John Chiang, California treasurer courtesy photo

SAN FRANCISO — Banking experts warned California leaders on Thursday that launching a state-operated public bank to serve a burgeoning, legalized marijuana industry may not be a workable solution.

Officials from Massachusetts and Colorado, states that have considered opening public banks but have not done so, told the treasurer’s Cannabis Banking Working Group meeting in Los Angeles that the multi­billion-dollar capitalization costs and limited service options associated with such institutions pose major roadblocks.

“I would suggest you really do not underestimate the challenges, complexity and time requirements of these sorts of issues,” said Don Childears, president and CEO of the Colorado Bankers Association. “They are enormous for a normal bank. They’re absolutely ominous for the kind of first-time-ever decisions that need to be made in a public bank.”

For eight months, California State Treasurer John Chiang’s appointed working group has been studying how to bank the state’s projected $7 billion marijuana industry once the regulated recreational market opens next year. Most banks in states where some form of marijuana use is legal refuse to serve cannabis-related businesses for fear of authorities on the federal level, where marijuana remains illegal.

The result is a cash-intensive industry that poses security risks and headaches for business owners trying to meet payroll or secure commercial loans.

A small number of institutions, mostly credit unions, openly serve marijuana-related businesses in states where marijuana use is legal, often with limited services and a costly monthly charge. Frequent and time-consuming federal reporting requirements for banks choosing to serve marijuana customers also have kept many institutions out of the market.

“The emergence of the multibillion-dollar cannabis industry could well be the catalyst that vaults public banking into becoming a reality,” Chiang said Thursday. “We are here to test the idea to see if it is truly workable. Is there something really there? Or is it like a potato chip? Tasty to eat, but ultimately of not much nutritional value?”

A public bank would still need to obtain a master account from the Federal Reserve to offer basic services, such as transferring funds among banks.

“Without a master account, state banks would simply be a place for customers to park cash,” said David Cotney, an adviser for RateGravity and a former commissioner for Massachusetts Division of Banks.

But the Federal Reserve has so far refused to grant master accounts to institutions that publicly declare their intent to serve marijuana-related businesses. Public banks could also put taxpayer funds at risk should the federal government ever crack down on marijuana businesses and their accounts, Cotney and Childears said.

“No public official has shown any appetite for that kind of risk,” Childears said.

Childears advised the working group not to seriously consider launching a public bank in California without receiving a positive report from a third-party analyst and a legal opinion that such an enterprise would be legal.

Both bankers and Chiang said the ultimate solution to the marijuana industry’s banking problem is federal legislation that would eliminate or at least reduce banks’ liability concerns. But whether that will happen in the Trump administration is unclear.

“The magic bullet is federal action removing cannabis from the Schedule 1 list of illegal drugs, which would automatically open the door for cannabis businesses to enjoy the benefits of financial services already enjoyed by every other business in the state,” Chiang said.

Thursday marked the last hearing for the treasurer’s working group. Its members are scheduled to release a report offering recommendations this fall.

Contact reporter Cheryl Miller at On Twitter: @capitalaccounts.