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White Paper: Public Banking in the Northeast and Midwest

States

A report published by The Northeast-Midwest Institute

SebastianLederMacek-September2019

MoreinformationabouttheNortheast-MidwestInstituteisavailableatwww.nemw.org

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About the Institute The Northeast-Midwest Institute is a Washington, D.C.-based, nonprofit, nonpartisan public policy organization committed to economic vitality, environmental quality, and regional equity for the 18 states of the Northeast and Midwest. As a policy-focused institute with a 40-year track record of producing first-rate research, developing policy options, and building and supporting regional coalitions, the Institute has unique standing in that it was founded in response to calls by the Congressional Northeast-Midwest Coalition for a stable and trusted source of regional data and research as well as policy options and analysis. It is precisely these roots and relationships on Capitol Hill which now position the Northeast-Midwest Institute to chart a future that encompasses an expanded agenda of critical regional issues and to embark on a strategy to achieve increased impact. Executive Summary This report lays out the major models of public banking around the world and in the United States and examines their various advantages, obstacles, and feasibility of implementation. Specifically, it explores the Bank of North Dakota, the German Sparkassen Banks, and India’s Public Sector Banks. It also examines the current political momentum behind public banks in NEMW states and looks into how the concept has built increasingly more widespread support over the years throughout both regions. This report then lays out the main policy breakdowns that could be addressed by the utilization of a public bank, particularly uncompetitive financial markets, lack of development, state fiscal health, and efficiency issues. In response to each problem, the report details how public banks could serve as a remedy. To combat these issues, the report has outlined a set of recommendations for how a state should create, structure, and regulate a state bank to best achieve its goals and address the problems facing the state. This report recommends that all NEMW states adopt a public bank and do so with close attention to their circumstances and needs, tailoring the bank’s specifics to the nuances of the state. Public banking is not a panacea, but it can move states in the right direction for addressing critical investment gaps and realigning state resources with state interests.

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TableofContents:

I.Introduction........................................................................................................................4

II.BackgroundonPublicBanking............................................................................................6A.CaseStudies................................................................................................................................6

1.BankofNorthDakota......................................................................................................................62.Sparkassen....................................................................................................................................233.India’sPublicSectorBank.............................................................................................................33

B.PoliticalOpportunitiesfortheNortheast-Midwest....................................................................37

III.PolicyBreakdown............................................................................................................43A.UncompetitiveLocalFinancialMarkets......................................................................................43

1.TheProblem..................................................................................................................................432.ThePublicBankingSolution..........................................................................................................55

B.LackofDevelopment.................................................................................................................581.TheProblem..................................................................................................................................592.ThePublicBankingSolution..........................................................................................................61

C.StateFiscalHealth......................................................................................................................641.TheProblem..................................................................................................................................642.ThePublicBankingSolution..........................................................................................................67

D.Efficiency...................................................................................................................................69

IV.Implementation...............................................................................................................71A.Capitalization.............................................................................................................................71

1.InitialFundingSource....................................................................................................................722.InitialFundingAmount..................................................................................................................763.FundingOverTime........................................................................................................................78

B.Ownership.................................................................................................................................791.CharteringtheBank......................................................................................................................792.OwnershipStructure.....................................................................................................................79

C.Governance...............................................................................................................................811.BeginningOperations....................................................................................................................812.Management.................................................................................................................................82

D.OperationalStandards...............................................................................................................85E.Insurance...................................................................................................................................90F.StateProfitDividend..................................................................................................................91G.Activities...................................................................................................................................93

1.Deposits........................................................................................................................................932.Investments...................................................................................................................................943.OtherActivities.............................................................................................................................97

H.GovernmentPrograms..............................................................................................................98

V.Conclusion........................................................................................................................99

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I . Introduction Publicbanksarebanksownedbyagovernmententity—beitanationstate,localsub-region,administrativeterritory,orgovernmentagency.1Apublicbankisonlydistinguishedfromaprivatebankbyitsownership.Ifagovernmentwantedto,itcouldrunapublicbankexactlylikeaprivateone.Assuch,generalstatementsaboutpublicbanksaredifficulttomake.Instead,publicbanks,andthepotentialeffectstheymayhave,mustbeunderstoodthroughthedifferentwaysinwhichtheyhavebeenimplementedandrunbygovernments.Fortunately,examplesofpublicbanksarewidelyavailable.ThoughintheUnitedStatespublicbanksarefewandfarbetween,amajorityofcountrieshavesignificantpublicbankingsystems.ThisincludescountrieswithcloseeconomicandculturalsimilaritiestotheUS.Forexample,publicbankshavebeenimplementedsuccessfullyincountrieslikeAustralia,NewZealand,Canada,Germany,Switzerland,India,China,andJapan.2Thesecountrieshaveadopteddifferentmodelsofpublicbanking.Acrossthesevaryingmodels,publicbankshavetakenonuniqueroleswithintheirrespectiveeconomies.TheserolesincludeeverythingfromdevelopmentbanksinSouthAmericaandEastAsiatosavingsbanksinGermanyandspecific-purposepublicbanksinIndiaandChina.America’sonlypublicstatebank,theBankofNorthDakota(BND),operatesonapartnershipbankorbankers’bankmodel.Alongwiththesedifferingroles,publicbankshavebeenownedandgovernedbytheirgovernmentsindistinctiveways.Someareownedaspubliccompanies,withthegovernmentasthemajoritystockholder,someaslegallypublicinstitutions,some“dobusinessas”theirrespectivegovernment.Despitethesesignificantdifferencesmanypublicbanksdosharesomesimilarities.First,becausethegovernmentofthecommunityinwhichtheyoperateownsthesebanks,thecommunityindirectlycontrolsthem.Indeed,thesebanksoftenhavea“publicpurpose”formalizedintheirfoundingdocumentsorbusinessplanswhichcommandsthemtopursueprojectsthatareinthepublicinterest.3Thisdistinguishespublicbanksfromprivatebanks,whichusuallyoperatetomaximizeprofitsorshareholderreturns.Second,thesebanksoftenholdgovernmentassetsorfundsasdeposits,ifthebankisadepositoryinstitution,orascapitalforinvestments.Third,publicbanksareoftenlimitedbytheirfoundingdocumentsoroperationalguidelinestoinvestingorconductingbusinessintheirlocalcommunity.Thus,publicbanksputtheirassets,whicharefromthecommunity,backintothecommunityasinvestments.This,again,contrastswithprivatebanksthatusuallyoperatewhereverthegreatestreturnsareexpected.

1FAQOnPublicBanking,PublicBankingInstitute(2019),2,https://www.publicbankinginstitute.org/faq/.2PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),11,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.3Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),4,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.

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Publicbankshaveplayedanimportantroleinfinancialmarketsaroundtheworld.Thoughthesizeofpublicbankshasdecreasedrelativetoprivatefirmssincethe1970s,theyhaveremainedakeypartofthefinancialindustry.Inthemid-1990spublicbanksheldone-quarteroflargebankassetsinindustrializedcountriesandhalfoflargebankassetsindevelopingcountries.4Throughawaveofprivatizationsandstructuraleconomicreforms,thegovernment-ownedshareofassetsfellduringthe1990sand2000s.In2008,government-ownedbanksaccountedforonly16%ofworldwidefinancialassets.5But,astheGreatRecessionforcedgovernmentstointerveneintheirfinancialsystems,theimportanceofpublicbankshasincreased,ashastheirshareofassets.By2010,theirshareofassetshadrisento19%.6InterestinpublicbankshasalsoincreasedintheUnitedStates.Citizensandpolicymakershavebeguntoadvocateforcreatingpublicbanksinrecentyears.Thisinteresthasbeenexpressedprimarilythroughcallsforpublicbankingatthestateandlocallevel.ThisinteresthasbeensubstantialenoughtoleadlargecitieslikeNewYorkandWashingtonDCtoconsidertheidea.PublicbankswerealsoincludedintheGreenNewDealresolutionreleasedthisyear.7MostadvocatesofpublicbanksintheUShavepointedtotheBNDanditsperformanceinthewakeoftheGreatRecessionasevidenceforthebenefitsofpublicbanks.TheyseetheBNDasasuccessfulmodelforhowpublicbankscouldbedevelopedinotherAmericanstatesandlocalities.InterestinpublicbankingcontinuedtoincreaseaftertheTerritorialBankofAmericanSamoawasfoundedin2016.ThispublicbankonlyrecentlygainedaccesstotheUSpaymentssystemthroughtheFederalReserve.8Afternothavinghadacommercialloanmadeontheislandinfiveyears,AmericanSamoahasmovedtoaddressproblemsinitsfinancialmarketsandhasproventootherAmericangovernmententities,bothstatesandmunicipalities,thatthereisapathtowardsestablishmentofpublicbanksinthenationalregulatorysystem.9BuildingonthisgrowingenthusiasmandtheincreasingrealizationoftheopportunityforpublicbankingintheUS,thisreportwillassesstheviabilityofestablishingstatepublicbanksinstatesintheNortheasternandMidwestern(NEMW)UnitedStates.Thesestatesare:Connecticut,

4Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),6,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.5Cull,Robert;Peria,Maria;Verrier,Jeanne,BankOwnership:TrendsandImplications,WorldBankGroup(2018),4,http://documents.worldbank.org/curated/en/810621515444012541/pdf/WPS8297.pdf.6Cull,Robert;Peria,Maria;Verrier,Jeanne,BankOwnership:TrendsandImplications,WorldBankGroup(2018),4,http://documents.worldbank.org/curated/en/810621515444012541/pdf/WPS8297.pdf.7Anzilotti,Eillie,TheOneStrategyThatCouldFinanceTheWholeGreenNewDeal,FastCompany(2019),https://www.fastcompany.com/90364616/public-banking-can-finance-the-green-new-deal.8Blackwell,Rob,AmericanSamoaFinallyGetsaPublicBank.AndU.S.StatesareWatching,AmericanBanker(2018),https://www.americanbanker.com/news/american-samoa-finally-gets-a-public-bank-and-us-states-are-watching.9Blackwell,Rob,AmericanSamoaFinallyGetsaPublicBank.AndU.S.StatesareWatching,AmericanBanker(2018),https://www.americanbanker.com/news/american-samoa-finally-gets-a-public-bank-and-us-states-are-watching.

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Delaware,Illinois,Indiana,Iowa,Maine,Maryland,Massachusetts,Michigan,Minnesota,NewHampshire,NewJersey,NewYork,Ohio,Pennsylvania,RhodeIsland,Vermont,andWisconsin.Thoughthediscussionwillbespecifictoissuesfacingthese18states,advocatesforpublicbanksinotherstates,municipalities,orregionsoftheUnitedStatesmayalsofindhelpfulinformationinthisreport.Ingeneral,theproblemsthatpublicbankssolveandtheopportunitiestheyofferarenotspecifictoaparticularregionorstate.Statescanusethebasicpublicbankframeworkoutlinedinthisreportorotherresearchandmodifyitassuitstheneedsoftheircommunity.Thereportwillhavethreesections.First,abackgroundsectioncoveringcasestudiesofpublicbankingandpoliticalopportunitiesintheNEMWstates.Second,abreakdownofhowthecreationofapublicbankwouldsolveproblemsfacingthesestates.Third,asetofrecommendationsforhowthesestatesshouldcreateastatebank.Thisreportconcludesthatall18statesshouldestablishapublicbankinthenearfuture.Thougheachstateshouldpayattentiontoitsparticularcircumstances,andshouldadjustitsbankingmodelaccordingly,someformofpublicbankingcanbehelpfultoallofthesestates.

I I . Background on Public Banking Tolayouttheexistingimplementationofpublicbanks,thischapterwilllookatanumberofcasestudiesofpublicbanksthroughouttheworld.ThechapterwillthendetailthepoliticalopportunitiesforpublicbankingintheNortheast-Midwest.

A. Case Studies ThissectionwillbeginwiththeBankofNorthDakota(BND),whichistheparadigmaticexampleofpublicbankingintheUS.But,justbecausetheBNDhasachievedsubstantialsuccessandsharesacommonregulatory,political,andeconomicenvironmentwithmanyNEMWstates,itisnottheonlyinstructiveapproachtopublicbanking.ThepurposeofincludingtwoothercasestudiesistoofferideasforhowtorunapublicbankwhicharenoveltoanAmericancontextandrevealpotentialproblemsfacingpublicbanks.

1. Bank of North Dakota TheStateLegislatureofNorthDakotafoundedtheBNDin1919.10Startingwithjust$2millionincapital,itwastaskedwithprovidingloanstolocalbusinessesandlocalfarmers.11Itsresponsibilitiesstartedtogrowasthebank’sassetscontinuedtoincrease.Thebankexpandedbeyondloanstofarmersandbusinessestoservingabanker’sbankfunction.Inthisrole,the10TheBNDStory,BankofNorthDakota(2019),https://thebndstory.nd.gov/.11BND-FAQ,BankofNorthDakota(2013),1,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.

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bankstrengthenedlocalcreditmarketsbyprovidingneededservicestocommunitybanks.In1945,thestateofNorthDakotatookitsfirstshareofbankprofits.12Sincethen,thestatehasregularlyearnedincomenotonlyfrominterestonitsdepositsinthebank,butalsofromitsshareofbankprofits.Throughoutthenexthalf-century,thebankhascontinuedtoexpanditssuiteofprogramstoextendcredittofarmers,businesses,smallbanks,andthestate.ThefirstkeytounderstandingtheBNDmodelistounderstandhowthebankisrelatedtothestateofNorthDakota.Thebankischarteredbythestate.13IntheUnitedStates,bothstatesandthefederalgovernmentcancharterbanks–theycangiveauthorizationforbankstobeginoperationsbyincorporatingthebankandspecifyingitsrightsunderthelaw.Second,theBNDissetupasaDBAofthestate.14DBAstandsfor“DoingBusinessAs.”BusinessesandotherorganizationsoftenuseaDBAsetuptoworkunderanassumedortradename.RegisteringaDBAallowsanorganizationtoconductfinancialtransactionsandlegalactivityunderasecondnameofitschoice.ThismeansthattheBNDbeingaDBAofthestateisthesameassayingthat“NorthDakota[isdoing]businessastheBankofNorthDakota.”15Inotherwords,thebankisnotonlyownedbythestate,itisthestate.Thestateandthebankarethesameentity,justonethatisoperatingunderdifferentnamesforbusinesspurposes.Thisownershipmodelmeansthatthebankandthestateareintimatelyconnected.Becausetheyaretechnicallythesameentity,bankofficialshavecloserelationshipswithgovernmentofficials.Thiscloseconnectionmeansmorecommunicationandcoordinationbetweenthestateandthebank.Perhapsmostimportantly,thisownershipmodelavoidsseverallegalissuesthatmayariseintheAmericanregulatoryframework.Hadthebankbeencharteredbyafederalagency,thiswouldhavesignificantlyimpededtheabilityofthebanktooperateaccordingtothestate’swishes.16Thefederalagencywouldbeabletodefinethetermsofthecharter,includingitsrequirementsforgrantingthecharter.Thisalsowouldhaveplacedthestate’sbankingactivitiesunderthejurisdictionofthefederalagency.Furthermore,ifafederalcharterwasgrantedtoaDBAbank,itwouldraisestates’rightsconcernsbecauseitwouldgiveafederalagencydirectcontroloverthestate.Instead,usingthestatecharterensuresthatthebankcanbefoundedandoperatedaccordingtothestate’sownbankingrulesandstandards.17

12BND-FAQ,BankofNorthDakota(2013),1,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.13PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),25,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.14PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),12,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.15PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),12,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.16PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),27,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.17PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),27,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.

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CreatingthebankasaDBAofthestatealsogivesthebankgreateraccesstocredit,especiallyearlyinitsestablishment.Becausethebankisthestate,thebankcancountstateassetsonitsledgers,whichallowsittoextendgreateramountsofcreditbasedonthoseassetvalues.Mostoftheseassetsarenotstoredinthebank.Yet,thebankisstillbeabletoloanonthebasisoftheseassets,evenbeforeithashadtheopportunitytobuilditsownsubstantialcapitalbase.TheBND’sownershipmodeliscombinedwithagovernancestructurethatdefinesthehigh-levelandlong-termmanagementoftheinstitution.In1919,thebankwascreatedalongsideaStateIndustrialCommission,whichwaschargedwithrunningthebank.18Thiscommissionismadeupofthreeofficials:theGovernor,theAttorneyGeneral,andtheAgricultureCommissioner.19TheGovernoristhechairofthiscommissionandeachmemberiselectedeveryfouryears.20TheIndustrialCommissionappointsthebankPresidentandapprovesallseniorVicePresidents.21Thus,theseelectedofficialsserveanimportantroleinoverseeingthebank’slong-termoperations.Crucially,astheonlypopularlyelectedofficialswithinvolvementinthebank’sgovernance,theseofficialsensureaccountabilityandtransparencyinthebank’soperations;accountabilitybecausetheseofficialscancertifythatthebankcontinuestomeettheneedsofitscommunityandtransparencybecausetheyoverseetheoperationsofthebank.Thecommissionisassistedinitsoversightofthebankbyanotherboardtaskedwithreviewingthebank’soperations.In1969,statestatuteestablishedtheAdvisoryBoardofDirectorstoassisttheIndustrialCommissioninitsimportanttasks.22TheIndustrialCommissionchoosesthisseven-memberboardwithincertainrestrictions.23TheboardmusthaveatleasttwomemberswhoareofficersofbankswhosemajoritystockholdersareNorthDakotaresidents.24Additionally,atleastonemembermustbeanofficerofacharteredfinancialinstitution.Alongwiththeserequiredappointments,theGovernorappointsaChairman,ViceChairman,andSecretaryfortheboard.Theseboardmembersremainontheboardforfouryears,whichensuresthateachnewIndustrialCommissionselectsitsownAdvisoryBoardmembers.25Duetotheserequirements,theAdvisoryBoardhasbothsufficientexpertiseandtheextensivelocalconnectionsneededtobethebank’swatchdog.Astheboardcanunderstandthebank’sactivitiesandhasitsownconnectionstothecommunitiesthatthebankisintendedtoserve,

18TheBNDStory,BankofNorthDakota(2019),https://thebndstory.nd.gov/.19Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),11,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.20PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),20,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.21PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),20,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.22BND-FAQ,BankofNorthDakota(2013),1,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.23Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),2,http://cms.mildredwarner.org/summaries/hussam2018.24Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),2,http://cms.mildredwarner.org/summaries/hussam2018.25Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),2,http://cms.mildredwarner.org/summaries/hussam2018.

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theboardplaysakeyroleininterpretingthebank’sactionsforthecommission.Therecommendationsoftheboardregardingthelong-termoperationsofthebankareacrucialcomponentofcertifyingthatthecommissioncanholdthebankaccountable.26Theserecommendationscoverthebank’smanagementandinternalpoliciesandprocedures,aswellasitsservicesandoutward-facingactivities.27Together,thetwoboardsprovidethehigh-leveloversightandgovernanceofthebank.Thisgovernanceismaintainedinanaccountableandtransparentwaybecauseofthemannerinwhichthesetwoboardsareorganizedrelativetothebank.Thatis,theboardsaregivenboththeaccessandtheimpetustooverseethebank’sactivities.BecauseeachnewIndustrialCommissionappointstheAdvisoryBoard,eachboardwillhavethesameviewsontheproperroleofthebankasthecommissionmembers.ThisalignstheincentivesofthetwoboardsandensuresthattheyworktogethertodowhatisbestforNorthDakotans.Thus,thesetwoboardsworkintandemtoensurethatthebank’smissionisupheld.Ontheotherhand,thebank’smanagersaregivensufficientindependenceintheirday-to-dayoperationstoavoidunduepoliticalinfluence.ThoughtheGovernorappointsthePresident,theirtermsdonotcoincideandtheappointmentsarenon-partisan.Almostalloftheleadershipischosenfromwithinthebankitself.28Asaresult,theappointmentsallowforthepoliticalindependenceofthebankmanagers.TheExecutiveCommitteemanagesthebank’sday-to-dayactivities.Thiscommitteeismadeupofsevenmembers,includingthePresidentandvariousVice-Presidentsinchargeofdifferentbankfunctions.29Aspreviouslynoted,thePresidentisappointedwhiletherestofthecommitteeareselectedbythePresidentbutaresubjecttoIndustrialCommissionapproval.Thefullcommitteemembershipis:thePresidentandCEO,theChiefBusinessDevelopmentOfficer,theChiefCreditOfficer,theChiefAdministrativeOfficer,theChiefTechnologyandOperationsOfficer,theChiefFinancialOfficer,andtheChiefRiskOfficer.Overall,thecommitteemanages168BNDemployees.30Thebankitselfhasanumberofnoteworthyoperationalprocesses.Principalamongtheseisitsrelationshipswithotherfinancialinstitutions.Thoughthebankholdsdeposits,itisnotamemberoftheFederalDepositInsuranceCorporation(FDIC).31Asaresult,theFDICdoesnotinsurethebank’sdeposits.Instead,“NorthDakotaCenturyCode6-09-10providesthatallBNDdepositsareguaranteedbythefullfaithandcreditoftheStateofNorthDakota.”32

26PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),20,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.27TheBNDStory,BankofNorthDakota(2019),https://thebndstory.nd.gov/.28PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),20,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.29BND-FAQ,BankofNorthDakota(2013),2,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.30BND-FAQ,BankofNorthDakota(2013),2,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.31TheBNDStory,BankofNorthDakota(2019),https://thebndstory.nd.gov/.32TheBNDStory,BankofNorthDakota(2019),https://thebndstory.nd.gov/.

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Furthermore,thebankhasanaccountwiththeFederalReservethroughitsrelationshipwiththeMinneapolisFederalReserveBankwhichallowsittoclearchecks,deposititsexcesscash,maintainitsreserverequirementstandards,andhaveaccesstodiscountwindowborrowing.33ThebankalsohasestablishedrelationshipswithbankswithinNorthDakota.ThebankhasacloserelationshipwithmostofthecommunitybanksinNorthDakota.Ofthe94separatebanksinNorthDakota,theBNDhasaworkingrelationshipwith85ofthem.34Finally,thebankhasstrictproceduresinplacetomanagerisk,liquidity,anditsportfolioofinvestments.Asloansmakeupthelargestproportionofitsassets,theloanapprovalprocessisparticularlyimportanttotheoperationsofthebank.Additionally,arigorousloanapprovalprocessnotonlymanagesrisk,liquidity,anddiversityofinvestments,butitalsoensuresthatthebankreceivesadequatereturnsonitsassetsandthatitfulfillsitsmissiontoimprovetheNorthDakotaneconomy.Theloanapprovalprocessbeginswhenthebankreceivesanapplicationforapotentialloanopportunity.Dependingonthetypeofloan,thismaycomefromtheprospectiveborrowerorfromacommunitybank.Regardlessofwheretheloanapplicationoriginatedfrom,anassignedloanofficerhandlesitfirst.35Loanappraisalbeginswitha“scoringmatrix,”whichispartofthebank’sduediligenceprocess.36ThissystemwasdevelopedinpartnershipwiththeDepartmentofTransportation,DepartmentofHealth,andtheNorthDakotaPublicFinanceAuthoritytoassessthepublicneedfortheproposedinvestmentopportunity.Afteranalysisandassessmentoftheloanopportunity,includingtheriskassociatedwiththeinvestment,therequestedloanprincipal,theproposedinterestratecharged,aswellasthepublicbenefitsoftheloanopportunity,theloanofficermustthenprepareareportfortheloantobereviewedbyahigherauthority.37Theloanofficerhasalegallendinglimitoverwhichheorshecannotapproveloans.38AnyloansabovethislimitmovetoaLoanCommitteethatismadeupofmajorlocallenders.Shouldtheloanbeabovethelendinglimitofthiscommittee,theloanwouldbeconsideredbytheInvestmentCommittee,whichismadeupofseniorbankmanagers.39Forthelargestloans,onesthatwouldcommitsubstantialbankcapitaltoasingleinvestment,boththeAdvisory

33TheBNDStory,BankofNorthDakota(2019),https://thebndstory.nd.gov/.34PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),19,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.35PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),18,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.36Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),3,http://cms.mildredwarner.org/summaries/hussam2018.37PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),18,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.38PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),18,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.39PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),18,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.

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BoardandtheIndustrialCommissionreviewtheloanopportunity.Thus,theloanprocessgivesattentiontoloansonthebasisoftheircapitalcommitment,andensuresthatthemostsubstantialinvestmentsaretheleastrisky.Thisisbecausetheseloansmustbeacceptedbyanincreasingnumberofofficers,withincreasingamountsofexperienceandexpertiseinthefinancialsystem.Thelargestloansmustnotonlybeacceptedbyaloanofficer,aswellasseniorbankofficialsandmajorlocallenders,butalsobythetopofthebank’shierarchy.Thus,riskminimizationandprioritizationofpublicimpactareintegratedintothebank’sloanapprovalprocess.ThisisalsoapparentinthescoringmatrixsystemandthefactthatmanyoftheapproversoftheloanshaveavestedinterestintheperformanceoftheNorthDakotaneconomy.NotonlyaretheapproversofloansallresidentsofNorthDakota,butmanyofthemarealsoplacedwithinrolesthatrelyontheeconomichealthofNorthDakota,suchasthemajorlocallendersandthepoliticiansoftheIndustrialCommission.Thisincentivizestheseindividualstobeexpresslycarefulaboutapprovingloansthatdonotmeetthebank’sstrictloanunderwritingstandards.40Sothebankhasstrongmanagementofriskonthemicro-level--atthelevelofapprovalofindividualloans--butalsoonthemacro-level.Macro-levelmanagementofriskincludesmaintainingloanlossreserves–excesscashreservesheldtoaccountforlossesfromloandefaults.TheBND’sAssetLiabilityCommitteeconstantlymonitorsthesereservestoensuretheyaresufficienttocoverexpectedlosses,andin2010theywere1.79%,lessthantheaverageforsimilarlysizedbanksof2.03%.41ThisindicatesthattheBNDhasfewerlossesonloansthancomparablefinancialinstitutions.TheBNDalsokeepsstrictcapitalrequirements.Itmaintainsitscapitalratiosat8to10%foralllevelsofcapital.42ItsstandardsarehigherthantheFederalReservestandardsandthusaresaferthanmostotherbanks.43Asaresultofthesestrictcapitalratiocontrols,thebankhasanA-pluslong-termratingfromStandardandPoor’s.44Additionally,thebankhasanindependentdepartmentthatreviewscreditrisksonallinvestmentsandwithallpotentialfinancialpartners.45Thisreviewprocesscreatesanextra40Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.41Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.42Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.43Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.44PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),21,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.45Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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layerofduediligenceininvestmentoperations.Overallportfolioriskismanagedbystandardsthatprohibitabove-averageriskloans—loansthatofferbelow-marketinterestrates—andotherriskierbankactivities.Lastly,thebanksubjectsitselftoregularauditingbothexternallyandinternallytomanageitsriskposition.TheBNDisannuallyauditedbyaCPAfirm.46Thisfirmpubliclypresentsitsfindingseachyear.47Additionally,theNorthDakotaDepartmentofFinancialInstitutionsauditsthebankeveryotheryearandthebankhasitsowninternalauditdepartmentthatperformsregularcheckupsonthebank’sposition.48ThisoperationalmodelminimizesrisksrelativetorewardsbyonlyengagingininvestmentswhichpromiserelativelycertainpublicbenefitsforNorthDakotaandprivatereturnsforthebank.And,itsucceedsbygrantingthebank’smanagerssufficientautonomyfrompoliticalinfluenceonbankdecisions.Thebankconductsitsfinancialactivitiesusingdepositsasthereserveswithwhichitcreatesloans.Thesedeposits,uniquely,comemainlyfromthestate.Insteadofdepositingitsrevenuesinlargeprivatecommercialbanks,thestateofNorthDakotaputsthesefundswithintheBND.49Specifically,thisislimitedtoallstatefunds.So,statetaxesandcollectedfees,andthefundsofallstateinstitutionsaredepositedwithintheBND.50But,trustsmanagedbythestate,suchaspensionfunds,arenot.Thedepositsofthebankarethestate’srevenuethatwillbeheldasdepositsuntilthestatespendsitonexpenseslikecontracts,procurement,andpayroll.Theoriginalbill,whichcreatedtheBNDin1919,mandatedthatallpublicfundsweretobedepositedinthebank.51But,arevisedmeasurein1921allowedpoliticalsubdivisionsofthestate,butnotthestateitselforitsinstitutions,todeposittheirfundselsewhere.52Still,theBNDdoestakedepositsfromnon-stateactors.Asapartofitsoriginallegislation,thebankcannotpaydifferentinterestratesondepositsfromthestateversusnon-statedepositors.53

46PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),18,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.47Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.48TheBNDStory,BankofNorthDakota(2019),https://thebndstory.nd.gov/.49Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),5,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.50WashingtonStateBankAnalysis,CenterforStateInnovation(2010),2,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.51BND-FAQ,BankofNorthDakota(2013),2,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.52BND-FAQ,BankofNorthDakota(2013),2,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.53BND-FAQ,BankofNorthDakota(2013),2,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.

