RESPONSE TO IBC and CBA
PUBLIC BANKS WILL STRENGTHEN THE ECONOMY, REDUCE RISK, AND INCREASE ACCOUNTABILITY
Recently, Michael van Norstrand, president of Independent Bankers of Colorado (IBC), wrote an Op-Ed for CP: “Public Banks Would Pose Risks, Play Politics.” The Op-Ed makes numerous incorrect assumptions and assertions.
- Public banks, as advocated by Colorado Public Banking Coalition and Rocky Mountain Public Banking Institute, will be modeled on the 102-year-old public bank of North Dakota (BND).
- The BND has greatly reduced the risk of banking and has never failed or been bailed out.
- North Dakota has many more community banks per capita than any other state.
- A Colorado public bank would have one depositor: The State of Colorado, which currently deposits most of its tax, fee, licensing and other revenue with JP MORGAN CHASE and WELLS FARGO, major Wall Street banks far removed from the unique economic needs of the state and its residents.
- Contrary to IBC’s assertion, like BND, a Colorado public bank will not compete with community banks for depositors or in making loans, but lend in partnership with community banks, sharing 50-50 in making the loan and guaranteeing it. This arrangement will greatly benefit community banks and the community they serve.
- Public banks would meet many underserved needs for loans in Colorado—for infrastructure, affordable housing, home loans without redlining, small businesses, education and lower cost student loans, conversion to clean energy, broadband, transportation, and paid family medical leave. The lending in these areas presently provided by the private banks of Colorado fall far short of the real needs.
- Thanks to BND, North Dakota perennially has the lowest unemployment rate, one of the lowest home foreclosure rates, and the lowest credit card and student loan default rates. North Dakota’s community banks strongly support the BND.
Thus, public banks reduce risk, while the major banks, some of which are IBC members, increase risk by inflating real estate values and engaging in high risk lending and investment meant to maximize profit for shareholders. These major Wall Street banks invest little in local small businesses, and rather than cooperate much with community banks in Colorado, actively compete with them. In contrast, public banks would be very beneficial for community banks and credit unions in Colorado, just the opposite of IBC’s assertions.
BND has averaged 20% return on equity over the last 19 years, far outperforming Chase and Wells Fargo where Colorado governments place most of their deposits. The major banks received massive bailouts from taxpayers in 2008, even though they created the bubbles and risks that caused the crash.
The IBC imply that public banks will be unduly influenced by politicians. Wrong. Like the BND, public banks in Colorado will be run by experienced professional bankers and will be strictly insulated from political and corporate influence and from conflicts of interest, in contrast to private banks whose goal is to maximize shareholder profit, which often conflicts with the public interest.
IBC asserts that public banks won’t work in Colorado because conditions here are different from North Dakota, a rural state with a small population. Wrong again.
- Alberta, Canada’s 83-year-old public bank, ATB Financial, has helped make Alberta the strongest economy in Canada, like the BND for North Dakota. Alberta’s population is 4.4 million. It has a mixed industrial and rural economy, like Colorado.
- Germany has 1,500 city-owned savings banks (Sparkassen), which have been the backbone of Germany’s economy and have made it the strongest economy in Europe.
The ability of public banks to create a strong, stable economy is unrelated to size or type of economy. Public banks succeed because tax revenue is deposited in the public’s own bank and loaned locally. Public banks operate with very low overhead, and make low-risk loans. The major banks prefer risky investments elsewhere to maximize profits for their shareholders, believing they’re “too big to fail.”
Public banks create a major new source of income (interest) and new loans for a state, county, or city, without raising taxes, and as a TABOR enterprise would not be subject to TABOR limits on revenue.
The IBC article makes additional false claims but limited space requires us to answer them in the Addendum of this complete version of our response.
Mr. van Norstrand asserts that a handful of public banks failed 200 years ago because of “gross mismanagement,” citing a 2015 CATO Institute article. The CATO article provides no support for that claim. A handful of states did have public banks in the early 1800s, but no systematic analysis was ever published. Some did very well. We don’t know why these banks failed. It could have been due to speculation by “public” banks that had majority private ownership, opposition from big banks, or recurrent recessions that caused many private banks to fail.
The IBC Op-Ed asserts that a state public bank must have FDIC membership and that not to do so would be reckless.
Although FDIC insurance might sound like a reasonable requirement, for several reasons it is not necessary or beneficial. First, our proposal calls for the Colorado state public bank to have only one depositor, the state of Colorado. Under one scenario it would have about $100 million in deposits. The maximum insurance coverage of the FDIC is $250,000 per account, or only 0.25% of minimum deposits. Although deposits can be separated into different accounts, the available insurance would cover only a small fraction of total deposits, making the insurance of negligible value.
FDIC membership is not required by federal law. The Bank of North Dakota (BND) has never been a member of the FDIC and has never needed coverage. The Bank of American Samoa, the recently opened second public bank in the United States, was approved by the Federal Reserve two years ago, is not a member of the FDIC, and is self-insured.
