Establish State Partnership Banks

“It is time to bring the money home so it can build our future. We will do this by redirecting resources to a bank that is committed to making investments in and for New Jersey because it will be owned by the people of New Jersey.”

-PHIL MURPHY, GOVERNOR OF NEW JERSEY374

THE PROBLEM

Investment enables our communities to thrive. Whether it’s a family seeking a mortgage to buy their first home, a neighborhood business that needs a loan to grow, or a city financing a new rail project, our communities rely on investments made today to flourish in the coming years. Traditionally, banks provided these up-front investments in local businesses and public projects. In recent decades, however, policymakers deregulated the financial industry, including breaking down the wall between retail banks that serve consumers and investment banks that place risky bets on Wall Street. Traditional banking, which focused on safeguarding deposits and lending to businesses and individuals, was transformed into a high-risk, high-reward wealth machine for a tiny elite of investment bankers and money managers. High-yield investment and securities trading now dominate the banking industry, instead of lending and depository services. Not coincidentally, the U.S. financial system has become extremely concentrated, with a handful of large banks now controlling close to 60 percent of the country’s financial assets, while community banks’ share of financial assets has shrunk by more than 50 percent since the mid-1990s, to only 11 percent of total assets. Community banks are in crisis—indeed, 25 percent shut their doors between 2008 and 2015.375

As the broader economic recovery gained momentum in recent years, small business leaders consistently identified capital needs as a major challenge. In 2016, approximately one-third of small businesses that applied for loans did not receive them; even worse, 54 percent of minority-owned businesses reported being turned down for loans.376  Despite growing consumer demand, small businesses—key drivers of job creation and overall resiliency in many communities—have not had sufficient access to capital. Meanwhile, the big banks that control most of the nation’s financial capital are using it for non-productive and often destructive activities like high-speed trading and securitizing mortgage debt, which was the primary cause of the financial crisis of the late 2000s. Overall, the biggest shift has been between stock trading and business lending: Trading assets expanded by a factor of 7 between 1980 and 2012, to approximately $35 trillion, while business lending only grew threefold, reaching about $15 trillion over the same period.377

This “financialization” of our economy is crippling long-term innovation and job creation in the real economy.378 In many metropolitan and rural areas alike, lack of access to affordable credit and banking services cuts off low-income communities and communities of color from being able to save or build for the future. At the same time, a lack of financing undermines regional equity strategies that promote local business growth and public goods across racial and residential divides. To solve the challenges facing small businesses and low-income communities, local lending and investment must grow substantially, and structural change in the finance industry is needed. State partnership banks—publicly owned banks where states and cities deposit their own tax revenue—are part of the solution. State banks cut out the Wall Street middlemen and make more resources available for in-state financial needs such as small business loans, student loans, and infrastructure investment.

 

POLLING DATA

  • 32% of Americans currently have confidence in banks.379
  • 79% of small businesses in Washington State, 75% of small business in Oregon, and 72% of small businesses in Maine support the idea of a state bank.380

 

POLICY SOLUTIONS

Establish a publicly run state partnership bank to make loans that address needs in the real economy, offsetting the financial imbalances created by Wall Street. North Dakota is currently the only state with a public bank, established in 1919 as a populist counterweight to Wall Street extortion on the frontier. A number of other states and cities are considering proposals to establish a state bank.381

Building on the North Dakota model, states should:

  • Charter a new bank entirely owned by the state. Deposit tax revenue with the state bank rather than with outside financial institutions, which charge high fees and invest the money out of state. Appoint a board of overseers, including representatives of various interested banking and business sectors as well as diverse community leaders, to monitor the bank’s activities and fiduciary health.  To avoid excessive risks with taxpayer money and the state budget, a state bank should operate like a bank and not an investment fund.
  • Use the bank to leverage and expand local lending. The main purpose of a partnership bank is to leverage and expand community bank lending and spread risk, helping to diversify local lending and enable more equitable access to credit.  
  • Provide low-interest loans. The Bank of North Dakota (BND) successfully provides low-interest student loans and municipal loans for small infrastructure projects, allowing cities to circumvent more costly bond markets. State banks should also provide a secondary market for local home mortgage and farm loans, to help expand local lending and spread risk in these important areas for state economies.   
  • Foster local ownership of banks. Shore up local ownership of community banks by offering loans enabling state residents to purchase local bank stock. State banks can also help community banks by offering letters of credit that help them meet stringent standards for managing municipal and county deposits. City and county tax dollars are then banked locally instead of with big out-of-state banks. 
  • Share benefits with the community and the state. A state bank should be fiscally beneficial in addition to eliminating Wall Street fees. It should pay market-rate interest on state deposits and an annual dividend to the state from its lending profits. A state bank could also house a state-level disaster relief fund, to expedite relief in advance of receiving federal funds.
  • Expand lending in communities of color. State bank policies for partnership lending in more diverse states with high levels of economic and racial inequality should be carefully calibrated to expand lending in communities of color. This could be enabled by distributing risk across the full portfolio and by leveraging other funds, such as subsidizing interest rate discounts for higher-risk loans. Municipal loans should be concentrated in the state’s poorest cities. Racial equity should be a focal point in the design and implementation of partnership lending, and mechanisms should be devised to ensure community input and oversight in the process.    
  • Enlist partners in capitalizing the state bank. States will need to find a way to capitalize a state partnership bank in its first years, in addition to accumulating annual deposits from the state; one idea is to enlist the Federal Reserve in purchasing low-interest bonds issued specifically by or on behalf of the state bank, as has also been proposed for the capitalization of federal and regional infrastructure banks. 382

 

HOW TO GO FURTHER

A state partnership bank could provide individual depository and low-interest emergency loan services, which is not a function served by the Bank of North Dakota. Serving these functions would require significant infrastructure (such as bank branches and personnel throughout the state) and could involve competing with existing community banks rather than partnering with them. Policymakers should consider how these services would be made accessible and affordable in communities traditionally underserved by the banking system.

 

HOW TO TALK ABOUT IT

  • We need banks that work for people and communities, not the other way around. Today we give our public dollars to Wall Street banks that charge exorbitant fees and don’t invest in our communities, infrastructure, or small businesses. A state bank will put our public dollars to work for all of us.
  • Instead of serving the interests of private shareholders, a state bank will serve the public interest and be accountable for community needs and goals.  Rather than paying dividends to shareholders like the Wall Street Banks do, a state banks pays its dividends back to the state, helping to stabilize the public budget to fund community needs like education, medical care, and transit.
  • State banks support community businesses. Small businesses struggle to find the credit they need to expand because Wall Street banks are focused on trading and larger investments with a higher short-term payoff. State banks can fill the gap by expanding the volume and diversity of local lending, enabling a local hair salon to expand or a popular restaurant to open a second location.
  • In North Dakota, the state bank helped communities through the financial crisis. In the one state that has a state bank, North Dakota, not a single bank failed during the Great Recession and availability of credit for small businesses actually expanded. A state bank can help a state and its local economies be “financial crisis-proof.”

 