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Thesenon-statedepositshavetypicallymadeuponlyaround10to20%ofthebank’sdeposits.54Mostofnon-statedepositscomefrommunicipalandcountygovernmentsfromwithinthestateaswellaslocalbusinessesandnon-profitorganizations.55Whileindividualsmayalsodeposittheirfundsinthebank,thesemakeuponly2%ofthebank’stotaldeposits.56Asmentionedearlier,thesedepositsgoonthebank’sledger.Thedepositsfunctionasreservesthatallowthebanktocreateloans.Assuch,thedepositsallowthebanktomaintainitsstrictlycontrolledcapitalandreserveratios.Withthemajorityofitsdepositscomingfromthestate,thebankhasauniquebenefitnotaffordedtoprivatebanks.Thatis,theBNDknowsthatamajorityofitsdepositswillnotbewithdrawn.Additionally,itknowswhenitshouldexpectwithdrawalsfromthestate.Thisallowsitnotonlytomanageitsliquiditysothattherearealwayssufficientreservesforthestate’sexpenses,butalsotomanageitsloanportfoliosothatitwillnotbeadverselyimpactedbydepositwithdrawals.ThismeansthattheBNDhassubstantialfreedomtoextendcreditinpursuitofitsmission,afreedomthatallowstheBNDtoengageinavarietyofdifferentactivitiestoimprovetheNorthDakotaneconomy.TheprimaryrolethattheBNDinhabitsthroughitsloanactivitiesisthatofabankers’bank.Thatis,theBNDprovidesanumberofservicestocommunitybankswithinNorthDakota.Infact,theBNDcharterstatesthatitmustsupport,andnotcompetewith,localbanks.57ThemostsubstantialwayinwhichtheBNDhelpslocalbanksisthroughpartnershiploans.TheBNDdoesnotdomostofitslendingdirectly.58Instead,itworkswithotherfinancialinstitutionstoprovidefundingforinvestmentsinawaythataidsboththestateeconomyandlocalfinancialinstitutions.Localbanks,includingcommunitybanksandcreditunions,oftenhavetroubleprovidingcapitalforloanapplicants.ThesebankstendtobesmallandlackthereservesneededtoprovideextensiveloanswhilealsosatisfyingFederalReserverequirements.Asaresult,thesesmallerbankstrytomakejointloanswithlargerfinancialinstitutions.Thelargerinstitutionwillsplittheloanamountinexchangeforapartofthereturns,whilethesmallbankwillmaintainitsrelationshipwiththeloanapplicantandhandletheservicingoftheloan.59Inmanycases,thelargerinstitutionsthatsmallerbanksmustturntoarebiggerprivatebanks.Inthesecases,thebiggerbankcanuseitsparticipationintheloantogetinformationontheloanapplicantand,ifthepotentialborrowerisagoodrisk,usethistoattracttheirfuturebusiness.Asaresult,“communitybankersroutinelycomplainthatparticipationloandealswith,say,WellsFargoor

54WashingtonStateBankAnalysis,CenterforStateInnovation(2010),2,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.55WashingtonStateBankAnalysis,CenterforStateInnovation(2010),2,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.56WashingtonStateBankAnalysis,CenterforStateInnovation(2010),2,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.57Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),6,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.58BND-FAQ,BankofNorthDakota(2013),3,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.59BND-FAQ,BankofNorthDakota(2013),3,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.

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BankofAmerica,turnintolostbusiness.”60TheBNDfillsthelargeinstitutionroleinNorthDakotabybeingawillingpartnershiplenderwhichdoesnotcompetewiththesebanks,butinsteadprovidesadditionalcredittobothincreaseoverallinvestmentinthestateandthestrengthoftheselocalbanks.Thebankengagesinanumberofotheractivitiesdesignedtoincreasethelendingcapacitiesofsmallbanksaswell.Thisincludespurchasingloansfromcommunitybankportfoliostofreeupcapitalforadditionalinvestments.61Thebankalsoengagesindirectbankstocklendingtosmallerbanks.Thisinvolvespurchasesofcommunitybankstockandsecuritiestoallowsmallerbankstoexpandtheirownlendingactivity.62Furthermore,thebankusesitsdiscountwindowborrowingauthoritytoprovidecreditatcheaperinterestratestobanks.ThediscountwindowallowstheBNDtoborrowdirectlyfromtheFederalReserveatlowerthanmarketrates.63Anotheravenueforincreasingsmallbanks’liquidityandlendingcapacityemployedbytheBNDislettersofcredit.AletterofcreditservesasaguaranteefromtheBNDonbehalfofthesmallerbankthatitwillcoveranyfundsmissinginafinancialtransaction.Assuch,smallerbankscanreplacetheirsecuritieswithlettersofcreditfromtheBND,whichallowsthemtomakemoreloans.64Thisisessentialforsmallercommunitybanksbecausetotakemanypublicdepositstheyneedtoholdsecurities.Insteadofbuyingsecurities,thesebankscanuselow-interestBNDlettersofcredit“topledgeforthedeposit”andusethefundsthey’vesavedtoinvestinthecommunity.65Finally,thebankoffersavarietyofservicestosmallerNorthDakotabanks.Inparticular,thebankhasanautomatedclearinghousesystemwhichsmallerbankscanuse,itofferscheckclearing,itallowssmallerbankstouseitsaccountattheFederalReserve,anditprovidescurrencytosmallerbanksthatneedphysicalcoinage.66Whilebankers’bankactivitiesimprovelocalcreditmarketstheBNDalsoengagesinmoredirectlydevelopmentalactivities.Manyofthepartnershiploansthebankparticipatesinhaveadevelopmentalfocus.Theseloansaremadetolocalcommunitymembers,usuallytolocalbusinessesorlocalgovernments,andtheyrepresentasubstantialinvestmentinthestate’s

60Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.61WashingtonStateBankAnalysis,CenterforStateInnovation(2010),3,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.62WashingtonStateBankAnalysis,CenterforStateInnovation(2010),12,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.63PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),20,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.64PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),20,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.65PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),21,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.66BND-FAQ,BankofNorthDakota(2013),8,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.

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economy.67Manyoftheloansthatthebankofferscomethroughitsprogramstargetedatfarmers,smallbusinesses,ordevelopmentprojects.Acrossthese18differentprograms,thebankoffersfavorable-rateloansforparticularpurposes,fromimprovingcommunitywaterqualitytofundingsmallbusinesscapitalexpansionandhelpingfarmsdiversifytheirincomestreams.68Someoftheseprogramsalsoofferinterestratebuy-downstoreduceborrowingcostsforprojectsthatwouldbenefitthepublic.69OneillustrativeprogramistheBND’sInfrastructureLoanFund,startedin2015.70Thefundinvestsinwatertreatmentplants,sewers,andtransportationinfrastructure.71With$150millioninstart-upcapitalization,thefundpromisestobuildessentialinfrastructureinthestatethroughaffordableloans.Thefundrequiresthatapplicantsseekoutothersourcesoffundingfirst,butcanprovidesupplementaryfundingforpubliclyimportantopportunities.72Themaximumloansizeis$15millionandinterestchargedonloansislimitedtoa2%fixedrate.73Thisrateisabout1%lowerthanwhatcitieslikeGrandForkscouldobtainforasimilarloanfromprivatebanks.74GrandForks,however,wasabletogetthislowerratethroughtheInfrastructureFund.Additionally,thecitysavedmoneythroughtheprogrambecauseoftheflexibilityofwheninterestratepaymentswereactivatedfordifferentcomponentsoftheloanfunding.Moreover,theBNDaidedthecitywithbondissuance,loweringitscostsfortakingouttheloan.75Overall,theloanprogramloweredinfrastructureinvestmentcostssubstantiallyforGrandForksandpromisestodosoformanyothercities.ThefundrepresentsaconcertedeffortbytheBNDtoprovideaffordablecredittoimproveimportantdevelopmentalfactorsinthestate.Thebankdoesalsoprovidesomeconsumerlendingprograms.Specifically,itisengagedintwoconsumer-relatedactivities:residentialandstudentloans.Thebankparticipatesinasecondarymarketformortgages,ensuringthatthereisdemandformortgagesgrantedbysmallerbanks.76Thismakesbanksmorewillingtocreatemortgagesandtoofferfavorabletermstohouseholdshopingtopurchaseresidentialproperty.77Thebankbothhelpstoserviceandprovidesdirect67BND-FAQ,BankofNorthDakota(2013),3,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.68BND-FAQ,BankofNorthDakota(2013),4,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.69BND-FAQ,BankofNorthDakota(2013),5,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.70Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),2,http://cms.mildredwarner.org/summaries/hussam2018.71Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),2,http://cms.mildredwarner.org/summaries/hussam2018.72BNDInfrastructureLoanFund,BankofNorthDakota(2019),https://bnd.nd.gov/infrastructure/bnd-infrastructure-loan-fund/#1443041252788-d3b587b4-c196.73BNDInfrastructureLoanFund,BankofNorthDakota(2019),https://bnd.nd.gov/infrastructure/bnd-infrastructure-loan-fund/#1443041252788-d3b587b4-c196.74Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),3,http://cms.mildredwarner.org/summaries/hussam2018.75Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),3,http://cms.mildredwarner.org/summaries/hussam2018.76BND-FAQ,BankofNorthDakota(2013),8,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.77WashingtonStateBankAnalysis,CenterforStateInnovation(2010),3,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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loanstostudentsattendingschoolinNorthDakota.78Theseloansofferpost-secondarystudentsinNorthDakotafavorableratesthatmakehighereducationmorewidelyaccessible.79Thebankhasextensiveinvolvementwithboththestateandmunicipalgovernments.Inthisrole,thebankprovidesdirectaidtothesegovernments.Themostimportantbenefitthatthestatereceivesdirectlyfromthebankisdividendsfromthebank’sannualprofits.Theseprofitsareoftenquitesubstantial.Thebankusuallycontributesaroundhalfofitsprofitstothestategeneralfundeachyear.80Thishastranslatedtoaround$30millionayearoverthepast15years.81In2009,thebankcounted$58millioninprofits.82Since1945,whenthebankbeganreturningpartofitsprofitsbacktothestate,theBNDhasreturnedoverabilliondollarstothestate.83Nordoesthebankmaketheseprofitsbypayingthestateverylowinterestratesonitsdeposits.Indeed,theBNDpaysthestatetreasuryamarket-averagerateforitsdeposits.84Forexample,in2010thestatereceived$23.4millionfrominterestpaymentsondeposits.85Whencombinedwiththeprofitsdividendthestatereceivedfromthebankthatyear,thestate’sreturnperdollardepositeddwarfednearbyWashington’s,whichdepositedallofitsfundsinprivatebanks.WhileWashingtonreceived2.53centsperdollardeposited,NorthDakotareceived5.28centsperdollardeposited.86Whenthestatereceivesaprofitdividendishighlyflexible.TheIndustrialCommissionaswellasbankleaders,whonegotiatewithstatelegislatorsonthefinaldollaramountreturned,determinetheamountthatisreturnedtothestate.87Thisflexibilityallowsthestatetodrawon78WashingtonStateBankAnalysis,CenterforStateInnovation(2010),3,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.79BND-FAQ,BankofNorthDakota(2013),9,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.80Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),5,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.81Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.82Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.83BankofNorthDakota2018AnnualReport,BankofNorthDakota(2018),10,https://bnd.nd.gov/annual-report/.84Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.85Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.86Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.87WashingtonStateBankAnalysis,CenterforStateInnovation(2010),18,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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bankprofitsintimesofneed,butitcanalsoreinvesttheseprofitsbackintobankcapitalineconomicboomtimes.Recapitalizationofprofitsmultipliestheimpactofthebankbyallowingittofurtherincreaseitslendingactivities.Thebankdoesmorethanreturnprofitstothestateintimesoffiscalneed.Ithasalsorepeatedlyhelpedthestatemanageitsfinancesduringeconomicdownturns.Aftertheburstofthedot-combubble,theBNDpaidaone-timedividendtothestatetoclosea$40millionbudgetdeficit.88Thebank’sactivitiesduringtheGreatRecessionalsoensuredthatlocalfinancialmarketsremainedstable,withnobanksclosinginNorthDakotaduringthistime.89ThebankcanevenlendmoneytothestateataninterestratesetbytheIndustrialCommissioninthemidstofeconomiccrises.90Thebankalsoprovideshelpfulservicestomunicipalgovernmentstoaidthemintheirpublicinvestments.First,theBNDprovidescounseltomunicipalitiesthathelpsthemobtaincapitalatcheaperratesthantheywouldotherwise.91Overitslifetimeithashelpedwith225municipaldebtissues.92Second,ashighlightedbytheInfrastructureLoanFunddiscussedabove,thebankprovidessomedirectandlow-interestinvestmentinimportantpublicinvestments.Finally,thebank’sTrustDepartmentoffersCorporateTrustservicestothestateanditssubdivisions.93Currently,thebankisatrusteefor52municipalissues.94Thebank’s2018financialrecordsshowthescaleofitsactivities.In2018,thebankhadarecordannualprofitof$159million.95Itsassetstotaledover$7billionwhileitheld$4.77billionindeposits.96TheBNDhadnearly$2billioninitsinvestmentportfolioand$4.584billioninloans.97Oftheseloans,14.5%focusedonagriculture,44.5%onbusiness,15.2%forresidentialloans,and25.8%instudentloans.98Whilecausalityinmacroeconomicmeasurementsisdifficulttodetermine,NorthDakotahasconsistentlyoutperformedcomparablestatesonkeyeconomicindicatorswherethebank’s

88Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.89Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.90Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),2,http://cms.mildredwarner.org/summaries/hussam2018.91Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),3,http://cms.mildredwarner.org/summaries/hussam2018.92BND-FAQ,BankofNorthDakota(2013),9,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.93BND-FAQ,BankofNorthDakota(2013),9,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.94BND-FAQ,BankofNorthDakota(2013),9,http://library.nd.gov/statedocs/BND/BankofND20101101.pdf.95BankofNorthDakota2018AnnualReport,BankofNorthDakota(2018),4,https://bnd.nd.gov/annual-report/.96BankofNorthDakota2018AnnualReport,BankofNorthDakota(2018),4,https://bnd.nd.gov/annual-report/.97BankofNorthDakota2018AnnualReport,BankofNorthDakota(2018),6,https://bnd.nd.gov/annual-report/.98BankofNorthDakota2018AnnualReport,BankofNorthDakota(2018),7,https://bnd.nd.gov/annual-report/.

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activitiesshouldbemosteffective.Assuch,itisverylikelythatthebankhascausedthesebenefitsinthelocaleconomy.

99AboveisagraphofNorthDakota’sRealGrossDomesticProductfrom2000to2018.RealGDPisGDPadjustedforinflation,soallgrowthonthisgraphrepresentsincreasesinproductiveeconomicactivity.Thedataisrepresentedintermsofmillionsofdollars.TheNorthDakotaneconomy’sproductiveactivitydoubledinlessthantwodecades.Noticetheactivityintheearly2000’sandfrom2008to2010.ThesewereperiodsofsevereeconomicandfinancialcrisisintheUS,thefirstfromtheburstingofthedot-combubble,thesecondfromtheGreatRecession.Yet,inbothoftheseperiodsofeconomicdownturnNorthDakotacontinuedtogrow.Buttheperiodofthemostgrowthisfrom2011to2014,duringwhichtimeNorthDakota’soilproductionboomed.ThisextraoilincomemayhaveprovidedamajorityofthesebenefitsinsteadoftheBND.So,tounderstandtheinfluenceoftheBNDontheeconomy,itwillbehelpfultolookatsomeindicatorswhereitwouldhavehadamoredirectimpact.

99RealGDPbyState,BureauofEconomicAnalysis(2019),https://apps.bea.gov/itable/iTable.cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1.

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TheseindicatorsshowsthattheBNDhasmadeloanstowardsdevelopment,eveninthemidstofcrisis,whilealsomaintainingthestrengthoflocalcommunitybanksandthecompetitivenessoflocalcreditmarkets.Asaresult,NorthDakota’sbankingsystemisstrongerthanitsneighboringstates’.ThisinfluenceillustratesthepositiveimpactoftheBNDonNorthDakotan’slives.Evenfrom2007to2009,theBND’sbusinesslendingincreasedby35%.100Despiteincreasedlendingunderriskyeconomiccircumstances,theBNDhadloanlosseslowerthanthenationalaverageforsimilarsizedbanks.101Thecountercyclicalloanactivitybolsteredlocalcommunitybanksandlendingthroughoutthestate.Asaresult,inthefiveyearsfollowingtheendofthecrisis,NorthDakota’sloanamountspercapitawere175%higherthantheUSaverage.102Duringthissameperiod,NorthDakota’sbankshavemaintainedhigherloan-to-assetratiosthanneighboringstateswithsimilareconomiessuchasWyoming,SouthDakota,andMontana.103Aloantoassetratiomeasureswhatpercentageofabank’sassetsareinloansandassuchisameasureofhowmuchofthebank’sassetsarecommittedtoproductiveinvestments.This“keymeasureofdirecteconomicimpact”remainedhighinNorthDakotaduetotheBND’scountercyclicalefforts,astheseratiosdroppedinNorthDakotabanks33%to45%lessthanbanksincomparablestates.104

100Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),5,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.101Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),5,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.102Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),5,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.103Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),5,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.104WashingtonStateBankAnalysis,CenterforStateInnovation(2010),1,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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105TheabovechartfurtherunderlinesthewayinwhichtheBNDhelpedtheNorthDakotaneconomythroughmaintainingthehealthofitsfinancialsystem.TwoobservationsareofnoteintheabovedatarepresentingloanspercapitabycommunitybanksforNorthDakota,neighboringstates,andtheUSatlarge.First,NorthDakotancommunitybanks’loanspercapitawerealreadyhigherthanallothermeasuresbeforethefinancialcrisis.Second,thoughtherewasadownturnin2009,NorthDakotancommunitybanksreboundedintheirloanactivitymuchmorequicklyandtoamuchgreaterdegreethanotherbanks.Whileloanscontinuedtodecreasefrom2009to2010inallneighboringstatesandonaverageintheUnitedStates,they

105Mitchell,Stacy,PublicBanks:BankofNorthDakota,InstituteforLocalSelf-Reliance(2015),https://ilsr.org/rule/bank-of-north-dakota-2/.

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notonlyincreasedduringthissameperiodinNorthDakota,butalsoincreasedcloseto2008levels.Clearly,theBNDhadapositiveimpactonmaintainingfinancialinvestmentinNorthDakota,evenduringafinancialcrisisanditsaftermath.Thebankhasalso,duetoitslonghistoryofsupportingsmallerbanks,maintainedcompetitioninlocalcreditmarkets.Thiscompetitivenessisimportantbecauseitmeansthatfinancialmarketswillyieldthebestoutcomesforconsumersoffinancialproducts—forallloanapplicantsfrombusinessestoconsumersandgovernmentstoprivateinvestors.Instandardeconomictheory,themarketswhichoperatethemostefficiently,whichprovidethebestpricetoconsumerswhilesupplyingtheoptimalquantityofproductsto“clear”themarketatthisprice,aretheoneswhereeachfirmcontrolsonlyasmallshareofthemarketandfirmsarenumerous.Theseconditionsleadfirmstocompetewitheachothertowincustomers,whichdrivespricesdownandforcesfirmstofindthemostefficientproductionmethods.Thesameistrueoffinance;competitivefinancialmarketsmeanlowerinterestratesforborrowers,aswellasbetterservicestoborrowersandforcesfinancialfirmstofindbetterwaysofassessinginvestmentopportunities.This,inturn,meansmoreinvestmentingoodprojectsaswellasmoreinvestmentoverall,makingitsothatthelocaleconomycontinuestogrowasinvestmentsyieldgrowingenterprisesandgreatereconomicactivity.So,maintainingacompetitivefinancialmarketisanimportantwayinwhichtheBNDimproveslocaleconomicconditions.Anditclearlyachievesthisgoal.ThesmallstateofNorthDakotahasmorecommunitybanksthanHawaii,Maine,andNewHampshirecombined.106Thesestates,together,havemorethansixtimesasmanyresidentsasNorthDakota.Nobankhasanoverwhelmingshareofthemarketeither.Thelargestbankinthestatehasonly10%ofconsumerdepositsandthetwobiggestout-of-statebanks,WellsFargoandU.S.Bank,haveseendecreasingmarketsharessince2007.107Asthebelowgraphindicates,NorthDakotahasfarmorebanksper100,000peoplethanitsclosestneighbors.Additionally,ithasnearly6timesmorebankspercapitathantheUSaverage.Asaresult,theBNDhashelpedNorthDakotamaintainafinancialmarketthatmeetstheperfectlycompetitivestandardsofsmallandcopiousbanks.

106Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),6,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.107Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),6,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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108Inlightofthesestrongfinancialindicators,itislikelythattheeconomicgainsexperiencedbyNorthDakotacanbeattributedinlargeparttotheBND’sactivities.ThiscasestudyhasattemptedtoshowhowtheBND’sownership,governance,operations,andactivitieshavecombinedtoproducethesebeneficialresults.TheBNDsetsaprecedentforotherAmericanstatesseekingapublicbankingmodel,notonlybecauseitsharesacommoncountrywiththesestates,butbecauseithasachievedstrongresultsforanextendedperiodoftime.

108Mitchell,Stacy,PublicBanks:BankofNorthDakota,InstituteforLocalSelf-Reliance(2015),https://ilsr.org/rule/bank-of-north-dakota-2/.

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2. Sparkassen ThefirstmajordifferencebetweenGermany’spublicbankingmodelandtheBNDmodelisinthenumberofbanks.WhiletheBNDistheonlypublicbankinNorthDakota,Germanyhasanentirenetworkofpublicbanks.Thesebanksareseparateinstitutionsandarenotconnectedexceptbytheirvoluntaryassociationwitheachother.Thisvoluntaryassociation,however,isveryimportanttothesebanksandhasplayedacentralroleintheirsuccessinGermany.AllpublicbanksaremembersoftheGermanSavingsBankAssociationorDeutscherSparkassen-undGiroverband(DSGV).TheDSGVismadeupof580memberinstitutions,allpublicfinancialinstitutions,andoperatesasthedecentralizednetworkthatunifiesthepublicbankingsysteminGermany.109AtthecoreofthegroupisitsSparkassenorSavingsBanks.ThesebanksmakeuptheGermanSavingsBanksFinanceGroup(Sparkassen-Finanzegruppe)thatisamajorsubsetoftheDSGV.Thereare413SavingsBanksinGermany,withalmost14500branchesacrossthecountry.110Therearealso7Landesbanken,whichareregionalbanks.111ThesebanksrepresenttheGermanLanderorstatesinthefederatedsystem.Additionally,theDSGVcontainsanumberofsmallerpublicfinancialinstitutionsthatspecializeinspecificareas,suchasrealestate,leasing,andequityinvestment.112TheSparkassenandLandsbankenarethemostimportantbanksintheDSGV.IndependentcommunitiesfirstfoundedSparkasseninthe19thcenturytostoretheirsavings.113But,bythebeginningofthe20thcentury,thebankshadexpandedtoofferafullsetofretailbankingservices.114In1909withthecreationofcashlesspayments,theLandesbankenbegantoworkwiththesavingsbanks.115TheLandesbankenhavesincedevelopedintowholesalebanks,similartolargerprivatebanks,whichalsoprovideimportantservicestothesavingsbanksandhandlecomplexfinancialactivities.116

109InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),3,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.110InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),3,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.111InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),14,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.112InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),14,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.113InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),5,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.114InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),5,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.115InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),5,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.116InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),5,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.

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PublicbanksinGermanyoccupyaspeciallegalstatus,whichdeterminestheirownership.Technically,thebanksarenotownedbyanyorganization.Theyareincorporatedunderlawaspublicinstitutions.117Thismeansthattheyarenotsubjecttoprivateinterests,buttheyarealsoinsulatedfrompoliticalpressures.Thebanksmaintainadegreeofautonomyfromownershippressurestooperatecontrarytotheirmission.Additionally,thebankshavenosharesavailableforpurchase.Localgovernmentscannotsellthebankswhendesired.118Thebanksarestablepublicinstitutions;onesthatarenotthreatenedbyprivatizationduetopoliticalsentimentorfinancialneedonalocallevel.LikewithaDBAofthestate,thepublicbanksexistaslegallypublicentitiesthatcannotbesoldtoprivateinterests.But,unliketheBND,thesebankshaveagreaterdegreeofseparationfromtheirlocalgovernment,atleastasitconcernsownershipofthebank.Insteadofowningthesebanks,localpublicauthoritiesserveasthe“responsiblepublicbodies”ofthebanks.119Thatis,localgovernments,ormunicipalspecialpurposeassociationsoftheselocalgovernments,governthebank.120Thisisreferredtoasamunicipalorpublictrusteeshipandallowslocalgovernmentsorauthoritiestojointlyrunthebanks.121Thus,theGermansystemofestablishingpublicbanksaslegallyindependentinstitutionsguaranteesthatthelocalpopulationcontrolsthebanknotthroughownership,butthroughgovernance.122Assuch,thegovernanceofthesebanksisparamounttounderstandingtheirimpactonlocalcommunities.Therearestrictrulessurroundingsavingsbankgovernancedesignedtoincreasethepublicaccountabilityofthebanks.Tostart,theSparkassenalloperateona“regionalprinciple”whichlimitsthemtooperatingonlyintheregioninwhichtheyarebased.123Thislimitisestablishedinthelawincorporatingthebanksaspublicinstitutions.124Moreover,thebanksarerequiredbylawto“operateunderapublicmandate.”125Thepublicmandaterequiresthatthebanksworkintheinterestsofthepublicbypromotingthepublicgood.Thisincludes:providingnon-discriminatoryservices,emphasizingloanstosmallbusinesses,increasing117InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),6,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.118Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),22,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.119Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.120Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.121Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.122Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.123InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),4,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.124InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),7,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.125InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),6,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.

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competitioninlocalfinancialmarkets,promotingsavingsamongstthepopulace,andsponsoringsocially-beneficiallyprograms.126Thus,thesebanksworktoimproveconditionsintheirhomeregions.127Thisconstitutestheprimarymissionofthesebanks.Indeed,thebanksaregovernedbytheSparkassengesetz,orsavingsbanklawsofthestatetheyarelocatedin.128Thesearethelawswhichspecifythepublicmandateforsavingsbanksaswellasthewaysinwhichthebanksmustfulfillthismandate.129Boththeregionalprincipleandthepublicmandatearereinforcedbyhowhigh-levelbankmanagersareselected.Themanagingmunicipalorpublictrusteeshipiscomposedofrepresentativesfromtheregionaswellasthelocalparliament.130Thishigh-levelmanagementiscalledthesupervisoryboard.131Itiscomposedofthelocalpopulace,whoalsoarethebank’scustomers,aswellasbankemployees,andlocalelectedofficials.132Ithiresandfiresthemanagersofthebank,knownasthemanagementboard,candeterminepaymentforbankemployees,anddecidesuponanyimportantchangestothebank.133Theheadofthelocalityusuallyholdsthechairmanofthesupervisoryboard,whichisoftenalocalmayor.134Thesupervisoryboardplaysacentralroleinensuringthatasavingsbankcarriesoutitspublicmandatetoitsregion.Thisissobecauseitiscomposedofindividualswithadirectinterestinthefulfillmentofthebank’smission.Thatis,bothlocalpoliticiansandthepublichaveadesireforthebanktoservetheregionwell.Additionally,theinclusionofbankemployeesontheboardensuresthatthebankisoperatedfairlyandefficiently.Demandsforpublicbenefitsfromthepublicrepresentativesareweighedagainsttheperspectiveofbankinsiderswhohaveabettersenseofhowthebankoperatesandhowchangestothebankmayimpactoperations.Bankingprofessionalspopulatethemanagementboard.135Additionally,atleasttwoofthemembersoftheboardmustbelicensedtoworkasbankers,althoughthisusuallyappliesto

126InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),6,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.127InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),4,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.128Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),3,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.129Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),3,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.130InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),7,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.131Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.132Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.133Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.134Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),22,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.135Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.

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moremembersoftheboardthantheminimumrequirement.136Everysavingsbankhasamanagementboardandeachmanagementboardhandlestheday-to-daybusinessofthebank.137Furthermore,themanagementboardmustreporttothesupervisoryboardonimportantissues.138Asaresult,bankerswithexperienceruntheday-to-dayoperationsofthebankwhilerepresentativesofthepublichandletheoveralldirectionandgovernanceoftheinstitution.139Inthissense,thegovernanceandoperationsoftheSparkassenaresimilartotheBND.AnothercommonalitybetweentheSparkassenandtheBNDisthelocaleconomicdevelopmentfocusofthebanks.TheSparkassenarebarredfromconductingfinancialactivitiesinmorelucrativeareas.Thatis,thebanksarerestrictedtothelocalregionwheretheyarelocated.Thismeansthattheyhaveastrongandlong-termcommitmenttothehealthofthehomeregion.Andthisintensefocusonasingularregiontranslatesintomoredetailedknowledgeoftheircustomers,whichleadstobetterriskmanagement,aswellasmorestablelendingpatternsinlocalfinancialmarkets.140Bankshavethetimeandtheimpetustoknowtheirlocalmarketwell.Asaresult,theyhavean“incentiveforSavingsBankstooperateveryclosetomarket,balanceriskscarefullyandtakealong-termperspectivewiththeirclientsandthecommunityasawhole.”141Andthisextendedlocalinteractiongivesthesebankstheopportunitytofinelycraftservicesandfinancialproductstotheirregion’sneeds.ThisimprovestheefficiencyofSparkasseninvestmentsrelativetoready-madefinancialservicesfromlargeprivatebanks.Adecentralizedapproachtobankingemphasizeslocalconditionsoverbroadmarketreach.MuchliketheBND,theSparkassenemphasizelocaleconomicdevelopmentbyputtinglocalassetstoworkasinvestmentsinlocaleconomies,preventingcapitaloutflowfrompoorerareasandincreasingtheleveloflocaleconomicactivity.142Savingsbanksalsohelptheirmunicipalitiespursueeconomicandsocialdevelopmentnotonlybyreinvestinginthecommunitybutalsobysupportingregionalpoliciesandsponsoringimportantculturalworks.143ThesavingsbankshaveextensiveinteractionswiththelargerDSGVorganization.ThoughtheDSGVplaysanimportantroleintheoperationsofthesebanks,itdoesnotdosoattheexpense

136Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.137Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.138Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),21,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.139InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),7,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.140Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),22,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.141InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),7,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.142Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),22,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.143Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),22,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.

