This article was originally published January 15, 2025 on the Dēmos blog. 

For decades, the racial wealth gap has persisted, with the median white family now holding more than six times the wealth of the median Black family in the U.S. Evidence has long shown that commercial banks perpetuate this divide through discrimination and predatory practices. But growing support for public banks—financial institutions created by local governments and chartered to serve the public interest—presents an opportunity for a transformative shift, one in which our financial system builds wealth in communities of color instead of extracting wealth from them.

A novel research project by Dēmos and New Economy Project examines public banking as a promising strategy to build community wealth and advance democratic governance in communities of color, providing a powerful framework for transforming local economies.

This project seeks to identify whether and how public banks can help close the racial wealth divide by expanding opportunities for communities of color to build generational and community wealth. We analyze established and proposed public banking models, policies, and governance structures to identify approaches that can best be leveraged to democratize the economy and build community wealth.

Wall Street Banks Have Fueled Racial Wealth Inequality—Their Extractive, Profit-first Model Won't Fix It

Wall Street banks have exacerbated racial wealth inequality through decades of redlining and other exploitative practices. In the years leading up to 2008, banks peddled toxic mortgages in Black and brown communities, fueling mass foreclosures and triggering an economic collapse that wiped out 50 percent of Black wealth. Today, banks continue to extract wealth from communities of color while systemically denying them opportunities to achieve financial security and build wealth. They do this by rejecting Black loan applicants at higher rates than whites, financing predatory real estate development that displaces Black and brown residents and businesses, depriving communities of color of bank branches, and much more. 

At the same time, the government confers extraordinary backing and support to banks—from low- or no-interest Federal Reserve loans to deposit insurance and even bailouts. Many state laws mandate that governments deposit public funds exclusively in commercial banks, giving Wall Street an effective monopoly over hundreds of billions of dollars in state and local funds. Banks benefit from this arrangement by charging governments costly fees and further profiting from the “float”—the period between when deposits are made and withdrawn. While public funds sit idle, banks leverage them to finance a range of exploitative practices, such as speculative real estate investments that displace low-income residents and drive up housing costs.

In our interviews with advocates, scholars, and community development lenders, a clear consensus has emerged: Banks have affirmative obligations to serve communities equitably, yet they consistently fail to do so. Instead, banks seek to maximize short-term profits for shareholders, engaging in a laundry list of risky and predatory schemes that disproportionately harm people and neighborhoods of color. This extractive model traps Black and brown communities in cycles of poverty and deepens the racial wealth divide.

Investigating the Promise of Public Banking for Closing the Racial Wealth Gap

The study is comprised of a comparative analysis of five public banking proposals (in Philadelphia, California, Massachusetts, New Jersey, and New York) as well as the Public Banking Act of 2023, a review of existing public banks (Bank of North Dakota, Native American Bank, Territorial Bank of American Samoa), and an evaluation of Census Bureau and Federal Reserve data. 

Finally, we are conducting stakeholder interviews with community groups, experts, and advocates and developing a public banking policy assessment rubric based on governance, community investment, and civic engagement.

Our research and interviews so far have revealed numerous ways in which public banks, by leveraging public funds to support vital local projects—such as permanently affordable housing, small and worker-owned businesses, and sustainable infrastructure—can spur economic growth that builds broadly shared wealth rather than funneling profits to private shareholders. This approach breaks the cycle of extraction, creating a system in which capital circulates and expands opportunities within communities.

Public Banks Can Transform Local Economies and Build Community Wealth

Hundreds of public banks exist arounds the world. Many have demonstrated the transformative potential of this model when aligned with the public interest and local needs. In the U.S., the century-old Bank of North Dakota manages a loan portfolio of more than $5 billion, approximately half of which is lent out in partnership with community banks and credit unions. Thanks to this partnership model, North Dakota has more local banks and credit unions per capita than any other state, fostering a strong network of community lenders. While not without its limitations—for example, the bank recently endorsed expanding fossil fuel infrastructure in its ESG report—the Bank of North Dakota illustrates how public deposits can be leveraged to support local businesses, residents, and infrastructure, reinforcing economic resilience and self-reliance in communities.

In recent years, public banking campaigns have gained significant momentum across the U.S. as communities recognize the potential to create locally accountable financial institutions that prioritize the public good over private profits. State and local coalitions nationwide are working to advance legislation establishing state and municipal banks. In 2019, California enacted the California Public Banking Act, creating a framework for local public banking. In Congress, Representatives Rashida Tlaib and Alexandria Ocasio-Cortez have reintroduced the Public Banking Act, which would support states and municipalities in establishing public banks.

Democratic Governance and Intentional Policy Design Are Key to Unlocking the Potential of Public Banks

As support for public banking grows, so too does the urgency to design and implement models that directly address the racial wealth gap and dismantle—rather than perpetuate—structural inequities. Through early analysis of public banking proposals and interviews with experts and community practitioners, we are identifying policies and frameworks that are key to achieving concrete racial equity outcomes.

Robust governance and public accountability, for example, are crucial to ensuring a public bank’s responsiveness to local community needs. Interviewees stressed the need for public banks to enable meaningful participation from a broad array of stakeholders, including from historically marginalized communities, to allow those most impacted by financial exclusion to have a direct voice in shaping the bank’s priorities and investments. 

Public banks additionally could embed racial equity goals in their structure and operations—prioritizing, for example, loans and investments that directly benefit communities of color, in alignment with the bank’s community wealth-building mission. Partnerships with community development financial institutions—with roots in and track records of responsibly serving historically redlined communities of color—are critical to expanding the bank’s reach and impact. At the same time, states and municipalities can establish guardrails prohibiting public banks from investing in speculative real estate and other industries that run counter to racial equity and other public policy objectives.

Public banks can transform our financial system to serve people, not profit. Our research offers valuable insights to shape public banking policies that help reduce the racial wealth divide and advance economic justice.

Related Projects