Are State-Owned Banks the Antidote to the Too-Big-To-Fail Epidemic?

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The American Great Plains are known for their expansive farm lands, endless horizons, and — in recent history — staunchly conservative politics. So it may come as a surprise that only state-owned bank in the U.S. (an institution more widely associated with communist China than the Republican Party) can be found in ruby-red, rural North Dakota.

That’s right, The Bank of North Dakota (BND) — the largest bank in the state by deposits — was founded by legislative mandate in 1919, and has been a mainstay of the North Dakotan economy since that time, mostly through partnering with community banks to provide loans for local businesses. And advocates of public banking are holding up the BND as an example of what government-owned banks can do for an economy.

Take for example a problem that seems obvious to many observers of the financial system, but is one for which there is no evident solution: the concentration of power in the banking industry. Since the 1970s, the concentration of power in the nation’s largest banks has grown swiftly. According to a report issued by the Federal Reserve Bank of Dallas last year, the share of assets controlled by the five largest U.S. banks has more than tripled from 17% in 1970 to a whopping 52% in 2010. This concentration of power is the main ingredient of “Too-Big-to-Fail,” as these outsized institutions pose a danger to the entire U.S. economy if one of them were to fail. But a bank’s size also can create a greater risk of failure in and of itself, the report argues, as larger banks are more difficult to manage and to regulate.

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Therefore, small, community banks are vital to the health of a financial system — and the Bank of North Dakota is an institution that is primarily focused on partnering with community banks by providing a minority of the funding for loans those banks have decided to issue, thus allowing banks to expand the funding they are able to issue at lower interest rates. The result? North Dakota’s banking industry is dominated by small financial institutions. According to a 2011 report by the Federal Reserve Bank of Boston which studied the affect of the BND on the North Dakotan economy, “banks with less than $500 million in deposits account for almost one-half of the total bank deposits in the state.” South Dakota, on the other hand, is dominated by one too-big-to-fail bank: Wells Fargo, which accounted for 73% of the bank deposits in the state in 2010.

The financial crisis has only served to concentrate the banking sector further, as weak banks were taken over (often with the support of the Fed and Treasury) by stronger banks. This dynamic has been almost universally criticized from those on the left and the right as well as by those inside government and the banking industry itself. Of course, nobody has yet to propose a realistic way to actually shrink the TBTF banks down to size.

But what if we instead figured a way to level the playing field for smaller banks, and make it easier for them to grow? Ellen Brown, chairman and president of the Public Banking Institute, a think tank that promotes public banking in the U.S., argues that the Bank of North Dakota is vital in promoting the strength of community banks in the state. “Wall Street banks aren’t as interested in evaluating local businesses or potential mortgagors, whereas community banks want this business, but quite often don’t have the capital to fund it,” says Brown. “North Dakota has the highest number of banks per capita,” she adds, attributing the strength of community banking in the state to the fact that they have a well-capitalized state bank to partner with to fight off competition from well-capitalized Wall Street banks.

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Community banks have proven to be a vital cog in the nation’s financial system. The subprime mortgage crisis which sparked the financial panic of 2008 and caused so much suffering across America and the world, was more the fault of large banks than small ones. And the robosigning scandal, which was recently put to bed after settlements with states attorneys general last February, and with banking regulators earlier this month, has led to the nation’s largest banks paying collective penalties of more than $30 billion. But according to the FDIC, community banks fared far better when it came to sound mortgage underwriting and fair foreclosure proceedings.

Yet the weak economy and regulatory changes following the passage of Dodd-Frank have put more pressure on community banks than ever before. At a recent industry conference Emmet Daly, a Sandler O’Neill Investment Banker,  predicted that the number of community banks in America would shrink from more than 7,000 today down to just a few hundered, according to Fortune Magazine.

So even though there seems to be near-universal agreement from all sides of the political debate that something must be done to curb the power of large financial institutions, we are standing idly by while the TBTF banks’ only competition nears extinction. Encouraging state governments to set up government-owned banks along the lines of the Bank of North Dakota is an idea that has a real chance of working, and doesn’t involve any action from Washington.

Sure, there are many obstacles to launching publicly-owned financial institutions. Pulling state capital out of commercial institutions could prove to be disruptive to the current financial system. And proper controls need to be set up to avoid political considerations overwhelming proper analysis of lending opportunities. But North Dakota has avoided these pitfalls, and the NBD is an institution that has proven its ability to work alongside the private banking industry to help the state’s economy — one of the most successful in the nation in recent times — develop and grow.

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18 comments
CarlLegg
CarlLegg

Fannie Mae and Freddie are two of the largest "banks" in the world.

OtI ItO
OtI ItO

No, stronger antitrust laws to foster competition. Revise anti-tying rules to avoid conflict of interest. Revise Sarbanes-Oxley Act to improve accountability. Revise derivatives trading rules to mitigate speculation and encourage hedging. State run institutions don't have the competitive incentives to take advantage of efficiency, effectiveness and scaled economies.

robert.cogan
robert.cogan

Stater and more local independent banks are an excellent idea. Let's not forget though cooperatives like credit unions. SO far we, the people, still have freedom to move our money. Make use of it!

