the Farm Energy Project, explains how a disfunctional financial system has made it harder to lend to small businesses which in turn impacts communities.
Published on Mar 21, 2013
Alex Templeton speaking at ECOBATE UK
Speaking at the Just Banking conference in April, Prof Richard Werner called for an end to the suppression and repression of the third sector, including mutually-owned financial institutions and credit unions, while also calling for the introduction of a “regime of credit guidance”. Werner, chair in international banking at University of Southampton School of Management and founding director of the Centre for Banking, Finance and Sustainable Development, said:
“[we need to] return the power to create and allocate money to the people, this privilege belongs to them … by having local banks we can have local money.”
Prof Richard Werner at the Just Banking conference on 20th April 2012
Her solution to the US Credit Crisis.
Speaking about the US but it resonates with us in Ireland
The Sparkassen, The German Public Savings Bank System
The Sparkassen Public Saving Banks are
- Independent of political influence and control.
- Controlled by stakeholders from the local community.
- Only allowed to lend only to local people and businesses in its designated catchment area.
- Banned from engaging in financial speculation.
- Operated on commercial principles with the aim of maximising sustainable lending and not on maximising profits.
- Operated on the Principle of “Local deposits into local loans” keeping capital in their own area.
- Surpluses remain with the Bank & within the region: Profits are used to increase equity and for non-profit purposes (the public benefit principle).
Germany with 40% Public Banks & 24% Co-op Banks essentially has 64% Public Banks. These banks increased their lending to the public & SME’s during the current recession. This in no small part accounts for Germanys continued economic success and it coming through the current recession virtually unscathed. Lending increased to SME’s by 17% from 2008 to 2011
Dr Thomas Keidel speaking at ECOBATE 2013 UKDr Thomas Keidel
Director Financial Market Relations, DSGV
Before joining the DSGV, he spent five years establishing and acting as Managing Director of Heptagon Capital Beteiligungsgesellschaft der Freien Sparkassen mbH & Co. KG. After completing his bank apprenticeship at the MM Warburg-Brinckmann Bank, Wirtz & Co, Dr Keidel studied business studies and economics, with an emphasis on banking management, at the University of Hamburg.
He completed his doctorate at the EuropeanBusinessSchool in Oestrich-Winkel. From 1996 to 1999 Dr Keidel worked in the office of the Senior Executive (Partner) and in the Corporate Finance Department of MM Warburg & CO. As Project Manager in the mergers and acquisitions division, Dr Keidel successfully supervised medium-sized corporate mandates and privatisation projects.
From 1991 to 1998 he was deputy of the finance department (Ministry) of the Free and Hanseatic City of Hamburg. Dr Keidel has been a member of several boards of directors and advisory committees of medium-sized German businesses. He has gained extensive experience in the field of international banking.
of THE GERMAN SPARKASSEN
by C. V. J. SIMPSON – SIMPSON ASSOCIATES UK
C.V.J. Simpson – Personal Profile
Christopher Simpson is Managing Director of Simpson Associates, an international engineering consultancy providing advice and support to companies in the UK, USA, Germany and other European countries on strategy, project management, acquisitions and other business development.
He has held directorships with major manufacturing corporations in the UK and Germany and has wide experience of working in the USA and Europe. He has in depth knowledge of Germany and is fluent in the language. His specialist areas are advanced manufacturing and financial management. He has a first degree in engineering and is a Sloan Fellow at the London Business School.
Apart from his direct business activities, he is Chairman of the UK Manufacturing Excellence Awards (MX), a Member of the Board of MX Germany, Past Chairman and current Board Member of the Manufacturing Division and Chairman of the Management Group at the Institution of Mechanical Engineers. He is a Liveryman of the Worshipful Company of Engineers and a Freeman of the City of London.
German success versus British malaise:
CIVITAS Press Release Feb 2013
“Much like our own banks, the big German commercial banks cut lending to businesses after the crisis in 2008. However, Germany has a parallel system of community Savings Banks (Sparkassen) that actually increased their lending during this turbulent period, providing vital support for the wider economy in difficult times.”
