As Community Lenders Sell Out or Go Under, Can Publicly-Owned Banks Restore Local Control?

Silicon Valley Bank opened in 1982 to serve startups shunned by big lenders, which saw the fledgling tech sector as innately risky. But Roger Smith and Bill Biggerstaff, the Wells Fargo defectors who founded the small bank with Stanford University professor Robert Medearis, had deep roots in the derring-do culture that would transform Santa Clara Valley into the world’s innovation capital.

Now with more than $60 billion in assets, Silicon Valley Bank long ago outgrew its provincial status. Still, those early days wove it into a rich tradition of community lenders that make decisions based on nuanced understanding of specialized markets and close relationships with borrowers.

Small banks have since become an endangered breed.

Once awash in neighborhood lenders and credit unions, the South Bay has lost the vast majority to mergers and acquisitions. Beloved local brands such as Saratoga National Bank, Peninsula Bank, San Jose National Bank and the Bank of Santa Clara gradually consolidated out of existence. Cupertino National Bank and Mid-Peninsula National Bank were rolled up into Greater Bay Bancorp in the 1990s. In 2007, the 41 Bancorps branches were slurped up by Wells Fargo. Borel Private Bank & Trust was sold to Boston Private Bank. CEFCU of Peoria, Illinois, acquired Valley Credit Union. The list goes on.

The disappearance of Silicon Valley’s small banks reflects a broader trend driven partly by economies of scale and also by growing compliance costs. From 1985 to 2010, the number of banks in the US with assets under $100 million fell from 13,000 to just 2,625. The pace quadrupled between 2010 and 2014.

At his confirmation hearing 2½ years ago, Treasury Secretary Stephen Mnuchin attributed the ebb to laws enacted after the 2008 global financial crash. “Regulation is killing community banks,” he told Congress. “We’re losing the ability for small and medium-size banks to make good loans to small- and medium-size businesses in the community, where they understand those credit risks better than anybody else.”

Some experts blame the regulatory burden of the 2010 Dodd-Frank Act, which bolstered oversight of the financial industry. Others cite the anti-terrorism money laundering controls of the 2001 Patriot Act. Multimillion-dollar fines for violating suspicious-activity and cash-transaction laws force smaller operations to shut down or acquiesce to big banks with well-staffed compliance teams. All the while, stricter supervision for new banks has decimated the number that dare to break into the industry.

The banks that financed entrepreneurial ventures and helped its founders buy homes and equipment are no longer here. No wonder Silicon Valley is losing its luster.

Local lawmakers, however, are looking to an unlikely source for answers: North Dakota. That’s because the rural midwestern state boasts six times the number of locally-owned financial institutions than the rest of the country. Its secret? A public entity that supports small private lenders by helping with capitalization and liquidity—and allows them to take on larger loans that would otherwise go to big out-of-state banks.

It may sound far-fetched, but proposals paving the way for the public banking option have made headway in several states, including California. AB 857—a bill introduced by Assemblyman David Chiu (D-San Francisco) and co-sponsored by colleagues Miguel Santiago (D-Los Angeles) and Ash Kalra (D-San Jose)—would authorize counties and cities to charter banks mandated to serve the public interest. On Wednesday, it cleared a major hurdle by passing the Senate Banking and Financial Institutions Committee.

Jake Tonkel, a 28-year-old biomedical engineer campaigning for a public bank of Silicon Valley, envisions one that would slash debt costs, fund infrastructure and spur entrepreneurship. “If San Jose had control of its own finances, we could use it to reach the goals that the city is trying to achieve,” he says. “We can fund climate mitigation and put solar on more roofs. We can invest in affordable housing and small businesses and shape the city into what we want it to look like.”

What’s Old is New

Public banks enjoy a long but obscure history in the United States. Benjamin Franklin’s creation of a land bank in Pennsylvania allowed farmers to secure cheap loans. Even today, public entities such as the Small Business Administration, the Federal Deposit Insurance Corporation and the Federal Housing Administration are important parts of the modern banking system.

But the Bank of North Dakota is the mainland’s only state bank, and it’s held up as an archetype by advocates of alternative financial systems.

