After we last year proposed “Equality Banks,” ideas flooded in on possible charters. We also heard from those who so distrust any venture involving private finance that they believe only a public bank suffices to ensure fair delivery of equality-essential deposit, loan, and payment products. In this blog post, we build on prior work to lay out an array of charter options suitable for different types of Equality Banks owned by different types of financial or private investors. We reiterate our worries about public banks, adding to our prior evaluation of state and municipal efforts with an analysis of “low-income” credit unions and of the only equality-focused federal public bank to date. Each of these well-intentioned initiatives in fact made U.S. inequality a little bit worse, providing important lessons as progressive Democrats ready a raft of proposals not only to craft public banks, but also even to make the Postal Service or Federal Reserve become one.
Equality Bank Charter Options
Validated by the history of the abortive equality banks presented below, our thinking about marshalling private-sector resources for public-interest capitalism is premised on ensuring that all such institutions received subsidies or regulatory exemptions only if they are governed by both profit-driven incentives ensuring market-service delivery and a well-designed, up-front, and enforceable straight jacket aligning profit with social purpose. Based on this framework, prior Equality-Bank work identified two possible charters:
- using a so-called bankers’ bank to establish a mutual owned by like-minded banks of any size that is given significant capital and other regulatory relief by the Federal Reserve only if the bank establishes an equality-focused mission that is enforced by the Fed, transparent, measurable, and contractually binding on the institution. As we noted, bankers’ banks then could create secondary markets for equality loans originated by member banks, handle payment services through higher-cost technology, and provide the managerial and technology advice necessary to achieve cost-efficiencies in higher-risk equality finance; and
- redesigning the OCC’s special-purpose fintech bank into a special-purpose equality bank owned by a single BHC, a group of banks, a group of banks and private investors, or just a group of socially-minded investors. The type of capital flexibility the OCC offers fintechs would be provided to a special-purpose equality bank again under strict, transparent, binding, and enforceable limitations.
Each of these two bank options is possible under current federal law and each has pluses and minuses in terms of product offerings discussed in more detail in our prior blog post. How else to open an Equality Bank without changing federal law? Additional options we only sketch below in broad strokes include:
- Reviving the “Morris Banks” first envisioned in 1910 and still authorized in federal law. Morris Banks went from pioneering, profit-driven social lenders in 1910 to companies offering loans for first-class travel and mink coats by 1938, but the charter is strong and can be quickly implemented in Utah, California, Nevada, Minnesota, and three other states. FDIC approval is also necessary based on certain product mixes. We think it would come quickly with a sound charter combining a strong mission with a sound business plan and robust mission controls.
- Savings Banks: Although the thrift charter fell into ignominy first in the 1980s S&L crisis and then again under OTS supervision before 2008, it was first crafted in the progressive era at the start of the 20th century for equality-boosting finance. Nothing in the charter bars this now nor are there limits to establishing federal- or state-chartered savings banks with an equality mission that are owned by other banking organizations or investors. Regulatory exemptions are harder to get now due to the thrift industry’s sorry history, but the charter nonetheless warrants attention for any equality institution with a single- or multi-family mission.
- Merchant Banking: Buried in the bowels of the activities authorized for financial holding companies is authority to take equity stakes in private ventures as long as the investment is passive and other conditions are met. Used mostly to fuel big-bank private-equity operations, this merchant-banking authority also offers a powerful vehicle for funding start-up small businesses and other equality-focused employment engines.
Good Intentions Gone Awry
Some have also suggested that Equality Banks take on the mantle of a “low-income credit union” as authorized by the National Credit Union Administration. Although credit unions as is are supposed to serve households without ready access to banks, the sector’s mission has gone so mainstream that the NCUA in 2010 decided to authorize these “LICUs,” offering them very generous relief from the common bond otherwise supposed to link credit-union membership. A recent Federal Reserve Bank of Philadelphia study found that these “low-income” credit unions grew 800% once the rules were off, now amounting to a $400 billion segment – i.e., about the size of the eighth largest U.S. bank holding company.
Did all these billions promote equality? According to this study, they instead powered up high-risk auto lending, serving also as a competitive force against community banks that led to still more consolidation in this already-shrinking sector.
Another cautionary tale is the saga of the National Cooperative Bank. The Co-op Bank was authorized in what I’d call the mini-progressive era of the late 1970s to provide an indirect federal subsidy for loans to farmers cooperatives and those springing up in towns such as Berkeley to offer lower-cost groceries and even financial services. Fast forward to 2019 and one finds a $2.3 billion bank making loans to fund Park Avenue co-ops and other high-price housing. The switch happened with awesome speed – the Co-Op Bank went from a “federal instrumentality” in 1978 to a cooperative bank owned by its borrowers in 1981 to a “competitive market-oriented private financial institution” by 1985. In 1986, a director who resigned from the Co-Op Bank in protest described it as a “go-go financial conglomerate with a half-dozen subsidiaries all kept afloat by the interest on its original subsidy.”
And then of course there’s Fannie Mae and Freddie Mac. Suffice it to say that public financial institutions without effective mission and prudential controls have so far fared badly.