“While Britain’s banks regularly turn away successful businesses, Simpson’s forensic case study reveals how a local German Savings Bank provided crucial support to a cutting edge exporter with 800 employees during the worldwide recession. This concrete example provides a strong insight into the causes of German economic success. Whereas local entrepreneurs in Britain are ignored by the large commercial banks, the Sparkassen give German entrepreneurs and communities the independent means with which to improve their lot and contribute to the wider economy.”
The roots of German success
“Simpson also explains how the Sparkassen operate, describing their history, structure and organisation. Savings Banks are only allowed to lend within a geographically defined local area and as a result develop close relationships with their customers. They are publicly-owned but independent organisations with the ‘common good’ objective of supporting sustainable economic development rather than maximising profit. Moreover, their geographical spread extends to all of Germany, ensuring that all communities have access to finance. They are a key factor behind the success of Germany’s formidable ‘Mittelstand’ sector of small and medium-sized enterprises. In 2010 they funded over half of new business start-ups in the country.”
Debt Free & Interest Free Money: Richard Werner
How to Ease the State’s Budget Crises:
Own a Bank
The Bank of North Dakota has taken a role more akin to a central bank.
The Bank of North Dakota!
Instead of theorizing about possible advantages we want to present a concrete example. It is from the almost 100 years of consistently successful performance of the public Bank of North Dakota. Briefly, from this we can conclude that a public bank can:
- Create new jobs and spur economic growth
- Generate new revenues for states
- Lower debt costs for local governments
- Strengthen local banks and even out credit cycles
- Build up small businesses.
Private Banks are pressed by the owners to focus on rapid generation of profit,
which often leads to more or less hazardous gambling with money that could
have promoted the ecnomic growth of the state and nation.
The public bank, on the other hand, is required by its owners – you, the people – to act so as to promote the economy of the state in the best possible way by providing credit for growth and prosperity.
North Dakota is an excellent example, being the only state in the US with a flowering economy and low unemployment in the midst of the more or less severe crisis of all the other states.
The experience from North Dakota indicates the following advantages:
If modeled on the successful Bank of North Dakota (presented furhter below), Partnership Banks in other states would:
• Create new jobs and spur economic growth. Partnership Banks are participation lenders, meaning they partner—never compete—with local banks to drive lending through local banks to small businesses. If Washington State had a fully-operational Partnership Bank capitalized at $100 million during the Great Recession, it would have supported $2.6 billion in new lending and helped to create 8,212 new small business jobs. A proposed Oregon bank could help community banks expand lending by $1.3 billion and help small business create 5,391 new Oregon jobs in its first three to five years. All of this would be accomplished at a profit, which Partnership Banks should share with the state.
• Generate new revenues for states directly, through annual bank dividend payments, and indirectly by creating jobs and spurring local economic growth. The table above shows projected dividends for established Partnership Banks in the states considering such proposals, based on BND’s 2009 dividend payment to North Dakota’s General Fund.
• Lower debt costs for local governments. Like the Bank of North Dakota, Partnership Banks can get access to low-cost funds from the regional Federal Home Loan Banks. The banks can pass savings on to local governments when they buy debt for infrastructure investments. The banks can also provide Letters of Credit for tax-exempt bonds at lower interest rates, or help a city or the state itself issue a new bond at an interest rate lower than it could otherwise get in the open market, or buy bonds already issued and traded on the bond market, with interest payments simply diverted to the state.
• Strengthen local banks and even out credit cycles, and preserve real competition in local credit markets. There have been no bank failures in North Dakota during the financial crisis. BND’s charter is clear that its goal is to “be helpful to and to assist in the development of [North Dakota banks]… and not, in any manner, to destroy or to be harmful to existing financial institutions.” By purchasing local bank stock, partnering with them on large loans and providing other sup- port, Partnership Banks would strengthen small banks in an era when federal policy encourages bank consolidation.
• Build up small businesses. Surveys by the Main Street Alliance in Oregon and Washington show at least 75 percent sup- port among small business owners. In markets increasingly dominated by large corporations and the banks that fund them, Partnership Banks would increase lending capabilities at the smaller banks that provide the majority of small business loans in America.