Founded 100 years ago to extend credit to broke farmers and ranchers, the Bank of North Dakota has evolved into a reliably profitable financial powerhouse. According to its 2016 annual report, the state bank logged its 13th straight year of record profits, garnering more than $136 million in income while expanding its loan portfolio by $449 million.

Proponents of the North Dakota model credit the publicly-owned bank for helping the state shore up in the booms and weather the busts inherent in today’s economy.

Since 2011, a nonprofit called the Public Banking Institute has recruited organizers to try to adapt the template to other states and cities. The past year has seen the movement gain steady traction. New Jersey’s Democratic governor, Phil Murphy, campaigned on the promise of a public bank. Leaders in Oregon, Vermont and Washington D.C. have held meetings to talk about the practical benefits of the public system.

Several major cities that joined the California Public Banking Alliance, an advocacy organization that supports AB 857, have completed feasibility studies, including Oakland and San Francisco. A ballot measure that would’ve allowed Los Angeles to create its own bank failed to garner enough votes last fall. But the city—where $170 million a year in taxpayer money goes to private banking fees and which pays $1.1 billion in annual interest to bondholders—is backing the statewide effort to authorize a local charter.

Each jurisdiction faces a unique set of challenges, from steep startup costs to legal barriers and tepid political will. But advocates hope the idea of public banking will catch on, in part, because of its potential appeal to both sides of the aisle. Conservatives might appreciate the potential cost-saving and local control offered by public banks, while progressives might buy in as a way to combat climate change and other societal ills.

When the subject came up at a public hearing some months ago in San Jose, Councilman Lan Diep, a Republican, applauded a plan to study the concept. “On the idea of public banking,” he said, “I’m actually quite intrigued.”

Seeing Green

While the Wall Street bailout fueled interest in public banks more than a decade ago, a new generation found its way to the movement through fears about climate change—fears that intensified with the oil industry’s victory at Standing Rock.

Jake Tonkel's push for divestment eventually led him to join the call for public banks. (Illustration by Kara Brown)

Despite nearly a year of protest that resulted in 500 arrests and 300 police-inflicted injuries, the Dakota Access pipeline fulfilled its manifest destiny.

In June 2017, the conduit began slurping up fracked oil from the Bakken formation to spew out at a tank farm 1,200 miles southeast in Pakota, Illinois.

By the time authorities disbanded the camp, the resistance had metamorphosed from physical standoff to burgeoning movement.

The fossil fuel divestment campaign came to be known as Mazaska Talks—“mazaska” means “money” in Lakota—and prompted people, companies and public agencies to pull $5 billion from Bank of America, Goldman Sachs, JPMorgan Chase, Wells Fargo and other banks funding new oil pipelines.

Tonkel, a Peace Corps alumnus who joined the opposition at Standing Rock for a brief time in 2016, returned home to San Jose determined to keep up the fight. He started small, closing his Bank of America accounts and, through, sifting through 215 mutual fund options to align his 401k to the cause.

For Tonkel, that wasn’t enough. He wanted the banks banned from doing business with all local governments in Santa Clara County.

So he began hosting panels and talking to community groups about moving public money away from financial institutions profiting off of fossil fuels, private prisons, payday lending, weapons manufacturing and latter-day redlining. As divestment campaigns caught on elsewhere, it became clear that even cities sympathetic to the idea—Los Angeles, Oakland and San Francisco—could only do so much.

Virtually every bank big enough to take major-city deposits had an ethically dubious and sometimes criminal record. “I knew we’d have to think bigger,” Tonkel says.

Two Wrongs

Councilman Sergio Jimenez learned about public banking in much the same way Tonkel did: by mulling divestment from fracked-oil pipelines. In 2017, the newly elected councilor and his staff began researching the city’s investment standards because of the growing outcry over the North Dakota pipeline and found that San Jose had diverted its deposits on moral grounds before.

On the heels of the 2009 subprime mortgage crisis, the city broke up with Bank of America for failing to prevent foreclosures, which—like the rest of its too-big-to-fail cohorts—it promised to do when it accepted the federal bailout. Wells Fargo filled the void. But it, too, strayed from the city’s professed values.

