While many of us understand the importance and benefit of public banks for stimulating local economies, there are many who have the opposite point-of-view and can present arguments that are reasonable, given their set of assumptions. It is important that we understand these arguments and can respond to them. The link below is to a recent New York Times Opinion Page Forum entitled Room For Debate, in which arguments are given by both supporters and opponents of public banking.
In an article in The Wall Street Journal dated November 16, 2014 and entitled Shale Boom Helps North Dakota Bank Earn Returns Goldman Would Envy, Chester Dawson relates a largely factually correct representation of the Bank of North Dakota. However, the interpretation of these facts is easily questioned. Ellen Brown, a major intellectual leader of the Public Banking movement, critiques the article in her blog, ellenbrown.com and reprinted below. This blog entry is also a very accessible summary of the benefits of a public bank.
Posted on November 19, 2014 by Ellen Brown at ellenbrown.com
While 49 state treasuries were submerged in red ink after the 2008 financial crash, one state’s bank outperformed all others and actually launched an economy-shifting new industry. So reports the Wall Street Journal this week, discussing the Bank of North Dakota (BND) and its striking success in the midst of a national financial collapse led by the major banks. Chester Dawson begins his November 16th article:
It is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003. Meet Bank of North Dakota, the U.S.’s lone state-owned bank, which has one branch, no automated teller machines and not a single investment banker.
He backs this up with comparative data on the BND’s performance:
[I]ts total assets have more than doubled, to $6.9 billion last year from $2.8 billion in 2007. By contrast, assets of the much bigger Bank of America Corp. have grown much more slowly, to $2.1 trillion from $1.7 trillion in that period.
. . . Return on equity, a measure of profitability, is 18.56%, about 70% higher than those at Goldman Sachs and J.P. Morgan. . . .
Standard & Poor’s Ratings Services last month reaffirmed its double-A-minus rating of the bank, whose deposits are guaranteed by the state of North Dakota. That is above the rating for both Goldman Sachs and J.P. Morgan and among U.S. financial institutions, second only to the Federal Home Loan Banks, rated double-A-plus.
Dawson goes on, however, to credit the BND’s remarkable performance to the Bakken oil boom. Giving his article the controversial title, “Shale Boom Helps North Dakota Bank Earn Returns Goldman Would Envy: U.S.’s Lone State-Owned Bank Is Beneficiary of Fracking,” he contends:
The reason for its success? As the sole repository of the state of North Dakota’s revenue, the bank has been one of the biggest beneficiaries of the boom in Bakken shale-oil production from hydraulic fracturing, or fracking. In fact, the bank played a crucial part in kick-starting the oil frenzy in the state in 2008 amid the financial crisis.
That is how the Wall Street-owned media routinely write off the exceptional record of this lone publicly-owned bank, crediting it to the success of the private oil industry. But the boom did not make the fortunes of the bank. It would be more accurate to say that the bank made the boom.
Excess Deposits Do Not Explain the BND’s Record Profits
Dawson confirms that the BND played a crucial role in kickstarting the boom and the economy, at a time when other states were languishing in recession. It did this by lending for critical infrastructure (roads, housing, hospitals, hotels) when other states’ banks were curtailing local lending.
But while the state itself may have reaped increased taxes and fees from the oil boom, the BND got no more out of the deal than an increase in deposits, as Dawson also confirms. The BND is the sole repository of state revenues by law.
Having excess deposits can hardly be the reason the BND has outdistanced even JPMorganChase and Bank of America, which also have massive excess deposits and have not turned them into loans. Instead, they have invested their excess deposits in securities.
Interestingly, the BND has also followed this practice. According to Standard & Poor’s October 2014 credit report, it had a loan to deposit ratio in 2009 of 91%. This ratio dropped to 57.5% in 2014. The excess deposits have gone primarily into Treasuries, US government agency debt, and mortgage-backed securities. Thus the bank’s extraordinary profitability cannot be explained by an excess of deposits or an expanded loan portfolio.
Further eroding the Dawson explanation is that the oil boom did not actually hit North Dakota until 2010. Yet it was the sole state to have escaped the credit crisis by the spring of 2009, when every other state’s budget had already dipped into negative territory. Montana, the runner-up, was in the black by the end of 2009; but it dropped into the red in March of that year and had to implement a pay freeze on state employees.
According to Standard & Poor’s, the BND’s return on equity was up to 23.4% in 2009 – substantially higher than in any of the years of the oil boom that began in 2010.
The Real Reasons for Its Stellar Success
To what, then, are the remarkable achievements of this lone public bank attributable?
