I first heard about the Bank of North Dakota (BND) about a month ago. It was called 'the only state-owned bank in the USA.' That intrigued me, and I decided to look into it. What I saw impressed me enough that I am sharing it, with a question to state lawmakers: Is this something that could profit your state?
Bear in mind, North Dakota is not exactly like North Carolina or Utah or anywhere else (not even South Dakota). As Mother Jones says, "To be sure, it (BND) owes some of its unusual success to North Dakota’s well-insulated economy, which is heavy on agricultural staples and light on housing speculation." Very true, and we recognize that what plays in Bismarck probably won't play in Boston. But Boston asked the question anyway and so have many others from Washington to Florida.
So, what is it and why is it so great?
What is it?
Media outlets like the Huffington Post and Newsweek/The Daily Beast frequently call it "socialist," however, a study by the Federal Reserve Bank of Boston found, "BND is perceived as conservative and well managed."
BND's founder, A. C. Townley, was a member of the Socialist Party and headed a short-lived movement called the National Non-Partisan League (NPL), a farmers' organization. North Dakota Farmers were having a lot of trouble getting credit at a reasonable cost back in the teens, so this grassroots movement stepped up to the challenge, got political control of North Dakota and founded BND in 1919. (They had other agenda items, but the movement didn't last long enough to get most of them rolling.)
The State of North Dakota deposits all the taxes and fees it collects into BND; these collections form its capital base. BND actually pays the state treasurer interest on those deposits. (Other state governments deposit their collections in private banks, which also pay interest to the State.) Those deposits are used to pay the State's expenses and loan money to farmers, students (before that was outlawed by the Obama administration) and local businesses, mostly through partnering with private banks.
Eric Hardmeyer, current BND president, told the Huffington Post, "[W]e have specifically designed programs to spur certain elements of the economy. Whether it’s agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education – we do a lot of student loan financing. So that’s our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history."
That mission was designated, in part, to avoid competing directly with private banks. Hardmeyer continues, "[W]e understand that we walk a fine line between competing and partnering with the private sector . . . So most of the lending that we do is participatory in nature. [A loan is] originated by a local bank and we come in and participate in [fund a part of] the loan and use some of our programs to share risk . . . [we also] provide services to banks, whether it’s check clearing, liquidity, or bond accounting safekeeping."
Bear in mind, North Dakota is not exactly like North Carolina or Utah or anywhere else (not even South Dakota). As Mother Jones says, "To be sure, it (BND) owes some of its unusual success to North Dakota’s well-insulated economy, which is heavy on agricultural staples and light on housing speculation." Very true, and we recognize that what plays in Bismarck probably won't play in Boston. But Boston asked the question anyway and so have many others from Washington to Florida.
So, what is it and why is it so great?
What is it?
Media outlets like the Huffington Post and Newsweek/The Daily Beast frequently call it "socialist," however, a study by the Federal Reserve Bank of Boston found, "BND is perceived as conservative and well managed."
BND's founder, A. C. Townley, was a member of the Socialist Party and headed a short-lived movement called the National Non-Partisan League (NPL), a farmers' organization. North Dakota Farmers were having a lot of trouble getting credit at a reasonable cost back in the teens, so this grassroots movement stepped up to the challenge, got political control of North Dakota and founded BND in 1919. (They had other agenda items, but the movement didn't last long enough to get most of them rolling.)
The State of North Dakota deposits all the taxes and fees it collects into BND; these collections form its capital base. BND actually pays the state treasurer interest on those deposits. (Other state governments deposit their collections in private banks, which also pay interest to the State.) Those deposits are used to pay the State's expenses and loan money to farmers, students (before that was outlawed by the Obama administration) and local businesses, mostly through partnering with private banks.
Eric Hardmeyer, current BND president, told the Huffington Post, "[W]e have specifically designed programs to spur certain elements of the economy. Whether it’s agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education – we do a lot of student loan financing. So that’s our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history."
That mission was designated, in part, to avoid competing directly with private banks. Hardmeyer continues, "[W]e understand that we walk a fine line between competing and partnering with the private sector . . . So most of the lending that we do is participatory in nature. [A loan is] originated by a local bank and we come in and participate in [fund a part of] the loan and use some of our programs to share risk . . . [we also] provide services to banks, whether it’s check clearing, liquidity, or bond accounting safekeeping."
Some have termed this "a banker's bank," meaning a bank that services other banks – 104, all in-state – instead of individuals and companies. (BND does have a few private accounts – about 2% of total deposits.) There are about 20 such banks nationwide.
Why is it so great?
BND works. BND currently has $4 billion in assets, with $2.8 billion in loans outstanding. BND has been consistently profitable – $62 million in profits in 2010.
A portion of profits have always gone to the state's general fund, lowering the tax burden to taxpayers. Since 2000, those profit returns have totaled over one-half-billion dollars. That's hundreds of millions in taxes and fees that North Dakotans didn't have to pay. By the way, 2010 is the seventh straight year the bank set a record for profits earned, up from $13 million in 1990.
You might have noticed most of the quotes in this post are from liberal news sources – Mother Jones, Huffington Post, Newsweek/The Daily Beast and Political Affairs. I heartily recommend reading the source articles at the links appended. You'll see the many references to a "socialist bank." These liberal media outlets flaunt BND's success as if it was a success for socialism. (I may have to add this to my post liberal hypocrisy.)
I laugh because BND isn't a socialist success, it is a conservative, free market success. Marxist rag Political Affairs admits, "North Dakota citizens are a fairly conservative and didn't do any subprime lending. Nor was there a powerful incentive to get into the derivatives markets and put on swaps and callers and caps and credit default swaps. Their philosophy was 'if we don't understand it, we're not going to jump into it.' Thus they avoided those pitfalls."
That is a conservative business model and it has resulted, among other things, in a 1.46% return on assets (ROA) in 2010 – 0.61% is the national average. In 2006, BND earned a 1.99% ROA, compared to a 1.00% national median. No bailout money went to BND, while trillions were given to Wall Street to prop up their failed economic strategies.
BND has also piloted a local, private ownership program. The New Rules Project writes, "Part of BND's mission is to expand local ownership of banks and increase their capitalization. To this end, the bank has a bank stock loan program, which provides loans to finance the purchase of bank stock by North Dakota residents." Local government can open accounts with BND, but the bank actually discourages this practice, recommending towns use local banks instead, and "facilitates this by providing local banks with letters of credit for public funds. In other states, banks must meet fairly onerous collateral requirements in order to accept public deposits, which can make taking public funds more costly than it's worth. But in North Dakota, those collateral requirements are waived by a letter of credit from BND."
Socialists draw power to themselves; conservative capitalists realize that competition is healthy for businesses and customers. This, too, has benefits: Over the last decade, North Dakota community banks averaged more than quadruple the lending to small businesses than the national average. Yes, politics could skew BND off its conservative path, but BND publishes quarterly and yearly reports, meaning the people can actually see what the Bank is doing and can take it out on the politicians if they don't like what they see. How long have we been arguing about an audit of the Federal Reserve Bank?
The Bottom Line:
I'm not suggesting that the Bank of North Dakota model is the solution for America's economic problems, but it might be a part of the solution for your State. BND's activities over the last nine decades demonstrate that a publicly-owned bank that does business with local banks and businesses through a solid, conservative business model has clear benefits to the state.
Thanks for listening, tune in next week for another rant.
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