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 hello public banking in very general terms and today we're going to get a bit more specific and of course the name of the show the public bank solution raises the question what problem are you guys tried to solve today we're go talk about our guest is dr curtis gregory who is a former banker currently a professor at temple university and someone who has worked with the city of philadelphia in business development in the commerce department he was a senior director there and so that's the problem that we want to address that is to say how do public banks which are banks that are owned by cities counties and states how do they address the need for money inside local economies and how do government agencies satisfy that need and also how well is commercial banking doing in that segment so we have a couple of good angles and good experience from from curtis to be able to discuss curtis is a is a noted lecturer around the country he's one of the top fifty black m b a s in the country he has twenty years experience as a senior vice president with several with four of the of the top twenty five banks so he has lots and lots of that we think should be able to shed some light on the value of public banking in the day to day world of making our city economies county and state economies you are focused on in your management of all of these institutions public banking doesn't have that kind of an objective it doesn't have to maximize profits so what is it about public banking  you as a as someone who's been in this business well you know when i first got into banking community service impact social impact was still an important component of what i did for a living  as the industry evolved i think we got a little bit away from social impact and focus primarily on capitalistic endeavors in other words economic impact so when i first heard about public banking i thought it was the perfect strategy or policy innovation whatever you want to call it that balanced out social objectives with capitalistic objectives yeah well one of your specialties was in providing affordable credit for small businesses but also in serving minority needs and how does the public banking prospect work from that perspective what this what's unique about public banking that yeah well there was an article by i think it was a cleveland federal reserve bank where they wrote about the impairment of capital and one of the outcomes of that article was that minority women owned businesses rely very very heavily on debt capital ok what has happened in the commercial banking industry is i think it's been kind of a shift in how they focus or how they define small business lending when i first got into banking it was zero due maybe ten million in sales was considered small business when i exit it banking it was five million to twenty five million so they're raising the bar and depending on what circles you're talking about communities are in five mean to twenty five billion may not necessarily be as small as what we would think a small business so there is a need to get this no longer being met they're saying they're still doing small business lending or small business services but by redefining that to five minute twenty five million there's a whole gap of what they'll now call maybe micro businesses that's being under served with minority and women own businesses relying very heavily on that capital the lack of access to capital has been a critical impact on their ability to not only start but also to grow and thrive and the small business administration were to small where does the s b a come into that the horizon of lending is a great question the s b a did continue to do good work but i view them more as a resource for the large commercial banks that are actually direct resource to small business owners point number one they do not do direct lending doing time the s b a does directly in the is in the case of a crisis if there is a hurricane whatever comes through it and wipes out the business you can actually get a direct loan from the s b a once the federal government or the state designate this as an emergency what the s b a does is it come in as a secondary lender so the argument the banking industry will tell you is you know we might not have been able to make that loan if it wasn't for that s b a guarantee where we're headed for fifty percent the s b a is in for forty percent of the total loan amount and the owner only has to put ten percent in so i think they're a wonderful resource for the commercial bankers to mitigate that gap or to reduce the risk from a clowder will shortfall perspective but at the end of the day if the cash flow is not there if the math is not there banking once you got to a certain dollar amount of the loan requests you had to come down to what's called a loan committee and over a couple drinks i could say all kinds of horror stories about loan committees and when i brought something that they didn't want to prove it but loan committee was a wonderful way to have a more and more broad holistic dialogue about this particular credit when i remember specifically was there was the president of the bank at the time i was just coming up and i was a branch manager the time and he asked a question about the c e o of the person for this particular business and and everybody was like why do you want to know about this person he says because companies don't repay debt people do  when you talk about character we talk about community involvement those aspects of lending used to come out loan committee that went away when we went to a different model where we sent loans packaged up to loan processing centers now it comes down to just math the artistic aspects of lending has kind of gone away with the elimination of long and the personal aspect absolutely which is where community banks credit unions right come in and how important they now than we've seen since i believe in one thousand nine hundred four so it's the default rate of those smaller community banks has been very troublesome and this is where the public bank solves the problem or provides a public bank solution to this shortfall of affordable credit that community banks are on the front lines i mean they're making over fifty percent of the loans to small businesses now but that's a higher risk prospect isn't it when you mean by higher risk i will i mean  small businesses fail especially new once for so the public bank can pro ten provide a partnering sort of a backdrop of a provider standing with a local bank the community bank in let making absolutely so if we're in a traditional conventional i said financing model if we're financing something mammoth like a new stadium or a new theatre it's rare that one bank will just go and say here here's a check you know have at it typically those multi million dollar projects are done as syndication deals or participation deals where one bank two three four banks are in a shared lane position where a public bank can help is if you're a small community bank and a two million dollar loan to something in the food service industry which we traditionally say is a cautionary industry with the help of a of a participatory would help a public bank they can shoulder some of