money moves the world and banking moves money welcome to the public bank solution conversations about an emerging new american institution a publicly owned partnership banks able to rebalance the scales of monetary control in service of the public interest and our common wealth brought to you by the public banking institute and its national association of partners and organizations below and welcome to the public bank solution and what mccree with the public bank an institute and with public banking associates today talking about public bank focusing on the bank of potential state bank of new jersey this series of presentations really talking about the banking on new jersey prospect and today our we have a guest in the studio wayne louv who is a vice and executive director of the rainier community development financial institution ranier community development corporation i guess and wayne has been in banking for many decades came to that that world  to this current world of community investment from the commercial banking world so we're going to be talking in this particular edition about what banking is and what public banking is and what a difference it makes it how it can work for new jersey as well as any other community city county state around the country so first of all welcome wayne it's nice to have you here thank you very very much walter's pleasure to be here i just want to make one small correction it is called the raynier valley community development fund and we are doing at nonprofit lending for small business in a neighborhood in southeast seattle yeah right so it is from the other side of the of the country from where we are and i knew i blew that name you know in our next edition of we're going to be talking about what a community development financial institution is but i thought it would be an opportunity for us to talk a little bit about banking itself  the question is with regard to having creating a state bank what problem are you trying to solve what is the issue here why you guys want to have a public bank and by the way what is it i want to take a brief moment to repeat what a public bank is this is a bank that is not doing commercial or not doing retail banking that is to say it's not a bank that you'll be getting a mortgage or car loan or going to a branch or having dns is this bank is really designed as a partnership bank for community banks and for communities and municipalities and the state to be able to finance their own needs the big difference between financing yourself and having to go to private sources like the bond market or wall street to be able to come up with the capital that you need to make improvements that's a very costly proposition and typically doubles the cost of infrastructure so the public bank idea here is simply to be able to make lending more available make credit more available for the local economy to do it more efficiently and to be able to drip generate more of it credit being the lifeblood of the economy and you know it will start there when on the way over we're talking a little bit about economics yes and how economics is actually more than just figuring out what happens to the money it's really about a kind of a homeostasis if you will a balance between assets and living yes that's very true of you know economics i think the misconception a lot of people have about economics this is just about money or it's about you know how well a country daz in terms of its production and the gross domestic product and those kinds of things but really the study of economics is fascinating because it really is talking about the maximize a of your utility to whether some individual personal economics or to a geographic entity or to a country a state of given that all whether you're an individual or a country you have limited resources or limited assets that you work within and your assets could be financial assets it could also be your skills your abilities and the third thing is the time so how do we ma all three of those to bring the maximum utility or benefit i guess is another word for utility and that's the study of economics all right so the the economics that we all live in a state economy or in  economy is are bound by our financial resources in so many ways yes and of course it's supported by taxes and other fees that the states that account the collects and the money gets into the economy into the local economy through lending for people who haven't saved all the money that they need through lending and community banks have been a primary source for that no i baited distinction between want to make a distinction between community banks and the global banks the money banks that pretty much rather worth but community banks have been front and center in making local economies work tell me just tell us a little bit about what role community banks that first of all they are chartered within a certain state or even within a certain g graphic locality so when they get deposits they are going to be derives from the local area that they're at and then they're also charged with investing and loaning within a certain geographic area it's not going to go outside of that area and so that means that the money that is generated from the deposits from for that community bank are going to be put back locally for that community and not going to some out of state or to another for a purpose that was not originally intended by that the positives who put the money into that bank and you contrast this with the the the i know i'm not going to say necessarily global banks but let's just say multi state banks that are you know the top you know thirty forty fifty banks here in the country in terms of asset size the multi state banks are the ones that yes you can put your deposits in maybe some of those loans are going to be done in the local community but then a lot of that money may be going out to wherever they feel their investments are maximized and that's what they should do i mean they're there to maximize the profits for their shareholders however it may not necessarily be that those funds from local be posits are going to be reinvested back into the community that which is one of the strategic benefits and points of creating a state bank is that we want to keep our money at home too and invested in ourselves as opposed to shipping it off correct community bankers themselves often have a personal mission for service to the community you made a distinction between the well about making profits yes and of course banking is a means to be a profitable business but the idea of community service is pretty deep in the bloodlines of community banks and we're looking at the public bank been having the same sort commitment to service to the community that the community banks have and yet we find that there's some pushback from the from community bankers at least initially when they hear about a public bank in any thoughts about that is that a precarious environment to be in a business environment well i can understand the concern of community banks when they first become aware that there is are there you know some discussion of a public bank because they may feel that it's going to take away from some of their business the one thing community banks they are still subject to the same kind of regulatory oversight that large banks have in terms of safety and soundness what they do with the deposits and what kind of loans that they do i mean that kinds of lending that they do are is not that different than what the big multi state banks do is just an order of magnitude you know whether they're doing you know hundred thousand or five hundred thousand dollars loans were versus fifty million dollars