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oflocalautonomy.Localsavingsbanks,theirsupervisoryboards,andespeciallytheirmanagerialboards,havethefinalsayonmostoperationsofthebankandhowtheyruntheday-to-daybusinessofthebank.Thisincludesdecidinguponthetransactionsthattheywillundertakeandtheamountofriskthattheywilltakeon.144Individualbankscanchoosetotakeonriskierormoreconservativeassetpositions.145Assuch,therecanbesubstantialvariationinhowthesavingsbanksconducttheirbusiness.Still,thebanksthroughtheDSGVhavecreatedstrongsafetymeasuresandmonitoringtoolstoensurethateachbankperformswell.146Thebanksuseacommonframeworkformutualsupport.Forexample,thebanksinsureeachotherthroughaJointLiabilityScheme,whichcanprovidefundstobanksinbadfinancialpositions.147TheSparkassenalsoimposetheirownregionalornationalmonitoringsystemsinwhichtheDSGVmonitorsandauditsindividualbanks.148Thisisself-governedmonitoring,aprocessthatisinternaltotheDSGVbutexternaltotheindividualbank.Assuch,theDSGVanditsmonitoringarmisinapositiontohonestlyandaggressivelycheckindividualmemberbanks’activities.TheDSGVaswellasregionalassociationsofSparkassencreateandusethemonitoringtools,buttheydosowithinputfromthememberbanks.149Thereareanumberofbenefitstothisfederatedsystem.First,thereareuniformandeffectivestandardsacrosstheentiregroupbuttheyareformulatedbasedontheknowledgeandexpertiseofthesavingsbanks.150Thebanksfollowstrictstandards,butthesestandardsareself-designedandimposed.Underwritingandriskstandardsareuniversalacrossthegroup.151Memberbankscannottakeonundueriskinanyonetransaction—higherriskthatisnotbalancedbyasufficientlyhigherpotentialreward--andtheyareevenprohibitedbylawfromengagingincertainhigh-riskfinancialtransactions.152Thebanksinthegroupalsopooltheirdatafromtransactionsandusethisnational-leveldatasettoperformbetterwithinthestandardssetbytheDSGV.153Theyalsoinsureindividualbanksfromriskbymutually

144Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),6,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.145Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),6,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.146Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),5,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.147Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),5,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.148Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),5,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.149Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),6,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.150Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),6,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.151InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),18,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.152InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),18,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.153Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),6,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.

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guaranteeingeachother’ssecurity.154Finally,theyreceivethebenefitsofspecializedDSGVservices,sothatlocalbankscanfocusonlocalissueswhilethegroup’sexpertscanfocusonlargerormoretechnicalprojects.155Forinstance,theDSGVachieveseconomiesofscaleinITandback-officeservices,inadditiontoproductdevelopment,regulatorycompliance,andemployeetrainingwhiletheSparkassenfocusonlocallendingandeconomicdevelopment.156So,banksandtheDSGVcoordinatetotheirmutualbenefit.Indeed,onereasonfortheDSGV’sstrongcreditratingsis“thehighlevelofco-operationwithintheSavingsBanksFinanceGroup.”157TheSparkassenareengagedinretailbanking.RetailbusinessisthemainsourceofrevenuesfortheSparkassen.158Theseearningsalsoaccountfortheircapitalbaseastheydonotsellstocksanddonotreceivefundingfromlocalgovernments.159Theirbusinessmodelissimple.Theyholddepositsandusethesedepositstomakenon-securitizedloanstoprivateindividualsandsmallbusinesses.160Theyusetheearningsfromtheseloanstoinvestinothersociallybeneficialprojectsortoholdascapital.161Capitalisthebasisoftheircontingencyfunds,whichtheyholdtocoverlossesfromloanrepaymentfailures.162Thesavingsbanksrelyondepositstobackinvestmentsintheirlocalcommunities.Mostofthesedepositscomefromprivateindividualsororganizations.Whiletheydoreceivedepositsfromlocalgovernments,theyaretheprimarybankforhalfofallGermanconsumers,have94millionaccountsintotal,andarethemainbankfor40%ofallGermanbusinesses.163ThisisanareawheretheyclearlydifferfromtheBND;whereastheBNDmainlyreliesondepositsfrompublicentities,theSparkassenholdmainlyprivatedeposits.

154Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),6,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.155Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),6,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.156Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),18,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.157Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),28,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.158InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),12,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.159InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),12,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.160InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),15,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.161InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),15,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.162Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),22,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.163InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),13,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.

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Thebanksstakeoutdiversifiedportfoliosintheirlocalfinancialmarketsbyengaginginawidearrayoflendingactivities.164Theyloantobothprivateconsumersandbusinessesinmarketsasdiverseasmanufacturingandtechnologytoresidentialloans.Whenmakingloansthebanksseeklowtomoderaterisk.165Astheydonothavetofollowademandtomaximizeprofits,andtheydealinsimplefinancialinstruments,theyareusuallyunwillingtotakeonhigh-riskinvestments.Instead,theyfocusonloansthatpromisetohelptheborrowerandthehomeregioneconomically.Asaresultoftheirdiversifiedportfolioandcarefullycontrolledriskpositions,thebankstendtohavestablerevenuegrowthyeartoyear.166Thisgrowthhasaccumulatedovertimetothepointwhere,now,theSparkassenandLandesbankencombinetohaveabalancesheetof€2.7trillion,€700millionmorethanDeutscheBank.167TounderstandthebasisoftheSparkassen’ssuccess,onemustunderstandtheirrigorousloanapprovalprocess.ThisprocesshasallowedthemtobecomethepremiereconsumerbanksinGermany.Itstartswithaninteractionbetweentheprospectiveborrowerandthesavingsbank.Becausesavingsbankshavedeeprootsintheirlocalcommunities,borrowersoftenhaveapreexistingrelationshipwiththebank.Thisallowsthebanktoincorporate“softfacts”—informationthatmightnotbecapturedinafirm’sbalancesheet—intotheirapprovalprocess.Regardlessoftherelationshipbetweentheborrowerandthebank,everyloanapprovalbeginswithsignificantstatisticalanalysisoftheborrower’sdata.TheDSGVcollectsandsendsitsmembersinformationoncompaniesinmanyindustrialsectorsthatarefurthersubdividedbybusinesssizeandgeographicalregion.168Foreachofthe75sectorscovered,therearethousandsofaccountsthathavebeenanalyzedtoprovideausefulcomparisonbetweentheprospectiveborrowerandsectoraveragesinitsregionandforitssize.169Thisinformationisusedtocreatekeyperformanceindicatorsthatserveasareferencepointforevaluatingtheborrower.170Theborrowerisjudgednotonlyonitsownfinancialhealth,butalsobyhowitperformsrelativetoothersimilarlysituatedfirms.171

164InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),12,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.165InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),12,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.166InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),12,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.167Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),15,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.168Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),38,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.169Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),38,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.170Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),38,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.171Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),38,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.

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Usingfurtherstatisticalanalysis,theprospectiveborrowerisgivenaratingthatrepresentsthechancethatofaloandefault.172Theratingincorporatesthequantitativedataofthefirm’sbalancesheet,aswellasitsperformancerelativetopeerinstitutions,andqualitativeinformationalongwithothercreditratings.173Theratingisusedtosettheinterestrateoftheloanandotherfactorswhichsignaltheriskthebankseesinextendingtheloantotheborrower.174Thefinancialinformationofthefirmanditscomparisondataareusedtoscorethefirm.Thesescoresarethenweightedaccordingtotheirrelativeimportanceindeterminingtheriskinessoftheloan.Thescoresaremultipliedbytheweightstogeneratefinalweightedvalueswhichareusedtogeneratethefirm’soverallquantitativecomponentscore.Thereisasimilarprocesswiththequalitativecomponent.Thebankassessesthebusiness’smanagement,planningandcontrol,marketsandproducts,andvalueaddedchainsusingascoringrubricforeachsectiontogenerateaqualitativecomponentscore.175Thequantitativeandqualitativescoresarecombined.Next,externalcreditratingsandpasthistorywiththecompanycanbeincludedtoadjustthiscombinedscoreupwardsordownwards.176Afteradjustment,ornon-adjustment,thebankusesthisfinalscorealongwiththedetailsoftheproposedloantomakeafinalapplicationdecision.177Whethertheloanisapprovedorrejected,thesavingsbankusestheprocesstoaidthebusinessincontinuingtogrow.Thebankprovideseachloanapplicantwithafullreportoftheloanappraisalthatincludesthebank’sopinionofthestrengthsandtheweaknessesofthebusiness.178Thisanalysisiscombinedwithrecommendationsforimprovements.179Thisunderlinesthebank’scommitmenttoeconomicdevelopmentandhelpstodeliveronthebank’smission.Asmostofthebank’sloancustomersaresmallandmediumenterprises(SMEs),byprovidingextensiveanalysisandrecommendationsonhowtosucceedingrowingtheirbusiness,thebankisprovidingaservicethatcanboostgrowththroughoutitseconomicregion.Thesavingsbanksimprovethehealthoflocalbusinesseseveniftheydon’textendcreditto

172Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),39,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.173Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),39,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.174Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),39,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.175Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),42,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.176Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),43,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.177Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),43,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.178Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),44,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.179Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),44,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.

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thesebusinesses.Furthermore,theymakeitmorelikelythatfirmsthatarerejectedforaloanwillbeacceptedforaloaninthefuture.Insteadofaflat-outrejection,whichdoesnottellthefirmwaysitcanimproveandexpanditsfinancialposition,theSparkassengivefirmspathsforimprovementandthechancetoreceiveloansinthefuturebyimprovingitsbusinessperformance.Thebanksalsohelpbusinessesinthelong-term.TheyoftenworkwithSMEsintheirhomeregionoverthecourseoftheirentirebusinesslifecycle.180Thisincludes€1.3billioninvestedinover10,000startupsannually.181Banksarealsotheretoprovidecreditwhilebusinessesaregrowing,withover€81billioninnewloanstoenterprisesin2015.182Morethan80%oftheSparkassen’sloanstofirmsaremediumorlong-term.183Thisfreesbusinessesfromimmediatefinancialpressuresandallowsthemtoplanforthefuture.TheSparkassenarethemainsupportersofSMEsinGermany.Theyaccountfor70%ofSMEfinancingand42%ofallbusinessfinancing.184In2014,thesavingsbanksdidover€1trillioninbusiness.185Indeed,thequantityoftheseloansnearlydoubledfrom2004to2011movingfrom€36billionto€67billioninjustsevenyears.186Theimportoftheireconomicroleisunderlinedbythefactthat99%ofGermanbusinesseshaveannualrevenuesbelow€10million.187Thesesmallerfirmsarenottargetsforprivatefinancecapitalbecausetheydonotofferthehighestreturns.188ThesavingsbankstaketheplaceoflargerbanksbyprovidingaffordablefinancingwithcloselytailoredservicesandtermstomeetSMEsneeds.TheSparkassen’slending,inparticular,hasbeencentraltoGermany’sstrongeconomicgrowthanddevelopmentinthewakeofthefinancialcrisis.EvenastheGermaneconomyshrankby5%in2009,thesavingsbanksincreasedtheirloanstobusinesseseachyearfrom2009to2015.189CountercyclicallendingspeduptheGermanrecoveryandallowedbusinessestosurvivethe

180InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),13,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.181InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),13,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.182InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),13,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.183InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),13,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.184Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),2,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.185Irigoyen,Claudia,SparkassenSavingsBanksinGermany,CentreforPublicImpact(2017),2,https://www.centreforpublicimpact.org/case-study/sparkassen-savings-banks-germany.186Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),14,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.187Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),14,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.188Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),14,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.189InsidetheSavingsBankFinanceGroup,FinanzgruppeDeutcherSparkassen-undGiroverband(2016),13,https://drive.google.com/file/d/1I2RYVgJ_V7rsq0-eQRq_nTZak8dr1eEm/view.

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economicdownturn.Forinstance,Germanmanufacturingoutput,thoughitfelldramaticallyfrommiddle-2008tomiddle-2009,returnedtopre-crisislevelsbymiddle-2010.190Thus,oneofGermany’smostimportantindustriesreboundedinlessthanayearfromtheendofthecrisis,whilemanyothercountriesrecoveredslowly.Furthermore,thenumberofloansextendedtobusinessstart-upsbytheSparkassen,thoughitfellin2008,increasedin2009andreturnedtopre-crisislevelsby2010.191Finally,theSparkassenprovideadirectbenefittolocalgovernments.Thelocalgovernmenttaxesthembecausetheyaredefinedaslocalcompanies.192Theserevenuesprovideextrafundsthatlocalgovernmentscanusetopursuetheirowndevelopmentstrategiesorpolicies.However,theSparkassendoearnlowerprofitsthanprivatebanks.Theytendtofavorsaferinvestments,withstablereturnsandmodestprofits.Thus,Germanbankingprofitsarelowerincomparisontoothercountries’banks.193But,Germanbanksarecomparativelyefficient;theyarejustnotasprofit-oriented.194Insteadofaccumulatingefficiencygainsasincreasedprofits,Germanbankspasstheseontotheircustomers,whouniquelybenefitfromtheirlow-profithigh-efficiencybankingsystem.195TheDSGVhasastrongcreditrating.Thisisattributabletotheabovefactors;notably,thatthebanksattainstablereturns,havestrongriskmanagementandloanappraisalsystems,havedeepconnectionsintheirlocalmarkets,carrydiversifiedinvestmentportfolios,haveastrongreputationassafebanks,andcoordinateamongthemselvesverywell.196Thus,theGermanpublicbankingmodelhasbroughtmanybenefitstoGermanlocaleconomicmarketsandshouldbeconsideredasuccessinpublicbanking.But,ithasachievedthissuccessonamodelverydifferentfromthatoftheBND.WhiletheBNDhasworkedtostrengthenbanksandhasinvolveditselfinmorecomplexfinancialtransactionsaswellasdirectloans,theSparkassenhavefocusedonsimpleloansandoperationsdesignedtoincreaseeconomicdevelopment.MorecomplexoperationshavebeenlefttotheDSGVandtheLandesbankentohandle,usingtheirexpertiseandtheirgreaterareacoveragetohandletheseissues.

190Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),15,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.191Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),26,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.192Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),22,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.193Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),30,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.194Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),30,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.195Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),30,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.196Simpson,C.V.J.,TheGermanSparkassen,Civitas(2013),28,http://www.civitas.org.uk/content/files/SimpsonSparkassen.pdf.

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Furthermore,whiletheBNDhasavoidedcompetingforprivatedepositswithsmallerbanks,theSparkassenrunlargelybasedondepositsfromindividualconsumersandbusinesses.

3. India’s Public Sector Banks India’sPublicSectorBank(PSB)systemisuniqueamongstpublicbankscoveredinthesecasestudiesinthattheywerenotfoundedpubliclyandhavenospecialpublicstatusunderthelaw.Rather,thesebankswerealreadyinexistencebeforetheycametobecontrolledbythepublic.Thegovernmentnationalizedfourteenbanksin1969,followinglegislationpassedin1967.197Sixmorebanksweremadepublicin1980.198Thesenationalizationsoccurredthroughpurchasesofbankstocksinopenstockmarkets.Thegovernmentownsthesebanksinthesensethatitownsamajorityoftheirstock.Yet,therearealsoprivateshareholdersofthesestocks.Insomecasesprivateshareholdersowncloseto45%ofthesebanks.199Thenationalizationsweredonetomakethebanksservetheinterestsofthepublicratherthanprivateinterests.Thoughthebanksdostillhaveprivatestockholderswhocanbuyandsellthestockofthebanks,thegovernment,asthemajorityholderineachofthesebanks,haseffectivecontroloverbankoperations.But,astheyweretakingoverprivatebanks,thegovernmentinheritedinstitutionsthatstilloperatedontheprivatebankingmodel.Thisnecessitatedchangesinhowthebanksoperated.Thetakeoverofthebankswasmeanttoimproveeconomicandsocialconditions.Socialcontrolofthebankswasinstitutedwiththegoalsofextendingcreditmorewidely,limitingcorruptionandmisuseofbankingassets,andboostingeconomicdevelopmentthroughtargetedfinancing.200Thefollowingdecadessawlargegainsfromthisapproach.TheentireIndianbankingsystemwasfundamentallychangedaspublicsectorbanksfocusedonexpandingcreditandofferingfinancialservicestotheun-banked.201PSBsalsodirectedcredittoimportantareasforeconomicdevelopment,suchasagricultureandsmallbusinesses.202Asaresult,thestringofnationalizations,startingin1955withtheStateBankofIndiathrough1980,placedPSBsina

197Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),8,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.198Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),8,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.199ShareholdingPatternofPublicSectorBanks,DepartmentofFinancialServices(2013),https://financialservices.gov.in/sites/default/files/Shareholding%20of%20Govt%20of%20India%20final.pdf.200Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),8,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.201Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),8,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.202Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),8,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.

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centralroleinIndia’sfinancialsystem.203Thebankswerechargedwithincreasingdevelopmentandexpandingaccesstocredit,andachievedboth,leadingtotheirgrowthintheIndianfinancialsystem.Today,theyaccountforalmost70%ofallbankingactivityinIndia.204Thoughthesebanksadoptedastrongdevelopmentalfocus,onethatprioritizedbotheconomicgrowthandprofit,theyweredistinctfromotherpublicbankscoveredinthisreport.Theyhadlargenumbersofprivatestockholders.Thisforcedbankstopayattentiontoissueslikeprofitabilityandstockholderconfidenceinthecourseoftheiroperations.Thebanksneededtokeeptheirshareholders,eventheminorityprivateshareholders,happyenoughtocontinuetoholdthestock.IfPSBshadtotallyignoredprofitsorthewishesoftheseshareholderstheymayhavebeenmetwithprivateholderssellingofftheirsharesenmasse,leadingtofallingstockpricesandlowervaluationsforthebanks.Second,someofthesebanksfocusedonspecificareasormarketsforinvestment.Insteadofgroupingawidevarietyofactivitieswithinoneinstitution,manyPSBsfocusedonnicheissues.Theserangedfromspecificmarketsectors,likeagricultureormanufacturingtoindividualconsumersandgovernmentstoservicinglargerbusinesses.Thesefactorshavecreatedauniquegovernancesystemforthebanks.Thoughthegovernmenthasmajoritycontrolofeachbanks’centralboardbyvirtueofitsownershipofthemajorityofbankstock,theselectionoftheseboardsvariesbybank.Theboardsaremadeupofgovernmentappointees,nomineesfromIndia’sreservebanks,andtherepresentativeselectedbyprivateshareholders.Assuch,governingboardsamalgamatedifferentinterests.Governmentappointeestendtohavepoliticalconnections,whilereservebanknomineestendtobeexpertsandpickedthroughanapoliticalprocess,andprivaterepresentativestendtorepresenttheinterestsofprivateshareholdersontheboard.Yet,thebankscontinuedtogrowintheearly2000’s.TheIndianeconomywasgrowingrapidlyandthePSBsbegantolendgreateramountstocompanies.205Increasesinbanklendingcamewithmorerelaxedlendingstandards.PSBsbegantoextendcredittobiggerbusinesseswithoutseriousanalysisoftheirfinancialpositions.206Indeed,PSBsonlyadoptedtheuseofcreditscoresintheirevaluationsofloansin2007.207Ithadbecomenormaltograntaloanonthebasisofgeneralinformationaboutapotentialborrower,suchastheirpastofloanrepayments,theirindustry,ortheirrelationshipwiththebank,ratherthantheviabilityoftheprospective

203Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),13,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.204Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),16,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.205Non-PerformingAssetsinIndianBanks,CorporateFinanceInstitute(2018),https://corporatefinanceinstitute.com/resources/knowledge/other/non-performing-assets-in-indian-banks/.206Non-PerformingAssetsinIndianBanks,CorporateFinanceInstitute(2018),https://corporatefinanceinstitute.com/resources/knowledge/other/non-performing-assets-in-indian-banks/.207Srinivas,Arjun,PublicSectorBanksSlowtoAdoptCreditScores,LiveMint(2019),https://www.livemint.com/industry/banking/state-run-banks-slow-to-adopt-credit-scores-1554391599986.html.

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loanopportunity.PrivateSectorBanks(PVBs)hadstartedusingcreditscorestoevaluatecreditworthinessearlierthatsamedecade.208Thesetrendscametoaheadinthewakeofthefinancialcrisis.Duringthecrisisbusinessessufferedfallingrevenuesandprofitswhilethegovernmentbannedminingprojectsandslowedapprovalsofenvironmentalpermitsfornewinfrastructureinvestments.209TheseeconomicpressurescombinedwithnewstandardsfromtheReserveBankofIndia(RBI)in2009pressuredPSBstotakeonriskierloanstoaidtheeconomyanddevelopment.210Specifically,RBIguidelinesallowedsomefailingloanstobehiddenasStandardRestructuredAssets(SRAs).211Bankscouldthenpretendasiftheirassetsweregreaterthantheywere,allowingthemtopursuemoreriskyinvestments.Thesefailingloanswouldsoonprovetroublesomeforthepublicbankingsystem.InIndiathesebadloansaretermedNPAsorNon-PerformingAssets.Theyaredefinedasloansthathaveaninterestratepaymentorinstallmentoverdueforaperiodoflongerthan90days.212ThesearemonitoredbytheRBI,butwiththechangeinguidelinesin2009theseloansbecameeasiertohidefromnationaloversightauthorities.213By2015,PSBsbegantorealizetheextentoftheirvulnerabilitytobadloans.Asaresult,theIndianbankingsystemhasbeenstrugglingtodecreaseitsshareofNPAsandriskyassets.Thiswastrueofprivatebanksaswell,butpublicbanksweretheworstoffenderswhenitcametoNPAs.From2015to2018,PSBsaccountedfor70%ofIndianbankingactivitybutheld87%ofallNPAs.214InJune2018,publicandprivatebankscombinedheldnearly$150billioninNPAs.215AslateasMarch2018,11.5%ofallbankassetswereNPAs,thoughtheRBI’sPromptandCorrectiveAction(PCA)frameworkhelpedbanksdecreasethisratioto10.8%bySeptemberofthesameyear.216

208Srinivas,Arjun,PublicSectorBanksSlowtoAdoptCreditScores,LiveMint(2019),https://www.livemint.com/industry/banking/state-run-banks-slow-to-adopt-credit-scores-1554391599986.html.209Non-PerformingAssetsinIndianBanks,CorporateFinanceInstitute(2018),https://corporatefinanceinstitute.com/resources/knowledge/other/non-performing-assets-in-indian-banks/.210EASEReformsforPublicSectorBanks,BostonConsultingGroupandIndianBanks’Association(2019),11,https://media-publications.bcg.com/EASE-reforms-for-public-sector-banks.pdf.211EASEReformsforPublicSectorBanks,BostonConsultingGroupandIndianBanks’Association(2019),11,https://media-publications.bcg.com/EASE-reforms-for-public-sector-banks.pdf.212Non-PerformingAssetsinIndianBanks,CorporateFinanceInstitute(2018),https://corporatefinanceinstitute.com/resources/knowledge/other/non-performing-assets-in-indian-banks/.213Non-PerformingAssetsinIndianBanks,CorporateFinanceInstitute(2018),https://corporatefinanceinstitute.com/resources/knowledge/other/non-performing-assets-in-indian-banks/.214Bandyopadhyay,Tamal,TheStatusofPublicSectorBanksinIndiaToday,LiveMint(2018),https://www.livemint.com/Opinion/arQr1ZUW9EI51qwmF7lqJN/The-status-of-public-sector-banks-in-India-today.html.215Bandyopadhyay,Tamal,TheStatusofPublicSectorBanksinIndiaToday,LiveMint(2018),https://www.livemint.com/Opinion/arQr1ZUW9EI51qwmF7lqJN/The-status-of-public-sector-banks-in-India-today.html.216India’sBankingSector:TurningaCorner?,TheEconomistIntelligenceUnit(2019),http://www.eiu.com/industry/article/1717543555/indias-banking-sector-turning-a-corner/2019-01-14.

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ThePCAframework,however,hasonlyimprovedbank’spositionsattheexpenseofreducedeconomicinvestment.PSBshavecontinuedtounderperformprivatebanks.217LendinghasbeencutbackacrossthePSBs,withdecreasingtotalamountsofloansthroughout2018.218Higherlendingstandards,lesscapitalextension,andmoreattentiontocompensatingforbadloanshasalsomeantthatbankprofitshavedecreaseddramatically.219Asaresult,theRBIhasintervenedtoimprovetheperformanceofthePSBs.IthasoverseenmergersbetweenPSBswheresmallerandlesshealthybanksareabsorbedintolargerandmorestablePSBs.220Thesemovesareexpectedtoincreaselong-termdiversityofinvestmentstodecreaserisksinbanksinthelong-termandtoincreaseoverallstabilityinthefinancialsector.Still,thestateofIndianpublicbankingisnotpromisingandshouldserveasawarningtoproponentsofpublicbankingintheUS.Despitestablegrowthindepositsandabundantcapitalavailability,IndianPSBsfoundthemselvesinapositionwheretheyhavemanyuselessassets.221Thereareafewreasonsforthisoutcome,allofwhichshouldbecarefullyconsideredinthecreationofapublicstatebank.First,thebanks’economicdevelopmentorientationitselfexposedittounduerisks.Thatis,becausethebankswereconcernedwithsocialbenefits,theymadeloanstosectorsthatareriskierthanaverage.ThisisborneoutbyanalysisofPSBassetsincomparisontoPSVassets.NPAsforPSBsareconcentratedinthemining,textiles,infrastructure,andaviationsectors.222Forinstance,infrastructureloanswere17.6%ofPSBassetsandonly8.4%ofPSVassets,while30.9%ofPSBNPAswerefrominfrastructurecomparedtoonly18.2%forPSVs.223Thisistrueacrosssectorsimportantfordevelopment.Second,thebanksweresubjecttopoliticalpressuresthatledthemtograntinefficientloans.Becausethemanagementofthebanksoftenincludesdirectgovernmentappointeesthereareconcernsthattheseappointeesusedtheirpositiontoextendbadloanstotheirconstituents.Third,thebanksweresubjecttoprivatepressuresthatledthemtowardsprofitseekingandawayfromresponsiblepublicinvestments.Privatestockholdershavebothrepresentationintheboardofthesebanksaswellastheinfluencetomaketheirvoiceheardinbankdecision-making.Asholdersofbankstock,theycandepressthebank’sequityvalueiftheyarenotconfidentinbankactivities.Asaresult,thesebanksmayhaveprioritizedriskyloanstogenerate

217India’sBankingSector:TurningaCorner?,TheEconomistIntelligenceUnit(2019),http://www.eiu.com/industry/article/1717543555/indias-banking-sector-turning-a-corner/2019-01-14.218India’sBankingSector:TurningaCorner?,TheEconomistIntelligenceUnit(2019),http://www.eiu.com/industry/article/1717543555/indias-banking-sector-turning-a-corner/2019-01-14.219India’sBankingSector:TurningaCorner?,TheEconomistIntelligenceUnit(2019),http://www.eiu.com/industry/article/1717543555/indias-banking-sector-turning-a-corner/2019-01-14.220India’sBankingSector:TurningaCorner?,TheEconomistIntelligenceUnit(2019),http://www.eiu.com/industry/article/1717543555/indias-banking-sector-turning-a-corner/2019-01-14.221Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),13,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.222Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),13,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.223Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),13,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.

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profitsfortheseshareholderswhilealsopushingtheseloanstowardscertainriskyindustriestopleasetheirpublicowners.Thus,thesethreecausespointtotheimportanceofhavingaunified,coherent,andlogicalinstitutionalstructureinplaceforapublicbank.Apublicbankmustbeownedinawaythatwillavoidprofit-seekingpressuresthatencourageriskybehavior.But,thebank’sgovernancemustalsobestructuredtoavoidunduepoliticalpressure.Managersmusthavesubstantialautonomytooperatethebankinanefficientmanner,butmustalsobeaccountabletothepublictoensurethatthemissionofthebankisupheld.Theactivitiesofthebankmustdeliveronthismission,butmustnotdosoattheexpenseofmakingbadinvestments.Insum,thePSBsareinabadposition,althoughnotonethattheyhaven’treboundedfrombefore.224TheystillserveacentralroleintheIndianeconomyandhavebeenoneofthemaindriversofIndia’sdevelopmentoverthepasthalf-century.Yet,theycontainsomestructuralflawsthathaveallowedforrecklesslending.PublicbankingadvocatesshouldlearnfromthesuccessesandmistakesofthismodeltodeliversoundpublicbankingsystemstotheUnitedStates.

