State Owned Banks: Trend for the Future?
Recently, credit conditions have sparked interest in the concept of state-owned banks. The only state-owned bank in the nation, the Bank of North Dakota or BND, was created almost 100 years ago. But the idea is just now catching on. So far in 2011, Oregon, Washington, and Maryland have introduced bills to allow state-owned banks, joining Illinois, Virginia, Massachusetts and Hawaii, each of which introduced such legislation last year.
Most state and municipal governments have assets in rainy day funds earning interest in Wall Street banks. They also borrow from Wall Street at high interest rates when necessary. In contrast, BND, as the depository for all state tax collections and fees, allows the State of North Dakota to leverage its own funds to finance its operations. In addition to providing interest-free government financing, BND invests strategically in areas that commercial banks avoid, earning a return for the state’s general fund while financing projects believed to be crucial to the state’s economic development. It also acts as a bankers’ bank, providing check-clearing and liquidity services for commercial banks in the state. Instead of being insured by the Federal Deposit Insurance Corporation (FDIC), deposits are guaranteed by the general fund of the State of North Dakota itself and the state’s taxpayers.
There is a fine line between competing and partnering with private banks. States considering opening state-owned banks would have to wrestle their state funds, which have already been deposited in commercial financial institutions, away from the private sector to capitalize the new state-owned bank. To avoid crowding out the private banking sector, BND was designed to partner with commercial institutions rather than compete with them. For example, BND partners with commercial banks by guaranteeing student loans, business development loans, and local bonds. Loans are typically initiated by a local bank, and BND’s role is to share the risk of the loan and buy down the commercial bank’s interest rate. So far, these types of partnerships have been very successful. According to the Public Banking Institute, North Dakota has more community banks per capita than any other state, suggesting that the presence of a state-owned bank could actually help local community banks. Through such risk-sharing arrangements with the state’s bank, community banks can compete with large multi-state banks.
In hopes of securing affordable financing, small business owners have responded positively to the establishment of state-owned banks similar to BND. According to the Seattle Times, 79% of business owners surveyed by the Main Street Alliance of Washington supported Washington’s bill to allow state-owned banks. In fact, over 35% of the businesses surveyed said they could create additional jobs if their credit needs were met.
Considering North Dakota’s economic performance, especially in recent years, it’s easy to see why other states are thinking about opening state-run banks. Last year, North Dakota boasted the lowest unemployment rate in the country, at 3.8% according to the Bureau of Labor Statistics, and the lowest default rate in the country according to the Public Banking Institute. Since 2000, North Dakota’s economy has grown 56%, over 15% faster than the Gross National Product as a whole. While North Dakota’s relative prosperity cannot be linked either directly or only to BND’s impact, there is something to be said about investing taxpayer money in the public good. Unlike commercial banks whose top priority is to maximize shareholder returns, a state-owned bank can concentrate on financing those endeavors that maximize the returns gained by society as a whole. In this era of justified resentment and hostility toward big banks, state-owned banks may be another part of reforming the U.S.’s financial system.
Melanie Jacobs co-authored this blog post.