In 2015, the banking behemoth Citigroup, along with JPMorgan Chase and Barclays, among others, pleaded guilty to felony charges for conspiring to illegally inflate interest rates as part of a global financial racket known as the Libor scandal. A year later, regulators brought Wells Fargo’s fake-accounts scheme to widespread attention. The pipeline became another black mark, compounded by revelations that the bank invested in private prisons conscripted into President Trump’s deportation infrastructure.

Frustrated by the city’s ties to the banking giant, Jimenez urged colleagues to update the “social responsibility” clause of the investment policy for the first time since the Great Recession. In a March 2017 memo, he proposed revising it to “prioritize city values and address public concern,” and to expand the policy to reflect the city’s commitment to “fair practices and engagement with socially responsible businesses.”

“We wound up modifying the investment policy by adding a line about social impact,” he says. “Some time after that, these public bank advocates began reaching out to me.”

Shortly after his epiphany about the link between divestment and public banks, Tonkel teamed up with a handful of activists from the South Bay Progressive Alliance to convince residents and elected leaders to seriously consider the prospect. Jimenez was one of the first local electeds the group approached. Tonkel, retired techie Judy Young and Brian Haberly—who led a campaign to keep oil trains out of San Jose—were among the first advocates to tell him about their vision for another kind of fiscal enterprise.

“They talked about not just the environmental aspect, but all these other potential benefits,” Jimenez says from his 18th floor office at City Hall. “That’s when I started digging into what it would take, understanding the complexities and realizing that it would be a pretty big lift to change banking services the city uses.”

From a black cabinet by his desk, he pulls out a yellow folder.

“I started a public banking file,” Jimenez says, brandishing a dossier filled with handouts from advocates of the movement. “It’s not a massive file, but it got me thinking about what I could do to advance the conversation and what to do about this policy-wise.”

When San Jose’s contract for banking services recently went out to bid, it exposed yet another ethical conflict and gave Jimenez an opening. None of the banks big enough to handle San Jose’s $4.3 billion budget complied with its policy against hiring companies with multiple wage theft judgments in the past five years.

Chase, the best-scoring candidate for the city’s financial services contract, showed more than 20 wage and hour violations that incurred $160 million in fines. Wells Fargo outdid itself—lying by omission about 10 judgments ranging from $840 to $116,536.

Jimenez convinced council members Raul Peralez and Magdalena Carrasco to co-sign a memo that would direct the city to explore creating a public bank. In March, the proposal won unanimous approval from the 11-member council, which also agreed to extend the deal with Wells Fargo for a year. But the next step depends on the outcome of AB 857.

“Learning that we have such a huge dependency on these big banks—that really struck me right there,” Peralez says.

The city stood up to PG&E by creating San Jose Clean Energy to induce demand for a cleaner power supply. Peralez says that makes him believe it can just as well wield its power as a depositor of billions of dollars in tax revenue and an investor of billions of dollars in worker pensions against a banking industry rife with misconduct and beholden to far-away shareholders.

But at what cost?

Risky Rewards

Citing his two decades in private banking, and echoing the industry’s opposition, Councilman Johnny Khamis urged his colleagues to consider the liability.

“As soon as you open a banking institution, you’re going to have to get into the loan business and you’re going to have to invest in something, or you’re not going to get any money back,” he said from the dais when the bank deal came up for discussion on March 21. He went on to say, “Bad times can come, and our investments can go the other way. My biggest fear is having our taxpayers on the hook.”

San Jose Finance Director Julia Cooper—who spent the better part of 20 years shepherding the city’s finances, including the last economic downturn—expresses similar reservations. In an interview from a 13th floor conference room at City Hall, she winces at the mention of the Bank of North Dakota.

“It was founded for a specific purpose, at another time,” she says. “There have been others like it in the past 100 years, but that’s the only one still in existence.”

While the North Dakota bank has evolved with the industry, Cooper says she doubts it would survive past its startup phase had it launched today. “It would have been a much heavier lift,” she says.

