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By Daria Lenderman, Lucy Lawrence, Gabriel Coll, and Terri Friedline

Introduction

Public banking is a promising way for cities and states to most efficiently use public funds for investing in their communities, especially supporting small business owners, developing affordable housing for residents, and building community wealth. In this brief report, we use the Bank of North Dakota—the nation’s only state-owned public bank with a history of over 100 years of successful operation—as an example for how California can finance needed community investments. We discuss how the Bank of North Dakota uses lending to support the state’s small businesses, pursue economic growth, and finance affordable housing and other infrastructure development.

Today in California, small businesses navigate challenges keeping their doors open, hiring workers, and expanding their operations. In particular, predatory lenders that charge high interest rates undermine the potential for small businesses to contribute to economic growth. Alternative lenders offer loans with excessively high interest rates. An analysis conducted by the Opportunity Fund found that these alternative loans carried an average annual percentage rate (APR) of 94%, with one loan analyzed reaching a shocking 358% APR. These predatory loans often include many exploitative terms, such as requiring large, lump sum payments at the end of a loan term. Between 2007 and 2013, Small Business Administration lending fell by 60% in California, creating an even stronger market for predatory lenders. A 2024 survey by Goldman Sachs found that on average 28% of small businesses nationally report experiencing predatory loan payment terms, however that number increased to 37% for Black small business owners. The average California business using predatory loans is charged 178% of its net income, with Black- and Latine-owned businesses being disproportionately targeted with expensive lending products.

California also needs to invest in affordable housing and help communities build wealth. The state is well-known for its chronic shortage of affordable housing, made worse by frequent environmental disasters including wildfires and floods. In 2023, California awarded $576 million in low-interest loans to developers for completing affordable housing units. However, developers had requested $3.5 billion and the insufficient amount of low-interest loans meant many projects were stalled. Racial, income, and wealth divides are also widening in the state. Alongside residential segregation, these divides suggest that some communities have disproportionately fewer resources and opportunities— especially poor communities and Black, Indigenous, and other racially marginalized communities. As one example, White households in Los Angeles have a median net worth of $355,000 compared to $4,000 for Black households and $3,500 for Mexican households.

Public banking is one way for California to support small businesses, construct affordable housing, and build community wealth. If the state were to adopt some of the Bank of North Dakota’s approaches, which could be accomplished by expanding the purview of the state’s Infrastructure and Economic Development Bank (IBank), there would likely be benefits to local communities. This is especially true if the public bank incorporated into its design a targeted universalism approach, an outcome-oriented methodology that ensures every person or community benefits from a given policy. Public banks can create tailored programs to address the economic and social needs of California’s people and communities by considering the impacts of structural disadvantages, such as poverty, racism, and gender bias. With unequal social and economic contexts in mind, public banks can more effectively design programs that deliver on mandates to promote investment supporting public good. For example, a public bank in California can:

• Expand affordable capital for small business owners to start, grow, and invest in their small business.
• Promote local economic thriving and bolster local workforces by increasing access to quality jobs for rural entrepreneurs, generationally impoverished people, and people marginalized by race and gender.
• Save hundreds of thousands of dollars on the costs of each new affordable housing unit by lending at lower interest rates.
• Support sustainable wealth building through cost-saving infrastructure improvements that address climate change and improve energy efficiency.

In the full policy brief, we describe the Bank of North Dakota and its lending activities in small business development, affordable housing, and community wealth building. Within each of these areas, we offer some preliminary estimates of how a California public bank, modeled after the Bank of North Dakota, could support the state’s communities. For example, the Bank of North Dakota uses a partnership model to expand access to capital for local banks and credit unions, thus enabling partner institutions to offer loans at substantially lower interest rates than private banks. Expanding access to large amounts of low-cost capital can lead to outcomes like more affordable housing as a result of cheaper building costs—a high priority for California residents facing expensive housing markets which are further threatened by disasters like floods and wildfires.

Although the states of California and North Dakota differ considerably in size and demographics, the model provided by the Bank of North Dakota can be adapted and scaled to support the specific needs of Californians while maintaining commitments to promote the public good. The longstanding success of the Bank of North Dakota illustrates the profound potential of public banking in California to deliver financial services on an even larger scale. The state of North Dakota has a smaller economy in comparison to California, which has the fourth largest economy in the world. Therefore the Bank of North Dakota, even in a state with relatively limited financial resources, is able to make meaningful investments and positive contributions to local communities. This would likely be even more true for California, which has access to more financial resources. State and municipal public banks in California can also design programs that consider the diverse social, cultural, and economic contexts of California residents to offer holistic support for small businesses, affordable housing, and community wealth building.

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