Wende Bradley Hernandez
Wende Bradley Hernandez

We have 'crown corporations' in Canada (power, energy, phone and liquor)...its no better....

I-Am Awake
I-Am Awake

No because the gov't can then use police power to pursue the personal debt of the members of the state.

Zack Patton
Zack Patton

No thats called nationalizing, its what all socialist countries do under a dictator.

walstir
walstir

So it may come as a surprise that [the?] only state-owned bank in the U.S. (an institution more widely associated with communist China than the Republican Party) can be found in ruby-red, rural North Dakota.”


North Dakota is so different from other states that it is meaningless­ to use it as a model. For one thing, it did not have a housing boom/bust. Go tohttp://www­.forecast-­chart.com/­housing-pr­ice-index.­html and compare North Dakota's 30 year house price history with California  North Dakota's population 'growth' is also untypical. North Dakota's population was near 680,000 in 1930 - as of July 1, 2008, North Dakota's population was estimated to have dropped to 641,481.  If North Dakota was showing the way to other states, why would its population decline over an  80 year span?  Since the 2008 housing crash in states where population growth allowed a housing bubble to form; North Dakota has had a modest population growth.

oregonstu
oregonstu

In the last paragraph, the author states "Pulling state capital out of commercial institutions could prove to be disruptive to the current financial system", as if this is a possible reason NOT to establish state banks. In fact, if this hypothetical result were to pass, I would suggest that it would be an  EXCELLENT reason to establish more state banks.

By all means, let's disrupt the current financial system! This is the root of our economic problems... the privately owned, debt based monetary system also known as fractional reserve banking. These unscrupulous shysters are continuing to rip taxpayers off to the tune of trillions of dollars with so many different multi layered frauds and scams we can hardly keep track of it all - from predatory sub prime lending, to fraudulent securities sold as conservative AAA investments that the banks simultaneously be AGAINST (akin to taking out a life insurance policy on somebody you just put a hit contract on), to forged documents and robo signing, to colluding to rig bids on municipal bond deposit interest rates, to the massive 500 trillion dollar interest rate swap scam, pegged to their Libor rigging conspiracy, with which they continue the enormous theft of trillions of dollars from State, county, and municipal governments across the country, to manipulating food, electricity, and gas prices (among others) sky high on the commodities futures markets... and yet we should worry about disrupting the business of these thieving vultures? I think not!

Read more: http://business.time.com/2013/01/15/are-state-owned-banks-the-antidote-to-the-too-big-to-fail-epidemic/#ixzz2IAux6RSy

failureofreality
failureofreality

We used to have small local banks.  Laws prohibited banks from expanding across state lines.  Laws limited the expansion of banks within states.  We got rid of the laws because of two basic arguments:  diversification and economies of scale.   Diversification through larger banks meant that banks would not be vulnerable to local economic downturns.  What happened is that the expansion of banks diversified stupidity into larger areas.  Economies of scale meant that larger banks would have lower per unit costs.  Since the laws limiting bank expansion have been removed, bank fees have increased.  We used to have an economy that worked for everyone.  Now we have an economy that works for the few.   

cscoxk
cscoxk

Successful sustainable systems have diversity and the ability to repair themselves.  North Dakota is evidence that diversity works in the financial system.  State and Locally owned banks should be established and encouraged.  In the modern age of communication big is not better nor is it more efficient.

PeterPumpkinEaster
PeterPumpkinEaster

I'll try again...

Let's prosecute the thieves on Wall Street instead of spending millions persecuting internet nerds. With any luck, some of those bas tards downtown will jump out the windows and save us time and money. 

There. I said what most others are thinking. Peace. 

oregonstu
oregonstu

typo correction: that banks simultaneously BET against...

walstir
walstir

@failureofrealityThere were lots of small local banks 30 years ago - they were called Savings and Loans. "S&Ls made long-term loans at fixed interest using short-term money. When the interest rate increased, the S&Ls could not attract adequate capital and became insolvent. Rather than admit to insolvency, some CEOs of S&Ls became "reactive" control frauds by inventing creative accounting strategies that turned their businesses into Ponzi schemes".  You can read the rest at:  

http://en.wikipedia.org/wiki/Savings_and_loan_crisis

stevehudson51
stevehudson51

@cscoxk  Yes, diversity does work in the financial system.  Germany's banking system is about half public and it is the most competitive in the world. Public banks keep private banks on their toes and give them a run for their money.  They can serve the public better because they don't have to always be focused on the next quarter's corporate bottom line or pay managers huge salaries and bonuses.  Instead, a public bank can focus on helping people and making good things happen. This is what BND does with its mandate to assist the economy of ND.  Taiwan is another country with about half public banking and an extremely competitive banking market, and like Germany, Korea, China, and a number of other countries, produced "economic miracles" with the help of public banks. They have been so successful in so many places, they really should be looked at as an alternative that can serve our economy  better.

efrustrated
efrustrated

@PeterPumpkinEaster Thanks!

 I can't speak for anyone else, but you surely said what I've been thinking since, like most normal follks, I became slowly aware of just how we've all been royally shafted for decades.

While we're at it, isn't this Time article about 5 years behind the curve?