B. Polit ical Opportunities for the Northeast-Midwest ThestrongperformanceofNorthDakotaamidsttheGreatRecessionandtheclearwayinwhichtheBND’sactivitiesaidedthisperformanceinspiredactiviststobeginpushingfortheestablishmentofpublicbanksintheirownlocalcommunities.Ithelpedthatthedownturnhadbeensparkedbytherecklessbehaviorofthesamelargeprivatebanksthatholdmoststatefundsasdeposits.ThecombinationofangertowardsthelargebanksandtheexampleoftheBNDincreasedmomentumfortheestablishmentofpublicbanksacrosstheUS.Thismomentumhasnotyetculminatedintheestablishmentofastatebankelsewhere.Yet,evenin2008and20097billswereintroducedrelatedtostatebanking.225Morebillsfollowedinlaterstatelegislativesessions,callingforbothfeasibilitystudiesandoutrightestablishmentofsomeformofpublicbanking.226TheNationalConferenceofStateLegislaturescollected,from2010to2017,allbillsregardingpublicbanks,withtheexceptionofinfrastructurebanks,inthestates.227Belowisadiscussionofthisinformation.224Singh,Charan,AnEssayonBankingandMacroeconomics:RoleofPublicSectorBanksinIndia,IndianInstituteofManagementBangalore(2016),13,https://www.iimb.ac.in/sites/default/files/2018-07/WP%20No.%20530.pdf.225Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),9,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.226Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),8,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.2272010-2017LegislationtoCreateStateOwnedFinancialInstitutions,NationalConferenceofStateLegislatures(2017),http://tre.wa.gov/wp-content/uploads/State-by-State-Public-Banking-Efforts-NCSL.pdf.

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Thereareafewkeytakeawaysfromthedataforpublicbankingadvocates.First,theintroductionofpublicbankingbillshasbecomearegularoccurrenceacrosstheUS.Thebelowgraphshowsthetotalnumberofbillsintroducedeachyearfrom2010to2017.

Billintroductionsspikedin2011andremainedinthedoubledigitsnationwidethroughto2017.Therewasahighlevelofenthusiasmin2011and2012,whilethenumberofbillintroductionsdroppedin2014and2015.But,introductionsincreasedagainfortheremainderofthemeasuredtimeperiod.AnotherimportanttrendishowthemovementforpublicbankinghasspreadtotheNortheast-Midwestregion.Thesestatesinitiallyaccountedforasmallpercentageofoverallbillintroductions.Andupuntil2012,moreintroductionscamefromnon-NEMWstatesthanfromNEMWstates.But,from2013to2017,NEMWstatesaccountedforthemajorityofbillsintroducedinsupportofpublicbanking.From2015to2017,anaverageof10billswereintroducedregardingpublicbanksintheNEMWstates.Asaresult,theNEMWstatesaccountedfor53%ofallpublicbankingbillsintroducedfrom2010to2017.

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TherehavealsobeenanumberofNEMWstatesthathaveconsistentlyintroducedbillsoverrepeatedlegislativesessions.ThoughIllinoishasthemostbillintroductionswith13overthattimespan,NewYorkhas8andotherNEMWstateslikeNewHampshire,Vermont,Michigan,Massachusetts,Maine,andMarylandhave5ormorebillsintroduced.Minnesotaalsohas4introducedbillsoverthistimespan.Overall,12oftheregion’s18stateshavehadpublicbankingbillsintroducedoverthis7-yeartimespan.

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But,it’salsoimportanttodistinguishthepurposeofthesebillproposals.Notallofthebillscalledfortheestablishmentofstatebanks.Rather,manyoftheproposalswouldhaveestablishedcommissionsortaskforcestostudythefeasibilityofstatebankingintheirrespectivestates.Ingeneral,abouthalfofthebillswerefortheestablishmentofstatebankswhilehalfwereforfeasibilitystudies.However,theredonotseemtobecleartrendsinhowthesefeasibilityorestablishmentbillsvaryovertime.

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Yet,thereisonecrucialconsiderationforactivistsconsideringthepoliticalpotentialforpublicbanking.Establishmentbillshadverylittlelegislativesuccess.Icreatedalegislativeactivitymeasureforthesebillswhichisscoredasfollows:ifabillorresolutionpassedonechamberitreceived1point,ifitpassedbothitreceived2,noadditionalpointsweregivenforbeingsignedbytheGovernor.Underthismeasure,proposalstoestablishastatebankreceived0points,meaningthatnoproposalsforcreatingstatebankswerepassedinevenonechamber.Feasibilitybillsandresolutionsreceived14points.IfurthersubdividedthisintoNEMWandnon-NEMWstates.Despitehavingamajorityofproposalsforpublicbanks,NEMWstateshadrelativelylittlelegislativeactivityonthesebills,accountingforonly29%ofpointsassessedcomparedtothe71%fornon-NEMWstates.Thisindicatesthat,whilethereisseriousconsiderationforpublicbankingproposalsintheNEMWstatesasrepresentedbytheirbillintroductions,thereisnotyetenoughwidespreadsupporttogetthebillspassedregularly.Themoreimportantpointisthedividebetweenestablishmentandfeasibilitystudies.Establishmentbillshavehadlittletractioninstatelegislatures.Thisdoesnotmeanthatactivistsandpolicymakersshouldavoidintroducingthesebills,butthattheyshouldalsopushforfeasibilitystudiesthathaveagreaterchanceofpassingthroughstatelegislatures.

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Feasibilitystudiescanalsoincreasethechancesoflaterpassageofstate-bankestablishmentlegislationinthreeways.First,theycanserveasawaytoraisepublicawarenessofthepublicbankingoption.Thepubliciscurrentlynotawareoforwellinformedaboutpublicbanking.Holdingastudyandpublicizingitsresultscanbeawaytoincreasethesalienceofthepublicbankingissue.Second,itcanraiseawarenessandinformpoliticiansandpolicymakers.Itislikelythatmanypoliticianswillnotbeawareofthepotentialforpublicbankinginthestates.Assuch,astudyfromacommissionortaskforcethatreportsbacktothestatelegislaturecaninformpoliticiansaboutthebenefitsandcostsofapublicbank.Finally,astudywilllikelyunderlinethebenefitsofapublicbank.Ifmostexistingresearchiscorrect,thenpublicbanksshouldbringgreaterbenefitsthantheircoststomoststates.Afeasibilitystudywouldhighlightthisfactandwouldmakethepoliticalargumentforpublicbankingstronger.TherearecurrentbillsonpublicbankinginthefollowingNEMWstates:Connecticut,Illinois,Maine,Massachusetts,NewHampshire,NewJersey,NewYork,andVermont.ConnecticutandIllinoisaretwoexamplesofstatesthathavepursuedadualestablishmentandfeasibilitystrategy.Bothstateshavetwobillsinprogressintheirhousesofrepresentatives,onewhichcallsfortheestablishmentofastatebankandonewhichcallsforafeasibilitystudy(H.B.5970andH.B.5973inCTandHJR2andHB19inIL).Allofthesebillsarestillincommittee.However,bothofConnecticut’sbillswerelastactedoninFebruary,whereasIllinois’billswereactedoninJulyandMarch,respectively.

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Maine’sfeasibilitybillintroducedthisyear,whichhad10sponsorsintheSenate,waskilledincommittee.Still,thenumberofsponsorsindicatesasizableamountofpoliticalsupportintheMainesenatefortheidea.NewHampshire’sbilltoestablishaStateBankofNewHampshirewasalsodesignatedasInexpedienttoLegislateinMarchbythestate’sCommercecommitteedespitebipartisansponsorship.MassachusettsandNewJerseybillstoestablishastatebankintheirrespectivestateshavealsobeenheldupincommittee.NewJersey’sbill,however,waslastactedoninJanuarywhiletheMassachusettsbillwassenttocommitteeinMay.Vermont’sfeasibilitystudybill,whichenjoys8sponsorsinthehouse,isalsoincommitteebuthasmoresupportthanthebillsfromtheseotherlargerstates.Lastly,NewYorkistheNEMWstatewiththemostpositivemovementonthepublicbankingissueinthissetofstatelegislativesessions.ThestatehasabillforcreatingacommissiontostudythecreationofastatebankthatpassedtheSenatewiththehelpofitsfivesponsorsinJuneona43to19vote.SincethenithasbeenconsideredintheAssembly,withnineco-sponsors,asA06522.ThebillhasbeenreportedtotheWaysandMeanscommitteeandiswaitingtomoveforwardinthelegislativeprocess.Currentbillsin8ofthe18statesofferopportunitiesforpoliticalorganizationandlobbyingonbehalfofstatebanks,whileanumberofotherNEMWstateshavehadbillsintherecentpastwhichhavebeeninsupportofpublicbanking.Additionally,theentireregion’slargestandmostimportantstateshavehadthesebillsinthelastdecadewiththeexceptionofOhio.NewYork,Illinois,Pennsylvania,Michigan,Massachusetts,andNewJerseyhaveallconsideredorareconsideringpublicbanking,whilesmallerstatesintheNEMWregionhavealsohadsomemovementinthisdirection.

I I I . Pol icy Breakdown TheNEMWstatesaresufferingfromthreeoverarchingissues.Theseissuesareinterlinkedandcanbesolvedthroughthecreationofastatebank.Thischapterwilldetailtheissuesfacingthesestatesandexplainhowstatebankingsolvestheseissues.

A. Uncompetit ive Local Financial Markets

1. The Problem TheissueswithNEMWstates’creditmarketsbeginwiththedisappearanceofsmallorcommunitybanks.Thesearebankswitharelativelysmallamountofassetsontheirbooks.Theyoperateonasmallscaleandassuchareusuallycloselytiedtothecommunitieswhere

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theyoperate.Usually,theyworkwithinonlyonestate,andtheyoftenhaveonlysmallnumberofbranchesconcentratedwithinacertainregionofthestate.Foratleasttwodecades,thesebankshavebeenstruggling.Acrossthenation,communitybankshavelostmarketsharetobiggercommercialbanksthatoftencomefromoutofstate.Overoneinfoursmallbanks(bankswithassetsbelow$10billion)wentoutofbusinessbetween2000and2014nationwide.228Over1000suchbankswentoutofbusinessintheimmediateaftermathoftheGreatRecession.229From1994to2014,thenumberofcommunitybanksdroppedfrom10400tolessthan6000.230FDICdatashowsthatfrom2018to2019,thenumberofcommunitybanksdeclinedby4.58%.231ThistrendhasnotlefttheNEMWstatesuntouched.BelowisagraphoftheFDICdatarepresentingthepercentagedeclineinthenumberofcommunitybanksfortheNEMWstatesfrom2018to2019.Thegraphshowsthatonlysevenoftheeighteenstatessawalesserdeclinethanthenationwideaverageoverthistime.Additionally,onlytwostates,twoofthesmallestintheregion,MaineandVermont,sawnodeclineintheirnumberofstatebanks.ThishighlightsthedegreetowhichcommunitybankshaveandcontinuetostruggleintheNEMWstates.

228Peirce,Hester;Miller,Stephen,SmallBanksbytheNumbers,2000-2014,MercatusCenter(2015),https://www.mercatus.org/publication/small-banks-numbers-2000-2014.229Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),9,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.230Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),8,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.231CommunityBanks:NumberbyStateandAssetSize,BankingStrategist(2019),https://www.bankingstrategist.com/community-banks-number-by-state-and-asset-size.

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232Thiscontinualdecline,bothacrosstheUSandparticularlyintheNEMWstates,hasresultedinfarfewersmallbanksthatoperateonalocallevel.Again,usingFDICdata,thereporthaschartedthenumberofpeoplepercommunitybankintheNEMWstatesrelativetothenationalaverage.Thismeasureindicatestheavailabilityoflocalbankingoptionsforthepopulationsofthesestates.Alowervaluemeansthattherearemorebanksperpersonandsomeansthateachpersonhasmorechoiceamongthesebanks.Assuch,itisahelpfulmeasureofthestrengthoflocalbanksinthesestateeconomies.Again,lessthan40%ofNEMWstatesdobetterthanthenationalaverage.ThisincludessmallerstateslikeVermontandMaineandlargeroneslikeIllinoisandMassachusetts.However,stateslikeNewYork,Michigan,Pennsylvania,andOhioperformpoorlyonthismeasure.Insum,then,thenumberofcommunitybanksintheNEMWregionhasshrunkdramaticallyintherecentpastandhascontinuedtodeclineinthecontemporaryeconomicenvironment.

232CommunityBanks:NumberbyStateandAssetSize,BankingStrategist(2019),https://www.bankingstrategist.com/community-banks-number-by-state-and-asset-size.

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Thedeclineofsmallerbankshasledtomoreconcentrationinlocalfinancialmarkets.Largerbanks,mainlyfromout-of-state,haveseizedlargerandlargersharesofdepositsandassetsinthestates.Assmallbankssawtheirshareofdepositshalvefrom2000to2014,thefivelargestbanksinthecountrysawtheirshareofdepositsdouble.233Asaresult,by2010thefivelargestbanksinthecountryhadmoredepositsthanthenext45largestbanksandonepercentofbankshadthemajorityofbranchlocationsinthecountry.234

233Peirce,Hester;Miller,Stephen,SmallBanksbytheNumbers,2000-2014,MercatusCenter(2015),https://www.mercatus.org/publication/small-banks-numbers-2000-2014.234Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),8,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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ThisconsolidationhashittheNEMWregionhard.UsingFDICdata,thisreporthascalculatedaHerfindahl-HirschmanIndex(HHI)fordepositsineachoftheNEMWstates.TheHHIisusedtocalculatethelevelofcompetitioninaparticularmarket.235RegulatorsliketheFederalReserveandtheDepartmentofJusticeusetheHHItoblockuncompetitivemergersbetweenbankswithsubstantialmarketshare.236Additionally,theseregulatorsusedepositstorepresentabank’sgeneralfinancialswaywithinamarket,soanHHIofdepositsismeanttorepresentoverallcompetitivenessinlocalfinancialmarkets.237TheDOJ’sstandardsdesignatemarketswithanHHIabove1000asconcentratedandthoseabove1800ashighlyconcentrated.Thebelowmapshowsthat9outofthe18NEMWstateshaveconcentratedfinancialmarkets.Additionally,twootherstates,MichiganandOhio,areclosetohavingsubstantiallyconcentratedlocalfinancialmarkets.

235TheABCsofHHI:CompetitionandCommunityBanks,FederalReserveBankofSt.Louis(2018),https://www.stlouisfed.org/on-the-economy/2018/june/hhi-competition-community-banks.236TheABCsofHHI:CompetitionandCommunityBanks,FederalReserveBankofSt.Louis(2018),https://www.stlouisfed.org/on-the-economy/2018/june/hhi-competition-community-banks.237TheABCsofHHI:CompetitionandCommunityBanks,FederalReserveBankofSt.Louis(2018),https://www.stlouisfed.org/on-the-economy/2018/june/hhi-competition-community-banks.

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238But,theseresultsmayactuallyunderstatethedegreeofconcentrationinthesestates’financialmarkets.Squaringeachfirm’smarketshareandtakingthesumofthesevaluesdeterminestheHHI.However,thisconstructioncouldmeanthatonelargefirmwithsubstantialmarketshareequaling,say50%,andtherestofdepositsbeingsharedamonghundredsofsmallfirmswouldbeahigherHHIscorethanhaving5firmseachwith20%marketshare.So,analternativemeasureofconcentrationlooksattheshareofdepositsheldbythefivelargestdepositholdersinthestate.Thismeasurecandoabetterjobofidentifyingsituationswhereafewlargefirmsdominateamarkettogether,attheexpenseofmanysmallerfirms.

238DepositMarketShareReports,FederalDepositInsuranceCorporation(2019),https://www5.fdic.gov/sod/sodMarketBank.asp?barItem=2.

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239UsingthesameFDICdata,thereporthascalculatedthemarketshareofthefivelargestbanksineachofthesestates.Thirteenstateshaveamajorityoftheirdepositsheldinonlyfivefirms.ThisincludesmajorregionalstatessuchasMassachusetts,Ohio,Michigan,andNewYork.Additionally,onlyonestatehasfewerthan40%ofitsdepositshousedinfivebanks,Iowa.Thismeansthatinallstates,exceptIowa,thelargestbanksinthestateholdatleast8%ofdepositsonaverage.But,thisnumberislikelyhigherinmuchoftheregiongiventhathalfofthestateshaveover60%ofalldepositsheldbythetopfivefirms.Maryland’scaseisillustrativeinthisrespect.Twoout-of-statebankscontrolmorethanathirdofalldepositsbetweenthemandofthefivelargestbanks,noneofthemarecharteredorbasedoutofthestate.240Additionally,thesebankshaveanaverageof12%ofstatedepositseach,whichindicatesasubstantiallevelofconcentration.Yet,despitethissituation,Maryland’sHHIbarelyplacesitintotheconcentratedrangewithascoreof1006.Thisconcentrationisindicativeofwhateconomistscallimperfectlycompetitivemarkets.Thesearemarketsthatarenotmonopolistic—theydonothaveonlyonefirm—butwhicharealsonotperfectlycompetitive.Thatis,thesearenotmarketswithmanysmallfirms,eachofwhichcannotsubstantiallyinfluencethemarketthroughitsactions.Instead,thesemarketsare

239DepositMarketShareReports,FederalDepositInsuranceCorporation(2019),https://www5.fdic.gov/sod/sodMarketBank.asp?barItem=2.240PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),8,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.

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characterizedbyafewlargerfirmsandmanysmallerfirms.Thelargerfirmsexertalargeamountofinfluenceonboththepriceandquantityatwhichproductsaresold.Assuch,thesemarketsareclosesttooligopolisticmarkets—whereafewlargefirmscompetewitheachother.Instandardeconomictheory,thismarketstructureisnotsociallyefficient.Thatis,havingafewlargefirmsmeanshigherpricesandlessgoodsforsociety.Thisisbecausethelargefirmscanearnmorebychargingahigherprice,evenifitmeanssellingalowerquantityofgoods.Astheconcentrationoffinancialmarketsprogressed,then,wewouldexpecttoseelowerratesofinvestmentandworseaccesstocreditforlocalbusinesses,governments,andconsumers.Thiseconomicintuitionissupportedbythedata,bothnationallyandfortheNEMWstates.IttookyearsforthebiggestbanksinAmericatoreturntheirlendingbackto2007levels.IttookJPMorganChaseandWellsFargountil2011togettothatlevel,whileBankofAmericaandCitigroupwerestilllendingwellbelowtheseamounts3yearsaftertherecession.241

241Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),8,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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242TheabovegraphshowsthegrowthrateofloansandleasesintheUnitedStatesfrom2001to2017.Thisdataincludesloansforrealestate,commerceandindustry,consumers,construction,andleasefinancingearnings.243Assuch,thismeasurecomprehensivelycapturesthemajorcomponentofbank’sbalancesheetsthatisdirectedtowardsproductiveinvestments.244Ascanbeseeninthegraph,loansandleasestookapredictabledivein2008buthavenotfullyrecoveredinalmostadecade.Indeed,onlyoneyearfrom2008to2017hasseenloanandleasegrowthgreaterthananyyearfrom2003to2007.Thispeakyear,2015,hasbeenfollowedbyprogressiveyearsofdecliningloanandleasegrowthin2016and2017.

242HistoricalBankData,FederalDepositInsuranceCorporation(2019),https://banks.data.fdic.gov/explore/historical/?displayFields=STNAME%2CBANKS%2CASSET%2CDEP%2CNETINC%2CINTINC%2CEINTEXP%2CTPD&selectedEndDate=2017&selectedReport=CB&selectedStartDate=1934&selectedStates=0&sortField=YEAR&sortOrder=desc.243HowdoestheFederalReservedefine“loansandleases,”andhowdotheyrelateto“commercialandindustrialloans”?,FederalReserveBankofSanFrancisco(2004),https://www.frbsf.org/education/publications/doctor-econ/2004/november/loans-leases-commercial-industrial-bank-portfolio/.244HowdoestheFederalReservedefine“loansandleases,”andhowdotheyrelateto“commercialandindustrialloans”?,FederalReserveBankofSanFrancisco(2004),https://www.frbsf.org/education/publications/doctor-econ/2004/november/loans-leases-commercial-industrial-bank-portfolio/.

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Still,theaverageloanandleasegrowthoverthisentireperiodwas4.92%.ThisvaluecomparesfavorablywithmostoftheNEMWstates.13NEMWstateshadaverageloanandleasegrowthrateslowerthanthenationalaverage.Infact,onethirdofallNEMWstateshad,onaverage,negativeratesovertheentireperiod.ThisincludesMichigan,Minnesota,NewYork,andMaryland.Maryland’sstoryis,again,instructive.EvenasMarylandlostover150,000jobsintherecessionandevenafterlargebankshadreturnedtoprofitmaking,thelargestbanksstillfailedtoreturntotheirpre-crisisloanlevels.245ThestatesthathadthelargestgrowthratesweremainlysmalleroneslikeRhodeIsland,Delaware,andMaine,withOhiobeingtheonlylargestatetoseegrowthabovethenationalaverage.Butwhataboutlendingtosmallandmediumbusinesses?Thisgroupisimportanttoeconomicgrowthandhasalargedemandforloans.AcademicstudiesfindthatSMEsaccountforalargepercentageoftotalemployment,butare“constrainedintheiraccesstofinance.”246IntheUS,smallbusinesseshavecreatedtwothirdsoutofalljobsinthelasttwodecades.247AstudyofSMEsacrosstheworldfoundthatSMEsfinditcomparativelymoredifficultandmoreimpactfulontheirperformancetogetfinancing.248AstudyfocusedonFrenchSMEsfoundthatatargetedcreditprogramstronglyincreasedloanstakenoutbySMEs.249ThisimpliesthatSMEshadademandforfinancing,but,duetothecostsofobtainingcreditfromtheopenmarket,couldnotreceivecredituntiltargetedbyaspecificprogram.250Yet,despitetheimportanceofSMEloanstothesefirmsandtotheeconomyoverall,SMElendinghasdeclinedalongwithotherformsoflending.Thefinancialcrisisinvolvedthelargestdrop-offinsmallbusinesslendingsince1942.251Theresultingrestrictionofbusinessactivitiesledtofurthereconomiccontractionassmallbusinessesclosedorhaltedexpansionplans.BankofAmerica,forexample,madeonlytwoSmallBusinessAssociationloansinMarylandtheentiretyof2010whereasin2007ithadmade312.252Indeed,themajorityofsmallbusiness

245PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),8,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.246Dutt,Devika,DoesGreaterPublicOwnershipintheFinancialSystemPromoteSuperiorPerformance?,PoliticalEconomyResearchInstitute(2017),7,https://www.peri.umass.edu/component/k2/item/1036-does-greater-public-ownership-in-the-financial-system-promote-superior-performance.247Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),4,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.248Beck,Thorsten;Demirguc-Kunt,Asli;Peria,Maria,BankFinancingforSMEs:EvidenceAcrossCountriesandBankOwnershipTypes,JournalofFinancialServicesResearch(2011),2,https://link.springer.com/content/pdf/10.1007%2Fs10693-010-0085-4.pdf.249Bach,Laurent,AreSmallBusinessesWorthyofFinancialAid?EvidencefromaFrenchTargetedCreditProgram,ReviewofFinance(2014),3,https://academic.oup.com/rof/article/18/3/877/1573387.250Bach,Laurent,AreSmallBusinessesWorthyofFinancialAid?EvidencefromaFrenchTargetedCreditProgram,ReviewofFinance(2014),40,https://academic.oup.com/rof/article/18/3/877/1573387.251Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),5,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.252PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),8,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.

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loanscamefromcommunitybanksinthewakeofthecrisis,despitethefactthattheyonlyheldonethirdofalldeposits.253DrawingonSBAdatafrom2016,thebelowgraphshowssmallbusinessloanamountspersmallbusinessemployee.Essentially,themetricrepresentstheamountofcreditsmallbusinessesreceiveinastatewhilecontrollingforthenumberofsmallbusinessemployeesinthestate.Assuch,themeasureshowstheextenttowhichcreditismadeavailabletosmallbusinessesinastate.

254Asthemapshows,moststatesintheregionarebelowthenationalaverageof$3911persmallbusinessemployee.Only5statesareabovethenationalaverage.ThisdoesincludelargerstateslikeIllinois,Michigan,andNewJersey,butrepresentsalowlevelofsmallbusinesslendingintheNEMWregion.Overall,mostlargestatesareunderthenationalaverage,suchasNewYork,Ohio,andPennsylvania.253Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),9,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.254SmallBusinessLendingintheUnitedStates,2016,SmallBusinessAdministration(2016),https://www.sba.gov/advocacy/small-business-lending-united-states-2016.

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Inshort,thereisgoodevidencethatsmallbusinesslendinghasdecreasedsignificantlyintheUS.Thislendingismostlikelysupply-driven—itisbecauseofalackofcreditavailabilityratherthanalackofsmallbusinessdemand.Thislackofcreditaccessisconnectedtoconcentrationinlocalfinancialmarkets.Asaresultofthisconcentration,largerbankshaveofferedfewerloanstosmallerbusinesseswhichtendtobelargerrisksandlessprofitablethanother,oftenmorecomplex,financialopportunitieselsewhere.TheseeffectshaveplayedoutespeciallystronglyintheNEMWregion,wheremanyofthestatesfaceissuesofconcentrationandlowlendingnumbers.Weakcreditmarketsalsoimposecostsonmunicipalandstategovernmentsduetolackofaccesstocredit.Governmentsareborrowersaswell.Often,theyborrowtofinanceimportantinvestmentsthattheybelievewillyieldstrongreturnsovertime.Thisincludesimportantinvestmentsinareaslikeinfrastructureandtheenvironment.However,weakerfinancialmarketsmeansthatsub-nationalgovernmentsmustpayhigherinterestratesorfeesinordertoreceivefinancingfortheirinvestments.Thisbothdissuadesproductiveinvestmentsonthepartofthegovernmentandleachesmoneyoutofpubliccoffers.Ifgovernmentsdodecidetoseekfinancingforinvestments,theyareusuallycompelledtogotolargebanks.Thesebanksgenerallyhavetheexpertiseandthefinancialconnectionstohelpgovernmentsthroughfinancing.However,thepricesthatstatesandmunicipalitiesfacearebothhighlyvolatileandlikelyhigherthantheyneedbe.255Theseeffectsareheightenedinthemidstofeconomiccrisis.Inthesesituations,creditavailabilityfurthershrinksforgovernments.Astheeconomyentersadownturn,manygovernmentsmustcutspendingduetodecreasingrevenues,whentheyshouldreallyengageincounter-cyclicalspending.Thisspendingwouldincreaseeconomicactivityandputmoneybackinlocals’pockets.Counter-cyclicalspendingcangenerateapowerfulpositivecycleofeconomicactivity,butthisisonlypossibleformanygovernmentsiftheycanreceivefinancingintheshort-termforinvestments.States,forinstance,oftenhavetoborrowat5%interestrates,inadditiontohavingtomanagetheircreditrating,paylatefees,andhandleinterestrateswaps.256Meanwhile,municipalitieshaveincreasinglybeenforcedtorelyonthisformoffinancingsincethe1980’sduetodecliningfederalsupport.257TheypayhigheramountsandcanoftenfallpreytocomplexfinancialinstrumentscontainedintheirdealswithWallStreet.258

255Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.256PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),11,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.257Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),10,https://rooseveltinstitute.org/municipal-banking-overview/.258Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),10,https://rooseveltinstitute.org/municipal-banking-overview/.

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Inconclusion,then,theNEMWstatesfaceanumberofissuesthatareinterconnected.Fromashrinkingnumberofcommunitybankstolesscompetitivemarketstolessinvestmentandaccesstocreditforgovernmentsandbusinesses,theseissuesarealltiedtotheweaknessoftheirfinancialmarkets.Anysolutiontotheseproblemsmuststrengthenthefinancialmarketsinthesestates.

