A public bank is a financial institution owned and operated by the government or a public entity. Public banks differ from private banks, which are owned and operated by private individuals or entities. The Bank of North Dakota is the only public bank in the United States.

Key Takeaways

• A public bank is owned and operated by a state or city government in the public interest.
• The Bank of North Dakota is the only public bank in the United States.
• Public banks may be better positioned to benefit city and state entities and broader communities, but the startup can be challenging.
• Recent financial crises have sparked widespread interest in creating public banks.

How Public Banks Work 

Though their ownership is different from that of commercial banks, public banks still facilitate the flow of money throughout the economy. Instead of a city, county, or state placing funds into a commercial bank and paying fees and interest, the government manages funds in its own bank. It can then theoretically loan money at reduced interest rates for community investment. 

“Public bank” can be confused with a “publicly-traded bank.” The latter is a bank whose stock is traded on the stock market or any bank whose financial information is reported to the public.

Services

Public banks are primarily recommended to manage local governments and agencies' deposits and other banking services.

In addition, these banks may be able to offer:

• Infrastructure lending
• Wholesale lending
• Small business lending
• Liquidity and security for other community banks

Currently, most state legislation and proposals require the public bank to limit public services. For instance, they might be required to partner with a local financial institution if they want to accept deposits from the general public. Or they might not be allowed to accept deposits from non-government entities at all.

A public bank can offer some of the same retail deposit and lending products as traditional banks, including saving and checking accounts, loans, and certificates of deposit (CDs).

However, concerns about the government competing with private businesses may limit even these services. For example, the bank may have only one location, only be available to local residents, or not offer standard features such as credit cards, online bill pay or even debit cards.

Features

A public bank is owned by the government or a government entity. Government ownership means the public has input in the bank's decisions, as elected officials or representatives help control the bank.

Public banks are focused on public interest and may be mandated to meet the financial needs of the community, city, or state they serve. Since public banks aren't necessarily focused on maximizing short-term profits, they may instead focus on the community's long-term needs.

Challenges

Establishing a public bank can be difficult because it requires a regulatory framework and startup capital to launch. Public banks could compete with existing local commercial banks, which could be counterproductive for the communities they serve.

Potential Impact

Public banks may be chartered to serve specific public policy goals. Traditional banks aren't meeting these goals, due to pressure to maximize shareholder profits.

History of Public Banks and the Bank of North Dakota

In the United States, the First Bank of the United States was established in 1791, but due to political conflict, its charter wasn't renewed in 1811. After a second attempt at a national bank failed, state governments began chartering banks. Many state banks closed after the financial panic of 1837. A new Federal banking system was established in 1863 with the creation of a national currency, and state banks slowly disappeared.

The Bank of North Dakota was established in 1919 after private banks made lending difficult for the state's agricultural industry. The bank is operated, managed, and controlled by an industrial commission, including the state governor, agriculture commissioner, and attorney general. Lending is done through partnerships with local banks and credit unions.

Note

The territory of American Samoa established the Territorial Bank of American Samoa in 2016 to provide basic banking services to its citizens. It's one of the territory's only options for domestic banking services.

Campaign for Public Banks in the United States

Although the Bank of North Dakota is the only public bank in the U.S., efforts are growing to start more. In two-thirds of U.S. states, grassroots organizations supporting public banks are advocating for the unique financial institution, and in many states, legislators are introducing bills supporting public banks.

Here are a few examples: 

• California: Passed the Public Banking Act in 2019, which allows municipal public banks to be chartered. 
• New Jersey: Governor Phil Murphy created a public bank implementation board in 2019 to expand access to capital for the state's most under-served communities. 
• New York: Representatives introduced a bill to establish a committee to consider the feasibility of a public bank.

Several California cities, including San Francisco, are studying or setting up city-owned or regional banks. San Francisco’s public bank will serve low-income communities and communities of color by providing affordable housing and business financing.

Public Banks vs. Traditional Banks

Public Bank	Traditional Bank
Owned and operated by the government or a public entity	Owned and operated by private individuals or entities
Usually have a social or developmental focus for the local community	Primarily focus on maximizing profits and shareholder value
Can provide financial services at a lower cost for infrastructure development	Local governments may pay high fees and interest for infrastructure development
Governed by regulations and policies set by the government or public entity and accountable to the public	May have more flexibility and decision-making and operations compared to public banks
Primarily serves municipal, county or state government but may serve the public in a limited way	Serves a wide variety of customers, including the general public

Public banks offer services much like traditional banks, for instance, checking and savings accounts, deposits, and loans. However, the two kinds of banks differ in structure and operations.

