North Dakota's Banker Will See You Now

Lawmakers view the state-owned bank as a model to boost revenue

Eric Hardmeyer may be the most popular banker in America. Over the last two years officials and advocacy groups in more than 30 states have called the Bank of North Dakota, where he is chief executive officer, to ask: How does the country’s only state-owned bank work? “As the financial crisis deepened and there were liquidity issues around the country,” says Hardmeyer, “our model was looked at a little bit deeper than it ever had been before.”

The Bismarck-based bank was founded in 1919 to lend money to farmers, then the state’s biggest economic contributors, and retains its socially minded ethic by subsidizing loans for those it believes will stimulate growth: startup businesses and beginning farmers and ranchers. The borrowers apply for the loans through one of the state’s 100-plus local banks and credit unions. If they qualify, the community lender issues the loans at the market rate; the borrowers pay a fraction of the interest, with the Bank of North Dakota covering most of the difference. How can the state bank afford the subsidies? Profit isn’t its first priority. “We have a specific mission that we’re trying to achieve,” says Hardmeyer, “that’s not necessarily bottom-line driven.”

Which is not to say the bank, which has assets of $5 billion, isn’t a moneymaker. Much of its income comes from helping local banks extend credit to borrowers. If a bank wants to share the risk of a loan, the Bank of North Dakota will cover part of it. The state bank then collects interest from the commercial bank at the going rate. In 2010 its profit hit $61.85 million, up 44.3 percent from 2006.

That’s nice, but here’s the real reason politicians across the country are contacting Hardmeyer: North Dakota’s legislature has the authority to tap the bank’s profits to fund government programs during tough times. Since 1945 the state has collected $555 million from the bank.

Democratic and Republican lawmakers in 13 states introduced bills this year to study or start state-run banks—none has been signed into law—a prospect that does not sit well with commercial lenders. It’s “socialistic,” says Camden R. Fine, president of the Independent Community Bankers of America, a Washington-based lobbying group that represents more than 5,000 community banks. “Why don’t we just relabel the state capitols the Kremlin?”

Ben Hueso, a Democratic member of the California State Assembly, introduced a bill in February calling for an outside task force to analyze the viability of a public bank. “People have access to capital in good years,” says Hueso. “When we have bad years things tighten up and banks don’t necessarily free up capital.” The California Bankers Assn., a Sacramento-based lobbying group, argued that a government-owned financial institution could end up extending credit to high-risk borrowers, potentially leaving taxpayers on the hook for bad loans. Hueso’s bill passed the state Senate and Assembly, but Governor Jerry Brown vetoed it in September, saying the legislature’s banking committees had the authority to explore the idea.

Startup costs could be an obstacle to any state that tries to get its own bank up and running. In Massachusetts a commission recommended this year that the state scrap the idea of creating a public bank because of the initial price tag: $3.6 billion. A question that nobody can answer, since it’s never happened: What would happen if a state-run bank failed?

Hardmeyer says the Bank of North Dakota took a loss on just .22 percent of its outstanding loans in 2010, compared with the average of .87 percent written off by the state’s local banks. “Our numbers,” he says, “obviously look very good.”


    The bottom line: In 2011, lawmakers in 13 states floated bills that would either create or study what it would take to launch state-run banks.

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