Policy Documents

Research & Commentary: State-Owned Banks

October 14, 2013

According to the National Conference of State Legislatures, since 2010, 22 states have introduced bills to create a state-owned bank or investment trust or study the possibility of doing so. Twelve such bills were introduced in 2013 alone. The model many states are seeking to follow is that of the Bank of North Dakota (BND), the only state-owned bank currently operating. The Bank of North Dakota, established by the North Dakota legislature in 1919, is a full depository bank with a lending focus on agriculture, commerce, and industry.

Unlike private banks, BND is not insured by the Federal Deposit Insurance Corporation; the deposits it holds are guaranteed only by “the full faith and credit of the state of North Dakota.” If any loans default, a state-run bank has no FDIC backing, and taxpayers could face substantial liabilities and tax hikes.

Supporters of the BND model claim a state-run bank would provide additional loans to small businesses and other consumers that private banks are not currently making. Many proponents also contend state-run banks would support the banking industry as a whole by lending to other local banks and creating competition for the large national banks that dominate the market. Finally, they say the bank would provide new revenue for the state through its dividends.

Hester Peirce, a senior research fellow at the Mercatus Center at George Mason University, argues in the New York Times that the creation of a state-run bank might only distort the banking market. Peirce argues this risk is amplified by the fact that state-run banks could face considerable pressure to make loans that private banks have good reason to reject, thus increasing the risk of default. Peirce recommends eliminating the existing laws that favor big banks and ending regulatory barriers in capital and lending requirements that hurt small banks. 

Also writing in the New York Times, Mark Calabria of the Cato Institute notes many of the problems that plague the political system in general are likely to affect a state-run bank: “When the government owns the banks, lending decisions become increasingly driven by politics, rather than economics. Resources flow to those with influence. Government-owned banks also tend to under-price risk in order to buy votes.”

Sound tax policy and financial laws that allow banks to base decisions on real-world risk are far better at fostering economic growth than government regulations or state-run banks. Just like any business, privately run banks can and do fail, but this is much better than burdening taxpayers with millions of dollars of new liabilities through a state-run bank.

The following articles examine state-run banks from multiple perspectives.


Don’t Distort the Market Further
http://www.nytimes.com/roomfordebate/2013/10/01/should-states-operate-public-banks/state-banks-would-further-distort-the-market
Writing in the New York Times, Hester Peirce argues state-run banks distort banking markets and amplify many of the problems they are expected to solve: “Government-owned banks would further distort the already-distorted banking markets. Reinvigorating private banking by curtailing government interference, rather than encouraging its direct participation in the markets, is the right approach to satisfying consumers’ needs.” 

State Banks Hurt Growth
http://www.nytimes.com/roomfordebate/2013/10/01/should-states-operate-public-banks/public-banking-hurts-economic
Mark Calabria, director of financial regulation studies at the Cato Institute, examines the history of state-run banks and argues they impede economic growth and can become highly politicized, placing unnecessary financial risk on taxpayers. 

Government Ownership of Banks
http://heartland.org/policy-documents/government-ownership-banks
Rafael La Porta, Florencio Lopez de Silanes, and Andrei Shleifer investigate government ownership of banks around the world. Their data resulted in four findings. First, government ownership of banks is large and pervasive around the world. Second, such ownership is particularly significant in countries with low levels of per-capita income, underdeveloped financial systems, interventionist and inefficient governments, and poor protection of property rights. Third, government ownership of banks is associated with slower subsequent financial development. Finally, government ownership of banks is associated with lower subsequent growth of per-capita income, and in particular with lower growth of productivity. 

Why Do Government Banks Perform Worse?—A Political Interference View
http://heartland.org/policy-documents/why-do-government-banks-perform-worse-political-interference-view
Chung-Hua Shen and Chih-Yung Lin explain how political considerations depress government banks’ performance. They conclude many of the worst outcomes occur due to political interference in bank lending decisions. 

Are State-Owned Banks the Antidote to the Too-Big-To-Fail Epidemic?
http://business.time.com/2013/01/15/are-state-owned-banks-the-antidote-to-the-too-big-to-fail-epidemic/#ixzz2ggjV0yDU
Writing in Time magazine, Christopher Matthews examines the efforts in many states to create state-run banks and reports on why some groups support these efforts. 

North Dakota’s State-Run Bank Adds Millions to Treasury, Spurs Imitators
http://www.bloomberg.com/news/2011-11-17/north-dakota-s-state-run-bank-adds-millions-to-treasury-spurs-imitators.html
Alison Vekshin of Bloomberg speaks with several groups on both sides of the state-run bank issue asking why they support or oppose efforts to follow the North Dakota model and create state-owned banks.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Finance and Insurance News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org. 

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.