The Bank of North Dakota has never needed to be bailed out or encountered a serious financial crisis. Our proposed state bank should be able to make returns similar to the Bank of North Dakota based upon similar methods of operation with very low overhead and safe lending. As we mentioned, the BND has averaged 17.5% return on equity over the past 10 years, and 20% ROE over the past 19 years, as shown in its online annual reports.
Finally, the FDIC’s total assets are enough to cover only a small fraction of all the bank accounts that it insures in the event of a general economic collapse, particularly when derivatives are considered, which amount to over $12 trillion in actual value and much more in notional value. Further, derivatives have priority in bankruptcy. The inadequacy of the FDIC was one of the reasons for the massive bailouts after the 2008 collapse.
Thus, unless FDIC membership can be shown to be advantageous to protect the bank, the state’s assets, and the general public, it should not be required, as it would just be an added expense making the bank less effective.
More on how Public Banks reduce risk while the major banks increase risk
Counter-cyclical Lending by Public Banks: In the Great Recession, the BND, in partnership with community banks in North Dakota, increased lending enough to offset the decline, making North Dakota the only state that suffered no recession in 2008 or after. Private banks in all other states cut lending, causing and deepening the recession. Some argue that North Dakota’s oil saved its economy, but fracking income did not kick-in until 2010. Montana and Alaska had as much oil as North Dakota, but suffered high unemployment and budget deficits in 2008 and after. In 2015, when the price of oil crashed the BND again made record profits and stabilized North Dakota’s economy.
Thanks to BND, North Dakota perennially has the lowest unemployment rate, one of the lowest home foreclosure rates, and the lowest credit card and student loan default rates. North Dakota’s community banks strongly support the BND.
The present lending practices of the top Wall Street banks operating in Colorado have subjected the economy of the state and nation to unreasonable risks, including the risk of a general collapse. Big banks are not concerned about recessions because they believe they’ll be bailed-out or bailed-in when they fail. They also are able to foreclose on corporate property, real estate and personal property of debtors, and to buy up businesses and other banks for a fraction of their real value.
During recessions the big banks reduce lending to businesses and households thus magnifying the severity of the recession. The highly for-profit banks have been bailed out recurrently—at taxpayer expense. In contrast, none of the public banks mentioned above have ever needed to be bailed out, including during the Great Recession. The major banks have not been held accountable for their risky behavior or the extensive damage that they caused. In contrast, public banks offer the least risk to taxpayer money, and the best chance for a strong and stable economy, by directly investing in the communities they serve.
The largest CBA banks also engage in lending practices that result in steadily increased debt of state and local governments, corporations and individuals to the detriment of the citizens of Colorado. The debt of state and local government is also greatly increased due to the fact that governments borrow money through private investors at interest rates that nearly double the total cost over the time the loan is repaid—all borne by Colorado taxpayers. Instead, public banks could lend to local governments and greatly reduce such interest and debt, recycling interest income back to government services. Any interest charged by a public bank for a loan becomes an asset that is shared between the government and the public bank.
(Waiting for legal opinion on state borrowing) However, under Article XIV section 18(2), a state public bank could lend directly to the state despite the prohibition on debt in Article XI Section 3 of the Colorado constitution.
A public bank is much more focused on serving the needs of Coloradans whereas the major Wall Street banks seek to maximize their own profit, often at serious risk to the economy, the environment, and our communities. The major banks have been assessed hundreds of billions in fines due to fraud on the public, investors, and even their own depositors. They were the primary cause of the 2008 Great Recession with their risky gambling in subprime loans and derivatives. The CBA has an obvious interest in defending its major member banks who engaged in such risky behavior. The four largest CBA banks – Chase, Wells Fargo, Bank of America, and US Bank – collectively have assets greater than $7.5 trillion, and hold many billions of dollars in deposits of the state of Colorado and its political subdivisions. The IBC seems to believe that all government deposits belong to its major banks, for their own use and profit, rather than to the governments and their taxpayers who paid the taxes and generated the public revenue that constitutes those deposits. The people should have the right to control their tax wealth by placing such deposits in their own public bank to serve the public good of Coloradans rather than maximize the profits of the major banks.
In contrast to the Bankers Association’s dire warnings, the Bank of North Dakota made record profits each year during the Great Recession, protected all of North Dakota’s community banks from failure, and enabled North Dakota to be the only state not to experience recession. The major Wall Street banks would have failed if taxpayers had not bailed them out. Countries with public banks experienced substantially less severe recession as a result of their countercyclical lending. A public bank is actually the best way to rapidly and effectively reverse recession. Germany’s Sparkassen and KfW infrastructure bank have both stepped up to help
lessen and reverse the COVID induced recession in that country, the government through KfW promising “unlimited amount of liquidity”. Additionally, a UN / ECLAC study of eight countries in 2008 showed that the public banks all increased lending to lessen the recession, while the private banks all cut lending making the recession even worse.
The Ever-Increasing Unpayable Debt Fostered By the Major Banks
The financial history of Colorado shows that State debt has skyrocketed to over $24 billion, and all other subdivisions of the state have increased their collective debt to nearly $50 billion. These debts are largely owed to the same private banks and other private investors. With public banks, this increase of public debt to private interests would cease, and debt reduction could begin.