While the furor over big bank fees continues and people hunt for alternatives, there's a little engine that could – the Bank of North Dakota. Founded in 1919, it is the nation's first and only publicly owned bank.
With $270 million in operating capital, BND is being looked at as a model worth replicating. Are publicly owned banks the next big thing in banking?
If Marc Armstrong has anything to do with it, they surely will be. Armstrong is the executive director of the Public Banking Institute, that has a mission to further the understanding, explore the possibilities, and facilitate the implementation of public banking at all levels -- local, regional, state, and national.
Seventeen states have introduced legislation for publicly owned banks or derivations, or for studies or task forces to determine how a publicly owned bank would operate in their jurisdiction, says Armstrong.
What exactly is a public bank? It is a financial institution owned by government entities, say a city, state or nation. The initial capital for a public bank often comes from a government appropriation or the proceeds of a loan arranged for the purpose of making the initial investment, but there are also other ways this money could be acquired, such as reinvesting money from idle state and local funds and by setting the bank up as a DBA of the state, making all the assets of the state assets of the bank, according to the Public Banking Institute.
Like a private bank, a public bank keeps money and issues credit. A big difference, if the government owns the bank, the profits go into public hands and offset the costs of government operations. There are other advantages, outlined on the Public Banking Institute's website. Rather than borrowing from Wall Street banks at 5 percent and having to worry about such things as credit ratings, interest rate swaps, and late fees, the state can fund its projects through its own bank, by backing the loans with its own revenues deposited in the bank with no interest having to be paid to itself, and until it can acquire the necessary deposits, it can borrow short-term from other banks at 0.2 percent.
Quite simply, public banks are about the public, and don't have to worry about shareholders obsessed about stock price and quarterly profits. “Private banks don't really have our interests at heart. It's about pocketing profits and taking lots of risks,” says Armstrong.
In public banking, profits are returned to the public in benefits like increased public services and reduced taxes. There's likely to be more profit too, because gazillions of dollars aren't going to fat cat bonuses for Wall Streeters. Employees of a publicly owned bank are public servants making civil service salaries.
How does the public banking system work?
In the example of BND, it is not a retail bank, per se, retail products are a tiny part of what they offer. They are a wholesale bank, or a “banker's bank,” as Armstrong calls it. BND helps local banks with capital requirements, partners with some 100 North Dakota financial institutions and participates in loans. BND creates loan programs that are rolled out through community banks. “If a small business needed $1 million to expand their business, they could apply through a community bank in the Bank of North Dakota program,” explains Armstrong, who says that some of the loans offered by BND are as low as 1% interest. “It's hard for small businesses to get operating loans typically, and not at that affordable rate. But banks make credit cards plentiful at 15-16 percent interest,” says Armstrong.
North Dakota residents can however, apply directly for student loans and residential mortgages. There are no branches of BND.
The majority of deposits come from tax collections and state fees.
Why the opposition?
So, with all the pluses, why aren't there more public banks? “There are roadblocks. Some people believe the government shouldn't be involved in banking, but yet they think it's okay that private banks have a monopoly and are in charge of the money supply after all the banking scams,” says Armstrong.
Then too, a lot of people don't understand that state and local governments can do public banking.
However, contends Armstrong, for all those who think public banking is a bad idea, BND's success is hard to ignore. It has low overhead, one central office of about 160 employees for the whole state, so it is extremely efficient relative to the revenue it produces for the state's general fund. And that contribution has been significant. According to the Public Banking Institute, BND has contributed more to the state budget over the last 15 years than oil taxes have generated and over the last decade, the BND has contributed over $300 million to the state. North Dakota, at 3.1 percent in February, has the lowest unemployment rate in the country. “If you give businesses loans, they can create jobs. Money is being used there to serve people, not bankers. Tax revenues are being put to work,” says Armstrong.
There's a lot of potential in public banking – it may be the best kept secret in banking. But word is getting out. Says Armstrong, “People are going to gradually recognize the benefits. I believe it will be the counties and smaller states that will be the first to go for this.”