Public banking was an ideal of the Founding Fathers, first tested in the colony of Pennsylvania. It had several precedents, successful and unsuccessful, in the 19th century. At the state level, the Bank of North Dakota has existed for a century and provides an excellent example of the power of public banking.
Since 2010, nearly half of U.S. states have introduced legislation to create public banks. This surge in legislation shows an attempt to regain control over regional economies after Wall Street destroyed much of the U.S. economy and was bailed out at the public’s expense.
In 2018, the U.S. territory of American Samoa established a new public bank, after years of work.
Taxpayers will benefit from both the profits the bank makes and the services the bank provides. Those services depend on the model the state or city chooses to follow, but possibilities include:
- Affordable financing to municipalities for public projects.
- Access to credit lines, loans, and other forms of finance to help local businesses succeed and grow.
- Affordable loans for students to attend college.
- Affordable loans on reasonable mortgage terms for home buyers.
City and state governments pay billions of dollars to banks and investors in interest on loans issued for public purposes. Fifty percent of the cost of infrastructure, on average, goes to interest. Public banks can make below-market loans to state and local governments, saving them millions or even billions of dollars.
Without that alternative, state and city governments today routinely cut programs that benefit low-income citizens and students to close “budget gaps” that appear on a regular basis, leaving many unmet needs for roads, bridges, public transit, energy, housing, education, water, and telecommunications services. If interest payments on infrastructure, housing, economic development, and student loans were going to the public instead of private shareholders, we could lower taxes and create the money to meet basic needs.
Public banks can also reduce the interest paid by consumers and businesses on student loans, home loans and business loans, and they can provide banking services to the un-banked and under-banked.
Recent studies have shown that public banks are actually less corrupt — and more profitable — than private banks. They can be structured in their charter to ensure that they are run free of influence from legislators and other high public offices.
A public bank on the Bank of North Dakota model would not compete with local banks. It would accept deposits only or principally from state and municipal governments — not individuals, organizations or businesses.
Public banks following the lead of the Bank of North Dakota would partner with local and regional banks, allowing them to make loans and take deposits that normally would be out of reach because of their small size. North Dakota (with its 99-year-old publicly owned bank) has more banks per capita than any other U.S. state.
Rather than competing with local private banks, public banks help create a diverse, robust private banking system that truly serves the public.
The banks that oppose public banking tend to be large, multinational institutions that provide banking services to city and state governments and invest their funds in out of state projects, such as the Keystone XL pipeline and the tar sands in Canada. Government deposits are a cheap source of liquidity for these banks and help to bolster their credit ratings.
For local community banks, on the other hand, the high collateralization requirements for government deposits make them of little use; and partnering with a public bank has many benefits. This benefit is confirmed by the fact that the North Dakota Bankers Association endorses the Bank of North Dakota.
A public bank can help protect the local economy during larger economic crises by providing the city or state government with money in the form of low- or no-cost credit to inject into the economy to maintain essential services and stimulate production and commerce. The Bank of North Dakota supported North Dakota’s economy in this way during the Great Depression and the Great Recession.
Q: Can't cities and states just deposit their funds into a credit union? Wouldn't that amount to the same thing?
Credit unions contribute to the economic strength of the communities they serve by returning their profits to local members rather than to out-of-state investors. But they are too small by law to handle the banking needs of a city or state. A public bank also differs from a credit union in that its profits go to the public — all the residents and taxpayers of a city or state — for public use. Find more details here.
No. This is an important issue to clarify. Nearly all city, county, and state governments have the money required to capitalize a public bank in the form of existing financial assets. If new money is needed, the local government can issue a commercial bond, repayable over time from bank profits.
Who will set policy for public banks? Who decides whether to approve loans? How are decision makers insulated from bribes and pressure from politicians and business interests?
The success of the Bank of North Dakota shows that a public bank can and must be run free of influence from legislators and other high offices.
Elected government lawmakers or policy makers determine the policies that govern the activities of a public bank, or in other words, the bank’s mission or “charter.” Policy makers can do this with the help of an informed advisory committee. Day-to-day decisions about creditworthiness and lending, on the other hand, are made by professional bankers. These decisions are governed by the bank’s charter and subject to transparency and administrative review.
In the case of the Bank of North Dakota, a three-member “State Industrial Commission” oversees the bank’s activities. The commission is made up of the Governor, the Attorney General and the Commissioner of Agriculture. The Bank of North Dakota also has a seven-member “Advisory Board” appointed by the governor, the members of which must be knowledgeable about banking and finance. The Advisory Board reviews the Bank’s activities and makes recommendations about the bank’s management, services, policies and procedures to the Industrial Commission.
Public banks have a mandate to be fiscally conservative, balancing their requirement to lend in the public interest with careful considerations of the risks involved in lending. Public banks are more cautious in their lending than Wall Street banks. The major credit rating agency Standard & Poor’s has consistently awards the Bank of North Dakota an “A” rating, indicating the highest possible levels of confidence in the bank’s standards, practices and creditworthiness. According to North Dakota Attorney General Wayne Stenehjem, “The  S&P review of the bank confirmed that it is well-managed and supports the economic needs of North Dakota. ... The report recognized BND for its conservative management strategy.”