The answer is something the privately-owned major media have tried to sweep under the rug: the public banking model is simply more profitable and efficient than the private model. Profits, rather than being siphoned into offshore tax havens, are recycled back into the bank, the state and the community.
The BND’s costs are extremely low: no exorbitantly-paid executives; no bonuses, fees, or commissions; only only one branch office; very low borrowing costs; and no FDIC premiums (the state rather than the FDIC guarantees its deposits).
These are all features that set publicly-owned banks apart from privately-owned banks. Beyond that, they are safer for depositors, allow public infrastructure costs to be cut in half, and provide a non-criminal alternative to a Wall Street cartel caught in a laundry list of frauds.
Dawson describes some other unique aspects of the BND’s public banking model:
It traditionally extends credit, or invests directly, in areas other lenders shun, such as rural housing loans.
. . . [R]etail banking accounts for just 2%-3% of its business. The bank’s focus is providing loans to students and extending credit to companies in North Dakota, often in partnership with smaller community banks.
Bank of North Dakota also acts as a clearinghouse for interbank transactions in the state by settling checks and distributing coins and currency. . . .
The bank’s mission is promoting economic development, not competing with private banks. “We’re a state agency and profit maximization isn’t what drives us,” President Eric Hardmeyer said.
. . . It recently started offering mortgages to individuals in the most underserved corners of the state. But Mr. Hardmeyer dismisses any notion the bank could run into trouble with deadbeat borrowers. “We know our customers,” he said. “You’ve got to understand the conservative nature of this state. Nobody here is really interested in making subprime loans.”
The Downsides of a Boom
The bank’s mission to promote economic development could help explain why its return on equity has actually fallen since the oil boom hit in 2010. The mass invasion by private oil interests has put a severe strain on the state’s infrastructure, forcing it to muster its resources defensively to keep up; and the BND is in the thick of that battle.
In an August 2011 article titled “North Dakota’s Oil Boom is a Blessing and a Curse”, Ryan Holeywell writes that virtually all major infrastructure in the boom cities and counties is strained or exhausted. To shore up its infrastructure needs, the state has committed hundreds of millions of dollars in revenue. Meanwhile, it is trying to promote industries other than oil and gas, such as companies involved with unmanned aircraft, manufacturing associated with wind energy equipment, and data centers; but the remoteness of the western part of the state, along with the high cost of labor, makes doing business there complicated and expensive.
Hydrofracking, which has been widely attacked as an environmental hazard, is not as bad in North Dakota as in other states, since the process takes place nearly two miles underground; but it still raises significant environmental concerns. In 2011, the state levied $3 million in fines against 20 oil companies for environmental violations. It also undertook a review of industry regulations and was in the process of doubling its oil field inspectors.
The greatest stresses from the oil industry, however, involve the shortage of housing and the damage to the county road system, which in many places consists of two-lane gravel and dirt roads. Drilling a new well requires more than 2,000 truck trips, and the heavy rigs are destroying the roads. Fixing them has been estimated to require an investment of more than $900 million over the next 20 years.
These are external costs imposed by the oil industry that the government has to pick up. All of it requires financing, and the BND is there to provide the credit lines.
Lighting a Fire under Legislators
What the Bank of North Dakota has done to sustain its state’s oil boom, a publicly-owned bank could do for other promising industries in other states. But Dawson observes that no other state has yet voted to take up the challenge, despite a plethora of bills introduced for the purpose. Legislators are slow to move on innovations, unless a fire is lit under them by a crisis or a mass popular movement.
We would be better off sparking a movement than waiting for a crisis. The compelling data in Dawson’s Wall Street Journal article, properly construed, could add fuel to the flames.
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.
The original post with reader comments can be found at http://ellenbrown.com/2014/11/19/wsj-reports-bank-of-north-dakota-outperforms-wall-street/
One of the major roles of the Bank of North Dakota (BND) is to support small businesses within the state. This story, which was in the New York Times Blog, You’re the Boss — The Art of Running a Small Business on March 13, 2014, gives some detail about how BND can help a small business through its partnership loan program. It further gives some details of the operations of the BND. We reprint the article here. The original article can be found at http://boss.blogs.nytimes.com/2014/03/13/what-north-dakotas-public-bank-does-for-small-businesses/
What North Dakota’s Public Bank Does for Small Businesses
By ROBB MANDELBAUM MARCH 13, 2014 7:00 AM
Five years ago, Brian Brasch, president of Branick Industries, a maker of specialty automotive tools in Fargo, N.D., took a phone call from a stranger. The caller was an auto mechanic in Florida who had an idea for a new kind of drain plug for an oil pan, one with an O-ring that expands to stop oil leaks.
