By Tyler Suksawat & Scott Ferguson
In previous writings, we advanced an inventive new model for municipal finance: what we call the Seattle Loop. By establishing a city-owned public bank, we propose, Seattle can not only expand public investment through municipal lending and provide residents with low-cost financial services; it can also purchase its own bonds and “loop” the interest back to the city itself, rather than to Wall Street. Over time, the Loop promises to save Seattle (and any other municipality that adopts the Loop) hundreds of millions of dollars in interest payments annually. More important, it stands to turn the city’s public debt into a self-reinforcing system of public finance, capable of addressing community and environmental needs far more democratically and robustly than ever before in the city’s fiscal history.
Here, we take a more granular approach to some of the Loop’s key operations—capitalization and maintaining reserve balances—zooming in, as it were, to address logistical specificities that our broader model facilitates.
How precisely can a city like Seattle capitalize a public bank? That is, how will Seattle secure enough funds to, first, acquire a banking charter, and second, steadily marshal sufficient owner equity, or “capital,” to meet ongoing regulatory requirements? Concomitantly, how can a Seattle Municipal Bank attain and maintain adequate reserve balances, ensuring daily liquidity in managing interbank payments with the rest of the U.S. financial system?
In what follows, we explain both processes. Ultimately, we demonstrate that capitalization and reserves are not separate stumbling blocks to be surmounted, but deeply interrelated operations that—when designed in tandem—create a mutually reinforcing engine for public provision.
No Cap: A Closer Look at Capitalizing the Loop
Since we first introduced the Seattle Loop, several interlocutors have expressed concerns regarding the city’s capacity to sufficiently capitalize a new public bank. Frequently, these anxieties rest on the erroneous notion that much of Seattle’s current holdings are functionally off-limits, either because they are supposedly locked in high-yield investments or because tax revenues earmarked for future spending are deemed unavailable for democratic deployment.
In reality, all funds Seattle presently holds in private banks and investment portfolios are readily available to the city. This includes earmarked revenues, waiting to be spent according to legislative directives. No city, state, or federal laws prevent the city from mobilizing its assets toward the capitalization of a new public bank.
The scale of Seattle’s public wealth is immense, totaling over $8.1 billion in managed assets. This figure rests on two primary pillars: the city’s $3.8 billion Treasury Investment Pool, which handles daily operating cash and earmarked reserves, and the $4.3 billion managed by the Seattle City Employees’ Retirement System (SCERS).
The trouble is, under current municipal arrangements, this $8.1 billion foundation is sequestered in private financial institutions, reducing the city’s greatest strength into a passive subsidy for Wall Street. As a result, Seattle is forced into a perverse position: the city pays hundreds of millions of dollars in predatory fees and exposes retirement savings to volatile speculative markets, all while providing the very liquidity that private banks use to underwrite their own exploitative and destructive regime of lending.
Seattle possesses the capacity to liberate its public wealth from private capture, reallocating its massive holdings to capitalize a democratic municipal bank. While this transition demands adept financial management—including the careful disaggregation of funds and a move away from speculative vehicles—the challenges are solely logistical. Potential liquidity bottlenecks and termination fees from private vendors represent one-time and short-term transitional hurdles rather than systemic barriers. Any payment or dip in yields marks the final extraction by private intermediaries, a cost that will be swiftly recovered as the Seattle Loop commences in earnest.
Securing this initial capitalization and, with it, a banking charter, Seattle’s reclaimed equity then serves as its public bank’s regulatory foundation, providing the balance sheet capacity necessary to absorb municipal debt and extend credit at a scale far exceeding the initial investment. From here, Seattle can begin issuing bonds directly to—and, when necessary, receiving loans from—its own public bank. Henceforth, the city will systematically retire its legacy obligations to private investors. However, all future interest payments will remain within the public circuit. Consequently, Seattle recuperates wealth once lost to the rentier class, looping interest back into the general fund to support social provisioning. It also effectively democratizes debt issuance, wresting control from bond rating agencies and private intermediaries to empower local government and the voting public.
Throughout this process, it is essential to recognize a more fundamental point about the entire logic of capitalization. Capital requirements do not obey immutable natural laws; they are legal constructs subject to democratic redefinition.
As California Assembly Bill 857 (2019), or Public Banking Act, demonstrates, it is entirely possible to legally codify what counts as capital in the first place. This landmark legislation reclassifies both existing investment portfolios and projected tax revenues as suitable for bank capitalization, providing a clear regulatory roadmap for municipal entities. While our goal remains to fully reclaim private investment portfolios for public use, we can certainly follow the California model by reclassifying future tax revenues as core capital.
