March 2nd, 2015
in Op Ed
by Shah Gilani, Money Morning
The free market for banking services in the United States isn't a free market at all.
The truth is the biggest commercial banks in America operate with virtual impunity as a government-subsidized, government-protected oligopoly.
So, why don't we drop the pretense that government-owned banks don't belong in a free market economy and create a network of honest state-owned banks to compete with so-called private banks?
We should. In fact, we have an almost 100-year-old U.S. bank as a model to copy.
A Single-Bank American Branch Is Proving the Model
It's the Bank of North Dakota, the only state-owned bank in America. The unique one-branch bank was founded in 1919 under a simple one-page charter. It has no automated teller machines and no investment bankers. But it's more profitable than Goldman Sachs and JPMorgan Chase & Co., with a return on equity 70% higher than either of those immensely profitable institutions.
The Bank of North Dakota's Standard & Poor's credit rating is double-A-minus, and according to The Wall Street Journal:
"That is above the rating for both Goldman Sachs Group Inc. and J.P. Morgan, and, among U.S. financial institutions, second only to the Federal Home Loan Banks, rated double-A-plus."
And no, the bank isn't profitable just because of North Dakota's newfound shale oil wealth.
In a Feb. 23, 2015, article titled "This Publicly-Owned Bank Is Outperforming Wall Street," noted attorney, would-be California treasurer, and the founder and president of the Public Banking Institute Dr. Ellen Brown says the bank is healthy and profitable.
The reasons she indicates are :
"The BND's costs are extremely low: [it has] no exorbitantly-paid executives, no bonuses, fees, or commissions; only one branch office; very low borrowing costs; and no FDIC premiums (the state rather than the FDIC guarantees its deposits)."
Brown goes on to say:
"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."
That a state-owned bank exists in a Republican stronghold is surprising. What's not surprising is the bank's model.
While BND offers some retail banking services and in 1967 was the first bank in the country to make federally insured student loans, it's essentially a "wholesale" bank. It makes loans to companies in partnership with community banks in the State.
BND gets the bulk of its deposits from the state of North Dakota. The state deposits its tax revenues, fees, and cash balances with the Bank. In turn, BND provides loan monies to partnering community banks who know their customers and make "local" loans.
The Bank of North Dakota doesn't compete with community banks, it augments them. It channels state money into the local economy through partnering banks who earn fees and profit commensurately.
Here Are Two (Rare) European Banking Systems That Work
Two other countries that Americans respect because of their economic and banking prowess, Germany and Switzerland, have successful state-owned or state-controlled banks that are similar in structure and function to the Bank of North Dakota.
Germany, a country of 82 million people, became the world's biggest exporter in 2003. It lost that title to China, with a population of 1.3 billion people in 2009, but it remains the engine of European growth thanks to its exports.
Economists and German manufacturers credit Germany's state-controlled, cooperative Sparkassen (savings banks) and the country's Landesbanken (state-owned, regional, predominantly wholesale banks) with the country's exporting success. These banks serve Germany's Mittlestand, or small to medium-sized businesses, which acting alone or as a network are the backbone of the German export juggernaut.
Sparkassen, which originated in 1778, operate regionally as savings and commercial banks under the auspices of local authorities. Shareholders of regional Sparkassen are either single cities where they operate or multiple cities convened into an administrative district. These savings banks operate in restricted geographic areas, but can act as a cooperative when making larger loans. Depositors are protected under a Joint Liability Scheme.
Germany's Landesbanken, more wholesale than retail banks, are predominantly owned by the country's savings banks through regional associations. The seven Landesbanken, besides acting as clearing banks for the Sparkassen, make loans themselves and perform commercial banking services on behalf of public and private enterprises.
Like the Bank of North Dakota, both Sparkassen and Landesbanken are effective in serving "local" businesses. And like BND they efficiently and effectively funnel back profits and taxes to the government bodies that control them.
It was only during the credit crisis that Germans came to realize their Landesbanken had overreached their regional focus. In search of yield in foreign mortgage-backed securities to compete with more aggressive German universal banks like Deutsche Bank and Commerzebank, losses on Landesbanken speculative holdings devastated the once conservative system. While the Landesbanken have recovered, the big private banks have been hit with repeated lawsuits and are sitting on untold billions of dollars of still-underwater assets.
For its part, the Swiss public banking system, based on shared ownership with regional Cantons that oversee the partially private shareholder-owned banks, operates similarly to BND and German public-owned or controlled banks.
In Switzerland - not unlike Germany's big private banks who amassed $600 billion of toxic assets heading into the 2008 credit crisis - it was big private Swiss banks, like UBS, that suffered huge losses and still deal with repeated and ongoing fraud charges by global regulators.
The Swiss National Bank, Switzerland's central bank, unlike America's Federal Reserve System, is operated for the benefit of its minority private shareholders and its majority shareholders, Switzerland's twenty-six Cantons. The SNB, for the past 100 years has paid its shareholders and the Cantons an annual "dividend." For the most part, the SNB pays out 6% of its net profits. Last year the Cantons split about $1.15 billion.
The Bank of North Dakota, and both German and Swiss publicly owned or controlled banks prove that private banks aren't the only free-market solution to providing critical banking infrastructure to big, modern Western economies.
The Too-Big-to-Fail Banks Are Effectively Government Subsidized
All America's too-big-to-fail banks are currently government subsidized now, so, they're not free-market competitors.
The implied government safety net these banks enjoy, which proved to be a lifesaver in the financial crisis, draws depositors. It provides them with cheap funding, lowers the cost of capital-markets funding operations, provides innumerable protections from regional bank competitors, and systematically undermines community banks across the country who don't have the economies of scale to pay for the increased regulations big banks brought upon the entire industry.
William K. Black, Associate Professor of Law and Economics at the University of Missouri-Kansas City and a former bank fraud investigator, recently said of the TBTF private banking oligopoly,
"Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians - at the ultimate expense of the taxpayer." He added, "In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions. Government-owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians."
Dr. Brown, author of the critically acclaimed book Web of Debt and its 2013 sequel The Public Bank Solution has a lot more to add. In her correspondence to me yesterday she wrote:
"Public sector banks lend counter cyclically, making more loans when private banks are pulling back. Public banks are also safer for depositors, avoiding bank runs and bail-ins. Public depository banks are not merely revolving funds. They can leverage the local government's capital at 10 to 1, backed by the government's own deposits."
Building Businesses Rather than Bonuses
On the subject of big Wall Street banks' impact on borrowers, Dr. Brown doesn't mince words, telling me:
"The fees alone paid to Wall Street banks by the city of Los Angeles exceed what the city pays to repair its streets. California school districts have succumbed to capital appreciation bonds on which they will be paying as much as 20 times principal by the time the loans are paid off. Meanwhile, the Bank of North Dakota is making 1% loans to school districts - as well as 1% loans to startup farmers and startup businesses, and 1.7% variable rate for loans to North Dakota students."