2. The Public Banking Solution Publicbankingthroughtheestablishmentofastatebankcansignificantlystrengthenthehealthoflocalfinancialmarkets.ThemostimportantroleplayedbytheBNDisasabankers’bankandapartnershipbank.Inthisrole,theBNDaidssmallerbankswithinitsstatethroughavarietyofdifferentactivities.Intheprocess,theBNDstrengthenslocalcommunitybanksandallowsthemtocompetewithbiggerbanks.Astatebankforanyotherstatecouldfillthissamerole.Anystatebankcouldparticipateinpartnershiplending.AswiththeBND,thispartnershipbankingactivitywouldensurethatsmallerbankshadmoreabilitytoextendlargerloanstotheircustomers.Smallerbankswouldalsobeabletooffermoreattractiveinterestratestotheircustomers.Thiswouldhelpcommunitybankskeeptheirmostimportantcustomersevenastheygrow.Apartnership-lendingprogramfromastatebankwouldhelpcommunitybanksbuildrelationshipswiththeircustomersoverthecourseoftheirlendinghistory.Thiscouldbeespeciallylucrativetosmallerbanksinkeepingtheirrelationshipswithbusinesses.Astatebankwouldalsoaidsmallerbanksbyprovidingthemwithadditionalliquidityforlittlecost.LiketheBNDdoes,astatebankcoulduselettersofcredittofreecommunitybankreservesforotherlending.AstatebankcouldalsoensurethatlocalbankshaveaccesstocreditthroughtheFederalReserveSystem.259Finally,astatebankcouldengageindirectbankstocklending.TheBNDcurrentlyhasover$150millionintotalbankstockfromcommunitybanksinNorthDakota.260ThesearepurchasesofsharesofsmallbanksthattheBNDhasmadeinordertofreefundsforthesebanksinavarietyofways.Thesepurchasescanhelpbanksmanagemergersbetweeneachotherorexpandtheirlendingactivities.261

259WashingtonStateBankAnalysis,CenterforStateInnovation(2010),2,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.260WashingtonStateBankAnalysis,CenterforStateInnovation(2010),12,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.261WashingtonStateBankAnalysis,CenterforStateInnovation(2010),12,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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Finally,astatebankcouldperformbankers’bankfunctionssuchascheckclearingandbondaccounting.262Thesearehelpful,ifsmall,servicesthatastatebankcouldofferwhichwouldfreesmallbanksfromfocusontheseissues.Instead,smallbankswouldhavemoreabilitytoprioritizetheirprimaryactivityofproductiveinvestment,similartothewaytheDSGVfreestheSparkassenfrommanycomplextaskstofocusonlending.Asaresult,astatebankwouldimprovecompetitivenessinlocalfinancialmarkets.Biggerbankswouldsuddenlyhavecompetitionforactivitiessuchaspartnershiploans,governmentdeposits,andbondissuesfromthestatebank.Additionally,smallerbankswouldbeinabetterpositiontocompetewithbigbanksforloans.Indeed,theBND“hashelpedcarveoutandprotectafreeandcompetitivemarketforcommunitybanks”whichmorecloselyresemblesaperfectlycompetitivemarket.263AlthoughtheNorthDakotanfinancialmarketisnotperfectlycompetitive,itislessoligopolisticthanotherstatebyvirtueoftheactivitiesofthestatebank.Thismeansgreaterquantitiesofloansatlowerratesascompetitionbetweenfirmsdrivespricesdown.AfeasibilitystudyforaWashingtonStateBankfoundthatloantoassetratioswouldbe5to7percenthigherwithastatebank.264Astatebankwouldalsocutintobigbanks’marketsharebytakingsizablestatedepositsoutoflargerbanks.Astatebankwouldincreaseoveralllendinginthestate.AfeasibilitystudyinVermontfoundthatoveralllendingwouldincreaseinthestatethroughthecreationofastatebankbecausethepublicbankwouldtargetdifferentprojecttypesfromwhatmanyprivatebanksdoandbecausethepublicbankwouldavoidoutflowsofcapitalfromthestate.265Thisisespeciallytrueifthestatebank,first,offersalowerinterestrateforkeyinvestmentsthancouldbefoundonthemarketand,second,extendscreditmorewidelythanprivatebankshavebyincreasingcommunitybankliquidityandbytargetinghighsocial-goodinvestments.ThepreviouslymentionedWashingtonstateanalysisalsofoundthatparticipation-lendingactivitywouldincreaseoveralllendingby8.2%or$2.6billioninthestate.266

262WashingtonStateBankAnalysis,CenterforStateInnovation(2010),2,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.263Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),6,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.264WashingtonStateBankAnalysis,CenterforStateInnovation(2010),1,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.265Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),19,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.266WashingtonStateBankAnalysis,CenterforStateInnovation(2010),1,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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Thedirectbankstockpurchasescanalsoincreaseinvestment.Atevenaconservative10%leverageratio,theBND’s$150millioninthesepurchaseswouldresultinupto$1.5billioninnewloans.267Academicstudiesoffinancialsystemsacrosstheworldalsofindthatpublicbanksincreaseoverallinvestment.Forinstance,astudyinItalyfoundthatpublicbankstendedtoofferlowerinterestratesthanprivatebanks,whichinturnmeansgreateroveralllending.268Anotherstudydemonstratedhowhavingpublicbanksthataretiedtospecificlocalitiesincreasedoveralllendinganddevelopmentintheregion.Thestudy’smodelimpliedthatbiggerprivatebankspursuedinvestmentopportunitiesinmoredevelopedareas,leavingpoorerareaswithoutadequatefinancing.269Thus,smallerbanksandpublicbankswerethedriversofinvestmentinpoorersub-regionsduetotheirinabilitytopursuemorelucrativeinvestmentopportunitieselsewhere.270Greateroverallinvestmentasaresultofapublicbankalsomeansgreaterinvestmentinsmallbusinesses.ApublicbankwouldincreaseinvestmentinSMEsintwodifferentways.First,throughaidingsmallcommunitybankswithpartnershiploansandincreasedliquidity,apublicbankwouldtherebyincreaselendingtosmallbusinesses.Second,astatebankcouldinstituteitsownspecificprogramsorientedtowardssmallbusinessinvestment.Asoneacademicstudynotes,SMElendingpromoteseconomicdevelopment.271StatebanksfollowingapublicmandatetoincreaseoveralldevelopmentcandeliveronthisgoalthroughtargetedlendingtoSMEs.272Finally,apublicbankcanincreasefinancingoptionsforlocalandstategovernments.First,thebankcoulddirectlyloantothesegovernmentsatfavorablerateswithaparticularemphasisoninvestmentsimportanttotheoveralldevelopmentoftheregion.Thiscanbeachievedby,forexample,directlybuyinggovernmentbondsorthroughspecialloanprogramsforspecifictypes

267WashingtonStateBankAnalysis,CenterforStateInnovation(2010),12,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.268Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),15,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.269Hakenes,Hendrik;Hasan,Iftekhar;Molyneux,Phillip;Xie,Ru,SmallBanksandLocalEconomicDevelopment,ReviewofFinance(2015),24,https://academic.oup.com/rof/article-abstract/19/2/653/1580484?redirectedFrom=fulltext.270Hakenes,Hendrik;Hasan,Iftekhar;Molyneux,Phillip;Xie,Ru,SmallBanksandLocalEconomicDevelopment,ReviewofFinance(2015),24,https://academic.oup.com/rof/article-abstract/19/2/653/1580484?redirectedFrom=fulltext.271Behr,Patrick;Foos,Daniel;Norden,Lars,CyclicalityofSMELendingandGovernmentInvolvementinBanks,JournalofBankingandFinance(2017),2,https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2640679.272Behr,Patrick;Foos,Daniel;Norden,Lars,CyclicalityofSMELendingandGovernmentInvolvementinBanks,JournalofBankingandFinance(2017),2,https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2640679.

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ofinvestments.273ThebankwouldalsohavealinewiththeFederalReserveandsowouldhaveaccesstoverylowratesinthediscountwindow.274Thebankcouldthenpassthesesavingsontothestateandlocalgovernments;insteadofpaying5%interestratesgovernmentscouldpay1%andthestatebankwouldstillprofit.275Secondly,apublicbankcaneaseaccesstocreditforgovernments.Forexample,thebankcouldofferlettersofcreditongovernmentbondsthatwouldincreasethenumbersofbuyersforthesebonds.276Thisroleiscurrentlyfulfilledbylargebanks,whichchargehigherratesfortheirservicesthanapublicbankwould.277Thestatebankcouldalsoaidthesemunicipalitieswiththeirbondissuesbyprovidingcounsel,lowerfees,andhelpingtoidentifythebestinvestmentopportunities.Thiswouldallowmunicipalitieswithlittleexperienceinfinancinginvestmenttodosoatmuchlowerratesthantheycouldreceivefromlarger,profit-focusedbanks.Overall,then,astatebankcouldaddresstheproblemsofNEMWstatelocalfinancialmarkets.Itwoulddosobystrengtheningsmallbanks,therebyreducingconcentrationinthemarketandincreasingcompetitionbetweenfirms.Thisincreasedcompetitionwouldtranslateintohigheroverallinvestment,greaterinvestmentinSMEs,andgreateraccesstoinvestmentfundingforlocalgovernments.

B. Lack of Development WeakfinancialmarketsareanimportantcausalfactorbehindlackofeconomicdevelopmentintheNEMWregion.278Assuch,theabovesectioncanalsoinformthesolutiontothissection;bymakingfinancialmarketsmorecompetitiveastatebankwouldalsoincreaseeconomicdevelopment.However,thecausesofdevelopmentaremyriad,andsothelackofdevelopmentinthesestatesisalsoanissueoutsidetheweaknessoftheirfinancialmarkets.

273Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),4,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.274PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),17,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.275PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),11,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.276Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),11,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.277Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),11,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.278Hakenes,Hendrik;Hasan,Iftekhar;Molyneux,Phillip;Xie,Ru,SmallBanksandLocalEconomicDevelopment,ReviewofFinance(2015),3,https://academic.oup.com/rof/article-abstract/19/2/653/1580484?redirectedFrom=fulltext.

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1. The Problem RealGDPpercapitaisconsideredthemoststandardmeasurementofeconomicdevelopment.Thismeasuresummarizesproductivityperperson.Italsodemonstrates,quiteclearly,thestrugglesofeconomicdevelopmentfacedintheNEMWregion.ThebelowgraphshowsanaverageofRealGDPpercapitagrowthrateacrosstheNEMWregion.

279Growthratesintheregionwerehighestbefore2007,peakingin2000and2004.Therecessionhadapredictableimpactongrowthstartingin2007,buttherecoverywasespeciallyslow;positivegrowthonlyresumedin2010.Sincethen,growthhasremainedunder2%peryeareachyear.In2013,growthwasevenslightlynegative.Thesegrowthnumbersoccurredastherestofthecountrywasalsosufferinganeconomiccontraction,buttheNEMWregionhadalowerannualgrowthin56%ofyearscomparedtothenationasawhole.Additionally,theNEMWregionaveragedgrowth.15%lessthanthenationalaverage,whichaddsuptoasignificantdifferenceover18years.Only7ofthe18statesintheregionaveragedgrowthratesovertheperiodhigherthanthenationalaverage,withthelargeststatesinthatgroupincludingNewYork,Massachusetts,andPennsylvania.But,Ohio,Michigan,andIllinoiseachaveragedlessthan1%growthovertheentiretimespan.Anotherkeyareaofeconomicdevelopmenthastodowithinvestmentinthefundamentallyproductiveelementsofaneconomy.Oneofthemostimportantoftheseareasisinfrastructure.Infrastructurereferstothebasicfacilitiesandsystemsthatservethemostessentialneedsofa

279RegionalData,BureauofEconomicAnalysis(2017),https://apps.bea.gov/itable/iTable.cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1.

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society.Assuch,havingefficient,up-to-date,andsoundinfrastructureisanecessityforeconomicdevelopment.Inthisarea,theNEMWstateshavelargeoutstandingneeds.TheAmericanSocietyofCivilEngineerspublishesaregularinfrastructurereportcardonthestateofthenation’sinfrastructure.Thisincludesgradingsomestates.Ofthe11NEMWstatesreceivingagradein2017,themostrecentreport,noneofthemscoredhigherthanaC.280ThemodalgradeacrossthesestateswasaC-.Thisimpliesthatallstatesintheregionhavelargeamountsofworktodotomeetthebasicinfrastructurestandardsagreedtobytheexperts.Thereportalsoassesseseachstatealonganumberoffactorsmeasuringthehealthofinfrastructure.Thebelowgraphrepresentstwoofthesemetrics,thepercentofastate’sbridgeswhicharestructurallydeficientandthepercentofastate’sroadsthatareinpoorcondition.Thesemetricscoveranimportantareaofinfrastructuretoeconomicdevelopment:groundtransportation.Poorroadsmeanpoortransportation,whichmeanshighercostsofbusinessandlessoveralleconomicactivity.Thebelownumbers,then,indicateaworryinglackofinfrastructureinvestment,withonaverageover10%ofbridgesstructurallydeficientandalmostaquarterofallroadsinpoorquality.

SomeoftheworstoffendersincludelargestateslikeMichigan,NewYork,andPennsylvania.Eventhebestperformingstates,likeMaryland,Indiana,andMinnesotahavearound10%oftheirvitalgroundtransportinfrastructureinpoorcondition.

280InfrastructureReportCard,AmericanSocietyofCivilEngineers(2017),https://www.infrastructurereportcard.org/.

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Inwatermanagementinfrastructurethereisasimilarneedforinvestment.UsingestimatesfromthesameASCEreport,I’vecalculatedthattheNEMWregionasawholerequires$264billionindrinkingwaterinfrastructureinvestmentand$125billioninwastewaterinfrastructureinvestmentoverthenexttwentyyears.Together,thesetwoneedsforwatermanagementtotalnear$400billionover20years,withanestimatedneedof$19.5billionperyearacrossthesestates.Clearly,then,infrastructureinvestmentislackingintheNEMWregion.Theregionrequiresgreaterinvestmentandfocusinordertoprovidethefundamentalunderpinningsforeconomicdevelopment.Lackinginfrastructuremakesitmoredifficulttoconducteconomicactivityatanytimeandlowereconomicactivityitselfbegetslowereconomicactivityduetorecessionarycyclesinlocaleconomies.

2. The Public Banking Solution Apublicbankcanincreaseoveralldevelopmentinthestateeconomy.First,financialsystemswillimproveasaresultofthepublicbank’sactivities.Animprovedfinancialsystemmeansmoreinvestmentandthusgreaterdevelopment.So,asolutiontothefirstlargeproblemfacingthesestatesisalsoapartialsolutiontothesecondproblemfacingthesestates.Apublicbankwouldalsofillafinancialrolenotfilledbyregularprivatefinancialmarkets.Thatis,agovernmentbankwouldbemorewillingtofundthelong-term,fundamentalprojectsforwhichthepublicsectorrequiresfunding.Shortofjustprovidinghelpwithaccessingfundingfortheseendeavors,asthebankwoulddothroughimprovinglocalfinancialmarkets,thebankcanalsodirectlyinvestinthemostimportant,large-scaleprojectsofstategovernments.Astudyofworldwidebankingsystemsshowedthatpublicbanksarefarmorewillingtomaketheseessentialinvestmentsthanprivatebanks.281Studiesalsosuggestthatpublicbankshavetheirmostbeneficialimpactsongrowthonlyindevelopedeconomieswithhighlydevelopedfinancialsystems.282ThisisthecaseintheNEMWregionandsoshouldimplythatastatebankwouldbringgrowthtotheregionthroughfinancialactivities.

281Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),7,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.282Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),24,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.

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But,astatebankshouldalsogenerategrowththroughitsdirectlydevelopmentalaims.Astatebankwouldhavea“publicpurpose”.Thispurposewouldmakethebankprioritizeinvestmentsthatbenefitsocietyasawhole,ratherthanpursuingtheprivateprofitsofthebank.Thisfocusonsocietalbenefitsshouldtranslateintoeconomicdevelopment,asthebankchoosesinvestmentopportunitiesthatpromisetocreategreatersocietalbenefits.ThisdevelopmentalfocusshouldmeanincreasesinGDP,income,andemploymentthroughoutthestate.283AfeasibilitystudyforaVermontstatebankfoundthatevenifthebankengagedinonly$230millioninlendingitwouldcreatenetincreasesinstateoutput,jobcreation,andsavingsoninterestratecharges.284AstudyforWashingtonstatefoundthatastatebankwouldgenerateupwardsof7500jobsinonequarterthroughincreasedlendingactivitytosmallerbusinesses.285Astatebankprovidesthesebenefitsthroughfundingessentiallong-termprojects,lendingtokeydevelopmentalsectors,andlendingcounter-cyclicallytoheadoffrecessionarycircles.Itwouldinvestwithalong-termperspective,withtheinterestsofthelocality’sfutureinmind.But,itcouldalsopromoteinvestmentsincomplexsocialproblems,whichoftenhaveindefinitecostsandbenefitsassociatedwithsolvingthem.286Problemssuchasglobalwarmingorshiftingdemographicsmustbeaddressed,butarenotattractiveforprivatefinancebecauseoftheirscaleandtheirpotentialcostsinsolving.However,apublicbank,byworkingintheinterestsofthepublic,mustaddressinvestmentopportunitiesthatwillworktowardssolvingtheseissues.Inthisway,astatebankaddressesmarketfailuresintheconstructionofourcurrentfinancialsystem.Thatis,itaddressesareaswhereprivateinterestswillnotcompelsubstantialinvestmenttomeetsociety’sneeds.Apublicbankcanaffordtodothisbyitsoperationinbothprofitableandlessprofitableactivities.LiketheBND,apublicbankcanuseitsprofitsfromactivitiesinmorecommonmarkets,suchasparticipatinginpartnershiploansordirectloanstobusinesses,andusetheearningsfromtheseactivitiestoinvestin“economicdevelopmentactivitiesthatmaycarrysomewhathigherrisksorwhereborrowershavedifficultyaccessingcapital.”287AstudyoftheGermanSparkassendemonstratesthedevelopmentalfocusofpublicbanksinaction.TheSparkassenareefficientrelativetointernationalstandards,butreceivelowerprofits.Thisis

283Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),7,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.284Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),13,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.285WashingtonStateBankAnalysis,CenterforStateInnovation(2010),12,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.286Mazzucato,Mariana;Penna,Caetano,BeyondMarketFailures:TheMarketCreatingandShapingRolesofStateInvestmentBanks,JournalofEconomicPolicyReform(2016),5,https://www.tandfonline.com/doi/abs/10.1080/17487870.2016.1216416.287WashingtonStateBankAnalysis,CenterforStateInnovation(2010),3,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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becausetheirefficiencygainsarepassedontoconsumersintheformofcheaperorbetterservices.Thestudyshowedthattheseefficiencygainsareassociatedwithregionaleconomicgrowth;inregionswithagreatermarketshareforthesavingsbanks,thereisalargeramountofeconomicgrowthasaresultofincreasesinefficiency.288Whereasprivatebankswoulduseefficiencygainstoincreaseprofitsormarketshare,publicbankscanusethesegainstosubsidizemoredirectlydevelopmentalinvesting,leadingtogreatereconomicgrowthintheirrespectiveoperatingregions.Oneimportantareaoflong-terminvestmentwhichmaynotbeimmediatelyproductive,butwhichcanoffergreatsocietalbenefitsisinfrastructure.Asnoted,infrastructureisessentialtodevelopmentbutvastlyunderinvestedinbytheNEMWregion.Publicbankscanfocusonimprovingstateinfrastructure.TheBNDhasonesuchprogram.Asaresult,NorthDakotamayindicatehowtheNEMWregioncanimproveitsinfrastructure.NorthDakotareceivedaCfromtheASCE,tiedforthehighestofanyoftheNEMWregion,whichonly3statesreceived.289Italsowasneartheaverageforpercentageofbridgesstructurallydeficientandwellbelowtheaverageforpoorroads.290Ithadlessthan$750millionincombinedwaterinfrastructureneedsforthenext20years.291Astatebankcoulddeliverthesesamelevelsofinfrastructurequality,orbetter,byfocusingondirectlydevelopmentaltasksandinvestinginthelong-termhealthofitsstate.Thepublicmandatealsoleadsbankstolendinamannerthathelpstheeconomyoverall.Publicbankscanhelptomanageeconomiccycles.Inmanagingthesecycles,astatebankcanlimittheirmagnitudeandcanreducetheirnegativeimpactsonlong-termeconomicgrowth.Governmentbanksofferthisstabilizingroleintheeconomythroughtheirlendingactivity.Publicbanks,accordingtomultipleacademicstudies,providecreditinamannerthatiseitherlesspro-cyclicalthanprivatebanksorsometimesevencountercyclical.292Theyareabletomobilizetheirresourcestolimitdecreasesininvestmentandconsumptioninrecessions,butalsoscalebackontheirlendinginexpansionarybooms.293WhereasprivatebankstendtoadjustlendingatevenhigherpercentagesthanGDPpercapitagrowth(i.e.,theyarehighly

288Hakenes,Hendrik;Hasan,Iftekhar;Molyneux,Phillip;Xie,Ru,SmallBanksandLocalEconomicDevelopment,ReviewofFinance(2015),20,https://academic.oup.com/rof/article-abstract/19/2/653/1580484?redirectedFrom=fulltext.289NorthDakotaReport,AmericanSocietyofCivilEngineers(2019),https://www.infrastructurereportcard.org/state-item/north-dakota/.290NorthDakotaReport,AmericanSocietyofCivilEngineers(2019),https://www.infrastructurereportcard.org/state-item/north-dakota/.291NorthDakotaReport,AmericanSocietyofCivilEngineers(2019),https://www.infrastructurereportcard.org/state-item/north-dakota/.292Dutt,Devika,DoesGreaterPublicOwnershipintheFinancialSystemPromoteSuperiorPerformance?,PoliticalEconomyResearchInstitute(2017),11,https://www.peri.umass.edu/component/k2/item/1036-does-greater-public-ownership-in-the-financial-system-promote-superior-performance.293Dutt,Devika,DoesGreaterPublicOwnershipintheFinancialSystemPromoteSuperiorPerformance?,PoliticalEconomyResearchInstitute(2017),11,https://www.peri.umass.edu/component/k2/item/1036-does-greater-public-ownership-in-the-financial-system-promote-superior-performance.

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volatile)publicbankstendtoadjust,inpercentageterms,lendingbylessthanhalfofGDPpercapitagrowth.294Apublicbankalsoincreasesdevelopmentthroughitsfocusonsmallbusinesslending.Theseloans,however,arenotdirectlydevelopmental.But,theseloanscanoftenbeimportantfordevelopingaregionaleconomy.Studiesshowthatsmallbusinesseshavecontinualissueswithfindingcredit,especiallyinrecessions,andsohavingapublicbankthatextendscredittothesebusinessesprovidesthemwithmorestablefinancialopportunitiesthantheycangetintheprivatemarket.295Assmallbusinessesplayacentralroleineconomicdevelopment,theseinvestmentscanalsoincreasedevelopmentinthestate.OnestudyfoundthatpublicbanklendingtoSMEsis25%lesssensitivetogrowththanprivatebanks,whichtranslatesintoalargeeconomicdifference.296What’smorethislendingissupply-driven,meaningthatSMEshavedemandsforfinancingthatarenotmetbecauseofdecisionsmadebybanksinextendingcredit.297Publicbanks,then,canprovidethiscreditwhereitislackingfromprivatefirms.Asaresult,smallbusinesseswillperformbetterinareaswithpublicbanks.Multiplestudiesconfirmthisintuition;publicbanksincreaseSMEdevelopmentandregionsinGermanywithgreaterSparkassenmarketshareseehigherlevelsofnewbusinessregistration.298This,inturn,willmeangreatereconomicdevelopmentintheseregions.Thus,apublicbankcanincreaseeconomicdevelopmentinaregion.

C. State Fiscal Health Thislastissueisonethatwillbesubstantiallyaddressedbysolvingthetwoaboveissues.However,astatebankwouldalsodirectlybenefitastate’sfiscalhealth.

1. The Problem Currently,theNEMWregionisinapoorfiscalstate.Therearetwobasicmeasuresofstatefiscalhealth.Thefirstisastate’sbudgetdeficitorsurplus.Thisvaluerepresentsthe

294Dutt,Devika,DoesGreaterPublicOwnershipintheFinancialSystemPromoteSuperiorPerformance?,PoliticalEconomyResearchInstitute(2017),12,https://www.peri.umass.edu/component/k2/item/1036-does-greater-public-ownership-in-the-financial-system-promote-superior-performance.295Behr,Patrick;Foos,Daniel;Norden,Lars,CyclicalityofSMELendingandGovernmentInvolvementinBanks,JournalofBankingandFinance(2017),2,https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2640679.296Behr,Patrick;Foos,Daniel;Norden,Lars,CyclicalityofSMELendingandGovernmentInvolvementinBanks,JournalofBankingandFinance(2017),2,https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2640679.297Behr,Patrick;Foos,Daniel;Norden,Lars,CyclicalityofSMELendingandGovernmentInvolvementinBanks,JournalofBankingandFinance(2017),2,https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2640679.298Hakenes,Hendrik;Hasan,Iftekhar;Molyneux,Phillip;Xie,Ru,SmallBanksandLocalEconomicDevelopment,ReviewofFinance(2015),24,https://academic.oup.com/rof/article-abstract/19/2/653/1580484?redirectedFrom=fulltext.

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relationshipbetweenastate’srevenuesandexpenditures.Whenastatespendsmorethanitcollects,itrunsabudgetdeficit.Thismeasureshows,onayear-to-yearbasis,howwellthestateismanagingitsbudget.Italsoservesasthedeterminantofastate’sdebt—thesecondbasicmeasureofastate’sfiscalhealth.Debt,here,referstoallunfundedobligationsthatastateisliabletorepay.Thisismainlyfromstateborrowingtofundspendingforwhichthereisnotavailablerevenue.Debtaccumulatesovertimeasdeficitscontinueandcanonlyberetiredthroughsurplusesequaltothepreviousdeficitsplusinterestpaidfortheborrowedfunds.ThestatedeficitdatashowsthatNEMWstateshavehadmixedresults.Thebelowgraphshowstwovalues:first,thetotalrevenuesofthestatesfrom2003to2017asashareoftheirtotalexpensesoverthistimeandsecondtheirnumberofyearswithadeficitoverthistime.Thefirstmeasuredemonstrateshowwellthestateisdoingatfundingallofitsobligations.Thesecondmeasureshows,onayear-to-yearbasis,howoftenastatefailedtomeetitsbudgetneeds.

299Sevenoftheeighteenstatesdidnotcollectenoughrevenuetoequalexpensesoverthistimeperiod.ThisincludeslargestatelikeIllinois,Massachusetts,NewYork,andNewJersey.But,amajorityofstatesdid.However,onlyfourrelativelysmallerstatesoutperformedthemedianacrossallstatesintheUS,whichwas102.1%ofexpensesinrevenue.Thus,14ofthe18NEMWstatesmustbeinthebottomhalfofstatesbythismeasure.ThestatusofNEMWstatedeficitsisevenworsewhenitcomestonumberofyearswithadeficit.Bythismeasure,allbuttwo

299Fiscal50:StateTrendsandAnalysis,ThePewCharitableTrusts(2019),https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2014/fiscal-50#ind9.

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statesarebelowthenationalmedian.Additionally,6statesspentatleasttwooutofeverythreeyearsinadeficit.And,twostates,NewJerseyandIllinois,spenteachyearwithadeficitinthetimeperiod.Clearly,NEMWstateshaveadifficulttimemanagingtheiryear-to-yearbudgets,atleastcomparedtotherestofthenation.Theissueisnolessseriouswhenitcomestostatedebt.TheNEMWregionhasalargeamountofunfundedobligationsthatmusteventuallyberepaid.Thebelowmapchartstheamountofunfundedobligationsstateshaveasashareofthetotalpersonalincomeinthestate.Notethatthisisnotstaterevenues,buttheincomeofallindividualsinthestate.Assuch,thismeasureisclosebutnotthesameasstateGDP.

300HeretheNEMWregionperformsbetterbutisbynomeansingoodshape.Inparticular,threestateshaveover30%oftheirpersonalincomeowedasunfundedobligations.Illinois,NewJersey,andConnecticutarealldoublethe50-statemedianvalueof14.8%.Only7statesareabovethislevel,thoughlargestateslikeNewYork,Ohio,andPennsylvaniaarejustbelowthisthreshold.Fourstates,allintheMidwest,arebelow10%inIowa,Wisconsin,Minnesota,andIndiana.Yet,whenwelookatthetotalobligationsoftheNEMWstates,thesituationstillseemsdire.TheNEMWregionasawholehasnearly$1trillioninunfundedobligations.ThoughIllinois,NewJersey,andNewYorktogetherowenearlyhalfofthisamount,otherstatesstillowe

300Fiscal50:StateTrendsandAnalysis,ThePewCharitableTrusts(2019),https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2014/fiscal-50#ind4.

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sizableamountsofpaymentstolendersandpensions.Thisnumberisgivenadditionalweightbythefactthatallstateshaveunfundedobligationsofonlyslightlyover$2trillion.Thus,theNEMWregionasawholeholdsnearlyhalfofallunfundedobligationsamongAmericanstates.Thesebudgetproblemscombinewithstate’srestrictedbudgetingoptionstocreateseriousproblemsforstate’sfiscalactivities.ThisisbecauseallstatesbutVermonthavebalancedbudgetrequirementsthatrequirestates,insomeway,tocutspendingwhenrevenuesfall.301Oftentheserequirementscanhelpstatesmanagetheirbudgets,buttheycanspelldisasterwhenstatesneedtomaintainspendingorinvestmentinthefaceoffallingrevenues.Thisiswhathappensduringrecessions;whenrevenuesfall,statesmustcuttheirspending.In2008,thisledtofurthereconomiccontractionswhenincreasedspendingwasneededmost.302Intotal,46statescutspendingonpublicservicesduringtherecessionastheirrespectiveeconomiescontinuedtostagnate.303Thus,statesinworsefiscalhealthnotonlyhavethestate’sownissuesrelatedtofulfillingtheirobligations,buttheyalsoareseverelyrestrictedintheirpossiblespendingoptions.

