Like San Francisco, Oakland, and even the state, Los Angeles is considering the creation of a public bank. A Los Angeles City Council committee began discussing the prospect Wednesday at the behest of Council President Herb Wesson.
Why Would L.A. Want Its Own Bank?
This all comes to down to the financial paradox facing the marijuana industry. While commercial marijuana will be legal under California law in just three months, it is still a violation of federal statute. That means many private banks want nothing to do with these enterprises, rendering cannabis a nearly all-cash industry. It’s a conundrum for the public agencies tasked with accepting and counting the cash for taxes, fees, and permits. It can also be downright dangerous.
What Would a Public Bank Mean?
A successful public bank might look something like the state-owned Bank of North Dakota, established in 1919 to assist farmers who had trouble getting loans. It is the only such institution in the United States.
Like your average bank, L.A.’s would accept deposits and make loans. But it would be owned by the city rather than shareholders; its board of directors would likely be made up of electeds or their appointees; and its ultimate goal would public welfare, not profits. Most importantly, it wouldn’t have the federal oversight that traditional banks have. BND’s deposits, for instance, are insured by the state, not the Federal Deposit Insurance Corp. While the marijuana industry would be its primary target, Wesson hopes the institution could eventually finance projects like affordable housing as well.
What Are Some Potential Challenges?
This idea presents a number of potential pitfalls. First, it would prove politically and financially difficult to do. Creating a public bank would be a complex and risky undertaking. Furthermore, if not done right, L.A. could still find itself on the wrong side of federal law -- and the feds would still have one powerful tool with which to respond: the Federal Reserve.
Whether public or private, banks need an account with one of the nation’s 12 regional Federal Reserve banks to do almost anything. Even BND has one. If the Fed refused to play ball, a public bank would essentially be “nothing but a huge cash vault” in the words of Mark Mason, co-founder of Fourth Corner Credit Union which serves Colorado’s cannabis industry.
Some of these challenges explain why the State of Massachusetts, which considered the creation of its own public banking system after the last financial crisis, decided not to go forward with the idea. The rapidly changing nature of the marijuana industry makes this a whole different ballgame for California and its municipalities, however. Eventually, we may not have much choice.