Since the 2008 financial crisis, the idea of creating a public bank has been proposed in dozens of states across the country. Cities including Santa Fe, Philadelphia, San Francisco, and Seattle are also exploring the option.
Progress has been slow and the only state so far to take concrete action is Vermont, which allows up to 10 percent of its cash balance to be used for lending and investments. But momentum has picked up with a proposal by Phil Murphy, a leading New Jersey gubernatorial candidate, for a public bank as a centerpiece of his economic platform. This proposal was received favorably by the state’s largest newspaper, The Star-Ledger.
New Jersey has approximately $12 billion of public funds invested in large banks such as Wells Fargo, Capital One and Bank of America. In 2015, Bank of America made only three small business loans in the state. Characterizing New Jersey as “the most under managed asset I’ve ever seen,” Murphy wants public deposits reinvested in the state. This plan is one component of Murphy’s broader objective to stabilize state finances and revive New Jersey’s reputation as an investment hub for technology and innovation.
Under this proposal, the state and potentially municipalities would deposit their revenues with the public bank. That capital would be leveraged into credit to support economic development and public investments. The bank would support community banks by acting as a secondary lender to help them compete with big banks. This, in turn, helps small businesses and local economies as community banks account for most small business loans.
The bank’s profits are returned to the state through dividends. The state could borrow at reduced or zero interest for projects such as infrastructure improvements. Interest payments and fees to private banks potentially double the cost of such government projects, according to Ellen Brown, founder of the Public Banking Institute.
Public banking is nothing new. It accounts for 40 percent of banking worldwide. Infrastructure investment funds are already used in more than 30 states nationally. But currently the only public bank in the U.S. is the Bank of North Dakota (BND), which has operated for almost 100 years. Following the 2008 crisis, North Dakota had the lowest national default and unemployment rates and was the only state reporting major surpluses. The bank’s success has inspired public bank proponents.
BND’s success model includes prudent management, insulation from political influence, and a supporting role on behalf of local financial institutions. It wisely avoided subprime lending. The bank’s state-appointed advisory board consists of finance experts, its executives are experienced bankers, and routine lending decisions are made by professionals.
Most BND loans originate from community banks and credit unions. Over the last decade the bank has reported record earnings, with more than $130 million in earnings and an impressive 18 percent return on investment in 2015. According to a 2011 study, two-thirds of the bank’s profits were returned to the state over a 35-year period and it responds more quickly during natural disasters then the federal government.
BND primarily services government agencies and local financial institutions. It deals directly with customers in only limited circumstances, such as student loans (the bank issued the nation’s first federally-insured student loan in 1967. Accordingly, the bank functions as a partner, not competitor, with community banks. For example, in addition to providing liquidity and secondary lending, BND provides letters of credit that allow local banks to accept deposits and manage funds for municipalities and counties.
Consequently, public banking can act as a counterweight against too-big-to-fail consolidation. Ever since the Riegle-Neal Act of 1994 allowing interstate banking, consolidation has increased dramatically. This trend only accelerated following the 2008 financial crisis. Since 1996, the number of banks nationally has declined from 11,454 to 5,170. More troubling, the seven biggest banks control 56 percent of all industry assets. This consolidation reduces competition and potentially increases systemic risk. It also explains why the bank lobby opposes public banks, employing “free market” rhetoric while benefiting from government largess.
The potential for public banks to counter big bank consolidation is multifaceted. In addition to providing an alternative depository for public funds and source of credit for public entities, support for community banking allows local financial institutions to compete with big banks. Competition and decentralization are worthy policy goals that contribute to stability. Indeed, North Dakota has the highest number of community banks per capita in the nation and weathered the 2008 crisis better than most.
The next governor of New Jersey will confront major economic challenges: slow growth, poor business climate, aging infrastructure, an underfunded pension system, and the reality of being the third-most indebted state in the nation. Under Gov. Chris Christie, the state’s credit rating has been downgraded a staggering 10 times.
In conjunction with other measures, a public bank could be part of the solution. The 2017 gubernatorial election may very well give Phil Murphy the opportunity to demonstrate that public banking works beyond North Dakota.
Douglas Singleterry is counsel at Vasios, Kelly & Strollo, where is specializes in civil litigation. He is co-author of the New Jersey Uniform Commercial Code and has served on the North Plainfield Borough Council since 2005. Zenon Christodoulou is a management consultant and adjunct professor at William Paterson University’s Cotsakos School of Business.