2. The Public Banking Solution Apublicbankwouldgivestatesthisfiscalfreedomtorespondtocriseswhilealsohelpingthemgenerallyreducetheirdeficitsanddebtsovertime.Overall,then,astatebankwouldgreatlyimprovethestate’sfiscalhealth.NorthDakotashowshowastatebankcanhelpitsstatemanageitsdeficitsanddebt.Indeed,onitsdeficit,NorthDakotasurpassesthebestNEMWstateforbothmeasuresused.Itsrevenueswere120%ofitsexpendituresfrom2003to2017,comparedtoIowa’s103.2%.Furthermore,NorthDakotahadonlytwoyearswithadeficit.304Additionally,ithasonly$2.5billioninunfundedobligationsthattranslatesto6.5%ofitspersonalincome,betterthanallbuttwooftheNEMWstates.305It’struethatNorthDakota,duringthisperiod,hadanoilboomwhichincreasedrevenues,buttheBND’simpactisalsounquestionable.Specifictomanagingdeficits,thebankhashelpedthestatemanagebudgetcrises.Thisprominentlyincludescaseswherefederalmoneyforspendingneedslikedisasterrelief,stimulus,orMedicaid

301Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.302Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.303Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),5,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.304Fiscal50:StateTrendsandAnalysis,ThePewCharitableTrusts(2019),https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2014/fiscal-50#ind9.305Fiscal50:StateTrendsandAnalysis,ThePewCharitableTrusts(2019),https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2014/fiscal-50#ind4.

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reimbursementsisslowincoming.306Thebankreplacestheserevenuesintheshort-term,allowingthestatetospendimmediatelyonurgentneedswhilealsoensuringthatthebankgetsreturnsonthesefunds.ThishelpwithdeficitissuesmeansthatNorthDakota’sdebtislowerasaresult.Becauseitdoesnothavetofundthisborrowingthroughbondsormoreexpensivefinancingoptions,thestatesavesmillionsovertimeondebtrepayments.307EstimatesfromVermont’sfeasibilitystudyonpublicbankingfoundthatthestatewouldsave$100millionover20yearsoninterestcostsassociatedwithrepayingborrowedfunds.308Ofcourse,thisisallbeforeaccountingforthewaysthatthebankwoulddirectlyandindirectlyincreaserevenuesforthestate.Theseincreasesinrevenueswouldmeanlowerdeficits,debts,andmoreoptionsforfiscalactivityevenbeforethebankhelpedthestatewithfinancingintheshortterm.First,bybothimprovinglocalfinancialmarketsandoveralleconomicdevelopment,thebankwillincreaserevenuesforthestate.Asmoreeconomicactivitytakesplace,withmorecompetitivefirmsinthefinancialsystemandmoresmallbusinesses,thestatewillcollectgreatertaxesandfeesonthisincreasedeconomicactivity.309Thestatebankwouldalsoprovidedividendsdirectlytothestate’sgeneralfundasashareofitsannualprofits.Theseadditionalfundswilladdtothestate’sfiscalopportunities,includingreducingdeficits,makingdebtpayments,orhavingcountercyclicalexpenses.Asnotedearlier,theBNDhasreturnedover$1billiontothegeneralfundsinceWorldWar2.Inrecentyears,ithasreturnedanaverageof$30milliontothestateperyear.Takingthesebenefitstogether,astatebankshouldpayitselfbacktothestatewithinashorttimeperiod.AnanalysisaboutthecreationofaWashingtonstatebankfoundthatthebankwouldbea“revenuepositiveeconomicdevelopmenttool”withinthreetofiveyearsofcreationevenafteraccountingfortheopportunitycostofcapital,losttaxrevenues,andthecostsofcreatingthebank.310

306Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.307Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),10,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.308Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),21,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.309Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),4,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.310WashingtonStateBankAnalysis,CenterforStateInnovation(2010),18,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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Thus,astatebankwouldprovideforthestate’sfiscalhealthbyincreasingrevenuesandhelpingthestatemanageitscosts,whichshouldresultinlowerdeficits,debts,andgreaterfiscalfreedom.

D. Eff iciency Lastly,theargumentthatastatebankcansolvethesevariousissuesfacingtheNEMWstatesispremisedontheideathatitcanoperateefficiently.Itisclearlytruethatsomestatebankscanoperateefficiently,liketheBNDandtheSparkassen,butonemightwondertowhatextentthisistrueofpublicbanksoverall.Onemightworrythatstatebankswillbetoobureaucratizedorconfinedtospecificoperationstooperateasefficientlyasprivateinstitutions.Thisviewonpublicbankingholdsthatthestatewouldhavethesameproblemsmotivatingthebureaucratswhorunastatebankastheywouldwithprovidingincentivestoprivatebanks.311Afterall,ifthestatecouldspecifyexactlywhatitwantedthebanktodo,thenitcouldcontracttheseservicesouttoaprivatefirmthatcouldoperateitefficiently.312But,thisbeliefisultimatelyunfounded.Notonlybecauseaprivatefirmwouldnotbeabletofulfillapublicpurposeaswellasastatebank,butalsobecausethoserunningthebankhaveaninterestinbenefittingtheircommunity.Therehavebeenmanystudiesintheacademicfinanceliteratureonthisissue.One,whichlooksatdatafromacross179countries,foundnosignificantdifferencebetweengovernmentownedbanksandprivateonesindevelopedcountriesintermsofefficiency.313AstudyoversevenyearsofdataonGermany’ssystemfoundthattheSparkassenactuallyenjoyaslightefficiencyadvantagerelativetosimilarlysizedprivatebanks.314Otherstudieshavegovernmentbanksasperforminglessefficientlythantheirprivatealternatives.315Itisimportanttonotethatmostofthesestudiesofefficiencycomparebanksbasedonmaximizingprofits,orinsomecases,minimizingcosts.316Yet,akeyelementofmostpublic

311Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),11,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.312Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),11,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.313Dutt,Devika,DoesGreaterPublicOwnershipintheFinancialSystemPromoteSuperiorPerformance?,PoliticalEconomyResearchInstitute(2017),14,https://www.peri.umass.edu/component/k2/item/1036-does-greater-public-ownership-in-the-financial-system-promote-superior-performance.314Dutt,Devika,DoesGreaterPublicOwnershipintheFinancialSystemPromoteSuperiorPerformance?,PoliticalEconomyResearchInstitute(2017),16,https://www.peri.umass.edu/component/k2/item/1036-does-greater-public-ownership-in-the-financial-system-promote-superior-performance.315Dutt,Devika,DoesGreaterPublicOwnershipintheFinancialSystemPromoteSuperiorPerformance?,PoliticalEconomyResearchInstitute(2017),14,https://www.peri.umass.edu/component/k2/item/1036-does-greater-public-ownership-in-the-financial-system-promote-superior-performance.316Dutt,Devika,DoesGreaterPublicOwnershipintheFinancialSystemPromoteSuperiorPerformance?,PoliticalEconomyResearchInstitute(2017),16,https://www.peri.umass.edu/component/k2/item/1036-does-greater-public-ownership-in-the-financial-system-promote-superior-performance.

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banksisthattheydonotsimplymaximizeprofits,butattempttomaximizesocietalwelfarethroughtheirfinancialactivities.Inthissense,publicbankscouldbeactingefficientlywhentheyinvestinprojectswhichofferlowerreturnsbutlargepublicbenefits.317Thus,totheextentthatpublicbanksaremeasuredashavinglowerprofitabilitythantheirprivatecounterparts,thismaybeduetotheirfocusonsocialwelfare.318Indeed,itcanmaketheentirepracticeofcomparingprivatetopublicbanksbythismeasurebiasedinfavorofprivatebanks.Eventhen,forstudiesthatdoapplytheprofitabilitycriteria,thereismixedevidenceonwhethergovernmentbanksarelessefficientthanprivatebanks.Thisallimpliesthatthereisnogoodbasisfordisregardingpublicbanksaslessefficientthanprivatebanks.Thereis,however,onewelldocumentedfactorthatcandecreasetheefficiencyofpublicbanksrelativetoprivatebanks.Thisispoliticalinfluenceortheimpactthatpoliticianscanhaveontheoperationsofthebank.Thekeyideaisthatwhenpoliticalfactorsdrivebankdecision-making,ratherthanfactorsdirectedbymaximizingprofitsorsocietalwelfare,thiscanleadtoinefficiencies.319The“governmenteffect”canloomlargewhenpoliticalactorshavetheleewaytodirectpublicfundstowardstheirownends;thishappensmostlyincountrieswithweakpoliticalinstitutionsandinbankingsystemswithweakgovernanceandoperationsstructures.320Thisistheonlyareawheredifferencesbetweentheperformancesofgovernmentandprivatebankshavebeenconsistentlyfound.321Asaresult,thekeytocreatinganeffectivestatebankistostructureitsownership,high-levelgovernance,andday-to-daymanagementinsuchawaythatoperationalautonomyismaintainedforthebank’sactivitiesbutsotooispublicoversightoverthebank.Inotherwords,“governmentshouldnotprovideexcessiveguidance”butitshouldbeinapositiontoprovideguidancewhennecessary.322Asaresult,then,thesolutionsofferedbyastatebanktotheNEMWregion’sproblemsarefullyrealizable,solongasthebankiscreatedinasmartandwell-thought-outway.Ifthiscanbeachievedthenthestateswillbenefitfromthecreationofastatebank.Thefinalrecommendationofthisreportisthis.EachstateintheNEMWregionshouldimplementastatepublicbankbecauseeachstatecouldbenefitsignificantlyfromone.Thisis

317Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),17,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.318Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),19,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.319Shen,Chung-Hua;Hasan,Iftekhar;Lin,Chih-Yung,TheGovernment’sRoleinGovernment-OwnedBanks,JournalofFinancialServicesResearch(2014),24,https://link.springer.com/article/10.1007%2Fs10693-013-0168-0.320Shen,Chung-Hua;Hasan,Iftekhar;Lin,Chih-Yung,TheGovernment’sRoleinGovernment-OwnedBanks,JournalofFinancialServicesResearch(2014),33,https://link.springer.com/article/10.1007%2Fs10693-013-0168-0.321Shen,Chung-Hua;Hasan,Iftekhar;Lin,Chih-Yung,TheGovernment’sRoleinGovernment-OwnedBanks,JournalofFinancialServicesResearch(2014),33,https://link.springer.com/article/10.1007%2Fs10693-013-0168-0.322Shen,Chung-Hua;Hasan,Iftekhar;Lin,Chih-Yung,TheGovernment’sRoleinGovernment-OwnedBanks,JournalofFinancialServicesResearch(2014),33,https://link.springer.com/article/10.1007%2Fs10693-013-0168-0.

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nottosaythateachstateshouldfollowthesamemodel,indeed,thenextsectionwilldiscussthesortsofimplementationchoicesthatwouldbestsuiteachstate.But,asthebelowchartdemonstrates,astatebankcouldsolvemultipleissuesforeachstate.Thougheachstatehasitsownsetofissues,astatebankcanhelpwithmanyofthem.Thebelowchartshowsasimplifiedjudgmentofthestate’sneedsbasedontheprecedingdataandexplanationsinthissection.Redindicatesanareaofneedwhilegreenindicatesrelativelystrongperformance.Eachsubjectdiscussedaboveislistedherewithacorrespondingmarkforeachstatedependinguponthestate’sperformance.Thisperformancewasdiscussedordisplayedaboveintheearliersub-sections.Theresult,though,isthatallstateshavemultipleareasofneedandmanyofthemhavemanyareasofneed.And,astatebankistheonlypolicyoptionthatcanimproveuponalloftheseareasatonce.Assuch,astatebankcouldmovetowardssolvingtheseproblemsandsoisrecommendedforallofthesestates.

IV. Implementation Thischapterwillcoverkeyimplementationissuesregardingtheestablishmentofastatebankfromcapitalizationandownershiptogovernanceandactivities.Thisiswherethevariousmodels,thetheoreticalarguments,theempiricalfindingscometogethertoinformhowstatesshouldsetaboutcreatingapublicbanktosuittheirownsituation.

A. Capital ization Capitalizationreferstotheinitialfundingofthebank.Thisistheupfrontinvestmentmadeincreatingthebankanddeterminingitsequityvalue.Theinitialfundingthatthebankreceivesisitscapitaland,alongwiththedepositsofthebank,thiscapitalallowsthebanktoextendcreditandcreateotherassetswiththesefundsasreserves.

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1. Init ial Funding Source Howshouldthisinitialcapitalizationbefunded?Numerousfundingoptionsareavailableandbringwiththemdifferentconsequences.First,thebankcouldbecapitalizedfromthestate’sgeneralfund.Thatis,thebankcouldbefundedentirelyfromastate’sbudgetthroughaone-offappropriationoffundsfromthestate’scoffers.323Thisapproachhastheimmediatedrawbackofahighupfrontcostforthestate.Obviously,themoneyusedforthebank’scapitalcouldnotbespentelsewhereandsowouldmeanthatspendinginsomeotherareawouldbemissing.However,thisapproachmeansthatthestatehascompletecontroloftheequityofthestatebankandassuchisentitledtotheentiretyofitsprofits.Also,asnotedbefore,astatebankwillreturnvaluetothestateinmultipleways.Asaresult,thebankwillalsocontributetotherevenuesofthestateandsothiswouldbeaninvestmentinsteadofasunkcost.AnanalysisforaWashingtonStateBankfoundthatthebankwouldincreasestaterevenuesandpaybackitsupfrontequitycapitalizationwithin4years.324Ifaone-offappropriationistooexpensive,astatecouldalsocapitalizeitsownstatebankthroughreturnsonitsdepositsovertime.325Thiswould,again,allowthebankanditsprofitstobecompletelyunderthecontrolofthestatebyfundingthebankentirelythroughthestate.But,thiswouldalsospreadoutthecostofcreatingthebankovertimebymerelyusingtherevenuesfromthestate’sdepositscurrentlyheldatprivatebankstocreatethefundingforthepublicbank.Onedrawbackwouldbethetimethisoptionwouldtaketocapitalizethebank,asreturnstodepositsmaynotbeenoughtofinancethebank.Anotherdrawbackisthatthisoptionisnodifferentinkindfromthegeneralfundoption.Allitdoesisspreadoutthecostofcreatingthebankovermanyyears,butthisdoesnotrequirethatthebankbecreatedusingdepositrevenues.Statesexpecttheserevenuestobeavailableforgeneralspending,andtheserevenuesgointothegeneralfund,sothisspendingisnodifferentfromtakingfromthegeneralfund.Furthermore,iftheideawastospendovertime,thereisnoreasontotiethisspendingtoreturnsondeposits;capitalizationshouldinsteadbeplannedaheadoftime.Thebankcouldalsobefundedthroughthesaleofbankstock.Thisapproachbringswithititsowndistinctadvantagesanddisadvantages.First,itmeansthatthestatehasamuchlowerfundingobligationfortheestablishmentofthebank.TheWashingtonStateBankanalysisreferencedabovefoundthatthestatewouldhavea25%lessfundingrequirementinorderto

323Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),6,https://rooseveltinstitute.org/municipal-banking-overview/.324WashingtonStateBankAnalysis,CenterforStateInnovation(2010),1,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.325Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),6,https://rooseveltinstitute.org/municipal-banking-overview/.

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providethesamelevelofcapitalizationtothebankthroughsellingsharesofthebank.326However,thislesserstateshareoffundingforthebankhasafewimplicationsforhowthestatewillbenefitfromthebank.First,whilethestatewillcontinuetogetashareofbankprofits,itwillnolongerenjoyalloftheseprofits.Itwillonlybeentitledtoitsshareofbankstock’sworthofprofits.Thisalsomeansthatitwillbeunabletonegotiateannuallywithbankofficialstodeterminethislevelofdividendversusrecapitalizationofprofits.Thereisalsouncertaintyaboutthedegreeoffundingobligationthatwillfallonthestateforagivencapitalizationamount.ItisunclearhowmuchdemandtherewouldbeforbankstockbeforethebankhasbeenestablishedgiventhenoveltyoftheideaofstatebankinginAmericanpoliticsandthepotentialprofitabilityofsuchaninvestment.Assuch,thestatemaynotraiseenoughcapitalorasmuchasexpectedoritmaybeforcedtosellalargerproportionofbanksharesthandesiredinthecapitalizationofthebank.Thiscouldalsoundercutthemainpotentialbenefitofcapitalizationthroughstocksales,whichisthepotentialincreasesinbankvalueovertime.Ifthebankisonthestockmarketasitgrowsitsstockscanappreciateovertime,growingitsvalueandprovidingadditionalopportunitiestoincreasebankcapitalinthefuture.But,ifthestatehasasmallershareofthebank’sstock,thesebenefitswillbeundercutandwillmainlyaccruetoprivateinvestors.Morewillbesaidontheadditionalcomplexitiesofstockfundingintheownershipportionofthissection,whereowningapublicbankthroughstockmayraiseadditionalproblemsforthestate.Finally,thebankcouldbefundedthroughabondissue.ThemostcommonforminproposalsofstatebanksisaGeneralObligation(GO)bondissue.Thisis,infact,howtheBNDwasstarted.AtitsfoundingitwascapitalizedwithaGObondof$2million,whichintoday’sdollarswouldbecloseto$30million.327Fromtherethebankhasgrowntoover$7billioninassets.328Underthisoption,thestatewouldnothavetopayanyamountfortheestablishmentofthebank.Instead,thebankwouldbefinancedthroughitsowndebtissuance,startingthebankoffwithasizableamountofcapitalbutalsowithanequalamountofdebtonitsbooks.Assuch,thisoptionislikelythemostpoliticallyfeasible.However,becauseitsaddlesthebankwithlargedebts,itreducesthebenefitsofthebanktothestate.Thestatewillreceivelessindividendsfromthebankbecausethebankwillhavefewerprofitsoverall.Muchofthepre-bondpaymentprofitswillhavetogotowardsservicingthedebt.TheWashingtonbankanalysisfoundthatthebank’sreturnonassetsdroppedtobelowtheindustry-averageformuchoftheperiodofbondrepayment.329Therewillbefewerleftoverprofitstoberecapitalizedforthebank.330Thiswill

326WashingtonStateBankAnalysis,CenterforStateInnovation(2010),18,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.327Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.328BankofNorthDakota2018AnnualReport,BankofNorthDakota(2018),1,https://bnd.nd.gov/annual-report/.329WashingtonStateBankAnalysis,CenterforStateInnovation(2010),17,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.330WashingtonStateBankAnalysis,CenterforStateInnovation(2010),17,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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meanthatthebankwillgrowslower.Thebank’sgrowthwillbeworseinboththeshortandlong-terms.Intheshort-termdebtrepaymentswillhinderitsgrowth.Andinthelong-termitslowerlevelsofcapitalduetothisshort-termrepaymentwillmeanthereisless“capitaltocompoundreturnedearningsoffof.”331Thatis,itwillearnlessintotalbecauseitwillhavelesscapitaltouse.Tohelpclarifythisdecision,thisreportusedthemodeldevelopedbytheCenterforStateInnovationthatconductedanalysesofaWashingtonStateBankaswellasanOregonStateBank.332Becausethisreportwillusethismodelafewtimesinthissection,itwillbehelpfultoprovidesomemoredetailonthemodel.Themodelwasbuilttoshowthegrowthofthebankovertimeaswellashowthebankwillbenefitthestategovernmentasitgrew.Italsogeneratessomeinformationonthebank’sactivitiesthatcouldbeused,withsomeadditionalinformation,toestimatetheeconomicimpactsofthestatebank.Thisreportwillnotcovertheeconomicimpactsofthebankbecausethisadditionalinformationisunavailable,butthisreporthasexpandedthemodeltoincludeupto30yearsofgrowthofthebank.Thereportwillusethemodeltoshowhowcertaindecisionsaboutthebank’simplementationmayaffectitsgrowthincapital,assets,anditsreturnstothestategovernment.Themodelisfairlysimple.Itinvolves18inputsoffactorslikeoriginalcapitalization,thetermsofthebondissue,capitalratios,thestate’sshareofprofitsanddeposits,theexpectedinterestratespaidandreceivedforactivitiesaswellasnon-interestincomesandexpenses,andsomeinformationaboutthestate’sfinancialmarkets.Usingtheseinputsitgenerates30outputs,themostimportantofwhicharethestate’sdividendandthebank’scapital,assets,andloans.Tobeclear,themodelisanapproximationofreality,onethatisquiteroughandsoshouldnotbetakentoproduceexactfigures.However,itcanshowthesizeorthescaleofastatebank’simpactonthestateanditsowngrowthtrajectory,especiallywhenconsideringalternativechoices.Theparametervaluesfortheinputsarealsopurposelyconservativesoastoavoidoverestimatingtheimpactofthebankinlieuofbetterinformation.333Eachstateshouldperformamorein-depthandspecificstudyofitscircumstancestogetamoreexactsenseofthebenefitsofastatebank.Whereverthemodelisusedinthissectionitisusedwiththesameparametervaluesexceptthosebeingvariedforthepointofcomparison.Thereporthasusedthemodeltocomparehowthegeneralfundscenarioversusthebondissuescenarioaffectsthedividendsreceivedbythestate.Belowisatablewitheachstate’sestimatedtotaldividendunderthetwoscenariostenandtwentyyearsfromtheestablishmentofthestatebank.Thechartclearlyshowsthebenefitsofthegeneralfundscenariointhemediumtolong-termforthestate.

331WashingtonStateBankAnalysis,CenterforStateInnovation(2010),18,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.332OregonStateBankAnalysis–Revised,CenterforStateInnovation(2010),http://cloud.snappages.com/8b4c3506d1b4d4ec3a752345750368b42852dd73/CSI-Oregon-State-Bank-Analysis-Revised-final-2.pdf.333WashingtonStateBankAnalysis,CenterforStateInnovation(2010),1,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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Bothtenandtwentyyearsafterthebank’sfounding,thegeneralfundscenarioreturnsmorethanthebondissuescenario.Aftertenyears,generalfundcapitalizationreturnsslightlymorethandoublethebondscenario.Aftertwenty,thegeneralfundreturnsmorethanthreetimesasmuchasthebondscenario.WashingtonStateBankanalysisproducesananalogousresult.334Additionally,thisdifferenceislargerthantheinitialcapitalthatthegeneralfundscenariowoulddemandofthestate.So,thestatewouldreceiveagreateroverallreturnfromthegeneralfundscenariocomparedtothebondscenario.Ifoneconsidersrealprofitstothestate,whichaccountsfortheotherusesofthestate’smoneyaswellastheforegonetaxrevenuefromthestatebankandthelostinterestonitsdeposits,thegeneralfundscenarioisstillanetpositiveafteronlyfiveyears.Thisdoes,however,restonsomestrongassumptionsabouthowquicklythebankwouldbeginfull-scaleoperations.Still,thegeneralfundscenariowillclearlybenefitthestateinthelongruneventhoughitimposescostsonthestateintheyearofthebank’screation.Thissamefindingistruewhenlookingathowthebank’sassetswouldgrowfromitsfirstyeartothetenthandtwentiethyearsofitsoperations.Inbothcases,thegeneralfundscenariomeansthatthebankwilldevelopitsassetstoamuchlargerextent.Thebelowtableshowstheseresults.

334PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),6,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.

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Infact,underthegeneralfundscenario5statebankswouldovertaketheBNDintermsofassetsizeinjust20years,althoughtheywouldbeservingmuchlargerstatesandwouldbeginwithmuchlargercapitalinfusions.Underthebondscenario,nostatebankwouldovertaketheBNDinthistimeframe.Theseresultsalsorepresentasimilarpatterntostatedividendgrowth,withassetgrowthbeingtwiceasbigaftertenyearsandthreetimesasbigaftertwentyyearsunderthegeneralfundscenariocomparedtothebondscenario.Thesesameresultswouldhold,althoughtoalesserextent,underthestockscenarioassumingthegovernmentprovidessomeofthefunding.335Thegovernmentwouldreceivelesserdividends,althoughassetgrowthwouldlikelybesimilar,unlessthesaleofsharesdidnotraisetheexpectedamountofrevenues.Yet,theseresultsleadthisreporttorecommendthatstatesemploythegeneralfundoptionwherepossible.Thisalternativewillmeanthatthebankgrowsthequickestandwillalsoquicklybegintoreturnbenefitstothestate.Thebankshouldbecomeanetbenefitwithinadecade,evenbeforefactoringinitseconomiceffects.However,ifthisoptionwerenotavailable,eitherduetobudgetissuesorduetopoliticalopposition,thenextbestoptionwouldbegradualfundingfromthegeneralfund.Ifthatisstillofflimits,sellingstocksasdetailedbeloworabondissueshouldbeconsideredbythestate.Inparticular,stateslikeNewJersey,Illinois,andMassachusetts,whichholdlargedebtsandhaveroutinelyrundeficits,mightconsiderfinancingthebankwithouttheimmediatecommitmentofstatefunds.But,evenforthesestates,generalfundcapitalizationshouldbestronglyconsideredasthebestwaytoreturnprofitstothestateinthemediumtolong-termandasthebestwaytoincreasetheimpactofthebank.

2. Init ial Funding Amount Howmuchmoneyshouldthebankreceiveinitially?Statesmightbetemptedtoprovideonlyasmallamountoffundingforabanktobothsavemoneyandtoseeifthebankcangrowitselftoalargersize.But,thispathisnotadvisablebecauseitwilllimittheimpactofthebank.EachoftheNEMWstateshasimmediateproblemswhichapublicbankisinauniquepositiontosolve,butonlyifithassufficientfunding.Short-changingthebankwillmeanitwilltakeexponentiallylongerforthebanktocontributetosolvingtheseproblems.Asofnow,thisreporthasbeenassumingthatastatebankwouldbecapitalizedwithanamountequalto.1%ofastate’syearlybudgetexpenses,perKaiserFamilyFoundationdata.336BelowthechartshowshowaMichiganstatebank’scapitalwouldgrowunderthisscenario,as

335WashingtonStateBankAnalysis,CenterforStateInnovation(2010),21,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.336TotalStateExpenditures,HenryJKaiserFamilyFoundation(2017),https://www.kff.org/other/state-indicator/total-state-spending/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D.

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wellasunderscenarioswherethebankwascapitalizedwith.25%ofastate’stotalexpendituresand.5%ofitstotalexpenditures.Thegraphshowstheclearexponentialtrajectoryofgrowthandthelargedifferencethatarelativelysmalldifferenceininitialfundingcanmakewhencompoundedovertime.

InMichigan,thedifferencebetween.5%and.1%fundingmeantarounda$200milliondifferenceinthepresent.Butthissmalldifference,thirtyyearsfromthebank’sfounding,wouldmeanamorethan$2billiondifferenceinthebank’stotalcapitalgrowth.Andthiscapitalgrowthitselfwouldsignifyapotentially$20billiondifferenceinthebank’stotalassets,dependingontheratiosandotheroperationalguidelinesthebanksubscribedto.Thismakescleartheimpactoffundingdecisionsattheestablishmentphaseofthestatebank.Unlessthereareverystrongreasonstousetheadditionalmoneyinthepresent,thatmoneyshouldbeinvestedinthebank.

Theabovetableshowsthedifferencesinthetotaldividendsthatthestatewouldreceivetwentyyearsfromthebank’sfoundingatthethreedifferentlevelsofinitialfunding.Clearly,morefundingmeansmoredividendsforthestate.Inallcases,thisincreasedfundingattheinitialstageismorethanoffsetbydividendreturnstwentyyearsafterthebank’s

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establishment.InalargestatelikeNewYorkthisfundingdifferencecanmeanmorethan$1billionbeingreturnedtothestateindividendsovertwentyyears,or$50millionayearmoreindividendstothestate.Thismorethancancelsthe$400milliondifferencebetweenthe.5%and.1%fundingoptionsforthestate.Infact,itpaysthisdifferenceoffinunder8years.Theremainingdividendscangotowardsotherprioritiesofthestate.And,ofcourse,thiseffectonlygrowslargerovertime.So,the$1billiondividendgainforNewYorkafter20yearswillonlybelargerafter40,60,or100years.Thus,therecommendationinthissectionisthesameasinthelast.Unlessthestatedoesnothavethefunds(likeNewJerseyandIllinois)orthepoliticalwilltoinvestmoremoneyinthebank’scapitalization,itshouldattempttocapitalizethebankasmuchaspossible.Themoreinvestedinthepresent,thegreaterthereturnsinthefuturebothtothestateandforthewholestatecommunityasthebank’simpactexpands.

