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.
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.
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.