Pub­lic bank for pot busi­nesses? It wouldn’t be easy

Ven­tures seek a way to process cash barred by fed­eral reg­u­la­tions.

Los Angeles Times - - BUSINESS - By James Ru­fus Koren

With recre­ational mar­i­juana sales set to be­come le­gal in Cal­i­for­nia next year and most banks un­will­ing to open ac­counts for cannabis com­pa­nies, pot en­trepreneurs are des­per­ate to fig­ure out what to do with their piles of cash. Now, some want the state or cities to get in­volved.

Over the last year, there has been in­creas­ing in­ter­est among cannabis busi­nesses and pub­lic of­fi­cials in the idea of pub­lic banks: gov­ern­ment-owned in­sti­tu­tions that would take de­posits, make loans and, in Cal­i­for­nia at least, be will­ing to work with mar­i­juana firms.

Gu­ber­na­to­rial can­di­date and Cal­i­for­nia Lt. Gov. Gavin New­som has called for the cre­ation of a pub­lic bank and has dis­cussed the idea with mem­bers of the cannabis in­dus­try.

L.A. City Coun­cil Pres­i­dent Herb Wes­son has said he wants to look into cre­at­ing a city-owned bank that might serve cannabis busi­nesses. But would it work? Maybe, said Matt Stan­nard, who has been an ad­vo­cate of pub­lic bank­ing long be­fore Cal­i­for­nia res­i­dents voted to le­gal­ize recre­ational pot use last year.

He’s op­ti­mistic, but also warns that there are plenty of po­ten­tial pit­falls.

“I’m not going to say that if you cre­ate a pub­lic bank, it’s going to solve all of the mar­i­juana in­dus­try’s bank­ing prob­lems,” he said. “But it’s worth a try.” Why a pub­lic bank? A pub­lic bank is much like a pri­vate one, tak­ing de­posits and mak­ing loans. There are a few big dif­fer­ences: Pri­vate Owned by share­hold­ers. Run by a board of di­rec­tors se­lected by share­hold­ers.

Run to gen­er­ate profit and re­turn profit to share­hold­ers. Pub­lic Owned by the pub­lic.

Run by elected or gov­ern­ment-ap­pointed of­fi­cials.

Run to sup­port pub­lic pri­or­i­ties and re­turn profit to the pub­lic.

Stan­nard, pol­icy di­rec­tor for Sonoma, Calif.-based ad­vo­cacy group Com­mo­nomics USA, said there are a hand­ful of po­ten­tial benefits of pub­lic banks, some eco­nomic and some so­cial, ir­re­spec­tive of their use by the mar­i­juana in­dus­try.

If Cal­i­for­nia had a pub­lic bank, the state could de­posit tax rev­enue there rather than at a pri­vate bank. Those de­posits would then be used to make loans.

But un­like at a pri­vate bank, those loans could be used to sup­port state needs — such as af­ford­able hous­ing — and prof­its could be re­turned to state cof­fers.

The Bank of North Dakota, the only pub­licly owned bank in the coun­try, has paid $85 mil­lion into var­i­ous state gov­ern­ment funds over the last four years, ac­cord­ing to its most re­cent an­nual re­port. It makes low­in­ter­est stu­dent loans and farm loans and helps fi­nance lo­cal pub­lic works projects, all pri­or­i­ties set by state lead­ers.

New­som, in a series of tweets in May dur­ing the Cal­i­for­nia Demo­cratic Party con­ven­tion, said Cal­i­for­nia should de­velop a state bank to of­fer stu­dent loans and fi­nance the con­struc­tion of health­care fa­cil­i­ties and hous­ing.

Stan­nard said the state could also make cannabis bank­ing a pri­or­ity, if for no other rea­son than to ad­dress the pub­lic safety con­cerns pre­sented by the in­dus­try’s cur­rent re­liance on cash.