3. Funding Over Time Lastly,thebankcouldseeincreasingfundingovertime.Thestatemaywishtospreadoutitsinitialfundingofthebankortoaddextrafundingtothebankatvarioustimes.First,ontheissueofinitialfunding.Onealternativemethodforastatethatcouldnotaffordorpassabillthatfundedthebankallatoncefromthegeneralfundistospreadoutthisfundingoverafewyears.337Theproposaltousetheinterestearningsonthestate’sdepositswouldbeonesuchplan.Thiswouldlessenthesingleyearloadonthestatetoprovidefundingwhilealsoensuringthatthebankwouldreceivealargerfundingstreamearly.Althoughthebankwouldgrowmoreslowlywhileawaitingadditionalfunds,ifitgetsthesefundswithinafewyearsofitsfoundations,itwillstillbeabletoaccumulatesubstantialgainsovertime.Thisfundingstylewouldalsogivethebanktimetorampupitslendingandoperationsandtosortoutproblemsinitsanyoperationalprocesses.Inthisway,spreadingfundingoutoverafewyearswouldprovideaminiproofofconceptforpolicymakerswhilealsoensuringthebankmakeshighreturnsinthelongrun.338Assuch,especiallyifbudgetissuesareamajorconcern,statesareencouragedtoconsiderthisformoffunding.Thestatemayalsoprovideadditional,one-offfundingtransferstothebankafterithasbeenestablished.ThishasneverhappenedinthehistoryoftheBNDandwouldlikelynothappenformoststates,butitisanoptionforallstates.Already,thestatewouldhavetheabilitytoreturnbankprofitsbacktothebankasnewcapital.But,ifthisamountprovedinsufficientforthestate’saimsorifstateshadavailablemoneythatitwishedtoputtosomeusefulpurpose,puttingthemoneyinthebankwouldserveasaprofitableinvestmentforthestatethatwouldalsodeliverbenefitstothecommunity.337WashingtonStateBankAnalysis,CenterforStateInnovation(2010),21,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.338WashingtonStateBankAnalysis,CenterforStateInnovation(2010),22,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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B. Ownership Onceastatehasdecidedhowitwouldfundastatebank,itmustdecidehowitwouldownthisbank.Inthecaseofastock-basedfunding,thisdecisionisalreadymadeforthestate.Alternatively,otherfundingmodelsgivethestatemorelatitudeinthisdecision-making.Thestatemustalsodecidehowitwillcharterthebank.

1. Chartering the Bank IntheUnitedStates,twoentitieshavetheauthoritytocharterbanks:stategovernmentsorfederalagencies.339Thedecisionforstateswhenattemptingtocreateastatebank,then,iswhethertocharteritsownbankortocharterthebankthroughafederalagency.Onthisissue,thereareclearreasonsforastatetocharteritsownbank.First,ifitcharteredfromafederalagencythetermsofthecharterwouldbesubjecttothedemandsofthefederalagency.340Astatecharterwouldallowthestatetoformulatethebankasitwished.Second,thiswouldplacethestatebankunderfederalagencyoverview,whichcouldrestrictthepossibleactivitiesthatthestatewouldwishthebanktoundertake.341Finally,thestatechartercouldmakethebankcomplywithitsownrulesandregulations,aswellashavingfinaloversightoverthebank.342Thiswouldmeanthatthebankwouldhavecompletecontroloverthebankontheregulatoryside,whichisaclearadvantageforthestate.

2. Ownership Structure Oncethestatechartersitsbank,itmustdecidehowitwouldliketostructuretheownershipofthebank.ThreemodelsofownershiparedoingbusinessasorDBA(BankofNorthDakota),legallypublicentity(Sparkassen),andstockownership(PublicSectorBanks).EstablishingthebankasaDBAofthestatemeansthatthebankwillbeanextensionofthestateoperatingunderadifferentname.Thischoicewillhaveafeweffectsontheoperationofthebank.First,itwillmakethestatecompletelyliableforanybankexpensesbutalsofullyentitledtoanyrevenuesofthebank.Thus,thestateassumesadditionalriskinexchangefortheprofitsofthebank.ItwouldalsoavoidlegalissuesbetweenthefederalandstategovernmentgiventheprecedenceoftheBNDthatoperatesasaDBA.Finally,itwouldallowthebankto

339PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),24,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.340PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),27,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.341PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),27,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.342PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),27,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.

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countonitsbalancesheetalloftheassetsofthestate.343Thiswouldallowthebank,especiallyearlyinitsexpansion,toextendgreateramountsofcreditthanitotherwisecouldhavebecauseitwouldmeetallnationalcapitalrequirements.344Thiswouldalsogivethebankacloseconnectionwiththestate,whichcouldeitherleadtogreaterefficiencyinitsdealingswiththestateorunduepoliticalinfluenceoveritsactivities.TheSparkassensystemispremisedonownershipthathasanunclearlegalbasisintheUnitedStates.Insteadofmakingthebankapartofthestate,thebankismadealegallyseparateentitybutonewhichisalsolegallypublic.ItisunclearhowsuchalegalstatuscouldbesustainedintheUS,butifitcouldbethisownershipstructurebringswithitafewfeatures.First,thebankwouldonlybeabletolendbasedontheassetsitwasgivenbythestateorthatitraisedthroughabondissue.345Thiswouldlimititsactivity,especiallyearlyoninitsdevelopment.Second,thebankwouldmaintainindependencefrompoliticalcontrolandindoingsowouldsolvethegreatestimpedimentforpublicbanksinachievingefficiencyovertheiroperations.Third,thebankwouldbefoundedinthepublicspherebylaw,meaningthatitcouldnotbesoldorprivatizedanditwouldonlyhaveincentivestofurtherthepublicinterest.346Lastly,ifthebankwasfundedthroughastockissueitmustbeownedbythestatethroughstock.Notethatthestatecouldstillownthebankthroughstocksthroughanyotherfundingmechanism–itwouldjustownallstocks.Thisownershipstructuregivesthestatetheabilitytosellbankstocktoraiseextrarevenue;althoughthisalsomeansthatpoliticalopponentscaneliminatethebankiftheytakecontrolofthestatelegislature.Thestate,though,couldbelimitedbylawtosellingonlynon-controllingsharesofthebank.347Ifonlynon-controllingsharesofthebankweresold,thestatewouldretainperpetualownershipandcontrolofthebank’sboard,butprivateindividualswouldgainpartofthebank’sdividends.Thiswouldmeanthatthestatewouldhavelessflexibilityindecidingitsshareofdividendsandinrecapitalizingprofitsintothebank.However,thiswouldstillallowthestatetocontrolbankoperations.Stillthisstructuremayeffectivelylimitthestate’scontroloverthebankthroughthefinancialincentivesfacingthebank,thestate,andprivateindividuals.Ifthebankisonthestockmarketthen,aswiththePSBs,thebankwillhaveincentivestoreturnhighenoughdividendstostockholderstokeepstockpriceshighinordertomaintainthebank’svalue.Thestate,evenifithadsolecontrolofthebank,wouldhavethesesameincentivesbecauseitwouldnotwantthebank’svaluetodepreciate.Thiswouldlimittherangeofthebank’spossibleactivitiesandlikelyforceitintomoreprofitableandriskyactivitiesattheexpenseofitsmission-drivenactivities.343PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),12,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.344PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),12,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.345PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),25,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.346ExploringtheSparkassenModelofLocalSavingsBankinIrelandwiththeSavingsBankFoundationforInternationalCooperation,PublicBankingForumofIreland(2014),4,https://webofdebt.files.wordpress.com/2014/11/sparkassen-model-in-ireland-oct-11.pdf.347Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),6,https://rooseveltinstitute.org/municipal-banking-overview/.

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Ifcontrollingsharesofthebankwerealsoavailableonthemarketitwouldonlycompoundtheseproblems.Ontopoftheissuesassociatedwiththenon-controllingsharessold,privateownershipofvotingshareswouldgiveprivateinterestssayoverthebank’sgovernancethroughrepresentationontheboardofthebankaswellasthroughincreasedmarketpressurestomaximizeprofits.ThisisthesamesetupastheIndianPSBs.Althoughthissetupallowedthemtoexpandgreatlythroughoutthelate1900’s,ithasalsoledtotherecentproblemsfacingthesebanks.Thismayalsoincludeout-of-stateentitiesbuyingsharesofthebank,whichwoulddefeatthecommunitydevelopmentaspectsofthebank’smission.Underthissetup,riskybehaviorandprofitmaximizationareemphasizedwhenthebankshouldbefocusedoncommunitydevelopmentandsocietalbenefits.Thus,thisreportrecommendsthatstatescreatebanksasDBAsofthestate.TheBNDhasproventhelegalavailabilityofthisroute,asopposedtopubliclylegalentities,anditdoesnotsuffertheincentiveproblemsassociatedwithprivateshareownersofapublicinitiative.

C. Governance Thissectionwillsurveythekeygovernanceissuesfacingapublicbank.Thisrangesfromthehigh-levelorganizationofitsleadershipandmanagementtotheday-to-dayconductingofitsbusiness.

1. Beginning Operations First,thestateshouldstartbyunderstandingwhereallofitsowndepositsareheldandtheamountsofthesedeposits.Thiswillbenecessaryinorderforthebanktoreceivethesedepositsinthefutureandtohaveasenseofthevolumeofdepositsitwillhavetofunditsinvestmentactivities.Itshouldalsohaveaclearideaofwhichpartsofthestatewillberequiredtodeposittheirfundsintothebank.Onthisissue,thereareafewdistinctalternatives.Allexecutivebranchagenciesshouldberequiredtodeposittheirfundsinthebank.Thesearethemostobviouscandidatesconsideringtheymakeupthemajorityofthestate’sbudgetandtheycurrentlydepositallfundstheyarenotusingintoprivateinstitutions.Thequestioniswhetherstateauthoritiesandotheragenciesaswellasstate-supportedinstitutionslikepubliccollegesshouldberequiredtodeposittheirfundsinthebankaswell.Itshouldbeanimperativeofthestatetoincreasetheimpactofthestatebank.Thiswouldmeanhavingalargeamountofthestate’sdepositsinthestatebank.Therefore,likeNorthDakotadoes,statesshouldrequiretheirauthoritiesandotheragenciestodeposittheirfundsinthestatebank.348Thiswillgivethebankagreateramountofdepositswithwhichtoextendcreditonandwill348Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),11,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.

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thusincreasethepositiveeffectsofthebank.State-supportedinstitutions,though,shouldretaindiscretionovertheirdepositplacementchoices,mainlybecausetheseinstitutionsfaceuniquechallengesandadministrativestructurescomparedtootherstateagencies.Nextisthequestionofwhetheragencieswillberequiredtodepositfundsthathavealreadybeencommittedtoacertainprogram.Heretheclearanswerseemstobetorequireallfundsthatarenottobeusedimmediatelytobeputinthebank.Evenfundsthatarecommittedtoacertainspendingpurposeneednotbewithdrawnfromthebankuntilthelastmoment.Inthistime,thebankcanextendloansandperformotheroperationswiththesefunds,whilethestatecanreceiveinterestonthesedeposits.Theworryisthatthebankwouldnothavetheliquiditytohandleregularwithdrawalsofdeposits.However,duetothecloserelationshipbetweenthestateandthebank,thebankcanmadeawareofthesecommittedfundsandwhentheywillbewithdrawnandadjustitsactivitiessothatallfundsareavailableattherequiredtime.Finally,thestatemustdecidehowquicklythebankwillreceivestatedepositsandhowquicklyloantoassetratiosandcapitalratiosshouldincreasetotheirstandardlevels.Bothofthesequestionsinvolvemorespecificanswersthancanbeprovidedhere.Eachstateshouldexamineitsvolumeofdeposits,speedofthebank’sestablishment,andtheperceivedcapabilityofthebanktohandlethesedeposits.Similarly,thebankmustconsidertheriskinessofitspositiongivenitsamountofdepositsandcapitalandshouldincreaseitsratiosaccordingly.Regardless,itwilllikelytakesometimetogetthebanktofulloperationswithregardstostatedepositsandcapitalratios.

2. Management Asdiscussedatlengthearlierinthisreport,thekeytaskfordesigningastatebankistoensurethatitbalancestwokeygoalsthatultimatelycomedowntomanagement.Thesearebalancingpublicaccountabilitywithbankingefficiency.Bankofficialsshouldhavesufficientautonomyfrompoliticaldemandstooperatethebankefficiently,buttheseofficialsshouldalsobeheldtothestandardsetoutinthebank’smissiontobenefitthepublic.349Thefirstpriority,then,forsettingupthemanagementofastatebankisitsboardofdirectors.IntheBNDthisistheIndustrialCommission,fortheSparkassenthisismadeupofemployees,localpoliticians,andpublicrepresentatives,andforthePSBstheseareavarietyofgovernmentandprivaterepresentatives.Overall,thestatemustdecidehowthisboardwillbechosen,whowillbeallowedonit,whatauthoritiesitwillhave,whatrestrictionswillbeonitspowers,andwhetheritwillhaveadvisorsorotherexpertstodrawon.Followingtheneedforpublicaccountability,thepublicshouldselecttheseboardmembers.ThisisthecaseforboththeBNDandtheSparkassen.Theboardcanbeselectedintwo349Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),26,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.

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differentways.Eithertheboardcanbemadeupofpoliticianselectedforotherpurposes,asitisintheBND,ortheycanbedirectlyelected,likeinsomeoftheSparkassen.Whilebothsystemshavebeenshowntowork,havingdirectelectionsofstatebankboardmemberswouldallowforgreaterpoliticalindependencefromstateactivitiesandmorefullrepresentationofthepublic’sinterestsontheboard.Boardmemberscouldbedrawnfromthenaturalregionalconstituenciesofthestatesothatthebank’smanagementwouldrepresenttheinterestsofallstatecitizens.Onebenefitofthisapproachisthateachareaofthestatewillhaveindividualsontheboardwithspecificlocalknowledgeandcommitmenttothatlocality.Thiswillactasacheckandbalanceagainstovertlypoliticallymotivatedbankingdirectives.350Furthermore,theleadersofthestatewillbechosendirectlyforthepurposesofleadingthebank,ratherthanassumingthisdutywhilebeingelectedforothermajorduties,likeintheIndustrialCommission.Theboard’sauthorityoveraspectsofbankmanagementshouldbesimilartothatoftheIndustrialCommissionintheBND.Thatis,theboardshouldhavetheabilitytomanagehigh-levelissuesregardingthebank’slong-termdirection,but“bankmanagersshouldhaveoperationalindependence.”351Whiletheboardcansetthetargetsforthebankstoreachinageneralsense,thebankmanagementshouldhandletheday-to-dayoperationsofthebankthatleadtothosetargetsbeingmet.352Theboard’spoweroverthesemanagersshouldbelimited.Inthelegislationcreatingthebankandthebank’scharter,therestrictionsontheboard’spowershouldbeclearlydelineated.Thisincludes,mostprominently,thenon-involvementoftheboardinmostday-to-dayoperationsofthebank.Themostimportantpoweroftheboardinaffectingtheseoperationswouldbetoappointthepresidentofthebank.However,theboardshouldnothavetheabilitytoinfluenceotherbankhiringactivitiesorseniormanagerselectionexceptforapprovingofseniorvice-presidentsofthebank.Tofurtherensureoperationalautonomyformanagers,theyshouldservelongertermsthanthetermsofthebankboardandthesetermsshouldgenerallynotcoincidewiththoseofthebankboard.353Thebankboardwillhavetoworkwithmanagerstomakechangestothebank.Additionally,theboardshouldhavelimitedoptionsforremovingthepresident,exceptinthecaseofanoverwhelmingmajorityofbankboardmembersvotingtoremovehimorher.

350Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),27,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.351Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),27,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.352Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),27,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.353Yeyati,Eduardo;Micco,Alejandro;Panizza,Ugo,ShouldtheGovernmentBeintheBankingBusiness?TheRoleofState-OwnedandDevelopmentBanks,Inter-AmericanDevelopmentBank(2004),27,https://www.econstor.eu/bitstream/10419/88042/1/idb-wp_517.pdf.

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However,theothermajorroleoftheboardwillbeasthepublic’swatchdogoverthebank.Theboardwillneedtoconductoversightoverthebank’sactivitiestoensurethattheymeetthepublic’sneeds.Thiswillrequiretotaltransparencyoverthebank’soperations.Thatis,theboardshouldhavecompleteaccesstobankinformationandmeetingstoensurethatthebankisoperatingaccordingtoitsmandate.Forthis,anadvisorycommitteeshouldassisttheboard,likewiththeBND.Thiscommitteewillfillinwheretheboardlacksexpertise.Thecommitteeshouldhavestrictrequirementsthatmostofitsmembersbedrawnfromprofessionalandlocalbankingservices.Theremayalsobeneedforrequirementsthatinvolverepresentativesfromhistoricallymarginalizedgroupsonthecommitteetospeakonbehalfofeconomicallymarginalizedcommunitiesasitrelatestothebank.Inthisrole,theadvisorycommitteewouldalsohaveaccesstobankinformationandwouldbeinapositiontocloselymonitorthebank’soperationsandtoreporttheirfindingstotheboard.Thecommitteeshouldbechosenaneweachelectioncyclebytheboardtoensurealignmentbetweentheirviewsonthebank.Thus,thepublicwillbeabletojudgethebank’sperformanceandholditaccountablebutwillnothavetheinfluencetopushpoliticallymotivatedloansorinefficientactivitiesontothebank.354Onaday-to-daybasis,professional,licensedbankerswillrunthebank.Thebankpresidentwillbetheonlypositionfilledbythepoliticalboard,whiletheboardwillapproveonlyseniorvice-presidents.Otherwise,thebankmanagerswillhavetheleewaytooperatethebanklikeaprivateorganization,withthenotableexceptionofconstantoversightfromtheboardandtheadvisorycommitteeoveritsactivities.But,asthebankleaderswillnotservedirectlyatthewillofpoliticalfigurestheironlyworriesfromthisoversightwillbeiftheydonotmeetthepublicmandateofthebank.Thebankshouldmakeanefforttohirefromwithinandtoelevatetoseniorleadershipthoseindividualswhohaveshownacommitmenttoandunderstandingofthebank’smission.Themanagersofday-to-dayoperationswillthusbehighlyinformedaboutthebankandwillhavesubstantialcontroloverallpartsofthebankwiththeexceptionofthelong-termgoalsofthebank.Themanagerswillalsohavediscretionovertheemployeestheyhire.Theseemployeesshouldbehiredastheywouldataprivatebank,witharigorousapplicationprocessandemphasisonskillsandfitforthebank’sneedsoverpoliticalloyaltyorothercriteria.Lastly,thereisthequestionofhowthebank’smissionwillbeincorporatedintoitsmanagement.Thoughtherewillbeanoversightmechanismasdetailedabove,whereexactlywillthismissionandotherguidelinesgoverningconductbestatedandhowwilltheyimpacttheoperationsofthebank?First,thepublicpurposeofthebankshouldbeincludedinitsfoundingcharterandthelegislationcreatingthebank.Thispurposeshouldalsobeincludedinthebank’sbusinessplanthatwillspecifymorespecificwaysinwhichthismissionwillbemet.Next,theboardand

354Mazzucato,Mariana;Penna,Caetano,BeyondMarketFailures:TheMarketCreatingandShapingRolesofStateInvestmentBanks,JournalofEconomicPolicyReform(2016),35,https://www.tandfonline.com/doi/abs/10.1080/17487870.2016.1216416.

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advisorycommissionwilloverseethedeliveryofresultsonthispublicmandateandwillhavethepowertopushthebanktomeetthesegoals.Finally,thebankshouldhaveanethicscoderequiringnotonlyethicalbehaviorfromitsemployeesandmanagersbutalsorequiringthattheycomportthemselvesinaccordancewiththemissionofthebank.Theboardandadvisorycommitteeshouldusethesedocumentsaspartoftheiroversightofthebank.Theyshouldhavetheabilitytopressmanagerstoupholdthesedocumentsandtopushforalignmentwiththesegoals.Thesedocumentsshouldalsobesubjecttoregularreviewsandupdatingwiththepurposeofkeepingthebankflexibleincarryingoutitsmission.Thesereviewsshouldbeconductedbytheboardandsubjecttoapprovalfromthelegislatureinthecaseofthebank’smissionandtheleadershipofthebankandbankemployeeswithregardstothebusinessplanandthecodeofethics.Thesedocuments,then,canserveacentralroleinguidingthebank’smanagementtofulfillingit’sthebank’smission.

D. Operational Standards Theoperationalstandardsthatthebankabidesbyarethekeytoensuringthatitmeetsitsgoalofdeliveringproductiveinvestmentswhilemaintainingstrongreturnsandstablegrowthofitsownassets.Thesestandardswillbereflectedinthebank’sbusinessplan,aswellasdirectionfromthebank’sboard,butwillbespecificallysetbythebank’smanagement.Thebank’smanagersshouldalsohavetheflexibilitytochangethesestandards,withinreason,tosuitthebank’sneeds.Furthermore,thebank’sboardandadvisorycommitteeshouldoverseethesestandards–bothhowwellthebankconformstotheapplicablestandardsandwhetherthesestandardsareinthebestinterestofthepublic.Thebank’sloanapprovalprocessisthebasisnotonlyofthebank’sexpectedreturnsonmostofitsassetsbutalsoonhowwellthebankmanagesriskanddeliversonitspublicpurpose.Loansarethelifebloodofthebankandassuchtheirapprovalprocessshouldbehighlyrigorous.AgoodloanapprovalprocessshoulddrawonaspectsoftheBNDandtheSparkassen,bothofwhichhavesucceededindevelopingstrongloanapprovalsystems.LiketheBND,astatebankshouldnotacceptloansatinterestratesbelowthemarketvalue,unlesstheyareaforaspecificprogramdesignedtoincreaseinvestmentinanunderinvestedarea.355AlsofollowingtheBNDmodel,thebankshouldhavestrictlendinglimitsthatitadheresto.356Inaddition,anyloanwhichdoesnotmeetthebank’sunderwritingstandardsshouldbeautomaticallyrejectedor

355Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.356Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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requireadditionalreviewbymoreseniorbankstaff.357ThebankshouldalsocopytheBND’smodelofescalatingapprovalrequirementsaccordingtothesizeoftheloan.358Thismeansthatlargerandlargerloansrequirethereviewandapprovalofmoreandmoreseniorstaff.Theuppermostmanagersofthebankaswellasthebank’sadvisorycommitteeandboardshouldreviewalllargeloanapplications.ButtheprocessshouldalsoincorporateelementsoftheSparkassenmodel.Inparticular,loanapprovalsshouldleveragealargeamountofdata,aswellasdetailedinformationabouttheloanapplicant,toproduceloanapprovalscoresthatcombinequantitativeandqualitativeconsiderations.LiketheSparkassen,astatebankcanuseinformationonhowtheloanapplicantcomparestoitspeerstoevaluateitquantitatively,andcanuseitslocal,personalknowledgeoftheapplicanttoincorporate“soft”informationintothesystem.Insodoing,thebankcanalsocreatehelpfulfeedbackfortheloanapplicant.Thisishelpfulforsmallbusinessesandmunicipalgovernmentsapplyingforloans.Theseorganizationscantakestepstoimprovetheircredit-worthinessandincreasethepotentialprofitabilityoftheirinvestmentswithfeedback.Thiswoulddeliveronthebank’sdevelopmentgoalsandwouldincreasethequalityoftheloansitcreates.Thebankwouldhaveastrongprocessfordeterminingthecreationoftheseloansandsowouldhaveahigherproportionofgoodloansonitsbooks.But,thebankwillalsohavetomanageitsriskonamacro-levelacrossitsentireportfolio.Asindividualfinancialactivitiesvaryintheirrisks,potentialrewards,timing,andrequiredfunding,havingmanygoodloansdoesnotmeanhavingawell-balancedportfolio.Thebankmusttakestepstoensurethatthisportfolioleavesavailableliquidityforwithdrawalsandotherfinancialactivities,ensuresagainstloanfailures,andhasamplecapitalreserves.Ontheissueofliquiditymanagement,thebank’smanagersmustensurethatbothexpectedandunexpectedwithdrawalswillhavesufficientdepositsavailableforthem.Theywillbeaidedinthistaskbytheircloserelationshipwiththestategovernment,whichwillallowthemtotimedepositavailabilitytotheneedsofthegovernment.Thisisnodifferentfromhowprivatebanksmustmanagetheirliquidityonaday-to-daybasis,exceptthatthepublicbankwouldhavetheaddedbenefitofknowingwhenitslargestdepositorisexpectedtowithdrawfunds.359Sufficeittosay,boththeBNDandtheinternationalexamplescoveredabovehavebeenabletomanagetheirliquidityaswellasprivatebanks.360

357Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.358Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.359Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),8,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.360FAQOnPublicBanking,PublicBankingInstitute(2019),7,https://www.publicbankinginstitute.org/faq/.

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Thebankshouldalsomaintainasizableamountofloanlossreserves.Thesereservesareheldtoaccountforfailedloansinwhichthefullamountoftheloanisnotrepaid.Thesereservescoverforlossesbyholdinganamountofadditionalfundsinthebank’svault.Largerreservesthusmeanthatthebankistakingalessriskypositionwithrespecttobadloans.Thedrawback,however,ofhigherloanreservesislowergrowthforthebank.Thebelowchartrepresentsthedifferencebetweena.6%anda1.2%loanlossreserveratioforastatebank.

Obviously,ahigherreservepercentagecutsintotheavailablefundsforloansandmeansthatthebankwillaccumulateassetsmoreslowly.Asisclear,thiscanhavealargeeffectovertime.However,giventhegoalsofthebank,itisrecommendedthatitavoidriskierbehaviorinexchangeforstablegrowth.Thismeansthatahigherloanlossreserveshouldbepreferredinmostsituations.Thisshouldbetrueparticularlyduringtheearlyyearsofthebankwhenitisunclearhowwellthebank’sloanswillperform.Overtime,thebankwillgetabettersenseofitsloanfailurerateandcanadjustitsreservesaccordinglytomaintainlowerrisksbutallowforgreateraccumulationofassets.Indeed,theBNDnow,afteracenturyoflearningitstrade,hasaloan-lossallowanceof1.79%,whichislowerthanthe2.03%averageforsimilarlysizedbanks.361Asimilarissuefacesthebankwithdecidingtheircapitalratios.Theseratiosareperhapsthemostimportantwaythatthebankcanmanageitsrisks.Theseratiosdeterminehowmanyassetsthebankcancreatebasedonthedepositsandcapitalthatthebankholds.Thus,theycomparethebank’sequitytoitsriskun-weightedassets(leverage),toitsriskweightedassets(capital),anditsreservestoitsdeposits(reserve).Theseratioshavedifferentregulated

361Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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minimums,rangingfrom3%to10%thatallbanksmustabideby.But,banksalsohavetheabilitytomaintainratiosabovethesestandards.However,profit-seekingbanks,duetotheirpursuitofprofit-maximization,usuallystayneartheseminimums.Apublicbank,becauseofitsmissionandpurpose,wouldlikelyprefertostayabovetheseminimumsandreduceitsrisks.Thisthenallowsthebankanditsmanagerstodecideonwhatcapitalratiosthebankwillmaintain.Alowerratiomeansthebankcancreatemoreassetsonthesameamountofdepositsandthuscanreceiveagreateramountofprofits.362Thismaybeappealingtobankmanagersandpolicymakers,butitcomeswithincreasedriskifassetsdefault.Thebelowgraphshowstwoscenarios:alow-riskscenariowithahigherleverageratioandalowerloantoassetratioandhigh-riskscenariowiththeopposite.

Thereis,again,asteepdrop-offinthebank’sgrowth,althoughnotassteepasinthecaseofloanlossreserves.Yet,thesamelogicwithloanlossreservesapplieshere;itismorealignedwiththegoalsofthebanktoallowforslowergrowthinassetsifitmeansthatthebankwillmaintainstableearnings,willnotgounder,andwillnotdestabilizethelocalfinancialsystembytakingonunduerisks.ThisishowtheBNDoperates;itmaintainscapitalratiosataround8%to10%forallcapitalmeasures.363Thoughthisundoubtedlyhasslowedthebank’stop-endgrowthrate,ithasalsoensuredthatthebankhascontinuallygrown,deliveredonitsmission,andreturnedbenefitstothestatecommunityandthestategovernment.

