There’s a war on the future. Who’s paying the price? Main Street suffers as Wall Street thrives.

In the last decade, Washington shifted its bets overwhelmingly in favor of multinational Wall Street banks. The excesses of Too-Big-To-Fail which led to the crisis of 2008, have been reinvigorated by Much-Too-Big-To-Fail since consolidation was fast-tracked and regulation was side-tracked. Apparently, bigger and riskier is supposed to be better somehow. As a consequence, many community banks went under. The U.S. now boasts fewer than 6,600 community banks (as defined by having asset totals under $10 billion). This statistic stood tall at 10,400 in 1994.

Meanwhile, the megabanks are chasing ever greater profits in securities trading and overseas operations. Instead of keeping the promise ― made in relation to receiving $7.8 trillion from the Troubled Asset Relief Program (TARP) and other Federal Reserve programs ― to step in and help Main Street, the four largest banks cut back substantially on small business lending ― a hefty 53 percent (on average) between 2007 and 2010, according to the Small Business Administration's tally. Rather than enjoy a low-interest SBA loan, small business owners have been pushed into variable credit card accounts that average 16 percent interest, more than double the rate of your average business loan. In fact, the megabanks’ lobbying exempted small business credit cards from the 2009 CARD Act, allowing the banks to charge higher rates to small business. Do you see a pattern here?

In addition, the megabanks offered auction rate securities and interest rate swaps which they presented as sophisticated financial wizardry to save local governments money. Both schemes, of course, had the opposite effect. As Pennsylvania’s Auditor General explained, “Elected officials are simply no match for the investment banker that’s selling the deal.” Our future is being bought.

Yet we’re told to blame public unions and government aid to those in need, for our budget troubles. We’re told to continue privatizing everything. After all, who’s more efficient than big business? Adding insult to injury, Main Street is told that austerity will stimulate the economy. Cut and grow, they call it. They must mean cut Main Street and grow Wall Street.

When economic disaster struck, there was little that communities could do to keep the money flowing toward Main Street. No bolsters existed to help local banks and governments keep credit lines open to businesses, with one notable exception ― the nearly century-old, state-owned Bank of North Dakota (BND), a public bank.

A form of public banking was successfully practiced by Benjamin Franklin's Pennsylvania colony (as well as other colonies) for several decades until King George issued the Currency Act (which was the prime catalyst for the Revolutionary War, according to Franklin's autobiography).

The Benjamin Franklin memorial in Philadelphia, Pennsylvania. Photo credit: Napalm Filled Tires. Used under Creative Commons license.

In the case of North Dakota, the state deposits all state funds into its state bank. The BND then forms partnerships with community banks (and other institutions) to deliver three major economic benefits: an annual dividend paid to the state’s general fund, low-cost loans to help small businesses add jobs, and support for local banks.

Every state but one is facing fiscal nightmares. The exception is North Dakota, which is debt-free and on strong fiscal ground: the only state that ran a major budget surplus in 2010, cut personal and business taxes during the recession, and has the lowest unemployment and foreclosure rates. And yes, the North Dakota Bankers Association and its member banks strongly support the BND.

Is the BND really behind North Dakota’s boom amid so much bust? Part of the state’s economic strength is due to natural gas and oil development, but that doesn’t explain the strength of its lending markets. Compared with Montana, South Dakota, and Wyoming (which all have similar populations and economies), North Dakota is well ahead in areas that the BND impacts: average loans per capita, quality of bank assets, and number of banks per capita, to name three. Also, the BND did not engage in the risky financial strategies that contributed to the catastrophic bank failures throughout the country. On the contrary, it helped prevent any bank failures in the state during the crisis and its aftermath. In fact, despite being one of the least-populous states, North Dakota has more community banks than Hawaii, Maine, and New Hampshire combined.

The unique prosperity of North Dakota has prompted 13 states to introduce bills to either create or study the feasibility of state banks over the past year. (In California, AB 750 is currently making its way through the Assembly and Senate.) Diverse stakeholders have come together to propose capitalizing a public bank with a mandate to help local economies prosper. The non-partisan Center for State Innovation recently estimated that state banks can create thousands of new local jobs, millions in additional state revenue, and billions more in business lending.

Why fight over crumbs when we can all prosper? The way out of a credit crunch is to increase the flow of credit, especially to those who will use it for the public benefit. Instead of selling the future, we need to fund it. Instead of compounding debt, we need to compound wealth.

Public banks provide access to low-cost, readily available credit for governments, businesses, and individuals, especially those creating productive capacity that benefits the public good. They are able to do this, in part, because they have no CEOs demanding huge bonuses; don’t gamble on financial shenanigans; and have no branch office, ATM, or marketing costs. Their mandate allows them to focus on medium- to long-term goals, rather than short-term profits.

Two-thirds of new jobs are created by small business. While community banks carry less than a third of banking assets, they provide over half of all small business loans. So, by partnering with state banks, they are able to offer even more small business loans, and are also able to acquire ready cash when necessary. But with the regulatory deck now stacked against them, community banks (and local economies) desperately need the help a state bank would provide.

Hundred dollar bills bearing Benjamin Franklin's portrait. Photo credit: Revisorweb. Used under Creative Commons license.

