States are Considering Public Banks

Econintersect:  Arizona, California and Massachusetts are three states mentioned in a Bloomberg/Businessweek article that are looking into the formation of state-owned banks.  This a form of the so-called public banking concept where such banks are owned by the state in which they reside and deposits are guaranteed by the state rather than the FDIC (Federal Deposit Insurance Corporation).  If this sounds like a radical idea, it has had an existing prototype for the past 92 years, the State Bank of North Dakota.

According to the Public Banking Institute fourteen states are in various stages of investigation of the possibility to follow the lead of North Dakota:

From the Public Banking Institute:

….14 states have decided enough is enough; they have introduced legislation for publicly owned banks or derivations, or for studies or task forces to determine how a publicly owned bank would operate in their jurisdiction. Eight of these states have bills that were only recently submitted, in 2011. In one of the 14 states, Massachusetts, the commission is already in force.

The original purpose of the Bank of North Dakota was to provide low-cost financing to the state’s farmers, but it has now become the financier for all kinds of commercial activity, according to Bloomberg/Businessweek.  Assets are currently $5 billion and the earnings of the bank go to the state treasury.  The rates charged for loans are substantially below commercial banks, currently 2.25% vs. 3,25% for five year loans.

From Bloomberg/Businessweek there are those who praise and others who criticize the public banking concept:

Supporters say state-run banks, whose deposit base would include tax revenue and other government funds, would have greater control to develop socially minded lending programs favoring average Americans.

“Because of the Occupy Wall Street movement, there is much more of an interest to put in place state-owned banks to serve the public interest,” Marc Armstrong, the executive director of the Sonoma, California-based Public Banking Institute, said in a telephone interview.

“The benefit to commercial businesses is they receive affordable low-cost loans, including some as low as 1 percent per year,” Armstrong said. “The benefit to the state’s public is a more affordable and competitive rate for student loans and home mortgages.”

…..

The U.S. banking industry opposes the idea and is lobbying against it, saying a state-run bank would compete with commercial banks for business and politicize a state’s lending decisions.

“A state-owned bank? Why don’t we just re-label the state capitols the Kremlin?” Camden Fine, president of the Independent Community Bankers of America, a Washington-based trade group that represents more than 5,000 community banks, said in a telephone interview.

“It’s a socialistic idea,” Fine said. “If you get a state-owned bank that is allocating credit, it can slide very quickly into a situation where those in favor get credit and those not in favor don’t get credit.”

Sources:  Bloomberg/Businessweek and  Public Banking Institute