Nov. 17 (Bloomberg) -- Eric Hardmeyer, chief executive officer of the Bank of North Dakota, said he’s heard from 30 to 40 states asking the same thing: How does the only state-owned bank in the U.S. work?
The financial institution, which opened in 1919 to help North Dakota farmers, has $5 billion in assets and contributed about $340 million in earnings to state coffers in the 12 years through mid-2009.
Lawmakers in other states are modeling proposals on the Bismarck bank as activists protest bailouts for JPMorgan Chase & Co. and other financial giants while their customers struggle with foreclosures and unemployment. Supporters say state-run banks, whose deposit base would include tax revenue and other government funds, would have greater control to develop socially minded lending programs favoring average Americans.
“Because of the Occupy Wall Street movement, there is much more of an interest to put in place state-owned banks to serve the public interest,” Marc Armstrong, the executive director of the Sonoma, California-based Public Banking Institute, said in a telephone interview.
“The benefit to commercial businesses is they receive affordable low-cost loans, including some as low as 1 percent per year,” Armstrong said. “The benefit to the state’s public is a more affordable and competitive rate for student loans and home mortgages.”
The Bank of North Dakota offers below-market lending rates as part of a program for beginning farmers. The rate yesterday was 2.25 percent fixed for five years, Hardmeyer said. In contrast, the prime rate, the interest rate that banks charge their most creditworthy customers, was 3.25 percent yesterday.
“We have a specific mission that we’re trying to achieve that’s not necessarily bottom-line driven,” Hardmeyer said.
Another difference is that deposits in most conventional commercial banks are guaranteed by the Federal Deposit Insurance Corp., while the North Dakota bank’s deposits are backed by the state.
Lawmakers in 13 states, including Massachusetts and California, introduced legislation this year that would create a state-run bank or study the notion, according to the Public Banking Institute, a non-partisan group backing the idea.
State officials are looking for solutions to budget woes after the recession ate away at revenue from sales and income taxes. U.S. states will have to close shortfalls of more than $46 billion in fiscal 2013, according to a June report by the Center on Budget and Policy Priorities, a nonprofit research organization in Washington.
“As the financial crisis deepened and there were liquidity issues around the country, our model was looked at a little bit deeper than it ever had been before,” said Hardmeyer, who may be the only bank president in the U.S. who’s also a state employee. “It has been overwhelming at times in terms of the response.”
The U.S. banking industry opposes the idea and is lobbying against it, saying a state-run bank would compete with commercial banks for business and politicize a state’s lending decisions.
“A state-owned bank? Why don’t we just re-label the state capitols the Kremlin?” Camden Fine, president of the Independent Community Bankers of America, a Washington-based trade group that represents more than 5,000 community banks, said in a telephone interview.
“It’s a socialistic idea,” Fine said. “If you get a state-owned bank that is allocating credit, it can slide very quickly into a situation where those in favor get credit and those not in favor don’t get credit.”
Arizona Representative John Fillmore, a Republican from Apache Junction who has introduced legislation to create the Bank of Arizona, said he views it as a way his state could increase jobs while bolstering its treasury.
“We would have a bank, just like a regular bank that you see out there, it would have savings accounts and checking accounts,” Fillmore said in a telephone interview. “But its main function would be to give support to the state and to other banks within the state.”
Efforts to pursue the idea have gotten off to a rocky start in Massachusetts and California. In the Bay State, where legislation was introduced to create a Bank of Massachusetts, a commission said the bank would cost $3.6 billion to start and may expose public funds to “unacceptably high risk.”
In California, lawmakers in September agreed to set up a task force to study the idea of a “California Investment Trust” to boost economic development by easing access to credit for California-based businesses, according to the legislative text. Governor Jerry Brown, a 73-year-old Democrat, vetoed the bill. Brown said he didn’t want to create another “blue ribbon” taskforce and suggested the Legislature’s banking committees look at the idea.
The California Bankers Association, a Sacramento-based trade group, lobbied against the proposal, saying a state-owned bank would crowd out commercial banks.
“A state bank has the ability to use the enormous resources of the state to nearly monopolize the market and as a result, create an unfair advantage over commercial banks,” Alex Alanis, the association’s vice president of state government relations, said in a May letter to Assemblymember Ben Hueso, who offered the bill.
Hueso, a Democrat from San Diego, said the proposal is aimed at creating a wholesale bank that would lend through commercial banks to businesses and consumers.
“Everything that we can do in this state to encourage the flow of finance, of loans, of capital will really help us in our economic recovery,” Hueso said in a telephone interview. Hueso said he will seek a hearing in the banking committees to explore the idea.
“I can see why state legislators, as those in California who passed this measure, would feel this is the right time,” Darrell Duffie, a finance professor at Stanford University’s Graduate School of Business, in Stanford, California, said in a telephone interview.
State-run banks are more likely to be more flexible in their lending relationships with consumers and less likely to engage in proprietary trading and other risky activities by large commercial banks, Duffie said.
“But if one day a lot of the loans that a state-run bank makes go bad, fingers may get pointed and people may change their mind about whether this is such a great idea,” Duffie said.
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