“The vot­ers of Cal­i­for­nia have voted to al­low recre­ational mar­i­juana but, given the sta­tus quo, that’s a huge mess, and it’s dan­ger­ous,” he said. “A pub­lic bank may be the best way to clean up that mess and the best way to pro­vide fi­nan­cial and phys­i­cal se­cu­rity to the in­dus­try.” What about drug laws? Most banks won’t know­ingly work with mar­i­juana com­pa­nies be­cause mar­i­juana is an il­le­gal sub­stance un­der fed­eral law. Banks are over­seen and in­sured by fed­eral agen­cies, so fed­eral

rules, not state ones, are key.

State- or city-owned banks could get around at least some of that fed­eral over­sight. At the Bank of North Dakota, de­posits are in­sured by the state it­self, not by the Fed­eral De­posit In­sur­ance Corp., tak­ing one fed­eral agency out of the mix.

The bank is over­seen by the North Dakota De­part­ment of Fi­nan­cial In­sti­tu­tions, not by fed­eral bank ex­am­in­ers.

Rat­ings agency Stan­dard and Poor’s noted in a 2014 re­port that Bank of North Dakota “has no over­sight from U.S. gov­ern­ment au­thor­i­ties or bank­ing reg­u­la­tory bod­ies.”

But there’s still at least one way fed­eral rules could block pub­lic banks from work­ing with pot busi­nesses: by shut­ting them out of the Fed­eral Re­serve sys­tem.

To be able to process checks, wire trans­fers and elec­tronic pay­ments — in other words, to in­ter­act with the rest of the fi­nan­cial sys­tem — banks must have an ac­count with one of the na­tion’s 12 re­gional Fed­eral Re­serve banks. Without such an ac­count, a bank is “noth­ing but a huge cash vault,” said Mark Ma­son, one of the founders of Fourth Cor­ner Credit Union, a Colorado in­sti­tu­tion that aimed to serve that state’s cannabis in­dus­try.

When Fourth Cor­ner ap­plied for an ac­count at the Fed­eral Re­serve Bank of Kansas City in 2014, the ap­pli­ca­tion was de­nied, in part be­cause of its plans to fo­cus on the mar­i­juana busi­nesses.

The credit union sued, ar­gu­ing it was en­ti­tled to an ac­count, but a fed­eral district judge sided with the Kansas City Fed.

The credit union ap­pealed and it now ap­pears Fourth Cor­ner will be able to get an ac­count — but only if it pledges not to work with cannabis busi­nesses. Ma­son said the credit union’s plan for now is to serve mar­i­juana ad­vo­cacy groups and per­haps busi­nesses that are con­nected to the in­dus­try but that don’t grow or sell cannabis.

There has been no firm rul­ing on the key is­sue in the case: whether a fi­nan­cial in­sti­tu­tion that plans to work with cannabis com­pa­nies will be able to get a Fed ac­count.

Stan­nard said pub­lic of­fi­cials and cannabis en­trepreneurs push­ing for pub­lic banks should be aware of this, though it shouldn’t stop them from pro­ceed­ing.

“It is not a set­tled ques­tion,” he said. “There are le­gal bar­ri­ers still. But our po­si­tion is it’s a bat­tle worth fight­ing.”

He also sug­gested that the Fed­eral Re­serve Bank of San Fran­cisco, the cen­tral bank for Cal­i­for­nia and eight other western states, may take a dif­fer­ent ap­proach than its coun­ter­part in Kansas City.

What’s more, he sug­gested Cal­i­for­nia’s size could al­low it to suc­ceed where Fourth Cor­ner failed.

“There’s a big dif­fer­ence be­tween an ap­pli­ca­tion from a tiny credit union and an ap­pli­ca­tion from the sixth­largest econ­omy in the world,” he said. How long are the odds? If Cal­i­for­nia, Los An­ge­les, Oak­land or any other ju­ris­dic­tion in the state suc­cess­fully cre­ates a pub­lic bank, it would be the first to do so in the United States in nearly a cen­tury.

A hand­ful of states had their own pub­lic banks in the 1800s, but now the Bank of North Dakota is the only one re­main­ing — and its ori­gins have a par­al­lel in the cur­rent pub­lic-bank move­ment.

