Megan Brooks
The US banking system is a blend of public and private institutions. The Federal Reserve Bank, for instance, is considered both public and private. While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. In the US, public banks are owned and operated by governments, while credit unions are private entities collectively owned by their members. The Bank of North Dakota is a well-known example of a public bank in the US, while national banks are typically commercial banks.
| Characteristics | Values |
|---|---|
| Definition of a public bank | A public bank is a financial institution in which a state, municipality, or public actors are the owners. |
| Who owns public banks? | A public bank is owned by a government unit—a state, county, city, or tribe. |
| Who regulates public banks? | The Office of the Comptroller of the Currency regulates national banks and federal savings associations. |
| History of public banks in the USA | During the colonial era, Pennsylvania, Massachusetts, and New Jersey established "land banks," which were state-owned public banks that issued mortgages for land. Following independence, many states had their own public banks, including Alabama, Kentucky, Illinois, Vermont, Georgia, Tennessee, and South Carolina. |
| Definition of a private bank | Private banks are financial institutions owned by private individuals or groups. |
| Who owns private banks? | Private banks are owned by private individuals or groups. |
| Who regulates private banks? | The Federal Reserve Banks are set up like private corporations, and member banks hold stock in them. |
| History of private banks in the USA | Not specified |
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What You'll Learn
The Federal Reserve Banks: private or public?
The Federal Reserve Banks are not a part of the federal government, but they were created by an act of Congress. Their purpose is to serve the public. The answer to whether the Federal Reserve Banks are private or public is that they are both.
The Federal Reserve System has a unique structure that is both public and private and is described as "independent within the government" rather than "independent of the government". The Board of Governors is an independent government agency, while the Federal Reserve Banks are set up like private corporations. The Board of Governors is appointed by the President and confirmed by the Senate, and it provides general guidance for the Federal Reserve System and oversees the 12 Reserve Banks. The Board reports to and is directly accountable to Congress.
The 12 Reserve Banks operate within their own particular geographic areas or Districts of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District's Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The Reserve Banks are required by law to transfer net earnings to the US Treasury.
Member banks hold stock in the Federal Reserve Banks and earn dividends. Holding this stock does not carry the same control and financial interest given to holders of common stock in for-profit organizations. The stock may not be sold or pledged as collateral for loans. Private banks elect members of the board of directors at their regional Federal Reserve Bank.
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National banks: essential to the federal system
The United States has a long history of national banks, dating back to the late 18th century. The concept of a national bank was first proposed by Alexander Hamilton, who helped found the Bank of New York in 1784 and later became the nation's first Treasury Secretary. In 1790, Hamilton submitted a proposal to Congress for the establishment of a national bank with a $10 million capital—a significant sum at the time—and the ability to issue paper money. This bank, known as the First Bank of the United States, was chartered for 20 years and had a mix of public oversight and private enterprise, with the federal government holding a minority stake.
The idea of a national bank was met with both support and opposition, often along sectional lines. While it faced criticism and contributed to the creation of America's first organized opposition party, the Republicans, the bank's ability to lend money to the government, hold deposits, provide a uniform currency, and promote business and industry through credit extension was recognized. The establishment of the First Bank of the United States laid the foundation for a centralized banking system in the country.
However, the charter of the First Bank of the United States expired in 1811, and it was not renewed due to political changes and opposition from figures like President Andrew Jackson. The absence of a central bank during the War of 1812 highlighted the need for a financial institution to fund military efforts, leading to renewed interest in establishing a national bank. This resulted in the creation of the Second Bank of the United States in 1816.
Despite the expiration of the Second Bank's charter under President Jackson, the need for a centralized banking system persisted, especially during the Civil War. In 1863, the "national banking system" was established, allowing banks to choose between a national and state charter. This marked the first time a uniform national currency was established in the United States.
The Federal Reserve Act of 1913, established the Federal Reserve System, the U.S. central bank. The Federal Reserve is considered both public and private, with the Board of Governors being an independent government agency, while the Federal Reserve Banks are set up like private corporations. The system performs key functions such as conducting monetary policy, promoting financial stability, supervising financial institutions, and fostering payment system safety and efficiency.
In conclusion, national banks have played a significant role in the evolution of the federal system in the United States. From Hamilton's vision of a centralized bank to the establishment of the Federal Reserve, these institutions have provided financial stability, facilitated economic growth, and ensured a uniform currency. While the structure of national banks has evolved over time, their essential role in the federal system remains, reflecting the need for a stable and efficient monetary system in the country.
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Public banks: history and current models
Public banks are financial institutions owned by a government unit, such as a state, county, city, or tribe, and are mandated to serve the public interest. They are distinct from state-socialism, as they involve government oversight of the credit and debit system that facilitates economic exchange, including that of free markets. Public banks are owned and operated by governments, while credit unions are private entities collectively owned by their members.
