Public banking works by placing a bank under full government ownership so that public deposits, lending decisions, and profits stay inside the public sector instead of flowing to private shareholders. The bank takes in tax revenues and other government funds as its deposit base, lends primarily through partnerships with local community banks and credit unions rather than directly to consumers, and returns its earnings to the government’s general fund or reinvests them to lend more. Only one such institution operates in the United States today: the Bank of North Dakota, established in 1919, which held roughly $10.8 billion in assets at the end of 2024.1Bank of North Dakota. 2024 BND Annual Report
What Makes a Bank “Public”
A commercial bank is a for-profit corporation owned by shareholders who expect returns. A credit union is a nonprofit cooperative owned by its members. A public bank is owned entirely by a government body, with the public treasury as its sole stakeholder. No private investors hold equity, and no individuals hold membership shares.
That ownership difference shapes everything downstream. A commercial bank’s lending decisions ultimately serve shareholder returns. A credit union’s decisions serve member benefits. A public bank’s decisions serve whatever policy objectives the government sets, whether that is cheaper infrastructure financing, support for local lenders, or returning profits to the state budget.
Public banks also tend to operate as wholesale institutions. They work behind the scenes with other banks rather than opening branches where you walk in and open a checking account. Most people would never interact with a public bank directly. The customers are typically government agencies, local community banks, and credit unions.
Who Owns It and Who Runs It
A public bank is structured as a government-owned corporation or state agency, with all equity held by the sponsoring government. A board of directors, usually appointed by elected officials, sets strategy and policy. The Bank of North Dakota is managed by the state’s Industrial Commission, which consists of the governor, the attorney general, and the agriculture commissioner.2North Dakota Legislative Branch. North Dakota Century Code Title 6 Chapter 09 Day-to-day operations are handled by professional bankers hired for their financial expertise.
The split between political oversight and professional management is where the model gets both its accountability and its risk. The board sets the broad mission. The banking staff makes individual lending decisions. When that boundary holds, the institution operates with both democratic accountability and technical competence. When it breaks down, you get political lending, which is the primary criticism leveled at public banks worldwide.
Standard conflict-of-interest protections include prohibiting board members and officers from having financial interests in borrowers, requiring written disclosure of potential conflicts, and separating individual loan approval authority from political appointees. These guardrails resemble what any well-run bank maintains, but the stakes rise when the owner is a government that also regulates, taxes, and contracts with potential borrowers.
Where the Money Comes From
A public bank’s deposit base comes primarily from government funds rather than consumer savings accounts. Tax revenues, licensing fees, and other state or municipal collections flow into the institution instead of being deposited in private commercial banks. North Dakota law requires all state funds to be deposited in the Bank of North Dakota.2North Dakota Legislative Branch. North Dakota Century Code Title 6 Chapter 09 That captive deposit base gives the bank a stable, low-cost funding source without needing to compete for consumer deposits.
Initial startup capital comes from the sponsoring government, typically through legislative appropriation. When the Bank of North Dakota opened in 1919, it started with $2 million in capital.3Bank of North Dakota. About BND Modern proposals contemplate significantly larger amounts given today’s banking requirements and economic scale.
Revenue comes from interest on loans and investments, plus service fees. The goal is self-sufficiency rather than aggressive profit maximization. Earnings either flow back to the government’s general fund or get reinvested to grow the bank’s lending capacity. The Bank of North Dakota has transferred more than $1 billion to the state’s general fund and special programs over its lifetime.
Protecting Deposits That Exceed Insurance Limits
Federal deposit insurance covers only $250,000 per depositor per ownership category at each insured bank.4Federal Deposit Insurance Corporation. Understanding Deposit Insurance Public deposits routinely dwarf that threshold, so the bank must pledge securities or other assets to cover the uninsured portion. The Government Finance Officers Association recommends collateral worth at least 100% of the uninsured deposit amount, with values marked to market and reported monthly.5Government Finance Officers Association. Collateralizing Public Deposits Many states set their own minimum collateral requirements by statute.
What a Public Bank Actually Does
Public banks focus on wholesale and participation lending rather than retail consumer services. They don’t compete with your local bank for checking accounts and car loans. They partner with local banks and credit unions to expand credit capacity in the region.
Participation lending is the signature activity. A local community bank might have a customer who needs a $5 million loan, but the bank’s lending limit only allows a $2 million exposure. The public bank buys a participation in the loan, covering the remaining $3 million. The local bank keeps the customer relationship, earns servicing fees, and stays competitive with larger regional lenders. The public bank deploys capital into the local economy without building a retail branch network. The Bank of North Dakota describes this directly: it participates in loans made by local financial institutions so that smaller community banks can support larger business efforts in their communities.6The BND Story. Partnering with Local Financial Institutions
Beyond participation lending, public banks can finance infrastructure projects like roads, bridges, and utility systems. They may purchase municipal bonds directly, which can lower borrowing costs for local government agencies by adding another buyer to the market. Targeted lending programs for agriculture, small businesses, and student loans fill gaps where private lenders may be less active or where the government wants to direct capital toward specific policy goals.