The Mid­west­ern bank was cre­ated in 1919 at the be­hest of wheat farm­ers who felt they were be­ing over­charged by banks in Chicago and Min­neapo­lis.

Today, the cannabis in­dus­try feels mis­treated and is push­ing for a pub­lic op­tion.

“This in­dus­try has been shut out of tra­di­tional bank­ing sys­tems in Cal­i­for­nia, cre­at­ing a cat­a­lyst for us to take up the pub­lic-bank­ing ques­tion,” said gu­ber­na­to­rial can­di­date and state Trea­surer John Chi­ang, who has said he is in­ter­ested in pub­lic banks but has not en­dorsed the idea.

He leads a group of reg­u­la­tors and cannabis in­dus­try rep­re­sen­ta­tives try­ing to bring the in­dus­try into the main­stream. Pub­lic bank­ing will be the fo­cus of the group’s next meet­ing, to be held in Los An­ge­les next month.

There’s also the no­tion that a pub­lic bank could pro­vide loans that pri­vate banks are less in­ter­ested in mak­ing.

“Imag­ine … a bank where its vi­sion state­ment is to fi­nance the build­ing of af­ford­able hous­ing,” Wes­son said in a speech Tues­day. “Imag­ine if we had a bank that is fo­cused on work­ing with small busi­ness en­trepreneurs to give them loans.”

There have been cam­paigns for pub­lic banks for years in other states and cities, es­pe­cially in the wake of the fi­nan­cial cri­sis, but they haven’t gone any­where. A 2012 Cal­i­for­nia As­sem­bly bill call­ing for the cre­ation of some­thing ap­proach­ing a state bank never made it to a vote.

In Mas­sachusetts, the state Leg­is­la­ture in 2010 called for a study on the fea­si­bil­ity of cre­at­ing a state bank. The re­sult­ing re­port rec­om­mended against such an in­sti­tu­tion, find­ing that the state would have to bor­row bil­lions of dol­lars to set up the bank and that de­posit­ing pub­lic funds in such a bank could put tax­pay­ers at risk.

That, Stan­nard said, is how most pub­lic bank­ing cam­paigns die.

“It’s al­ways a ques­tion of po­lit­i­cal will,” he said. “You have pub­lic of­fi­cials who are risk averse, and the safest thing to do is noth­ing.”

Even if the idea moves for­ward, cre­at­ing a pub­lic bank could take years.

Dan New­man, a spokesman for New­som’s cam­paign, said the lieu­tenant gov­er­nor is open to the idea of a pub­lic bank that would work with cannabis com­pa­nies, but said such an in­sti­tu­tion is not “a short-term an­swer or an im­me­di­ately scal­able op­tion.”

And, of course, there’s the bank­ing lobby. Pri­vate banks and their trade groups would prob­a­bly fight the cre­ation of a pub­lic bank, on the grounds that a pub­lic in­sti­tu­tion could have an un­fair com­pet­i­tive ad­van­tage, said Si­mone Lago­marsino, chief ex­ec­u­tive of the Cal­i­for­nia Bankers Assn.

“Who’s going to reg­u­late the bank? Who’s going to ex­am­ine it? If it loses money, are tax­pay­ers OK with ab­sorb­ing a loss? These are ques­tions our bankers would be ask­ing,” she said.

Luis Sinco Los An­ge­les Times

PA­TIENTS PAY through a teller win­dow at Med X, a med­i­cal mar­i­juana dis­pen­sary on Cen­tury Boule­vard in South L.A. Most banks won’t know­ingly do busi­ness with mar­i­juana com­pa­nies be­cause mar­i­juana is still an il­le­gal sub­stance un­der fed­eral law.

Gina Fer­azzi Los An­ge­les Times

EV­ERY YOUNG cannabis plant has a tag and a bar code in­side the grow site at Can­nde­s­cent in Desert Hot Springs. Many pot en­trepreneurs un­sure what to do with their cash want the state or cities to get in­volved.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.