The law opens the state up to the creation of city-run financial institutions. Advocates say public banks will help provide funding for projects that are in the public interest, such as affordable housing. Supporters also argue public banks help keep funds out of for-profit institutions that may not have public interest at heart.
The California Bankers Association (CBA) opposes the legislation and argues public banks cause community banks to lose business and put taxpayer dollars at risk.
Trinity Tran, a lead organizer for Public Bank LA, said divesting from public banks helps keep money within local communities.
"Our cities in California, cities across the nation, spend billions in debt services to borrow money from Wall Street banks that leverage our public funds to finance these destructive, harmful industries that our communities actively fight against," Tran told the Los Angeles Daily News.
Trade groups, however, said advocates for public banks are trying to solve a problem that doesn't exist, adding that the public has shown little support for the institutions.
Los Angeles residents last year voted against a ballot measure that would have allowed the creation of a local public bank.
In a statement addressing the bill's passage, the CBA cited a survey of 600 people that found 60% of likely voters said they oppose the public banking measure and nearly 90% are satisfied with their current banking options.
"Communities considering a public bank need to carefully consider whether any prospective benefits outweigh the negatives, specifically the very real risks to taxpayers who would be left holding the bag if the bank fails to manage its finances," Jeff Sigmund, spokesman for the trade group American Bankers Association told Banking Dive in an email.
"Today highly regulated, private-sector banks take on that risk as they reliably serve consumers and businesses, as well as state and local governments across the country," he wrote. "Except in very specific circumstances, public banks are a solution to a problem that doesn't exist, and taxpayers should be more than skeptical of politicians trying to convince them otherwise."
Los Angeles has expressed disfavor with large banks in the past. The city moved funds out of its Wells Fargo account in 2017, after the bank was fined billions of dollars as a result of its fake customer accounts scandal.
"Two years ago, we got the city of Los Angeles to move over $100 million out of Wells Fargo," Tran told the California Globe. "But we don't need a for-profit bank. We need socially responsible institutes for public dollars, and the wealth reinvested back into the community."
California is the second state to enact a public banking law, joining North Dakota, which has had a public banking system in place since 1919.