Here are the ABCs utilized by effective public banks:

A – Actively partner with community banks to strengthen local economies
The BND functions as a mini-reserve bank for the state’s banking industry, a bankers’ bank. It provides lower cost, higher quality, core services to community banks that choose to partner with the BND. Public-private partnerships provide the added benefit of market-driven checks against manipulation by politicians. Also, the BND has no branch offices, so it doesn’t compete for customers. Through these partnerships, the BND offers “below market rate of interest to startups, or to troubled borrowers within the state.” (from its website) North Dakota has beaten the Wall Street credit freeze by generating its own credit.

Community banks also benefit from the state bank purchasing their stock, and from the participation loans they offer jointly. This allows the smaller banks to expand their loan portfolios. The state bank shares in the risk, and may buy down the interest rate. It can also purchase part or all of a loan after it’s been issued to help a community bank stay within its capital adequacy and portfolio balance requirements. In addition, state banks supply capital to stabilize the loaning environment. Community bankers have endless stories about losing business to megabanks when partnering with them, while a state bank is a true partner that is mandated to strengthen local economies.

B – Bring in more revenue while slowly lowering taxes
The 2008 recession resulted in the greatest drop in state tax receipts in U.S. history. Since all states except one are legally required to balance their budgets annually, this has led to layoffs, cutbacks, and/or higher taxes. All this while local economies are in dire need.

The revenues (and savings) produced by a state bank, break this self-defeating dynamic. They come in four flavors:

  • Annual dividend: A portion of the bank’s profits (roughly half for the BND) are added to the state’s general fund. North Dakota chose to use this to enhance public services and lower tax rates.
  • Emergency relief: When federal money is slow in arriving, a state bank can fill the gap. This means that a state is not forced into the bond market to cover the emergency, saving underwriting fees and interest.
  • Higher return on deposits: While a state bank pays the average market rate for deposits, when you add the annual dividend, the return is greater than if you deposit in a megabank. This is most clear when the market falls. For 2009-2010, North Dakota gained a total of $5.28 cents per dollar deposited (when you add the dividend), compared to the $2.53 cents per dollar that Washington State’s Treasurer received in 2009-2010 from its depository banks.
  • Savings on infrastructure: When governments use Wall Street bond markets to finance projects, interest payments make up about half of the cost. State banks can save that unnecessary expense. It is generally agreed that public infrastructure spending during a downturn is smart because it creates an immediate influx of jobs and profit for businesses, while also laying the foundation for long-term prosperity. Although the need is great, too many states and localities are stuck with debt to Wall Street, whose swap and auction deals mentioned above gave the megabanks a major windfall after the 2008 meltdown. Many governments must now refinance their debt every couple of years with Letters of Credit (that guarantee payment). Freedom to raise rates and issue new fees is part of the deal. The BND provides much more user-friendly Letters of Credit to state and local governments. Since the BND has access to low-cost funds from its regional Federal Home Loan Bank, as well as low overhead, and an emphasis on public-purpose lending, it can lend its own assets, often at lower rates than private sources.

C – Combine full transparency with sound risk management
Since public banking is about optimizing a region’s economy ― and not about maximizing profit for a few ― high-risk ventures and rule bending are avoided. Several safeguards are used by the BND:

  • Independent audits: The BND is audited annually by an outside firm, and biennially by the North Dakota Department of Financial Institutions. The annual audit is publicly presented, which is unheard of on Wall Street.
  • Conservative lending: The BND refuses loans that are below-market rate or above-average risk.
  • Loan loss reserves: It keeps a fund to cover the inevitable defaults, and constantly monitors loan-loss ratios.
  • Capital standards: The BND keeps an 8 to 10 percent capital ratio across the board.
  • Loan reviews: The Advisory Board of community bank professionals reviews large loans.

Thanks to these safeguards, the BND has avoided major losses from loans and has always made a profit for taxpayers.

A map of North Dakota's rail lines circa 1895. Photo credit: Brian Swan. Used under Creative Commons license.

While North Dakota places all state funds in its public bank, other approaches are possible. The likely sources of start-up capital are the state General Fund, General Obligation Bonds, or other dedicated state funds. (About half of the BND’s profits go to increasing its capital to expand lending capacity.)

If the large “rainy day” funds that all levels of government now maintain (as listed on their CAFRs) were used to capitalize a state bank, the state bank would be able to provide ready credit that would eliminate the need for such funds, and get more bang for the buck to boot. Another possibility is tapping the mass of unclaimed properties that most states currently possess. For example, the State of California boasts over $5.7 billion in unclaimed property.

Public banks provide states (and municipalities, etc) with a way to multiply their revenue, and to build and stabilize local economies. The continuing domination of our economy by the unaccountable-to-the-real-world financial empire is awakening governors and treasurers across the nation to the foolishness of waiting for Wall Street to invest fairly in Main Street. By returning to (and furthering) the banking genius of Ben Franklin and other early Americans ― and the sustained, steady success of the BND ― we will fund a future that prospers all. That’s the joy of public banking.


The Public Banking Institute (PBI) is a non-partisan think-tank, research and advisory organization dedicated to exploring and disseminating information on the potential utility of publicly-owned banks, and to facilitate their implementation. PBI was formed in 2011 as an educational non-profit organization by a group of citizens including past and present community and civic leaders, businesspeople, educators, political economists, writers, and banking and other professionals. The group shares a concern over the destabilizing actions of a private banking industry that, through its corporate business model, has precipitated the economic imbalances now witnessed across the US economy. For more information about public banking, please check out PBI's "Public Banking in America Legislative Guide".

John David


John David

Staff Writer, Public Banking Institute