Cooper points to a study issued by the city of San Francisco, which put the upfront capital costs of forming its own bank somewhere in the range of $75 million to $170 million. That’s in addition to any losses that may arise if the city’s social aims undermine the bank’s ability to stay in the black. According to the January report by the S.F. Office of the Treasurer and Tax Collector, it could take decades for a city bank to break even.

“On the other hand, there could be a cost to inaction, as maintaining the status quo and continuing our banking relationships both have explicit and implicit costs,” the report also states. “The private banking industry has been responsible for multiple financial crises that have impacted the city, its finances and its residents and their financial health. Aside from the ideological benefits of divestment, there are potential long-term financial gains. A municipal bank is not a quick win but could pay dividends long into the future.”

Despite her skepticism, Cooper encouraged San Jose’s elected leaders to authorize a feasibility study, which she expects to get going sometime next year.

As cities debate the idea of running their own banks, Ellen Brown—an attorney who co-founded the Public Banking Institute in 2011 and authored the book Banking for the People—wants California to build on the one it already has.

The 25-year-old California Infrastructure and Economic Development Bank, also known as I-Bank, loans money to local governments, nonprofits and businesses to build hospitals, parks, roads, bridges and other public works projects. It also issues its own bonds and for the past four years has funded renewable energy developments to lessen the state’s carbon footprint.

Expanding the I-Bank’s impact requires lawmakers to turn it into a depository, which would let it leverage capital into more credit. Turning the $400 million I-Bank already has on hand into capital would allow it to loan $4 billion backed by demand deposits from its local government clients. Imagine the lending power if the state moved some of the $700 billion it parks in private financial institutions to its own depository.

Or—to bring the focus back home—what if San Jose leveraged some of its $5.8 billion in retirement funds to capitalize a city bank?

As it stands, the city’s pension plans sit in banks or get invested with asset managers and private equity funds that rack up most of the $70 million-plus a year it costs to administer them. In fact, management fees alone skyrocketed by more than 150 percent in the decade from 2005 because of the twin retirement boards’ affinity for risky yet—more often than not—poor-performing alternative investments.

Maybe it’s too soon to broach the subject in San Jose, which still reels from a drawn-out battle with unions over slashing benefits at the ballot box instead of the bargaining table. But in her pitch for public banks to the statewide powers that be, Brown has already made public pensions part of the conversation.

For now, Tonkel wants to focus on the fundamentals. A Public Bank of Silicon Valley could take many forms, as long as it serves the people who fund it. “That,” he says, “could cause the ripple economic effect on our communities that we really need.”

Jennifer Wadsworth is the former news editor for San Jose Inside and Metro Silicon Valley. Follow her on Twitter at @jennwadsworth.


  1. Perhaps the City of San Jose should learn how to fix roads and hire an appropriate sized police force before starting a bank.

    • Maybe there’s an opportunity here to make the world a better place:

      Put Wells Fargo in charge of fixing potholes and solving the homeless problem, and put local politicians in charge of running the bank and not helping themselves to the money.

      It just make sense to use all the genius and talent that are so abundant in Silicon Valley.

    • CSJ can’t give us anything but Third World roads, they have sunk hundreds of millions into failed “solutions” to the homeless problem…and you’re gonna trust them to run a bank????? I’d rather keep my money in a sock buried in my back yard.

    • How can you? i couldnt and i have never understood how 2 people can be married and love each other then get divorced and hate one another i mean i get the divorce part but how do you go from love to out and out hate??? srry i know i didnt help lol

  2. Until we start looking at what is happening with housing in our family courts, the problems can’t be understood. Private judges failing to comply with the law are ordering houses sold from divorcing couples in order to pay lawyers. Those lawyers misuse their trust accounts and even appear to be willing to lie about their military service in Vietnam. See Bradford Baugh video deposition: This man managed hundreds of real estate transactions during his legal career. Who needs banks when courts allow divorce lawyers to do all the banking and real estate management in the county?

  3. The Public Banking idea is appropriate for these times. I read Ellen Brown’s book, “The Public Banking Solution” and look forward to reading her new book. This is an idea whose time has come! Glad to read that our City Council people are examining this idea.