The Santa Fe City Council approved a resolution to move forward on a study of the long-term benefits of a public bank for the City of Santa Fe. The resolution was sponsored by Mayor Javier Gonzales and Councilors Peter Ives and Joe Maestas. They were joined by Councilors Patti Bushee and Carmichael Dominguez, who asked to be added to the list of sponsors at this meeting .
Banking on New Mexico encourages you to attend the next meeting of the Santa Fe City Council to help move public banking forward. After approval by City of Santa Fe’s Finance Committee on October 20, 2014, the resolution for a feasibility study of the benefits of a public bank will be on the agenda of the Santa Fe City Council on Wednesday, October 29, 2014.
The Finance Committee of the City of Santa Fe will convene for a regular meeting in the Santa Fe City Council Chambers at 5:00 pm on Monday, October 20, 2014. On the agenda is:
23. Request for Approval of a Resolution Directing Staff to Analyze the Potential Opportunities of Establishing Public Banking Functions for the City of Santa Fe and Projecting Whether a Public Bank Would Provide a Long Term Benefit for Local Businesses and Residents.
The City of Santa Fe issued a Request for Qualifications (RFQ) in August of this year to study the feasibility of establishing a public bank for the city (see City of Santa Fe issues RFQ to study a public bank). As outlined in the following article from today’s Santa Fe New Mexican, the submissions will be evaluated by the following six-member selection committee:
• City Manager Brian Snyder
• Kate Noble, acting director of the city’s Housing and Community Development Department
• Katherine Miller, Santa Fe County manager
• Kris Axtell, president of Luna Capital Advisors, a business advisory firm that helps clients find the lowest cost, most efficient commercial loan options in the Southwest
• Randy Grissom, president of Santa Fe Community College
• Mike McGonagle, president and CEO at Century Financial Services Corp.
Today’s story from The Santa Fe New Mexican:
Continue reading Public Banking in the Press — The Public Banking Institute, One of Five Groups Seeking City of Santa Fe Contract for Study on Public Banking
From the pages of The Albuquerque Journal:
Public banking debate starts in Santa Fe
By Mark Oswald / Journal Staff Writer
PUBLISHED: Friday, October 3, 2014 at 12:05 am
Santa Fe Mayor Javier Gonzales has put forth the first big idea of his administration – the possibility of creating a public bank in Santa Fe.
He said last week, before the start of a day-long symposium on the concept, that the city is seeking proposals to hire a consultant to help determine the feasibility of a public bank here.
“We are not going to rush into anything, but we are going to move forward in learning and understanding how to develop a bank in Santa Fe, and being honest about whether we can truly pull it off or not,” the mayor said. “That remains to be seen.”
He noted that city government’s bank these days is Wells Fargo. “They do a great job, but they also take city revenues, taxpayer dollars, and they use those dollars as part of a loan portfolio for folks outside of Santa Fe and New Mexico.”
With loans for small businesses way down since the recession, Gonzales said, “You have to pause and wonder, is this the best structure for our community?”
Tim Danahey set up his portable studio in the Green Room of the Banking On New Mexico Symposium to interview several of the invited speakers at the Symposium. The Symposium, whose principal topic was public banking, was held at the Santa Fe Community Convention Center on Saturday, September 27, 2014. Videos of the full program of events can be found on this website at Symposium Videos.
From The Santa Fe New Mexican:
Public bank advocates gain advice from experts
Posted: Saturday, September 27, 2014 10:00 pm | Updated: 11:18 pm, Sat Sep 27, 2014.
By Ed Moreno
For The New Mexican
The path to establish a publicly owned bank will be scattered with legal and political obstacles, but scores of citizens, public officials and public finance experts gathered in Santa Fe on Saturday to make the case that it can, and should, be done.
The spirited gathering, organized by “We Are People Here,” brought local, national and international perspectives on why it is necessary to try to establish publicly owned and operated banks that serve local communities, and not the “plutocracy” that controls the nation’s wealth, the event’s organizer said.
“We are gathered here because we recognize to the degree greater than in any time in the last 40 years that we are on our own,” said Craig Barnes, the founder of the organization. He cited the concentration of wealth and power and said “the life’s blood is being sucked away from our local communities.”
“We’re not here to blame, we’re not here to complain. We’re here to get up off our knees, because it’s in our nature as Americans to be on our feet,” he said.