What Is a Public Bank?

Definition

A public bank is a bank that is owned by the government rather than private shareholders.

Business team in the office of a public bank
Photo:

kate-sept2004 / Getty Images

Definition and Examples of a Public Bank

A public bank is a financial institution owned and operated by the state, city, or county government.

  • Alternate name: State-owned bank

Some examples of public banks include the Bank of North Dakota, the World Bank, and the European Investment Bank.

How Does a Public Bank Work?

Public banks offer many of the same financial services as traditional banks, such as checking accounts, loans, and mortgages.

However, their main purpose is to serve the public interest in their area. As a result, public banks put a huge focus on improving their local communities, using most of their resources to:

  • Provide low-interest loans to businesses and low-income households
  • Fund affordable housing and climate-protection projects
  • Create new jobs and stimulate economic growth in their regions

Public banks also work as a type of “mini-Fed” to regional banks, providing them with loans and other banking solutions. They also provide banking services to government departments.

The U.S. currently has one public bank: The Bank of North Dakota. It was founded in 1919 to promote agriculture and commerce in the state. Today, it provides loans, college funding, and banking services to North Dakota residents and institutions.

Note

There is a growing movement in the U.S. to establish public banks at the state level. California has already passed AB 857 (the California Public Banking Act), which makes it the first state to permit the chartering of municipal public banks.

Public Banks vs. Conventional Banks

Public Bank Traditional Bank
Owned by the government Owned by shareholders
Operates as a nonprofit Operates for profit
Mandated by the government to serve the needs of its local community May have some community-focused initiatives, but also obligated to make money for shareholders
Example: Bank of North Dakota Example: Bank of America

On the surface, public banks look a lot like mainstream commercial banks in the U.S., such as Wells Fargo, Bank of America, and Chase. However, there are key differences in how they operate.

First, public banks are owned by the government rather than stockholders. This means they operate as nonprofits that can pour earnings back into the state’s general fund rather than funneling them to shareholders.

Second, public banks are often mandated by law to make decisions based on what’s best for their communities. For example, a public bank in a rural area may focus on providing loans to farmers, while a public bank in an urban area may focus on financing affordable housing.

Last, public banks can also offer cheaper loans and credit products to small businesses and individuals. This makes them an important source of financing for many communities—especially those with a large low-income population.

Note

The Federal Reserve Bank of Minneapolis published a paper in which a law professor argued that public banking could be one of the keys to closing the gap between America’s rich and poor.

Pros and Cons of Public Banks

Pros
  • Better terms on loans and credit products

  • Focus on community development

  • Can help with economic stability

Cons
  • Potential for political interference

  • Lack of competition

Pros Explained

  • Better terms on loans and credit products: Public banks don’t have large overhead costs or shareholders to report to, so they can offer loans and credit products at lower interest rates.
  • Focus on community development: Public banks invest money into their local communities, helping to create jobs and improve residents’ quality of life.
  • Can help with economic stability: Public banks can help stabilize the economy by providing a source of capital during times of economic turmoil.

Cons Explained

  • Potential for political interference: While some argue that public banks are better solutions than traditional banks, they’re still at the mercy of elected officials and board members. So there could be people who disagree with how a public bank operates in their area.
  • Lack of competition: Currently, North Dakota is the only state with an operational public bank. So whenever you open your next checking or savings account, there’s a good chance it will be with a traditional, for-profit institution.

Key Takeaways

  • A public bank is a type of bank owned and operated by a government.
  • Public banks can take many different forms, but they all share the common goal of serving the public interest in their region.
  • The primary benefit of public banks is that they're able to reinvest profits into the local community. This reinvestment can take the form of infrastructure projects, small business loans, and support for local banks.
  • The only public bank in the U.S. is the Bank of North Dakota.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. California Public Banking Alliance. "About California Public Banking Alliance."

  2. Bank of North Dakota. "History of BND."

  3. Institute for Local Self-Reliance. "Public Banks: Bank of North Dakota."

  4. California Legislative Information. "Bill Text - AB-857."

  5. Federal Reserve Bank of Minneapolis. "Racism and the Economy—Focus on the Wealth Divide: The Racial Wealth Gap," Page 9.

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