The Case for a State-Owned Bank

One professor argues it's a way to bring revenue gushing into state coffers.
by | April 12, 2012

A growing number of policymakers have been looking to North Dakota and its state bank. Why, you ask? Founded in 1919 with $2 million in capital, the Bank of North Dakota (BND) now operates with more than $270 million. More to the point, it has handed over some $300 million to North Dakota's treasury over the past decade.

When states and localities are turning over almost every rock looking for revenue, that's an enviable track record. The Public Banking Institute reports that 17 states have introduced bills either to form state-owned banks or to do feasibility studies on their potential.

What are the arguments driving the debate over state banks? To gain some perspective on the issue, I talked to Timothy A. Canova, professor of international economic law at Chapman University in California, and a proponent of the idea. An edited transcript follows.

Everyone seems to be looking to the Bank of North Dakota. Is it the only model out there?

There are other state-owned banks. For example, California has the California Infrastructure and Economic Development Bank. What's different about North Dakota is that it takes deposits from individuals and state tax revenues, and in turn, makes commercial loans. It's perceived as a competitor to private or commercial banks, but in reality it plays a supportive role because it can purchase part or all of a bank's loan after it has been issued and do other financing arrangements. California's bank is an infrastructure bank. By definition, it doesn't compete with commercial banks in making commercial loans and taking deposits. What it competes with is other ways to finance infrastructure. There's an interesting bill that's been introduced by California state Sen. Alan Lowenthal that would expand the powers of the infrastructure bank to be able to receive state funds for deposit, which could then be used to reinvest in California communities.

The Bank of North Dakota has been getting more attention in the past couple years; it's becoming more widely recognized. As we keep trying other solutions and those solutions are not working, people will keep coming back to ones that do. Some say, North Dakota is just one small state. Okay, but look at Germany and China and their uses of publicly owned infrastructure banks. Look at Sweden. These models have worked successfully in recent years, and they worked well here in the 1930s and '40s.

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What can a state bank do for a state's economic and financial well-being?

It can extend credit to small- and medium-size enterprises, something that the private banking sector has not been doing. When you try to stimulate the economy with the private banking sector, it's -- to use a long-ago metaphor -- like pushing on a string. It's not a very effective way to get credit to the smaller enterprises. Look at North Dakota. Its bank accepts deposits from ordinary folks and, when the state collects tax revenue, instead of depositing it in big banks that might have another agenda, it goes into BND, which is more likely to take that tax revenue and other deposits and lend it within the state. It's one of the reasons North Dakota has the lowest unemployment rate in the country. Yes, the state also has an oil and gas boom, but so do Montana and Wyoming and they have high unemployment.

Meanwhile, California is the largest state economy in the nation, yet without a state-owned bank, it is unable to steer hundreds of billions of dollars in state revenues into productive investment within the state. Instead, California deposits its many billions in tax revenues in large private banks which often lend the funds out of state, invest them in speculative trading strategies (including derivative bets against the state's own bonds) and do not remit any of their earnings back to the state treasury.

What kind of headwinds does a state face in setting one up?

The private banking sector is resistant. It wants public funds deposited with its banks -- it doesn't want a competitor in taking deposits and making commercial loans. The political opposition is fierce. North Dakota's bank leaders admit that if the state were considering creating this bank today, it would have political problems -- even though it is fantastically successful. To overcome the political opposition of big banks requires an informed public, and that's a challenge on so many issues.

How would a new state-owned bank be capitalized?

One way might be for a state to put in an initial investment. State tax revenue is one way, too. I've been on an advisory committee U.S. Sen. Bernie Sanders of Vermont put together on reforming the Federal Reserve. (Also on this committee are economists Joseph Stiglitz, Jeffrey Sachs, Robert Reich and James Galbraith.) In the course of discussions, it has been proposed that the Federal Reserve help capitalize an infrastructure bank. I don't see why it couldn't do that for a state-owned bank. Just like the Federal Reserve used quantitative easing in the past few years, there's nothing economically or financially problematic for the Federal Reserve to simply purchase shares -- either common stock, preferred stock or debt securities -- from state-owned banks. Qualitative easing programs don't add to the deficit. If the Federal Reserve pushed several billions of dollars into state infrastructure banks -- the country needs $3 trillion in new investment in infrastructure over the next decade -- we would reduce the public deficit quickly. If state infrastructure and commercial banks start lending and financing infrastructure projects and business development, that will help renew the tax base. There are 13 million people out of work and businesses are hurting. They don't pay as much in taxes. That's been one of the real problems in public finance in past three years.

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