San Jose’s idea to launch a public bank is off the table

San Jose lawmakers explored forming a public bank a few years ago, but it went nowhere.

The idea was introduced by Councilmembers Magdalena Carrasco, Sergio Jimenez and Raul Peralez in a 2019 memo, after San Jose received information that led to the city exploring a banking contract with JPMorgan Chase. The institution had been accused of wage theft. The City Council ended up approving an extension of the banking service agreements with Wells Fargo.

“I think there’s still some interest here at the city level,” Jimenez said. “I think it’s worth evaluating the current landscape and from there seeing if there’s still a need that can be met via a public bank.”

Jimenez told San José Spotlight on Wednesday he was motivated in part by payday lenders charging exorbitant interest for loans, taking advantage of undocumented community members who couldn’t obtain bank accounts. Public banks can offer loans that benefit the local community such as affordable housing, small business loans and public infrastructure projects by leveraging deposits.

Assembly Bill 857, the Public Banking Act, which allowed cities and counties to operate public banks, was under consideration at the time. It passed in September 2019, and Jimenez wanted to explore how to move the city’s banking away from the large institutions “doing shady deals.”

But not everyone at the city was onboard. Concerned with the complexity of operating a public bank and possible financial loss to the city, former Councilmember Johnny Khamis opposed the idea and is still against it today.

“Banking is not a simple industry to step into,” Khamis recently told San José Spotlight. “Banks have to invest money and (San Jose) has a clear track record of not investing money well; take a look at our pension funds.”

Khamis said banking is a business and the city hasn’t proved successful at that either, evidenced by its ownership of Hayes Mansion.

“We let it go after years of losing money,” he said, adding that until recently, city-owned golf courses lost millions every year and San Jose Clean Energy has yet to turn a profit for the city.

Khamis, who ran a financial advisory business, said banks can lose money depending on who they loan money to.

“As we know, COVID killed a lot of small businesses,” he said, “and if the city had loans to restaurants, dry cleaners and nail salons, we would’ve gotten killed.”

Discussions of San Jose operating a public bank stalled because city administration didn’t consider it feasible. In a June 2020 memo, Julia Cooper, city director of finance, said staff concluded public banking is a “costly and highly risky endeavor” for local governments.

“In the process of establishing a public bank, the city would face many operational and policy challenges and legal requirements,” she said in the memo. “Staff does not believe that public banking is a viable alternative banking service delivery model.”

Contact Lorraine Gabbert at [email protected].

Editor’s Note: A previous version of this story incorrectly reported the city’s relationship with JPMorgan Chase. It only explored a contract with the bank.