The Only Working Example: Bank of North Dakota
Any working description of public banking in the United States runs through the Bank of North Dakota, because it’s the only functioning example. Established by the state legislature in 1919, the institution today manages over $10.8 billion in assets, carries roughly $6.1 billion in loans, and posted net income of about $200 million in 2024.1Bank of North Dakota. 2024 BND Annual Report
The bank’s powers are broad. State law authorizes it to make, purchase, guarantee, or hold loans to financial institutions, farmers with North Dakota real estate, federally guaranteed borrowers, nonprofits, and individuals purchasing bank stock for in-state banks, among other categories.2North Dakota Legislative Branch. North Dakota Century Code Title 6 Chapter 09 It offers student loan programs for state residents, including refinancing options designed to lower monthly payments.7Bank of North Dakota. Education Funding It also provides disaster relief and emergency loan programs during economic downturns.
With only about 180 employees, BND relies on local lenders as distribution channels for its programs. Community bankers in North Dakota don’t see BND as a competitor. They see it as a backstop that lets them handle deals larger than their balance sheets would otherwise allow.
Federal Rules a Public Bank Must Navigate
Tax-Exempt Status Under Section 115
A properly structured public bank can qualify for federal income tax exemption under Section 115 of the Internal Revenue Code, which excludes from gross income any revenue “derived from any public utility or the exercise of any essential governmental function and accruing to a State or any political subdivision thereof.”8Office of the Law Revision Counsel. 26 USC 115 – Income of States, Municipalities, Etc. The IRS evaluates whether the institution performs a governmental function, operates on behalf of a state or political subdivision, and remains fully under government control with no private interests involved.9Internal Revenue Service. Government Entities and Their Federal Tax Obligations Meeting these criteria means the bank’s earnings aren’t subject to federal corporate income tax.
A Federal Reserve Master Account
To function within the modern banking system, any bank needs access to the Federal Reserve’s payment infrastructure through a master account. Without one, a bank cannot process wire transfers, settle interbank transactions, or participate in the broader payments network. The Federal Reserve’s Account Access Guidelines establish a risk-based, tiered review that considers six principles, starting with legal eligibility and then assessing risks to the Reserve Bank, the payment system, financial stability, the broader economy, and the Fed’s ability to conduct monetary policy.10Federal Reserve Board. Master Accounts and Services Database FAQs Scrutiny increases for institutions that don’t fit traditional banking models.
FDIC Insurance
California’s public banking law explicitly requires FDIC insurance for any public bank chartered under its framework.11Department of Financial Protection and Innovation. Public Banks Obtaining FDIC coverage is a separate rigorous process involving its own application, capital adequacy review, and ongoing compliance obligations.
Starting One From Scratch
No general federal framework exists for chartering a public bank, so a state must first pass enabling legislation. California’s AB 857, effective January 1, 2020, provides the most detailed modern template.12California Legislative Information. AB-857 Public Banks
Under California’s framework, a local government must complete a detailed viability study before applying for a charter. The study must analyze risks, projected costs, and economic impact on the surrounding area. The governing body of the local agency must approve the study, and in most cases voters must also approve the proposal. Charter cities are exempt from the voter approval requirement. Only after clearing those hurdles can organizers submit an application to the state’s Department of Financial Protection and Innovation.13Department of Financial Protection and Innovation. California State Bank Charter – The Charter of Choice – Section: Public Banks
The application itself mirrors what any new commercial bank must provide: a business plan, description of governance structure, qualifications of proposed management, and evidence of adequate starting capital.11Department of Financial Protection and Innovation. Public Banks A critical restriction built into the law prevents a public bank from competing with local financial institutions. Retail banking activities must be conducted in partnership with local lenders.
The costs are substantial. Feasibility studies alone can run into the hundreds of thousands of dollars, and the capital required to meet regulatory minimums adds millions more. These upfront expenses, paid from public funds, put real taxpayer money at risk before the bank opens a single account.
The Main Risks
The strongest argument against public banking is political interference in lending decisions. Academic critics have framed government-owned banks as institutions “predestined for political uses” where officials face incentives to reward supporters rather than allocate capital efficiently. Internationally, government-owned banks in countries with weaker institutional checks have a documented history of directing credit to politically connected borrowers at the expense of sound underwriting.
In the United States, the Bank of North Dakota has largely avoided these problems, but it operates in a small, politically homogeneous state with strong institutional norms around the bank’s independence. Whether the governance safeguards that work for a 180-employee institution in Bismarck would scale to a multibillion-dollar operation in a large metropolitan area is an open question.
Startup risk is another legitimate concern. Public funds used for initial capitalization and feasibility studies are at risk if the institution fails or never reaches self-sufficiency. Unlike a private bank failure where shareholders absorb losses, a public bank failure means taxpayers bear the cost. FDIC insurance and collateralization protect depositors, but the equity capital invested by the government would be the first layer wiped out in an insolvency.
There is also an opportunity cost argument. The same public funds used to capitalize a bank could be deployed as grants, loan guarantees, or direct subsidies to achieve similar economic development goals without the regulatory complexity of running a depository institution. Proponents respond that a bank creates a self-sustaining revolving fund rather than a one-time expenditure, but that advantage only materializes if the bank operates successfully over the long term.