After seven years of economic instability caused by irresponsible financial practices, the big banks haven’t learned their lesson, and neither have many policymakers. Legislation enacted at the end of 2014 allows Wall Street banks to hold risky assets (such as interest rate swaps and other derivatives) in the banking unit backstopped by FDIC deposit insurance. This places the U.S. taxpayer on the hook for bailouts when these banks again go under due to derivatives failures. Changes adopted at the end of the year by the Federal Reserve threaten to increase interest rates for municipalities, raising the costs of municipal projects, school funding, roads, bridges, and other public service and infrastructure needs. Big banks continue to wreck our economy.
The people are pushing back. Public banking now occupies legislative agendas and/or local campaigns in Hawaii, Illinois, Arizona, Washington, Colorado, New Mexico, Wisconsin, Illinois, Maine, New Hampshire, Connecticut, and Pennsylvania.
In response to the enthusiastic embrace of public banking in Seattle, Washington, James Haley of the Community Bankers of Washington recently asserted that public banks will compete with community banks. He argued that the Bank of North Dakota, far from being a successful model of a public bank supporting small banks, has committed “mission creep.” Haley even asserted that public banks would support risky financial ventures. These are curiously uninformed arguments. Justin Dullum, in the January 20 Northwest Weekly, transcribed them uncritically and without inviting assessment from other experts. The result was an extremely distorted picture of public banking and no picture at all of what BND does for community banks.
Anyone wishing to get an accurate picture of what, precisely, BND does for community banks ought to listen to this seven-minute audio clip, based on a 2012 roundtable discussion that included Eric Hardmeyer of the Bank of North Dakota, Rick Clayburg of the North Dakota Bankers Association, and Gary Peterson of Lakeside State Bank in North Dakota. Of the 2008 economic meltdown, Clayberg said that the Bank of North Dakota was able to purchase loans from smaller banks, improve their equity, and help them “ride out the economic downturn.” He added that legislative oversight strengthens the scope and effectiveness of BND, and that the legislature authorized BND to assist in post-flooding redevelopment in 2010. He emphasized that the participation of local lenders is a decisive agent of implementation in all of these processes. Gary Peterson was enthusiastic about BND’s role in aiding community banks, calling the parties “true partners.” He said that it would be much more difficult to find loan participants without the backing of BND.
The BND helps, and does not compete against, community banks. During the last decade, banks in North Dakota with less than $1 billion in assets have averaged a stunning 434 percent more small business lending than the national average. Not just more lending, but more productive lending: BND enables community banks to devote more assets to productive lending rather than safe holdings like government securities. This is because the BND enables higher than average loan-to-asset ratios—better than their neighbors, and better than the nation.
North Dakota will also weather the coming decline in community banks (they are failing and closing rapidly, with terrible effects on localities) quite well relative to the rest of the country. The state, which has the most community banks per capita in the U.S., is expected to lose two banks in 2015, compared to the national average of 6.34 per state. This is important when we consider that community banks are the lifeblood of local economies. One commentator calls them the “99 percent,” an apt metaphor even if community bankers don’t always see themselves that way.
Mr. Haley asserts that public banks will become competitors, growing “financially dangerous.” According to the FDIC, 81% of banks in North Dakota are community banks--the highest ratio in the United States. Their partnership mandate, created by the legislature, contemplated Mr. Haley’s concerns, and although there’s a miniscule amount of other depositors, the BND is nearly exclusively a state money bank. Deposits from individual customers make up less than 2% of BND's total, hardly the “mission creep” to individual depositors contemplated by Mr. Haley. Haley’s claims that the BND “offers checking accounts and loans to everybody” and is a “widely functioning bank” are wild exaggerations. BND backs loans made by community banks, and offers a bland checking account for individual depositors, but does not loan those depositors money, and doesn’t have ATMs or debit cards. Haley’s concern about offering personal services would seem petty even if the BND were a fun place for consumers to bank—but in any case, it isn’t.
Interest payments to big banks bleed dry the institutions upon which we rely for basic services and day-to-day governing. Those banks control the financing of America’s municipalities. Those banks have exhibited no evidence of having reformed after 2008. Regulations are ignored, gamed, or gutted. That’s what the public banking movement is pushing back against. Another longtime opponent of public banking recently said that it was “a cure worse than the disease.” If we want to use such tired metaphors, the “disease” here is a vested profiteering franchise, playing with our national and global survival while constantly evading regulation, engaging in schemes and scams with legal impunity, and profiting from the crises they create. We think it’s worth testing out our cure. In fact, we already know it works.
Scott Baker and Walt McRee provided valuable assistance in the writing of this article. Any errors, however, are solely my own.