THE BLOG
02/17/2011 12:41 pm ET | Updated May 25, 2011

State Banks: A New, Old Idea to Increase Growth in Your Community

Every year billions of state tax dollars are taken from their respective states and deposited into the Wall Street "Too Big To Fail" banks. These same banks use municipal deposits to give loans to out-of-state big businesses, often shifting wealth from local communities; a huge loss of potential that could be better used encouraging local businesses and creating more jobs. With increased attention to where and how municipalities deposit their operating funds due in large part to the Move Your Money project, many are beginning to wonder: why can't that money stay local?

If community banks could accept public deposits, we could keep local money in the communities where it originated. Unfortunately, community banks are often unable or unwilling to accept large public deposits due to high collateral limits, making the venture unprofitable. That is where the idea of a public state bank -- or partnership bank -- comes into play.

The movement to create a publicly owned state bank has been on the rise this year as multiple states including Washington, Hawaii, and Oregon have already introduced bills in their respective states, with more expected to follow. The idea of a state bank is not new, but rather models after the Bank of North Dakota created in 1919, which today runs at a profit and allows for the state of North Dakota to make significant investments in agriculture, economic development, and student loans -- all at no cost to the state.

So what has caused a resurgence of an idea nearly one hundred years old? It is in large part due to the remarkable success experienced by North Dakota as the rest of the nation suffers through the global financial crisis. After the economic downturn sent shockwaves felt throughout the world, North Dakota ran counter-cyclical, leaving many to wonder what insulated the state from all the turmoil. While most municipal governments found record deficits, North Dakota found record surpluses and while most communities grappled with high unemployment, foreclosures, and bank failures, North Dakota remarkably survived the brunt of the attack unscathed. Undoubtedly, the fact that North Dakota's economy which is primarily based on agriculture and oil was a major contributor, but many are also pointing to North Dakota's state-owned bank as a major impetus to their success.

The Bank of North Dakota was created by a non-partisan populist movement in 1919 after farmers were fed up with out of state bankers limiting their access to credit. Farmers, whose livelihood primarily rests on factors outside of their control, revolted against their dire situation in creating the Bank of North Dakota. While the Bank of North Dakota was not an immediate success, over time the bank would serve as a tool to increase capital for local businesses and farms.

A common misconception of state banks is that they compete with private banks. This however, is not the case. While the Bank of North Dakota has the legal right to accept private deposits, in practice only 1 percent of their total deposits come from individuals and businesses (many of the current proposals will potentially go one step further and outright ban the ability for state banks to accept private deposits). Rather, a public bank mainly serves as a "bankers' bank," allowing a small, community bank to make larger loans by sharing the risk and buying down the interest rate or buying loans from community banks which increases lending for small businesses and agriculture.

Small businesses, which account for 70 percent of the nation's workforce, have been particularly hurt by the credit crunch. In a recent survey of small business owners in Oregon, 67 percent reported problems with accessing capital to expand and 75 percent supported the creation of a state bank. Easing community banks ability to supply loans will not only increase profits for the bank but also help small businesses grow and create jobs.

Additionally, a state bank could provide additional services to banks including currency exchange, check clearing, and providing liquidity. Thus, the relationship is more akin to a partnership, encouraging and strengthening community banks and allowing them to compete against the Wall Street behemoths.

The benefits of state banks, however, go further than just community banks. Since public banks have no shareholders to please, they have more freedom in choosing where they allocate their capital. Start-ups and small businesses that may provide long-term economic growth to a community are often passed over by Wall Street for investments that are more profitable to their immediate bottom-line. Yet a state bank would be able to leverage earned income through more lucrative activities to help subsidize economic growth in local communities.

An additional plus of the state bank movement is that it could be a potential source of revenue for the state. The Bank of North Dakota was able to return over $350 million to the state's General Fund in the last decade, which came in handy when the state faced a $40 million budget shortfall at the turn of the century.

A state bank may or may not be the solution for your state, but it is an interesting experiment that some state legislators feel is worth a try. During this legislative session, it will be exciting to see which bills are successful and which fall short. Nevertheless, the creation of a state bank is a new, old idea that is worth a strong consideration.