  4. For the record, Saratoga National Bank was never a part of Greater Bay, and it was the merger of Mid-Peninsula Bank and Cupertino National that led to what later became Greater Bay Bancorp (GBBK).

  5. This idea is insane.

    I’d like the promoters of this scheme to look me in the eye and tell me that politics won’t quickly take over these banks.

    Loans will be made based on who the lender knows, not on the borrower’s credit score and income.

    Then the defaults will start. Borrowers will have endless excuses about why they couldn’t repay their loans, and the bank will have ready made excuses to explain why the borrower had sterling credit, and they just can’t understand why the money wasn’t repaid.

    Final act: the taxpayers will end up holding the bag, again. Then they’ll have to bail out the bank and watch the deadbeat borrowers abscond with the loot. Taxpayers will be forced to replenish the missing funds, and we’ll all end up paying twice for everything.

    This country has experimented with government owned banks time after time, from the beginning of the Republic, and every single time the banks have failed. Government owned banks have NEVER been successful. No exceptions.

    The ONLY way a “public” bank has any chance at all of being profitable is if the officers of the bank agree to be personally responsible, pledging their assets, with no bakruptcy escape hatch, that the taxpaying public will never have to bail out any borrower. The officers would have to get a bond and insurance to cover the entire loan portfolio, in advance.

    But any such insurer would require that the bank must conform to industry accepterd underwriting standards. That would force the bank to make exactly the same kind of loans that private sector banks make now.

    Where’s the advantage in that? The whole idea of gov’t bankis is to make the money available to the same connivers that are scheming to misappropriate public funds.

    So the bank officers won’t be personally responsible for anything. They’ll find a way to wiggle out of it — and the public’s tax money will then be in the bank, ready to be pillaged by the same thieves who want this bank racket for their own personal benefit.

    The chances of the public being served are less than the chance of a cow jumping over the moon.

    There are plenty of banks now. Where’s the shortage? This proposed racket is being mooted for only one reason: to get the public’s tax money within easy reach.

    They say they want to take our tax money to fund “renewable energy developments to lessen the state’s carbon footprint.”

    Isn’t that swell? After more than forty years of telling us that the rise in CO2 will cause runaway global warming and trigger a climate catastrophe, there is nothing out of the ordinary happening. But they still tell anyone who will listen that the only way to avoid that calamity is by lowering CO2 (“carbon”, as in our “carbon footprint”).

    But rather than CO2 declining, it has continued to rise. It is now more than 40% higher than it was in 1940 — but not one of their alarming predictions has ever come true. Not one. In science, when predictions made based on a hypothesis like CO2=AGW are wrong, that hypothesis has been FALSIFIED. Only in Algore’s “carbon” pseudo-science are wrong predictions like that ignored.

    Why should our tax money be wasted on more of their “renewable” nonsense, when every prediction the climate alarmist crowd ever made has been flat wrong?

    Anyone who can’t see through this hoax must be terminally stupid. A bank controls a lot of money, and these crooks are scheming to get their hands on it.

    Does anyone believe one word of what they’re saying? Anyone?

    Listen up, folks: This isn’t about the community. It’s about M-O-N-E-Y, and lots of it.

    This self-serving clique is led by a 28-year old who never even worked as a bank teller. But he thinks we oughta hand him our tax money. He’ll lend it out for “renewables.” As if.

    Have we already forgotten about Solyndra?

  6. > Virtually every bank big enough to take major-city deposits had an ethically dubious and sometimes criminal record. “I knew we’d have to think bigger,” Tonkel says.

    Good grief!

    Where do these civic do-gooders get the idea that public officials are high-minded paragons of probity and virtue and would never think about groping an intern or pocketing a public dollar?

    “A Look At Chicago’s Corrupt Aldermen Through The Years”

    Thirty-four Chicago Aldermen in jail since 1972.

    TWO former Illinois Governors in jail. The people of Illinois have talked about creating a wing in the state penitentiary just for former public officials.

    California politicians are NO DIFFERENT from Illinois politicians.

    Politicians have “needs” (wink, wink).

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