Recognizing that these definitions are flexible opens the door to creative capitalization strategies that were previously unimaginable. Indeed, Assembly Bill 857 utilizes the same powerful assumption to endow California public banks with depository functions. In addition to reclassifying what assets can be used to capitalize a bank, the legislation also legally redefines what counts as a public depository to explicitly include public banks. All this is to say that when we treat monetary terms and procedures as flexible tools of governance, the perceived limits of municipal finance reveal themselves to be legal constructs that can be rewritten for transformative action.
When it comes to maintaining capital requirements, meanwhile, the Seattle Loop departs from the reactive logic of private banking. Rather than viewing the bank as a mere vehicle for attracting private investors or balancing risk against maximized yields, we approach the Seattle Loop as an actively constructed system of public coordination. We can strengthen this system and insulate it from the volatility of private markets by requiring partner community lenders to open and maintain deposit accounts within Seattle’s public bank. This creates a symbiotic effect wherein the public bank serves as a stable foundation for the entire local financial ecosystem.
The partnership model allows the Seattle Municipal Bank to pursue projects that are currently beyond the reach of smaller, mission-driven lenders. Through participation lending, the bank can supplement loans for critical public works, such as low-income housing development. If a developer requires $50 million for a housing project but a local credit union only has the balance sheet capacity for $10 million, the municipal bank can purchase the remaining $40 million of the loan. This is not a theoretical novelty; it is a proven model of public coordination successfully utilized by the Bank of North Dakota—which is primarily a wholesale lender to other banks—for over a century to anchor regional development.
To safeguard the long-term vitality of the public bank, we can also augment its capital base by instituting a policy of retained earnings. In mandating that a small portion of the bank’s net interest income remain within the institution rather than being fully remitted to the general fund, we establish an autocatalytic growth curve for public credit. In technical terms, these retained profits build up the bank’s Tier 1 capital—the core, loss-absorbing equity that serves as a primary regulatory buffer.
Because banking operates on the logic of leverage, this public accumulation of capital has a disproportionate impact on the city’s provisioning power. Given that the minimum Tier 1 capital ratio is typically set at 6%, every dollar retained by the bank potentially unlocks over sixteen dollars in new lending capacity. Committing to this steady internal capitalization, the Seattle Municipal Bank does not only maintain its solvency, but also structurally expands the horizons of what the city can afford to build, fund, and sustain.
The bank further strengthens its capital base by integrating the city’s broader economic transactions into its circuit. For example, city contractors can be auto-enrolled to receive funds—from grants to large-scale construction payments—directly into Seattle Municipal Bank accounts. While contractors remain free to move their funds at any time, the Loop Bank can offer unique institutional benefits and seamless integration that incentivize them to remain within the public circuit.
The Seattle Municipal Bank can extend this invitation to the city’s most vital resource: its employees. If the city invites public sector workers to hold payroll accounts directly with the public bank or its partner banks, it can offer exclusive financial services and benefits tailored to the needs of public servants. This transforms payroll from a seemingly neutral administrative task into an active tool for expanding the fiscal reach of the public bank, ensuring that Seattle’s wealth continues to circulate in the interest of those who make the city run.
Finally, the Seattle Loop achieves a structural advantage regarding fiscal retention that private intermediaries simply cannot match: immunity from federal taxation. While private commercial banks are subject to federal corporate taxes—representing a steady loss in municipal wealth—public banks operate as tax-exempt governmental entities. Therefore, the Loop does more than shield the city from Wall Street’s extractive fees; it ensures that the surplus generated by public credit remains entirely within the local circuit. This effectively closes a major valve of fiscal siphoning, retaining every dollar of generated value to support the city’s own provisioning.
Settling In: Building Reserves & Internalizing the Clearing Process
To operate as a viable financial institution, the Seattle Municipal Bank must participate in the complex infrastructure of interbank settlement. This process is mediated by reserves—the specialized, high-powered money that banks use to clear and settle obligations with one another. Unlike the commercial bank deposits used by the public for daily transactions, reserves exist as digital entries on the balance sheet of the Federal Reserve, serving as the ultimate medium for the final settlement of payments.
Only the Fed has the authority to issue and destroy these reserves, whether through routine open-market operations and repurchase agreements or via emergency lending facilities and large-scale asset purchases during periods of systemic crisis. Critically, these reserves are not redeemable outside of the central bank circuit; they are a wholesale instrument for institutional settlement, not a retail medium for public commerce. One cannot use reserves to purchase a cup of coffee or a car. Instead, they function as the specialized money, which banks use to cancel out debts with one another as their customers transfer and transact between financial institutions.