Experiences from the successful public Bank of North Dakota (BND):
State-owned banks could be a win-win for virtually everyone. Objections are usually based on misconceptions or a lack of information. Proponents stress that:
1. A state-owned bank on the BND model would not compete with community banks. Rather, it would partner with them and support them in making loans. The BND serves the role of a mini-Fed for the state. It provides correspondent banking services to virtually every financial institution in North Dakota and offers a Federal Funds program with daily volume of $330 million. It also provides check clearing, cash management services, and automated clearing house services. It leverages state funds into credit for local purposes, funds that would otherwise leave the state and be leveraged for investing abroad, drawing away jobs that could go to locals.
2. The BND not only does not compete for loans but does not compete for commercial deposits. Less than 2% of its deposits come from consumers, and municipal government deposits are also reserved for local community banks, which are able to use these funds for loans specifically because the BND provides letters of credit guaranteeing them. Virtually all of the BND’s deposits come from the state itself. All state revenues are deposited in the BND by law.
3. Although the BND is a member of the Federal Reserve System, it is insured by the state rather than by the FDIC. This does not, however, put depositors at risk. Rather, it helps avoid risk and unnecessary expense, since the BND’s chief depositor is the state, and the state has far more to deposit than $250,000, the maximum covered by FDIC insurance. FDIC insurance is not only very expensive but subjects members to FDIC regulation, making the state subservient to a semi-private national banking association. (The FDIC calls itself an independent agency of the federal government, but it receives no Congressional appropriations. Rather, it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.) North Dakota prefers to maintain its financial independence.
4. BND officials stress that the bank is run by bankers, not politicians bent on funding their favorite development projects or bestowing political favors. The bank is run very conservatively, doing only creditworthy deals and avoiding speculation in derivatives and risky subprime loans. By partnering with local banks, the BND actually shields itself from risk, since the local bank takes the initial loss if the borrower fails to pay.
5. The BND does not imperil state funds or tax money but is self-funding and self-sustaining. It keeps federally-guaranteed funds in the state that would otherwise go elsewhere, including VA and FHA loans and low-income subsidies. Profits on these federally-guaranteed loans can then be used to build a capital surplus from which riskier loans can be made to local businesses. The BND has a return on equity of 25-26% and has contributed over $300 million to the state (its only shareholder) in the past decade — a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. Compare California’s public pension funds, which entrust their money to Wall Street and are down more than $100 billion, or close to half the funds’ holdings, following the banking debacle of 2008.
6. Partnering with the BND allows community banks to fund local projects in which Wall Street is not interested, leveraging municipal government funds that would otherwise not be available for loans. Further, infrastructure projects can be funded through the state bank at substantially less cost, since the state owns the bank and gets the interest back. Studies have shown that interest composes 30-50% of public projects.
7. The North Dakota Bankers’ Association does not oppose the BND but rather endorses it. North Dakota has the most local banks per capita and the lowest default rate of any state.
‘Bank on Dave’ for people in UK.
Banking with a human face:
“People who rob banks get put in jail, bankers who rob the people get bonuses”
Christopher M. Quigley B.Sc.(Maj. Accounting),
M.I.I. (Grad), M.A.
Read Full article on Awaken Longford website.
Natural Money Examples:
1. The Austrian town of Worgl. On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl introduced a complementary currency. Wörgl was in trouble and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job and 200 families were penniless. The mayor Michael Unterguggenberger had a long list of projects he wanted to accomplish, but there was hardly any money to carry them out. These projects included paving roads, streetlights, extending water distribution across the whole town, and planting trees along the streets.
Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known as stamp scrip. The Wörgl currency required a monthly stamp to be stuck on all the circulating notes for them to remain valid, amounting 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.
Because nobody wanted to pay the holding tax, everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings but this offer was rarely taken up. Of all the business in town, only the railway station and the post office refused to accept the local money. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump and a bridge.
The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the Schilling. This in turn increased trade, creating extra employment. At the time of the project, unemployment in Wörgl dropped while it rose in the rest of Austria. Six neighboring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a special visit to see the ‘miracle of Wörgl’. In January 1933, the project was replicated in the neighboring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea. At this point the central bank panicked and decided to assert its monopoly rights by banning complementary currencies.
Read Full article on Awaken Longford website.