Are State-Run Banks a Good Option?

a bank teller hands out cash - state banksLocal news outlets in the state of Washington are reporting that legislators there are considering launching a government-run bank to compete with the "too big to fail" banking behemoths. The idea might sound strange, but it's not without precedent: North Dakota has had a state-run bank since back in 1919, and by all accounts, it's successful.

Other states, including Illinois, Virginia, Massachusetts, Maryland, Florida, Michigan, Oregon, California and Hawaii, have looked into the idea of creating their own state banks, intrigued by the amount of money North Dakota has been able to earn through its bank.Creating a state bank would let Washington store its own money in a new financial institution rather than with Bank of America (where it's held now). The state is looking to North Dakota as a successful model to imitate; in that state, the government bank provides credit to local businesses, and buys mortgages and municipal bonds. It also acts as a "wholesaler," or a bank to which other banks turn for their funds.

One point in favor of a state bank is that its mission is to boost the economy of the state, not shareholders. It doesn't pay fat-cat salaries and doesn't invest in shadowy securities of dubious value. Washington legislators who support a public bank point out that Bank of America currently benefits from having the state's money in accounts; by keeping that money in-house, so to speak, the state could keep the benefit of that money. (Fast recap: Banks earn money from funds that are in deposit accounts -- like your checking account -- by lending it out for very short periods of time on the overnight market and collecting interest.)

If the state had its own bank, the thinking goes, it could participate in this short-term lending and reap the rewards. This interview with the president of the Bank of North Dakota goes into much more detail about how that state has been very successful turning tax income and other funds into a $4 billion economic engine. North Dakota's bank invests back into the state, both directly and indirectly, by working with neighborhood banks. Supporting local banks by giving them access to funds at good rates keeps those institutions from having to resort to bailouts. Bottom line: Everybody wins.

The Washington proposal isn't without controversy, though. The Seattle Timespooh-poohed the idea in its editorial column, and some state lawmakers -- like the treasurer -- say the state's doing just fine managing its finances right now.

The objections aren't totally baseless; North Dakota was blessed by passing through the real estate meltdown relatively unscathed. One can only imagine that things might be different if the state bank were the holder of millions of mortgages in, say, Florida instead. Worry about corruption or unwise investments also aren't totally unfounded. As many underfunded pension funds prove, public officials don't have any magic powers that keep them from making money-losing mistakes.

As an alternative to the "too big to fail" banks, though, the idea of a state-run bank is certainly one that's worth consideration.
Read Full Story

From Our Partners