The history of public banking can be traced back to ancient times, with temples providing and overseeing weights and measures critical to exchange. In the ancient world, temples often functioned as financial centres, offering loans and safekeeping of valuables. The emergence of coins led to the development of public banks, with the Bank of Amsterdam in 1609 aiming to standardize coins and exchange. This was followed by the establishment of other public banks in Europe, such as the Bank of Hamburg in 1619, which was based on the Amsterdam model but included an expanded credit role.
In the late 19th and early 20th centuries, public or 'state-owned' banks proliferated globally as vital agents of industrialization in capitalist and socialist countries. As of 2012, state banks owned and controlled up to 25% of total global banking assets. Prominent current public banking models include the Bank of North Dakota, the Sparkassen-Finanzgruppe in Germany, and many nations' postal bank systems.
Public banks can be capitalized through initial investments by the city or state, as well as through tax and fee revenue. They can take tax revenues and other government income as deposits, create money in the form of bank credit, and lend at low-interest rates. Public banks have no shareholders, so they can pass these low rates onto borrowers. They also partner with local banks to fund projects that might otherwise go unfunded.
In the United States, there have been recent efforts to establish public banks, such as the feasibility study conducted in San Francisco in 2019 and the proposed New York public banking act. However, critics argue that public-sector banking decreases economic growth and that lending decisions become driven by politics rather than economics.
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Private banks: profit-driven business models
Private banks in the US are driven by profitability and growth, and their business models reflect this. They are committed by their business model to take advantage of low-interest rates by charging higher rates to borrowers. This is in contrast to public banks, which can lend at very low rates as they have no shareholders to pay.
Private banks must also provide highly personalized services and uphold professional standards that place the client's needs before those of the company. This means that understanding client profitability and client-level economics is essential to active business management and decision-making. Private banks must therefore develop a pricing discipline that fits the organization's needs, with transparent rules and room for flexibility.
Profitability is a challenging topic for US private banks, as they must balance conflicting needs, such as serving legacy relationships, customizing offerings, and scaling the business. Private banks that have pursued a deeper understanding of client profitability have been able to grow their revenue and profits by over 50% without losing clients.
Private banks are highly regulated, with the US Securities and Exchange Commission overseeing numerous laws. They are also subject to demographic and macroeconomic factors, such as regulation, policy, and assistance. Private banks have seen their profits increase due to higher interest rates and the expansion of assets under management.
The success of private banks depends on their ability to balance profitability and client needs. Private banks that can effectively manage these conflicting priorities can achieve significant revenue and profit growth.
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Public vs private: the debate
Public banks are financial institutions owned by a government unit, such as a state, county, city, or tribe. They are mandated to serve a public mission that reflects the values and needs of the public they represent. In the United States, public banks have existed at both the state and federal levels.
Historically, several states in the US had their own public banks, including Alabama, Kentucky, Illinois, Vermont, Georgia, Tennessee, and South Carolina. Additionally, the federal government has established public banks during times of crisis or economic depression. For example, the First Bank of the United States was established under the direction of Alexander Hamilton, and the Second Bank of the United States was created after the War of 1812. During the Civil War, Abraham Lincoln encouraged the creation of "greenbacks," which were interest-free banknotes.
Today, an example of a public bank in the US is the Bank of North Dakota, which has a healthy relationship with local community banks, credit unions, and CDFIs. It often partners with them through loans, providing capital, and buying their loans at better rates than the private market. This has resulted in North Dakota having more banks per capita than any other state.
Proponents of public banking argue that it can reduce government service and infrastructure costs, protect and support local banks, offer banking services to underserved communities, and promote specific economic development reflecting shared notions of social good. Additionally, public banks can lend at very low-interest rates, benefiting borrowers such as public agencies, local businesses, residents, and students.
On the other hand, critics of public banking, like Mark A. Calabria of the Cato Institute, cite the potential for mismanagement and decreased economic growth. They argue that lending decisions in public banks may become politically driven rather than economically driven.
Private banks, on the other hand, are committed to their business model, which involves taking advantage of low-interest rates by charging higher rates to borrowers. They are motivated by profit and operated by private shareholders. While private banks play a crucial role in the economy, the debate centres around the advantages and disadvantages of having government ownership and control over banking institutions.
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Frequently asked questions
Banks in the USA can be part of both the private and public sectors. Public banks are owned and operated by the government, whereas private banks are collectively owned by their members. The Federal Reserve Banks, for example, are set up like private corporations but are controlled by the federal government.
The Bank of North Dakota is an example of a public bank in the USA.
Any credit union, such as a local bank, is an example of a private bank in the USA.
Public banks are designed to reduce the costs of government services and infrastructure, protect and aid local banks, offer banking services to people and entities underserved by private-sector banking, and promote specific kinds of projects.
Private banks are committed to their business model of taking advantage of low-interest rates by charging higher rates to borrowers.