While traditional banks are owned by shareholders, public banks are owned by a municipality. Instead of sharing profits with shareholders, public banks use profits to benefit their community, city, or state. Or the public banks can invest profits according to socially responsible principles.

According to advocates, public banks won’t need to expend resources on marketing and other overhead—so there’s more to invest in infrastructure and community.  

Pros and Cons of a Public Bank

Many of these pros and cons are theoretical, as public banks aren’t yet in widespread operation.

Pros

• Wide range of financial services

• Affordable public project financing

• Community-focused

• Financing during economic crises

Cons

• May not offer federal insurance

• Weak local economy could threaten success

• Risk of mismanagement of funds

• Lack of competition

Pros of a Public Bank Explained

• Wide range of financial services: Public banks can invest in the local community's needs while also making banking services—deposit accounts, loans, credit cards, etc.—more accessible. 
• Affordable public project financing: State and city governments have more flexibility to initiate public projects without relying on expensive lending from private banks. 
• Community-focused: Public banks can choose to support community infrastructure and projects. 
• Financing during economic crises: As seen in North Dakota, public banks can lessen the effects of economic downturns or financial crises by providing funding to individuals and businesses.

Cons of a Public Banks Explained

• May not offer federal deposit insurance: Federally insured banks offer $250,000 in FDIC deposit insurance. The Bank of North Dakota notes that “deposits are guaranteed by the full faith and credit of the State of North Dakota.” 
• Weak local economy could threaten success: Public banks may be more vulnerable to local economic instability since many of their loans are concentrated in a specific area or industry. 
• Risk of fund mismanagement: Political interference, mismanagement of funds, and bureaucracy can also threaten a public bank's stability. 
• Lack of public services: Due to concerns about competition, a public bank may not serve the public or only offer limited services. 

What Are Some Public Banks in the World?

Assets in the billions of dollars reside in public banks worldwide. Notable public banks include Sparkasse in Germany (founded in 1778), ICBC China (the world’s largest public bank), and Bank Misr, nationalized in 1960. 

Who Owns a Public Bank?

Public banks are either wholly or partially owned by a federal, state, county, or city government.

What Is the Main Advantage of a Public Bank?

The main advantage of a public bank is that profits can be used to meet community needs that traditional banks aren’t meeting. Local governments can obtain funds for various initiatives without taking on extensive debt by issuing bonds.

What Is a Private Bank?

The term private bank usually refers to the financial services provided to high-net-worth and ultra-high-net-worth individuals, families, and businesses. Customers typically have a dedicated relationship manager or liaison to help conduct transactions. The term "private bank" could also refer to a bank owned by shareholders or another entity vs. being government-owned.

Is a Private Bank Better Than a Public Bank?

Working with a private bank may be better for people with a sizable amount of investable assets and complex financial needs. Private banks can more easily provide various services such as complex asset management, lending services, tax planning and other financial planning services.

The Bottom Line

Public banks have the unique advantage of offering banking services while serving specific public policy goals. While they can be a valuable resource for underserved communities and the specific government entity, establishing a public bank can be challenging, and there are potential risks to their stability. With growing interest in policy-focused banking solutions, several city and state governments have begun exploring public banks for their community.

Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

1. Public Banking. "Public Banks 101." 

2. Department of Financial Protection and Innovation. "Public Banks." 

3. Congressional Research Service. "Public Banks: History and Recent Proposals." P. 1.

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

5. Congressional Research Service. "Public Banks: History and Recent Proposals." P. 2.

6. Public Banking Institute. "Public Banks 101."

7. California Legislature. "Assembly Bill No. 857."

8. State of New Jersey. "Governor Murphy Signs Executive Order Creating Public Bank Implementation Board."

9. New York State Assembly. "S01755 Summary." 

10. Federal Deposit Insurance Corp. "Deposit Insurance FAQs."

11. Public Banking Institute. "World Map of Public Banking." 

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