In the current financial landscape, every time a check is cleared or a wire is sent between different institutions, a corresponding volume of reserves must move across the central bank’s ledger to satisfy the debt. For most municipal entities, the requirement to maintain and manage these balances has long been framed as an insurmountable barrier to entry into the specialized world of chartered banking and interbank settlement, often resulting in a costly and forced reliance on large private correspondent banks to handle the technical plumbing of settlement. With the design of the Seattle Municipal Bank, however, we build our own public system of liquidity, enabling the city to insulate itself from the extractive pressures of the settlement circuit, while also meeting ongoing reserve requirements.
One of the most common technical objections to our proposal is the problem of reserve acquisition. Critics ask how a new public bank can possibly compete in the interbank market without a pre-existing stock of Fed funds. Our answer is simple: reserves follow deposits. When the City of Seattle transfers its holdings out of private accounts and into its own municipal bank, the banking system mechanically expedites that move by transferring the corresponding reserves across the Fed’s ledger. In this light, the problem of reserve acquisition disappears. The city’s deposits furnish the very liquidity needed to settle the city’s payments.
While acquiring initial reserves is a mechanical byproduct of capitalization, maintaining them is a separate operational challenge. To see how this works, consider a simplified scenario: the City of Seattle receives a $10 million deposit from a private institution. In the interbank system, this deposit is accompanied by a transfer of $10 million in reserves. So far, the bank is flush. However, if the city then sells $10 million of its bonds to its own bank, it creates $10 million in new deposits. The moment the city attempts to spend that credit at vendors who bank in the private sector, the Seattle Municipal Bank must have enough reserves on hand to clear the payment. In this sense, reserves are the exit fee for transactions leaving the public circuit.
Still, a critical point remains: any payment clearing within the public-to-public system requires no reserves at all. When the city transfers funds between departments or pays an employee who also banks with the Seattle Municipal Bank, the transaction is settled via a simple ledger update—pure municipal bookkeeping. This allows for the creation of a relatively insulated, high-volume system of payment clearing, which lessens the demand for the Seattle Municipal Bank to keep up with settlements in the Fed funds market.
That said, the Seattle Loop’s capacity for internal settlement reaches its full, transformative scale only through the project we have previously championed: a comprehensive digital public payment infrastructure. By establishing a municipal payment utility—akin to a “Public Venmo” or “Seattle Square”—the city will broker both free and surveillance-free transactions that circumvent exploitative credit card companies and tech oligarchies.
Imagine a digital municipal wallet that serves as the primary interface for civic life: your ORCA card, your library card, and your portal for utility payments and local event tickets, all integrated into a singular, public circuit. As payments circulate and clear within this internal system, the exit fee of private reserves effectively vanishes. This infrastructure is particularly vital for rewarding care work, as it allows the city to directly recognize and pay public service workers tending to our community. At its core, however, creating a digital public payment system expands the city’s internal clearing capacity, diminishing the burdens involved in attracting and maintaining reserves in the Fed funds system.
The Seattle Loop ensures that fiscal expansion is no longer tethered to the liquidity bottlenecks of the private market, but is instead limited only by our collective capacity to provision for the public good.
Conclusion: The Future is Fiscal Resilience
By zooming in on the technical foundations of the Seattle Loop, we see that capitalization and reserves are not mere obstacles to be overcome, but the very instruments of a new municipal financial architecture. Once this architecture is in place, the Seattle Loop functions as a vital automatic stabilizer for the regional economy.
Unlike private commercial banks, which are structurally compelled toward pro-cyclicality—lending aggressively during booms and retreating during busts—the Seattle Loop operates under a mandate of counter-cyclical investment. During economic downturns, when private credit freezes, the city can strategically expand its lending capacity, acting as a public credit guarantee that maintains the city’s future wellbeing when the present is uncertain or unstable.
As part of this mandate for counter-cyclical investment, the Seattle Loop can endow the city with a powerful tool for public refinancing. The public bank can systematically retire the city’s extractive legacies by purchasing older, high-interest loans currently held by private institutions. It can also extend refinancing options to non-profits and community organizations that have long been burdened by predatory private debt.
In the final analysis, what all such possibilities demonstrate is that the Seattle Loop is not merely technically feasible. It is an active and generative construction that supplies the city with maximal fiscal resilience. By re-engineering the city’s financial plumbing into a permanent infrastructure of social and environmental stewardship, the Loop guarantees that Seattle’s wealth is never again treated as a compliant subsidy for Wall Street, but is rather deployed as a powerful tool for a just and plentiful tomorrow.
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