loans which is you know ten to fifteen million a sort of the minimum size for a large you know money center type bank so first of all you're talking about the order of magnitude but the lending itself and the oversight of a company day as a community bank is very similar to what a major bank would be you know face with now when you say there is some fear or maybe some initial hesitation on the part of community banks as to you know what a public bank might do what i would say is  we are there to serve areas that the community banks are not necessarily doing number one is for you know the the risk that a community bank might be willing to take they may have a mission and a purpose to serve the community however because of the oversight and the regulations that they have in the kind of lending practices or the credit risk that they are allowed to take they may not be able to do what they want to do and that's where a public may be able to step in and for fill fulfill some of that secondly there may be some new areas of lending that the community banks are not equipped to do because of expertise staffing and so forth that a public bank could maybe find the expertise and staffing to get into doing some of these types of lending and again we're not a public bank is not created to take away any of that business it they're just there to would be the public bank would be being able to move the new lines of lending the ones that they wouldn't otherwise do because bankers determine risk so they're very savvy with monitoring risk and that's at the central part of their business to be able to matters that successfully so the from the new lines of business to be able to stimulate local lending and to small businesses that one of the points that you made  small business lending most of the small business loans are done by community banks over fifty percent in the net nationally and yet they only have about a thirteen percent market share so a small percentage of the  banks are making loans to this small businesses which is where most of the new jobs are so we're seeing this public bank is being a resource for really accelerating that prospect yes that's that's very much the case  small business lending and even operating a small business one of the biggest challenges for small business is access to capital and they may be able to get a lot of that particularly if they are a very well established business very profitable has demonstrated a track record an earnings history of profitability they get they can definitely get credit however a start up business or a business  new field for example some of the technology companies are going to find it much more difficult to get credit that they need and if he again with the whether it's a city government or the state if they're trying to encourage business formation in particular segments technology or some other new kinds of business models that are coming into play then you may need a institution that is going to be more a willing to take those kinds of credits and take that kind of risk and to ensure the credit flow to these types of businesses that right now the community banks are not as i said not equipped to handle that type of lending  because because again because of the risk involved it's a private business it's and there they need to make a profit profits yeah and it's not just a matter of risk because risk and be perceived in different ways by you know different you know whoever's underwriting or whoever's looking at it and what kind of sets of glasses that they're putting on to underwrite risk that risk is sometimes is you know and there's always ways to manage risk a lot of that though what we find that lenders are unwilling to loan to certain kind of businesses they just don't understand you know how that business will works or they may not understand the culture or the the lending environment under which i'm sorry not lending environment the market environment of the economic environment of how that business is operating and so if the public bank for example develops a certain expertise in these types of things they can actually you know ensure that these these types of businesses have the access to capital because you know they they are able to to to deal with those kinds of customers and it's not always just a matter of respects also understanding your customers business  l and the other side note to that we would say about community banks is supposes that in north dakota where the only public bank exists that sector that business is doing better than anywhere in the country  community banks thrive like nowhere else in the country in part because of this partnership that they have that with the public bank their loans are larger they're able to lend more because the public bank stands with them  they're actually very conservative in their lending and they and their market share is much larger where as about thirteen seventeen percent somewhere in that range the upper teens is about the typical share for the national average for community banks in north dakota they have eighty two percent of the market and so you know which showed makes your point about how the community banks keep the money that home yes never leaves north dakota never you know would never leave new jersey let's say or where or the municipality except to be deployed in some meaningful way for what the mission yes of the bank is that it might not be a bad idea to be right for us to just talk a little bit about some of the banking basics a bank what does a bank do what really is the how does it operated why should we want one well banking as a concept  is a bank is a form of what we call financial intermediaries in other words a sort of in the middle there's people or institutions or companies that have money that are excess cash funds that they have money sitting you know it could be to sit in your pocket it could sit under the mattress or it can go into a repository or depository which is the bank now what does the bank do with that i mean they can just also sit on it in which case they really are serving no purpose it would just sit in this safe deposit box or sitting in the vault or what they can do is aggregate that money and that's where the indian media role comes in they can aggregate that money and loan it out to those who don't have the cash to do whatever their business plans are and that's probably you know that was the best use of that is what we call capital formation for business to give that money to the business so that they can buy equipment they can remodel their premises acquire a building hire more workers all of those kinds of things that make a business expand and grow profitable or there could also be maybe some public works that that money can be invested in but again the bank a serving as the intermediary they aggregate the deposits from those that have the excess cash because if you don't have that you know you know you don't need the money at that point are you don't need until next week or until next month then you put it in the bag maybe you can get a little interest by doing that and that is true for whether you're an individual consumer depositor or you're a public deposit or you want to earn a little something on it and then you keep it in that depository which then in turn lends it out in a prudent investment you know some things about brown said to us before the bank leverage is its capital so so that's like creating money isn't it well not no not not really creating money we want to disabuse or selves of the concept of you know creat money like you're you know you're obviously we're not printing the money but the money that a bank lends out is money that is there already