that risk with the public bank coming in as almost as a guarantee similar to what the s b a does so there's tremendous opportunity for public banking to really have an impact  community banks and credit unions like yeah that and certainly one of the things that's been i had here in new jersey is how can we move this essential credit into minority communities minority based in urban communities that have been really set outside of the of the service area or service interests of commercial banking now you've mentioned something about micro lending also list maybe we could touch on that  are there any commercial banks or community banks doing really small scale lending for small entrepreneurs and not really i think what they'll do get our member when we used to do it is we'll tell you it's a commercial loan but will underwrite it as a consumer loan and then i tell you what i mean by that if you come and say look i'm thinking about starting a business i want to start the walt x y z food restaurant whatever the case may be so we'll go hey w old home you have equity in a home you do well you know what here's what we're going to do we're going to give you that loan for walt x y z company we're going to secure it with your house we want you to personally guarantee it and we know that you also are you know you're working your other gig part time as a consultant while you're getting this restaurant up and running so we'll call a commercial oh we'll tell you the maven count it was a commercial loan but the way the risk is assessed the way we'll underwrite it is as a consumer loan right so it's always about managing risk for the banker right and having well yes what they're that's what is online to do right that's what they do yeah well from a city perspective when you're working in a large municipality as you did in philadelphia you are consulting and providing access to city programs presumably and through city agencies right building grants where the business owner comes in for part of money we come in for the rest of money to maybe improve the facade of the of the of the business typically those types of grants go to restaurants and retail food service  but we also have grants we've been pretty creative about the type of grants in philadelphia that we've been able to offer businesses with the affordable in store we call the in store program or forgivable loan where they it's not as simple as oh here you go here's a check the application process can be a little bit rigorous and so i've heard often times business owners are hesitant to go through that are going to go through all this a and i wish we could i could have found a way to streamline that while i was there we had one product called the capital consortium that you just filled out a two page applicant and it automatically got blasted to eighteen or twenty providers  final count now but still it was incumbent upon the business owner to still go through the application process with whoever raised their hand and said look i'm interested in funding you so i but there's some things we were doing but success at that level of enterprise of the smaller things really has a lot to do with follow up doesn't it i mean if you're a local banker and you've been in that seat knowing the customer from a lot of different perspectives as  critically important the public bank that we're proposing or there were hoping to see is is going to be partnering with the community banks to make to help them make these loans successful correct and that would look like what that not only finding out about the person but maybe following up like c d f eyes community community development financial institution helping them follow up to make sure that the business works but absolute education those components of  stimulating the local economy take people and dedicated service people to be able to stick with it and help the entrepreneur figure that stuff out and that's kind of a new dimension all component for administration for super city management is yeah yeah do you think there might be is there i suppose i think i suppose there are a lot of channels that are there to be on earth and created that the public bank would be able to help help develop and hearten her partner with i hope so i mean i can see i saw hints of it when i served on the committee for the forgivable loan program where we had not just people in the commerce department but we had people from other c d f eyes community velma finances students like you describe walt and other sources of capital that would come together around the table and talk about a particular business but it even though we looked at the financials we also looked at their involvement of community we looked at how this business was going to impact the community and we just had a broader discussion that i think a public bank can bring to the to the equation that's missing right now that happened very organically it was something that i found to be very rewarding but i'd like to see more examples of that start to take shape and i don't  examples of that have happening with the exception of the the bank of north dakota so on the landscape or the horizon of banking as an industry how are you how do you see public banking fitting in with the business models and the needs of communities and of the of the financial industry i see it fitting in it because it's going to meet the needs of those seeking capital particularly to marginalize or under served communities  it changes the game in terms of how government is able to impact its communities right now the models pretty simple be an army is more complicated there but i'm going to overly simplified for our purposes and say that they rely very heavily on tax revenues almost exclusively on tax revenues or reducing expenses stuff pretty much model we that to find another way to tax something some an organization or somebody or we have to reduce expenses but meanwhile we have deeds that are herculean in in infrastructure needs in education we all can agree on the needs  the debate continues on where do we increase taxes or where do we cut expenses and those are some tough decisions public banking brings another alternative into the equation where the bank of north bank of of revenues right as well as a new source of credit because all of the credit is contained inside of the the people at the control inspections of the bankers new credit and new opportunities for communities that quite frankly you know the industry to supposed to be servant has moved away from and and i would love to see this may be controversial for me to say but i'd love to  see this type of applications type of strategy get rid of predatory lending get rid of those that are taking advantage of those that need capital if you want capital bad if you can find someone to give you some money  you may dig a hole so deep you may never ever really get out of it right and i've seen it take place time after time after time with providers that have good intentions really want to help you but you know they just don't have the resources to to  assess the risk and really steer them in the right direction well we were talking about personal commitment for service that in time of the organizations that are committed to serving certain sectors and