Whatever happened to the public bank?

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In November 2019, Gov. Phil Murphy signed Executive Order No. 91 creating a Public Bank Implementation Board. The group was tasked with developing a plan for a public bank within one year. Since then, however, bankers from New Jersey – who generally opposed the plan as redundant and potentially harmful to taxpayers – say they’ve heard crickets from Trenton. But Murphy has hinted that the idea is still alive and kicking.

“Leveraging state resources to provide greater access to capital for our communities, small businesses, municipalities, and students is an important component of building a financially inclusive New Jersey,” Murphy said when he signed the executive order. “With the creation of this implementation board, I am proud to take the first step toward ensuring that our taxpayer dollars are invested here in New Jersey.”

According to the governor, the initiative would assess capital needs for New Jersey’s small businesses, students, and local infrastructure and affordable housing projects, as well as hold public meetings to better understand how the state can reduce those capital needs, with a special emphasis on supporting low-income and minority populations. In addition, the aim was to enhance the coordination and services of state authorities; identify how a public bank can strengthen the capacity of local financial institutions and nonprofit entities; develop a business plan for a public bank that determines capitalization needs and outlines a governance and operation structure; and consulting with experts and other knowledgeable individuals.

Still, it’s been “at least a year” since Magyar Bank CEO John Fitzgerald heard anything on the issue of a state-run public bank, and he’s fine with the silence. “Magyar Bank and other community banks in New Jersey lend and take other steps to reinvest locally, so there really is no need for a state-run bank,” he said. “We have a robust system in place, so why yank municipal deposits out of local banks, especially if they’re then placed with out-of-state and overseas banks?”

The pitch for a public bank does have some supporters, including Linda Stamato, a policy fellow at the Edward J. Bloustein School of Planning and Public Policy at Rutgers University in New Brunswick who is also an affiliated member of the NJ State Policy Lab. In a May opinion piece for NJ Spotlight News she wrote, “Public banks can assume more risk and serve specific needs, and, as they are not solely focused on profit-making, they can do what private banks are often reluctant to do: lend to those institutions, including nonprofit community development organizations and to individuals who have a tough time getting loans from private banks, certainly at reasonable rates; they can provide below-market-rate capital for creditworthy and socially beneficial projects, including those that support small business lending, affordable housing, and student lending, help community banks and credit unions and community-based financial institutions in under-served communities.”

But Murphy’s proposal “Is a solution in search of problem,” according to First Bank CEO Patrick Ryan. He raised issues of duplicate services and of credit quality, noting that, “Banks service their local communities effectively and efficiently, so at end of day what will a public bank do better? If a public bank makes loans to people who normally don’t qualify because of credit concerns, why is it better for a state bank to make subprime loans?”

Other bank executives also criticized the proposal, citing taxpayer and industry burdens. Provident Bank Executive Chairman Chris Martin said a public bank “was always a bad idea. New Jersey does not need a state-subsidized bank. If the state government directs a public bank’s investments, what keeps politicians from using the funds for their own pet projects — and then if they go bad, the loss falls on the taxpayers. Community banks are already challenged by onerous regulations, and there’s no reason to add to the burden.”

In fact, “A public bank would take municipal deposits away from individual banks, who lend it to their local communities, and move them to an institution that’s influenced by politicians,” warned Peapack-Gladstone Bank CEO Douglas Kennedy. “That can’t lead to a good outcome. The market is more efficient, and if the state tries to do something that free-market institutions do better, then taxpayers will bear the burden.”

Northfield Bank Chief Executive Officer Steven Klein said, with some relief, that the public bank proposal seems to have run out of steam. “I haven’t heard anything about a public bank in some time,” he said. “It sounds like it’s not the front burner, and it should not be. Banks are meetings the needs of their local communities through their CRA [Community Reinvestment Act] activity, digital and other solutions and their products. Community banks, in particular are critical to small businesses, and I do not see a need for a public bank on the retail or the consumer side.”

Back from the grave

In January 2022, though, in response to a question from an NJBIZ reporter, Murphy noted that the public bank idea was still alive. “The state bank, I think some version of that is going to come to pass,” he said. “We had a good meeting on that just before the Christmas [2021] holiday. There is an outline of a way forward, and I think you’re going to see real progress on that front. That’s been one of the harder ones for us to get done for a lot of legitimate reasons. It looked like it was easier from the outside to get into the office, and you realize some of this stuff isn’t as easy as you had hoped. That’s on that list, and I do think the pandemic and the challenges that individuals, families, businesses, municipalities, particularly students with college loans – I think it has sharpened the need for this as opposed to lessened the needs for it.”

And more recently, at the end of June, the governor cited “the work of the Public Bank Implementation Board,” when he signed Senate Bill 3977/Assembly Bill 5670, establishing a Social Impact Investment Fund (SIIF) and appropriating $20 million for it. Co-sponsored by Senate Majority Leader Teresa Ruiz, D-29th District, and Assemblyman John McKeon, D-27th District, the SIIF will “leverage social impact investments from the philanthropic and private sectors, multiplying the impact of the State’s funds.”

Murphy said the SIIF will “deploy below-market-rate loans, guarantees, or other financial tools to fill gaps in state financing programs, such as providing access to capital for early-stage affordable housing developers in partnership with New Jersey Housing and Mortgage Finance Agency, supporting Infrastructure Bank infrastructure investments in distressed municipalities that cannot currently qualify for I-Bank support to modernize local drinking water systems, and helping finance the construction and maintenance of early childhood education facilities.”

But four years on, “we still don’t quite see the value of a public bank, said Columbia Bank CEO Thomas Kemly. “New Jersey banks support small businesses, low-income housing and other initiatives. So where is the value of a public bank?”