you know from the deposits and the bank you know has a you know their assets are comprised of cash in the bank and loans so that you know and they may have some you know real estate their headquarters and some business equipment but the primary assets are either cash or loans and then on the  liability and the networks side you know you have your deposits which are your liabilities in you add that to your bank capital and that should equal your total assets on the bank so when you say you lend it out when you're not lending out on a one to one basis in other words if you put one hundred dollars in there not taking your hundred dollars in lending to mr smith what they're doing is aggregating all of that and they're reviewing all of the loan opportunities or investment opportunities that they have and they're lending that out now you know again they they can lend out and i know the next question may be how much can they lend out well it really depends on the regulations and the oversight that they may have or even their charter what they may say but a bank could easily lend out one hundred percent of their deposits or even a little bit more than that the capital there is different than the deposit base because the capital is there as they sort of a a cushion or a reserve in case there are any loan defaults or charge offs that they have to have you know so the assets of the of the bank then can be used also in a in a lot of different it creates a lot of flexibility a lot more flexibility for any municipal manager or financial manager to be able to fund certain things that would otherwise they would have to go to the bond market for what is what what how does that work some of the mechanics of the method that work when you fund yourself your loan or your so for infrastructure as opposed to go into the bond market well i think there's the concept of what we call the opportunity costs that you have if the traditional method of financing a public project or infrastructure would be to go to the bond market and you know of course municipal rates are fairly low nowadays depending on the municipality or the state's credit rating i mean they can vary all over the place so that but but that's a real cost that the municipality would have to pay if they go out to the bond market and then there's also the fees involved for the underwriting fees you know typically these are underwritten by certain wall street banks and then there's legal costs and so forth review all the bond documents i mean legal costs alone could run into six figures easily you know and then and that's just being paid to review all of these very complex you know loan documents and security agreements and so forth however if  there is a public bank that has the capacity to fund these essentially you can look at the as the city or the state basically saving that cost that they would otherwise have paid out because they are essentially  taking that money from their own little piggy bank on one side and paying for these projects rather than paying someone else the interest in the fees that go along with that banking is complicated risk management is a is a special skill can we the to answer the second question first that's going to be a matter of the governance and the management you know who you know what the what the reporting is and who ultimately the the bank directors are responsible for so the when you say for sample influence peddling or say political agendas of course you know you want to insulate that bank's investments and lending from any political influence or agendas i think that should go without saying there should be very strong safeguards built in so that the governance part is going to be truly independent from any you know changes in the political control you know of this particular city or the state you definitely want to build those in now as far as the the risk management that's going to be the same problem or the same challenge that that a bank a private bank would have whether it's a big you know money center banks or a community bank you have to have the right people in place to monitor the the loan portfolio and first of all the underwriting of the lender of the loans that are being presented for the banks consideration and then secondly if the loan is booked you want to have the proper control of the portfolio and monitoring of the loan portfolio and then thirdly really the reporting of the performance of that in the those are all three key components to risk management of the loan portfolio but those are things that can be quantified but there's a lot of you know information and best practices in terms of risk management that i think the if it properly implemented i think the board of directors for that public bank feel very assured that the best again best practices are in place to monitor the risk you know yeah is there a  reality yes i think their input would be invaluable because they understand the community they understand what the needs are they can also would hope i would hope that they would also be very forthright have a true mission of serving the community and they realize that they can't be everything and community banks cannot be everything to at community just like a big bank cannot be everything to that community they they each have their place and they can excel in their own particular roles however if you want to look at dressing look at dressing all of the needs of that community as far as the financing and the credit needs are concerned then they should be a part of it too to help design the kind of programs that the public bank would offer for you know for the business community and really for the you know for the other segments that they may want to do for example the housing a ffordable housing side or it could be for financing certain community facilities which is something you know in my area we do a lot of financing for community facilities or non profits non profits  believe it or not most of them do have some financing needs and they serve a public purpose so you know these are all areas that a public bank you know would would do well to get into and as as a community bank they may see some needs in there which maybe even be frustrated that they cannot do more in that and they can be very helpful to help guide the formation of that public bank well when thank you we're almost out of time but i thank you very much for those  insights and understanding is a lot more to talk about here here we are in new jersey on the threshold of a new period hopefully in which banking will become one of the new public utilities  where banking where credit is realised as one of the essential components that has to be managed for the public interest and i think that's one of the points of distinctions that we would make about the public bank versus a private bank and one is that the public ba is there for the public interest and the private bank is there to basically make a profit in this case of community banks make a profit while serving the us as a community yeah well we're we are we hope that the new jersey state bank if we're able to realise it will be a strong partner for against the banks which have been taking a real hit in terms of consolidation leaving neighborhoods which means that the democratic access in the the relationship t undermined by these larger out of town kind of interests thank you very much i thank you wayne la executive director of the ranger valley community development fund and we'll be back again with wayne to talk about community development financial institutions how do these organisations financial institutions build the prospect for moving credit into where it's needed to our communities thanks for