certain objectives so it comes down to the people in the city level who are the administrators or in the case of banks it comes down to bankers who are saying look you know i'm here for a purpose and it seems to me that and correct me if i'm wrong but the community bankers in particular have been come from that place of they're committed to their local communities they know the people they know the assets and they want to serve but they really bet as you say been compromised or bought out because the business has been hard to maintain right i mean what are some of the factors awak community banks haven't been able to kind of keep the keep pace with the necessary profitability the size is significant size difference a significant  gap the disparity in resources is huge i'll give an example i read in black enterprise magazine years ago about the top fifty black owned banks right it might be minority owned banks and  other even fifty of them but well this was a long time ago this is the forty two thousand zahora this article what was alarming to me was that with the exception of the top three in the country none of them had more deposits more loans outstanding or more assets than my department while at the bank that i was once possible for so when you think about economic impact you're a a pimple on the elephant's back so it's hard to really you know for a while there i was losing some of my direct reports would leave and go start their own bank you know and the general rule of thumb was you know what i'll just start my own bank get to a point where it gets the attention of a big bank to get by they buy me out i'm retired that's a great way to make some money yeah and it's a model that i see taking place over and over and over again particularly in those small under served communities well the the municipal the be administration the city level of a commitment is something we're going to have to rely on this service idea we're going to have to rely on having worked in a city administration what are some of the likely challenges that we're going to come or come up against if the public bank here is part and parcel of the administrative  bureaucratic system well it represents change and human nature being what it is there sometimes resistance to change and there is also going to be for those that are making money off of an old economy they will fight you to keep the new economy from emerging in my nine years in government i saw that scenario take place more times than i care to remember the public banking on the surface it's pretty easy concept understand when you start peeling away the layers of the onion though it can get fairly complex in a hurry and my biggest fear is they don't they don't know what they don't understand it their need jerk reaction might be to go well maybe not right now or let's face it in order let's do another feasibility study or yet another study wow our foreign competitors are getting it and jumping on board quickly that and you're talking about community banks now that are reacting to that idea of a public bank no i'm talking about in this is there a should the city administration reacted right idea of a public man right because they have things models that they think might be working fairly well yeah look like we're approving x percent and we're put an x amount of capital into the local economy look at look at all the small business lending we're doing now but what i know is that some applications don't get counted because they get turned down on the streets  and those never even get recorded those only even get in the pipeline so you don't get a true accurate number of what they're turned on rate might be and what their approval rate might be so it's tough yeah yeah well when you i was when you were responding and describing the scenario inside a ministry of attitudes and opinions i thought you might be talking about the community bankers responses that we've been seeing in part just the resistance to the idea of a public bank as if it were only competitive make sense of that for me you know again perhaps misunderstanding yeah no no no you bring up a great point i remember years ago we rolled out a crowdfunding strategy and we had a conference call commerce department and with a lot of r c t advise a lot of different sources of capital and i had never heard of crowd funding at the time i heard a little better about it from another university did a workshop about it but as the concept was still fairly new to me at the time so i had a little bit of resistance although i knew i had to support because of ministration was behind it on a conference call but all that once i got it was going no no no no no because that fifty thousand dollars you're going to do tomorrow now you can now save part of that twenty thousand here and spend the rest someplace else so you spread the pool of money you have right over multiple for voters isn't that more impactful you have more clients and then well i never thought of that way the same mentality has to take place with community bank c e o s they have to see that way and of course the advantage of having shared risk mean if the public bank is going to stand with the community banks and underwrite some of these riskier loans like for example affordable housing right or the small business loans where there's tremendous need in our communities to have some new sources of capital that that would be a an important improvement to their business model and of course there we do have the bank from north dakota the only public bank in the country by the way that model that shows very clearly community banks profit of profit and are more and more prolific than anywhere else in the country per capita i tell you the impact is mind blowing a lot right now as we speak there's a major business on a commercial corridor in our country in our state in our city in our local communities that struggling and you probably can think of that business it might be a big restaurant you might be in and in my mind it's no different than the anchor store  shopping center and they're struggling and maybe the rest the community came on board at a time when a lot of people businesses weren't coming to the community and they are struggling to raise capital they're struggling to find capital  public bank can prevent that aker store from going out of business because when a traditional bank looks at that they don't take into consideration the impact to the community that business goes dark whereas a public man will take that in consideration and go look this is too important we can't lose the momentum of this neighborhood we can't lose the momentum of this community we've got to find a way to make it happen maybe not just this one small community bank maybe we can bring in some partners now and spread that risk over two or three providers so we can make this community continue to thrive that's great curtis thank you well we have to leave it here now but but we've touched on some important solutions to the problem thank you so much for joining having me appreciate your time yeah this is great so dr curtis gregory of the fox school of business the temple university a former city administrating a commerce department supervisor and a and a banker talking about public bank public