362WashingtonStateBankAnalysis,CenterforStateInnovation(2010),17,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.363Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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Toensurethatalloftheseoperationalguidelinesaremetconsistently,thebankmustalsohavearigorousauditingsystem.Auditingshouldbestructuredsuchthatthebankwillmonitoritselfwhileitisalsomonitoredbyoutsidegroups.Thebankshouldhaveaninternalcreditreviewandauditingdepartment.Thiswouldbeanindependentdepartmenttaskedwithconstantlymonitoringthebank’sactivitiesandreportingtoseniormanagementandtheboardontheissueswiththebank.364Thismonitoringsystemhastheadvantageofimmediateevaluationofthebank’sactivities.However,internalmonitoringraisesanobviousproblem.Whatiftheinternalmonitorsareunwillingtoholdtheirbossestoaccount?Thebankshouldhavetwoothermonitoringactivitiesthatareexternaltothebank’smanagement.First,thebank’sboardandadvisorycommitteemustmonitorthebank’soperations.Thesegroupswillhaveaccesstothebank’sactivitiesandwillholdthebank’sactivitiesaccountabletothepublic.Secondismonitoringbyexternalorganizationswithexpertiseintheseareas.Thisshouldinclude,likewiththeBND,annualauditsfromanon-affiliatedCPAfirmandfromthestate’sfinancialinstitutionagency.365Theresultsoftheseauditsshouldbepublic.AsystemofinternalandexternalmonitoringishowtheBNDandtheSparkassenhavebeenabletoachievesteadygrowthandstrongreturnsovertheirlonghistories.Theimportanceofthesesystemscannotbeunderstatedbecauseitisthesesystemsthatmakethebank’sotheroperationalguidelinesmeaningfulinthefirstplace.Withoutrigorousauditing,theotherstandardsofthebankcanbeignored.366Finally,thebank’sguidelinesshouldalsoprovideforsocialresponsibilitystandardsininvestment.Thismeansthat,liketheSparkassen,everythingfromtheloanapprovalprocesstotheprogramscreatedbythebankshouldbeevaluatedbytheireffectsonthepublic.Thisensuresthatthepublicpurposeofthebankremainsrelevanttobankingdecisions.Thispublicpurpose,inadditiontobeingincludedinthebank’sfoundingdocuments,shouldalsobeincludedspecificallyinthebank’sbusinessplanandinitsoperationalguidelines.Thesedocumentsshouldnotehowthebankisspeciallysituatedtoprovidelong-termcapitaltoimportantpublicprojects,tocoordinatestakeholders,andtoemployawidevarietyoftoolsinsupportinglocaldevelopmentandgovernmentpoliciesthatadvancethestate’seconomy.367364Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.365Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.366Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),9,https://rooseveltinstitute.org/municipal-banking-overview/.367Mazzucato,Mariana;Penna,Caetano,BeyondMarketFailures:TheMarketCreatingandShapingRolesofStateInvestmentBanks,JournalofEconomicPolicyReform(2016),5,https://www.tandfonline.com/doi/abs/10.1080/17487870.2016.1216416.

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Theseguidelinesshouldfurtherunderlinethatthebank’sgoalisnottomaximizeprofitsbuttoincreasethewelfareofthestate’scitizensinasustainable,stableway.368

E. Insurance Thebankhastwooptionsforhowitcouldinsureitsdeposits.First,itcouldbeamemberoftheFDIC,submittoitsoversight,andbeinsuredbythefederalagency.Secondly,itcouldbeinsuredbythestateitself.WhiletheFDICoptionmayappearappealing,itisproblematicforafewreasons.Instead,astatebankshouldfollowtheBNDmodelbybeinginsuredbythebankitself.Thoughthiswouldberiskierforthebank,itisaworkableoptionforastatebankbecauseofitsconnectionswiththestateitself.FDICinsuranceisproblematicfortworeasons.First,theFDIConlyinsuresupto$250,000peraccountholder,meaningthatmoststatefundswouldbevulnerableinthebank.369Second,allowingfederaloversightoverastatebank,especiallyifownedthroughaDBA,wouldcreatestate’srightsissues,whichmaypresentaseriouslegalchallengetothecreationofthestatebank.370Indeed,thisishowtheBNDhasremainedinsuredbythestate.ItwassetupthiswaypriortotheFDICbecomingmandatoryinthe1990sandsowasgivenanexemptionfromtherequirement.371WiththeprecedentoftheBND,otherstatescouldclaimthissameexemptionandappealtotheirdistinctlegalstatusascomparedtoprivatebanks.372Beinginsuredbythestatedoesbringincreasedriskforthestate.But,self-insurancehasworkedsuccessfullynotonlyinNorthDakotaforacentury,butalsoinGermanyforevenlonger.TheSparkassenself-insurethroughtheirumbrellagrouptheDSGV.Thesesystemscanworkinstatebanksbecausetheyreducetherisktothestateofabankfailure.Banksfailwhentheydonothavefundsavailabletoclearwithdrawalsandotherbasicfinancialservices.Thisisbecausebanksmakeloansmanytimesthevalueoftheirdepositsandbetthattheywillearnenoughfromtheseloanstoclearanywithdrawalswhilealsomakingaprofit.Assumingthatabank’sloansdonotfailatahighrate,then,abankfailswhentoomanyconsumerswanttoremovetheirdepositsatonce.373Thisforcesthebanktoreininitsloansandeatsawayatits

368ExploringtheSparkassenModelofLocalSavingsBankinIrelandwiththeSavingsBankFoundationforInternationalCooperation,PublicBankingForumofIreland(2014),4,https://webofdebt.files.wordpress.com/2014/11/sparkassen-model-in-ireland-oct-11.pdf.369Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),11,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.370PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),25,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.371PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),25,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.372PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),25,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.373PublicBankinginAmerica,PublicBankingInstituteandCenterforStateInnovation(2011),26,https://drive.google.com/file/d/1LGedFLXOEuUNKWSzJSFsScADb5dl3Kjz/view.

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depositbaseuntilitnolongercanfunction.Astatebankthatholdsmainlystatedepositswillbefarlesslikelytosufferthesecircumstancesbecauseitsinsureranditsprimarycustomerarethesame.Thestatewillknowwhenthestatebankhasliquiditytoprovideforwithdrawalsjustasitwillknowthatattemptingtoremovetoomanydepositsatoncewillcausethebanktofailandwillthuscausethestatetohavetopayforthebank’slosses.Thestatewillnotcauseabankrunonitsownbankandsoitwillnothavetoinsurethedepositsofitsstatebank.TheBNDhasneverrequiredinsurancefromthestateandshowshowstateinsuranceofthebankcanbeworkableinthisparticularinstance.

F. State Profit Dividend Therearetwoseparatequestionsfacingthestatewhenitcomestodeterminingitsstateprofitdividend.First,howwillthisshareofprofitsbedecided?Second,howlargeofashareshouldthestatetake?Thefirstquestion,dependingonhowthebankisowned,maybedeterminedforit.Inparticular,ifthebankisownedthroughsharesorismadelegallypublicthenthestatewillhavenosayintheprofitshareitreceives,ifany.However,ifthebankisownedasaDBA,asthisreportrecommends,orinsomeotherarrangement,thenthestatemayhavetheabilitytosetthisshare.Thissharemaybesetbylegislationasafixedrateeachyearoritmaybedeterminedthroughnegotiationbetweenthebank’sofficialsandlawmakers.Afixedratesystemwouldmakethereturnsforthestatemorepredictablebutwouldoverallbefartooinflexibleforthestate’sandthebank’sneeds.Someyearsthestatemayneedalargerdividend,likeinarecession,whereasinothersitmayneednoneatall.Havingthesharedeterminedbynegotiationbetweenthebankofficialsandstatepolicymakersmaintainsthisflexibility.Additionally,thisnegotiationwouldensurethatallinterestedpartieswouldhaveaseatatthetable.Thisreportrecommendsthatthissharebedeterminedannuallythroughagreementbetweenthestate’slegislature,management,andboard.Theboardshouldhavethefinalauthoritytodecideonamediatedamountbetweenthetwosidesiftheyareunabletoreachanagreement.Thissystemshouldallowboththebank’sneedsandthestate’sneedstobesufficientlyrepresentedwhilealsomaintainingtheflexibilitytoshareprofitswiththestateortorecapitalizetheseprofits.Secondly,therewilllikelybeatemptationfromthestatetotakealargeshareoftheprofits.Afterall,thestateownsthebankandisentitledtoallofitsprofitsifitdesires.However,thisimpulseisultimatelycounterproductive;takingalargersharewillmeannotonlyslowergrowthofthebank,butalsolowerreturnsforthestateinthelongrun.Thebelowgraphshowsthetotalstatedividendsthatthestateisestimatedtoreceivebyyear20ifittooka30%,50%,or70%shareofprofitseachyear.Thisis,again,employingtheCenterforStateInnovationmodel.

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Theresultsshowsmallincreasesinthetotalamountreceivedbythestatebythesehighermargins.Thesehigherratesareundercutbythefactthattheytakemoneyoutofthebankinsteadofrecapitalizingit.Thismeansthatthebankgrowsslowerintermsofcapital,assets,andloansunderthe70%scenariothanitdoesunderthe30%.Asaresult,totaldividendsarenotmuchhigherand,iftheestimateswereextendedoutanotherdecadeortwo,theywouldshowthestate’stotaldividendfor70%and50%begintobeovertakenbythe30%rate.Thisisbecause,underthe30%rate,thebankwillgrowtosuchafasterextentthantheotheroptionsthatitwon’tmatterthatthestateisgettingasmallercutoftheoverallprofits.Currently,theBNDtransfersaroundhalfofitsprofitstothestate,butithasexistedforacentury.374Especiallyearlyinthebank’sdevelopment,thestateshouldbecautioustodrawcapitaloutofthebank.Ifthatcapitalisreinvestedearlyon,throughcumulativegrowth,itcanhavealargebenefitforthestatelateron.Indeed,theWashingtonStateBankanalysisshowsthebank’sreturnonassetsratewouldbeabovethatofcomparablebanksandwouldbenearthatgeneratedbytheBNDifthestateallowsbankcapitaltogrow.375Thesameanalysisfoundthatinthebank’s40thyear,“ifthebankconsistentlyreturnedmostprofitstothestate,theyear-by-yearreturnwouldbeonlyabout$20mmcomparedtothe$175mmindividendsifthe

374Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),11,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.375WashingtonStateBankAnalysis,CenterforStateInnovation(2010),17,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.

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stateletthebankkeepandaccruemostofitsprofits.”376Intermsofrealprofitstothestate,allowingthebanktorecapitalizeitsprofitswouldhaveasimilarimpactinthelong-term.377Thus,thereareclearreasonsforstatestotakealowershareofthebank’sprofitsasadividend.Inlieuoftakingthebank’sprofits,itcanreinvestthismoneybackintothebankandallowittogrowsothatitwillreturngreateramountstothestateinthelong-term.But,solongasflexibilityismaintainedinthedeterminationofthisshareofprofits,thereneednotbearbitraryrestrictionsonthisamount.JustaswithNorthDakotaandtheBND,thestatecandrawonbankprofitsintimesofneedandforgoitsshareintimesofplentytoallowthebanktogrowforthebenefitofthestatecommunityasawhole.Unlesstherearepressingimmediateneeds,especiallyintheearlyyearsofthebank,thestateshouldreturnbankprofitsbackintothebank.

G. Activit ies

1. Deposits Themostimportantactivitythatbankcanundertakeistosecuredeposits.Depositscancomefromavarietyofsources.Obviously,thestatewillbeamajordepositor,butfundscouldalsobedepositedfromstatetrusts,localgovernments,businesses,andprivateconsumers.Thissectionwillconsiderwhetherthebankshouldacceptdepositsfromallofsourcesandwhetheritshouldcompetefordepositsinalloftheseareas.First,astatebankshouldclearlyacceptdepositsfromthestate’sfunds.Thisis,infact,partofthepurposeofcreatingastatebank;tofunnelstatefundsbackintothestate’sdevelopment.But,thebankshouldnotacceptstatemanagedtrusts.378Thesetrustshavetheirownobligationsandrequirehigherreturnstofundtheseobligationsthancanbepaidbythebankondeposits.Totakeonthesetrustswouldforcethebankintoriskierinvestmentstoearnhigherdividendsandundercutitscentralmission.Thesituationislessclearwhenitcomestodepositsfromnon-stateentities.Althoughtakingonadditionaldepositswouldallowthebanktoincreaseitsloansandtohavealargerimpactonthestatecommunity,itcouldalsocompetewithcommunitybanksforthesedeposits.Ifitendedupgettingtoomanyofthesedeposits,itmightbegintoundercutcommunitybanks.However,inthisscenariothebankwouldeffectivelyreplacethesecommunitybanks,exceptitwouldleveragegreatereconomiesofscale,expertise,andamoreexplicitpublicpurposethanisfoundincommunitybanks.

376WashingtonStateBankAnalysis,CenterforStateInnovation(2010),18,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.377WashingtonStateBankAnalysis,CenterforStateInnovation(2010),18,http://leg.wa.gov/JointCommittees/Archive/IFTF/Documents/2011Aug22/CSI-Analysis.pdf.378FAQOnPublicBanking,PublicBankingInstitute(2019),6,https://www.publicbankinginstitute.org/faq/.

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Thebankcouldbebannedfromtakingindepositsfromlocalgovernments,businesses,andconsumers.379Yet,thiswouldbeaneedlesslyrestrictivelimitationonthebank’sabilitytogrowitsassets.Ifthesegroupswantedtodeposittheirmoneyinthebank,thenthebankshouldacceptthesedepositsandusethemtobetterdeliveronitsmission.Whetherthebankshouldadvertiseorcompeteforthesedeposits,however,ismorecontentious.Thesegroupsmaybeabletoreceivemarket-averageratesontheirdepositsfromthestatebank.380Additionally,thesefundswouldbeputbacktowardsbenefittingthedepositinggroups.Thismightbeanespeciallystrongreasonforlocalgovernmentstodeposittheirmoneywiththebank.Butthesebenefitsaccruelessdirectlytobusinessesandconsumers.Additionally,communitybankshaveamuchhardertimeholdinglocalgovernmentdepositsthantheydofrombusinessesorconsumersduetothehighersecurityreserverequirementsassociatedwithlocalgovernmentdeposits.So,itmaybebeneficialforastatebanktocompeteforthesedepositswithprivateinstitutions,atleastiftherearenotalreadymunicipalpublicbanksinthearea(whichdonotexistintheUScurrently).But,astatebankshouldavoidcompetingwithcommunitybanksondepositsfromprivateinstitutionsunlessthecommunitybankingsystemisunabletohandlebusinessintheregion.Thismightbethecase,forexample,inRhodeIsland,Delaware,andMinnesota.Inthesestates,astatebankmightfinditmorecomplementarytoitsmissiontocompeteforprivatedepositslargelyhousedinlargeprivatebanksandtothenusethesedepositstosupportweakercommunitybanksandtodirectlyinvestinthecommunity.Asalways,thisdecisionshouldbemadewithcloseattentiontolocalconditionsandneeds.

2. Investments Thetypesofinvestmentsthatthebankwillengageincanbebroadlygroupedintofourcategories.Thebankwillmakeinvestmentswithorincommunitybanks,fordirectdevelopment,forconsumers,andforthegovernment.Perhapsthebanksprimaryrolewillbeasapartnershipbank,similartotheBND.Inthisrole,thebankwillengageinpartnershiploansandotherinvestmentactivitiesdesignedtobenefitcommunitybanks.Inpartnershiploansthebankwilljoinwithsmallercommunitybankstoprovidecapitaltoexpandcommunity-bankingactivityandtoallowcommunitybankstoretaintheirlargestclients.381Thisisapracticethatastatebankshouldmakecentraltoitsactivities.Thisisespeciallytruewhentherearealargenumberofsmallcommunitybanksinthestate,so379Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),14,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.380Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),18,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.381Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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thatastatebankcanensurestrongcompetitioninlocalfinancialmarkets.Eveniftherearefewcommunitybanksinthestate,thebankshouldsupplementmoredirectlendingactivitieswithpartnershiploansinanefforttostrengthenthesecommunitybanks.Thebankcanalsoincreasetheloancapacitiesofcommunitybanksintwootherways.First,thebankcanengageindirectbankstockpurchases.Thebankwouldpurchasethestockofcommunitybanks,providingthemwithimmediatecapitaltoaidthesebanksincreatingnewloans,mergingwithothercommunitybanks,orexpansion.382Thebankcanalsoexpandcommunitybankliquidityforinvestmentsthroughissuinglettersofcredit.Byguaranteeingtheobligationsofthecommunitybankforasmallinterestrate,theselettersofcreditwillallowthecommunitybanktocommitgreaterfundstowardslendingratherthanholdingthemasreserves.Althoughnotnearlyasimportantaspartnershiploans,theseactivitiesarerelativelyinexpensivewaysforthestatebanktoimprovetheconditionsoflocalfinancialmarketsthroughexpandingthepowerofcommunitybanksinthestate.Assuch,thebankshouldengageintheseactivities,althoughitshouldnotcommitasmuchcapitaltowardstheseopportunitiesasmoreproductiveloans.Inparticular,directbankstockpurchasesmayberelativelymoreexpensivecomparedtothebenefitsreceivedfromcheaplettersofcredit.Thebankshouldalsosetasideasizableamountofitsavailablefundsforinvestmentindirectdevelopment.Althoughmanyloanstobusinessesmayrunthroughpartnershipswithcommunitybanks,thestatebankcanalsoprovidedirectloanstofarmersandsmallbusinesseswithaneyetowardsthedevelopmentofthestateeconomy.Furthermore,thebankcanestablishprogramstoprioritizeinvestmentininfrastructureandenvironmentalopportunitiestoaidthestateindevelopingthesekeyareas.Asashareofitstotaldirectinvestmentfunds,loanstofarmersandsmallbusinessesshouldberelativelysmaller.Thisisbecausethebank,throughpartnershiploanswithcommunitybanks,shouldalreadybefinancingthesegroups.However,directloanprogramscanprovideafurtheremphasisonthebank’smissiontoimproveeconomicdevelopmentinthestatebytargetingcertaintypesoffarmersandsmallbusinesseslikelytoimprovethestate’seconomy.Indoingso,thebankcanworkwithstateeconomicdevelopmentagenciestoidentifyareasofneedanduseitsamplecapitaltofunddevelopment.383ThiscanalsobeexpandedtocommunitydevelopmentassociationsastheBNDdoeswiththePACEprogram.384

382Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),12,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.383Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),16,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.384Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),11,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.

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Moreimportantdirectdevelopmentinvestmentprogramsshouldfocusoninfrastructureandgreeninitiatives.AsdetailedintheBNDcasestudy,theInfrastructureLoanFundisoneexampleofsuchaprogramandhowitcanbesetuptoaidthestateinboostingeconomicdevelopment.385Apublicbankwouldalsobewellpositionedtoinvestingreenprojectsbecauseofitspublicpurpose.386Thisisbecausegreenprojectshavelargebenefitsbutnotonesthataccrueimmediatelyor,usually,toanyoneorganization.Theyarehardtomonetizeyetstillsocietallybeneficial.Astatebankwouldhavelessconcernwithturningalargeprofitontheseinvestments,solongastheyresultedingreatereconomicdevelopmentinthestate.Astatebankwouldalsobewellpositionedtoadvancethelong-termloansnecessaryformanyinfrastructureandgreenprojectssafeintheknowledgethatitdoesnotrequireimmediate,largereturnstosatisfyitsowners.Instead,liketheBNDdoeswiththeILF,loanscanbeofferedwithrepaymentperiodsoverdecadesatlow,stableratesthatencourageinvestmentinkeydevelopmentissues.Ifinvestmentswithcommunitybanksandindirectdevelopmentshouldmakeupthelargestsharesofthebank’sassetportfolio,loanstoconsumersshouldbesubstantiallylessimportant.Theseloanstendtohavealesserimpactonsocialwelfare.TheBNDisinvolvedsubstantiallyintwotypesofconsumerloans:studentloansandresidentialloans.TheBNDloansdirectlytoeligiblestudentsatfavorableratescomparedtowhatcouldbefoundinprivatemarkets.TheBNDalsoisresponsibleforcreatingthesecondaryloanmarketformortgagesasawayofincentivizingbankstooffermoremortgagesforconsumers.387Intheinterestsofmaximizingthestatebank’simpactonthestatecommunity,theseloansshouldbeusedmoresparinglythanintheBND.Notonlyaretheremoreampleprivatealternativesinstateswithlargerfinancialmarketsforbothofthesetypesofstudentloans,buttherearealsomuchlargerrolesforfederalgovernmentinvolvementintheseissues.Indeed,thereisachancethatstudentloanmarketswillbedramaticallychangedinthenextdecadeasthegovernmentseekstorespondtothestudentdebtcrisis.So,astatebankwouldbeadvisedtofocusmoreoninvestmentactivitieswhereitcanhaveagreatermarginalimpactonthestate’swell-being.Thestatebankcanalsoinvestingovernmentsinavarietyofways.First,insteadofdirectlyinvestingininfrastructureprogramsthestatebankcouldbealeadingbuyerofmunicipalorstatebondsfundinginfrastructure.388Thiswouldbeasaferwayforthebanktofundinfrastructurewhilestillguaranteeingareturnonitsinvestment.Thebankcouldalsodirectlyloanmoneytothestateintimesofneed.Thiscould,forexample,allowthestatetocheaply385Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),2,http://cms.mildredwarner.org/summaries/hussam2018.386Mazzucato,Mariana;Penna,Caetano,BeyondMarketFailures:TheMarketCreatingandShapingRolesofStateInvestmentBanks,JournalofEconomicPolicyReform(2016),3,https://www.tandfonline.com/doi/abs/10.1080/17487870.2016.1216416.387Figart,Deborah,ExploringaPublicBankforNewJersey:EconomicImpactandImplementationIssues,StocktonUniversity(2018),11,https://stockton.edu/hughes-center/documents/2018-0326-exploring-a-public-bank-for-new-jersey-economic-impact-and-implementation.pdf.388Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),13,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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borrowfromthebankratherthanfromaprivateorganizationintheshort-termwhileitwaitsforsay,disasterrelieforfederalgrantfunding.TheBNDhasfilledthisrolebefore,withtheIndustrialCommissionsettingtherateatwhichthebankloansfundsbacktothestate.389Bothoftheseoptions,however,shouldbedrawnonsparingly.Thebankshouldnotserveasthepersonalpiggybankofthestate,butshouldonlyassistitwithfundingwhenthereisademonstrablepublicbenefitfromthebank’sfunding.Lastly,thebankcoulduseitsfundstobuynon-infrastructuresecuritiesfrommunicipalitiesandthestateitself.Thesesecuritiescouldhelpthebankloweritsriskpositionacrossitsportfolioandprovidearegularstreamofincometohelpmanageliquidityforwithdrawalsandnewinvestments.390Furthermore,byholdingthesesecuritiesfromlocalandstategovernments,thebankwouldprecludestateresourcesfromleavingthestateintheformofpaymentstooutofstatesecurityholders.391Stategovernmentpaymentswouldgobackintothestatebankratherthantooutofstatebanksororganizations.Then,thestatebankwouldreinvestthesefundsintothestateforthebenefitofthestate.392

3. Other Activit ies Thebankwillalsoengageinseveralotheractivitiesinadditiontoholdingdepositsandmakinginvestments.Themostimportantoftheseotheractivitieswouldbebankers’bankservices.Inadditiontocreatingpartnershiploansandprovidingliquiditytocommunitybanks,apublicbankshouldalsoprovideavarietyofhelpfulservicestothesebanks.Theseserviceswillmakeiteasierforcommunitybankstocompeteinfinancialmarketsandsowillhelpdeliveronthebank’sgoaltoincreasecompetitioninlocalfinancialmarkets.ThebankwouldperformthesamerolethattheBNDdoesinthissense;itwouldprovidelowcostservicesforcommunitybanksrangingfromcheckclearing,tocurrencyprovision,andaccesstoaFederalReserveaccount.393Communitybankscouldstillchoosetogotooneofthecountry’s22privatebankers’banks,buttheywouldhavegreaterchoicewiththecreationofapublicbankers’bankinthestatebank.394

389Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),2,http://cms.mildredwarner.org/summaries/hussam2018.390Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),11,https://rooseveltinstitute.org/municipal-banking-overview/.391Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),12,https://rooseveltinstitute.org/municipal-banking-overview/.392Beitel,Karl,MunicipalBanking:AnOverview,RooseveltInstitute(2016),12,https://rooseveltinstitute.org/municipal-banking-overview/.393Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),13,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.394Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),13,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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Anotherpossibleactivityforthestatebankwouldbetoattempttoextendbankingservicestotheun-bankedandtheunder-banked.Theun-bankedandtheunder-bankedarethoseindividualswhodonothavesufficientaccesstocreditoressentialbankingservices.39538%ofAmericansareunder-bankedorun-bankedandsotherehavebeendemandstoextendbankingtotheseindividuals.396Somemaythinkthatapublicbankwouldbeinanidealopportunitytofillthisroleforthebenefitofthepublic.Thiswouldbuildonexistingproposalsforpostalbanking,whichwouldofferbankingservicesthroughUSPostalServicebranchestoachieveeconomiesofscaleandproximity.397However,astatebank,atleastoneinthemoldofthemodeldiscussedhere,wouldnotfillthisroleverywell.First,thebankwouldnothavetheinfrastructuretoextendtheseserviceseasily.Indeed,partofthereasonthebankcanoffersuchstrongreturnsisbecauseithaslowoverhead;ithasonlyonelocation,stafffocusedonbanking,andoffersalimitedsuiteofservices.Ifastatebankwereforcedtoextendbankingstatewidetotheun-bankedthiswouldentailmuchgreatercostsforthebankandwouldundercutitsusefulness.Thisis,infact,onereasonwhypostalbankingisasolutionwithgrowingpopularity;itleveragestheexistinginfrastructureofthepostalservicetoextendthesebankingservicesatminimaladditionalcost.Secondly,extendingcredittotheseindividualswillmostlikelynotreturnaprofit.398Itwillprobablybeaninitiativethatcostsmoneytothebank,butwouldresultinanoverallsocialbenefit.Still,thebankshouldbeareturn-seekingentity–itmakesinvestmentsnotgrants.ForcingastatebankintothispositionmaycausethesameproblemseeninIndia,wherePublicSectorBankshavegreatlyextendedservicestothehundredsofmillionsofruralIndians,butasaresulthavetakenonriskierinvestmentstocompensatefortheirlossesintheseareas.Overall,postalbankingisanideaworthyofconsideration,butnotonethatcomplementsthepurposeofapublicstatebankintherolediscussedinthisreport.

H. Government Programs Finally,itisnecessarytobrieflyconsidertheroleofthebankasitrelatestoothergovernmentprograms.Quitesimply,thebankdoesnotcompetewithothergovernmentprograms.Rather,thebankworkstosupplementtheactivitiesoftheseprogramswithloansandotherinvestmentsthatreturnaprofittothebank.

395Baradaran,Mehrsa,It’sTimeforPostalBanking,HarvardLawReview(2014),1,https://harvardlawreview.org/2014/02/its-time-for-postal-banking/.396Baradaran,Mehrsa,It’sTimeforPostalBanking,HarvardLawReview(2014),2,https://harvardlawreview.org/2014/02/its-time-for-postal-banking/.397Baradaran,Mehrsa,It’sTimeforPostalBanking,HarvardLawReview(2014),3,https://harvardlawreview.org/2014/02/its-time-for-postal-banking/.398Baradaran,Mehrsa,PostalBanking’sPublicBenefits,UniversityofGeorgiaSchoolofLaw(2018),9,https://digitalcommons.law.uga.edu/cgi/viewcontent.cgi?article=2198&context=fac_artchop.

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Thebankis“notaneconomicdevelopmentprogram.”399InthecaseoftheBND,however,itishousedwithNorthDakota’seconomicdevelopmentagency.400Thisallowsthetwogroupstoworktogetherondeliveringthestate’seconomicdevelopmentgoals.Still,theyapproachthesegoalswithadifferentsetoftoolsforbringingabouteconomicdevelopment;thebankasaninvestorseekingareturnandthedevelopmentprogramasasourceofgrantfundingforvitalprojects.Thisincludesinfrastructurespecificdevelopmentprograms,onwhichthepublicbankwouldprovideanalternativethroughhavingapolitically-independentandreturn-seekingapproach.401Thebankmayserveacentralroleincoordinatingandhousingthevariousdevelopmentagenciesofstatetogethertoensuregreaterteamworkamongstthestatedevelopmentarms.402Thebankwillalsonot,aspreviouslymentioned,replacetheinvestmentmanagersofthestate.Thetrustsofthestateandtheirallocationacrossdifferentinvestmentswillnotbemanagedbythebank.ThiswouldberetainedbythestateTreasurerasisthecaseinNorthDakotaandcurrentlythecaseinallotherstatesaswell.403Thebankwillalsonotreplaceanyprogramsseekingtoimprovetheenvironment.Althoughthebankwillhaveprogramstoinvestinsustainableandgreenopportunities,thesewillbeoneswhereareturnofisexpected.Thoughthebankwillhaveapublicpurpose,itwillnotbedirectlyfundingenvironmentalprojectsbutinsteadfindinginvestmentopportunitiesusingloansbackedlargelybystatefunds.Itwillcoordinatewithenvironmentalgrantprogramsandwillsupplementthetoolboxofthestate’senvironmentalimprovementinitiatives,butwillbynomeansreplacetheseprograms.

V. Conclusion ThisreporthasattemptedtolayoutsomemajormodelsofpublicbankingaroundtheworldandintheUnitedStates.IthasfocusedontheproblemsfacingtheNEMWstatesandthewaysinwhichapublicbankcouldaddresstheseproblems.Finally,ithasdetailedasetof

399Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),18,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.400Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),18,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.401Hussam,Shareef,PublicBankingforInfrastructureFinance,CornellUniversity(2018),3,http://cms.mildredwarner.org/summaries/hussam2018.402Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),18,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.403Judd,Jason;McGhee,Heather,BankingonAmerica:HowMainStreetPartnershipBanksCanImproveLocalEconomies,Demos(2011),19,https://www.demos.org/sites/default/files/publications/Demos_NationalBankPaper.pdf.

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recommendationsforhowastateshouldcreateastatebanktobestachieveitsgoalsandaddresstheproblemsfacingthestate.ThefinalrecommendationofthisreportisthatallNEMWstatesadoptapublicbankanddosowithcloseattentiontotheircircumstancesandneeds.Publicbankingisnotapanacea,butitcanmovestatesintherightdirection.