HOW IT WORKS

  • A state bank helps create jobs by expanding community banking and small business growth in the state economy. North Dakota has 4 times as many community banks per capita compared to the national average. 383  Community banks hold 60 percent of North Dakotan deposits, compared to only 16 percent nationally. Lending volume per capita by community banks in North Dakota is about 4 times as large as the national average for community banks. North Dakota has had consistently low unemployment over many years, and this is not solely due to the energy boom; neighboring states with similar economies, such as Montana and Wyoming, typically have higher unemployment.
  • State banks strengthen local economies by expanding small business lending. North Dakota is a leading incubator of successful business startups, ranking first in access to financing and overall best state to start a business in one 2017 study.384 Estimates show that comparable state bank performance in a bigger state, such as Washington, would generate approximately $2.6 billion in additional business lending and would create or retain more than 8,000 small business jobs in a single year, and more than $200 million in new state revenue over 20 years. 385 A state bank can also help to diversify community bank lending by distributing risk, potentially expanding affordable credit to businesses in traditionally underserved communities.
  • State banks make municipal financing for infrastructure, school construction, and other public goods less costly compared to Wall Street financing.386
  • A state bank is a buffer against the business cycle, insulating local banks and small businesses from volatility in the broader financial system. During the financial crisis, local banks in North Dakota were able to turn to the BND, which took unpaid loans off their books and injected new equity into the banks with its bank stock loan program (not a single North Dakota bank failed in the financial crisis of the late 2000s).
  • A state bank benefits the state by paying market-rate interest on state deposits and a yearly dividend from its lending profits, in addition to eliminating Wall Street fees. Between 1995 and 2014, the BND paid dividends to the state totaling nearly $400 million out of approximately $950 million in bank profits. 

 

ADDITIONAL RESOURCES

 

ENDNOTES


  1. Alyana Alfaro, “Murphy Unveils Plan to Revitalize NJ Economy, Create State Bank,” Observer, September 8, 2016, http://observer.com/2016/09/murphy-unveils-plan-to-revitalize-n-j-econom....
  2. Stacy Mitchell, One in Four Local Banks has Closed since 2008, Institute for Local Self-Reliance, May 5, 2015. https://ilsr.org/vanishing-community-banks-national-crisis/.
  3. Advocates for Independent Business and Institute for Local Self-Reliance, 2016 Independent Business Survey, https://ilsr.org/wp-content/uploads/2016/02/2016_Survey_Report_FINAL.pdf.
  4. Wallace Turbeville, Financialization and Equal Opportunity, Demos, February 10, 2015. http://www.demos.org/publication/financialization-equal-opportunity.
  5. Wallace Turbeville, Financialization and Equal Opportunity.
  6. Frank Newport, “Americans’ Confidence in Institutions Edges Up,” Gallup News, June 26, 2017, http://news.gallup.com/poll/212840/americans-confidence-institutions-edg...
  7. Direct from Main Street: Washington Small Business Views on Credit and Lending, Main Street Alliance of Washington and Alliance for a Just Society, 2011, http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/Mains... Direct from Main Street: Maine Small Business Views on Credit and Lending, Maine Small Business Coalition and Alliance for a Just Society, 2011, http://allianceforajustsociety.org/wp-content/uploads/2011/05/Direct-fro... Direct from Main Street: Oregon Small Business Views on Credit and Lending, Main Street Alliance of Oregon and Alliance for a Just Society, 2011, https://www.scribd.com/document/46774924/Direct-From-Main-Street-Report. 
  8. 2010-2017 Legislation to Create State Owned Financial Institutions, National Conference of State Legislatures, May 25, 2017, http://tre.wa.gov/wp-content/uploads/State-by-State-Public-Banking-Effor...
  9. The debate about the role of central banks in infrastructure investment, also known as People’s Quantitative Easing (PQE), is further advanced in the United Kingdom. See “People’s QE Pros and Cons,” World Finance, January 13, 2016, https://www.worldfinance.com/infrastructure-investment/government-policy.... Quantitative easing refers to central bank asset purchases with the purpose of stimulating the economy.  
  10. Stacy Mitchell, “How State Banks Bring the Money Home,” Yes Magazine, September 15, 2011, https://ilsr.org/how-state-banks-bring-money-home/.
  11. Richie Bernardo, “2017’s Best & Worst States to Start a Business,” Wallethub.com, https://wallethub.com/edu/best-states-to-start-a-business/36934/.
  12. Washington State Bank Analysis, Center for State Innovation, December 2010. http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-A....
  13. On Wall Street’s extortion of cities, see Wallace Turbeville, The Detroit Bankruptcy, Demos, November 20, 2013. http://www.demos.org/publication/detroit-bankruptcy.