State Bank

 A state bank is a public institution with a mission of partnering with private financial institutions to help increase lending to small businesses and small farmers. North Dakota created its state bank in 1919 in response to a credit crisis that threatened its agricultural economy. North Dakota now has the lowest unemployment rate in the country and healthy revenue. 

The Problem

The United States is experiencing the greatest drop in lending since the Great Depression. (Wall Street Journal, “Lending Falls at Epic Pace,” Feb. 24, 2010.) Large out-of-state banks have cut off affordable credit for many small businesses. As a result,  too many businesses have been left with no way of purchasing inventory, conducting marketing, or following up on expansion plans. A state bank will help solve the credit crunch by supporting Main Street lending. 

Why Pass it

1.Job Creation/Retention. Estimates show that a state bank could help create or retain about 3,500 additional small business jobs in Maine due to increased loan activity through bank participation loans from a state bank at full lending capacity, and that during the recent recession around 600-800 jobs would have been created or retained due to stabilized lending. 

2.New Lending. BND helped to sustain a loan to asset ratio for North Dakota banks – a key measure of direct economic impact – by mitigating the effects of the recession on lending, resulting in reductions of 34%-50% less than comparable states. In Maine, this would have resulted in roughly 1.04 to 1.36 percentage points greater loan to asset ratios during the current economic downturn. It is also estimated that a state bank in Maine could generate roughly 8% or about $1.1B in total new lending activity and $220M in small business loans due to bank participation. 

3.New Revenue. A Maine State Bank could generate dividends for the state starting in year 3, and a bank capitalized at $100M—and conservatively run—could pay total accumulated dividends to the state’s General Fund or Rainy Day Fund of $39M after 10 years, $126M after 20 years, $346M after 30 years, and $708M after 40 years. 

4.Return on Equity. A Maine State Bank would have a positive Return on Equity (ROE) to the state (including all costs) within 4 years with prudent banking practices.  

Addressing Common Concerns

1.State bank legislation would prohibit state banks from taking any private deposits.It is true that private banks would no longer receive short-term state deposits, but considering that most community banks receive little of this money to begin with and that many states are still requiring 100% to 110% collateral for these funds it is unlikely to have a great effect on private bank profits. Also, a state bank in the model of the Bank of North Dakota would not only not take local and municipal deposits, but would help local community banks secure these deposits through letters of credit.  

2.While a state bank could be set-up to originate loans, the Bank of North Dakota, as well as most proposed state banks, requires the state bank to operate in a participatory manner. In most cases a state bank would make participation loans with the private banks acting as the originators and servicers of those loans. The Bank of North Dakota does service some residential mortgages, but this is only after a local lender originates the loan and sells it to the Bank of North Dakota for servicing.

3.A State Bank does not add any regulatory hurdles to private banks. A state bank is NOT a financial bailout to private banks, a la TARP. Due to the prudent banking practices of a state bank (which is not pushed into risky lending instruments by stockholder-driven profit-maximization), we would expect that the private banking market would be affected by positive, stabilizing market-driven forces.

4.There is no set minimum for start-up capital. Of course, a state bank would need to sustain its capital adequacy, so depending on how much state deposits will be held at the state bank, this could drive the capital needs. It seems likely that there will be a transition stage where the state bank’s participation loan portfolio grows and there are arguments for growing the capital at a similar rate. Ultimately, a state bank can be thought of as an economic engine that will be greatly impacted by the inflow of state deposits and reinvestment of profits into state bank capital. CSI analysis shows that even after accounting for debt service obligations due to start-up capital, a state bank would still be profitable after a few years and a strong economic tool for a state.

Sources and Links to more information

Maine State Bank Analysis: