The Bank of North Dakota: Banking’s ‘Public Option’

As Congress returns this week to writing a bill overhauling regulation of the banking industry, some states are pondering homegrown solutions to the credit crisis. And for inspiration, they’re looking to a place that is far away from Wall Street in more ways than one: North Dakota.

North Dakota operates the country’s only state-run bank. The Bank of North Dakota makes loans to businesses and to other banks, and has come to be seen both in and out of the state as a beacon of economic stability and financial independence. Then there’s the revenue: The bank has turned over $350 million in profits to North Dakota’s general fund since 1997. Bills intended to create similar state-run banks or study the idea are being discussed in Hawaii, Illinois, Massachusetts, Virginia and Washington State. Five more states have contacted the Bismarck-based bank in hopes of learning more about how the bank’s 168 employees straddle the line between public benefit and private enterprise.

But despite the interest and the bank’s success, the question other states are trying to answer is whether the model — and the benefits — are exportable. “I still have my doubts that it will be,” Bank of North Dakota President and CEO Eric Hardmeyer says. “It’s important that they look at the model and understand what works for us might not work for them.”

That model has been evolving since the day the bank’s doors opened in 1919 with just $2 million in capital. Originally intended to help farmers by increasing access to farm loans, the bank now operates with more than $270 million in capital and has branched out  to many other kinds of financing. It provides residential and student loans and also operates as a banker’s bank, providing funds to private-sector lenders that choose to keep an account. But despite its growth, there’s really no secret to the way the bank operates, Hardmeyer says. In many ways it’s like a normal bank.

Day-to-day operations are headed by an executive committee that consists of Hardmeyer, as well as the heads of lending, banking, accounting, student loans, human resources and information technology. The bank’s finances are regularly scoured by external auditors, who are procured through the state auditor’s office through a bidding process.

But there are some ways the Bank of North Dakota is unlike a normal bank. Deposits aren’t backed by the Federal Deposit Insurance Corporation. Rather, they’re backed by the full faith and credit of the state. What’s more, the bank’s top leaders are picked and overseen by the governor, the attorney general and the agriculture commissioner — all elected officials who make up the North Dakota Industrial Commission. Although that’s a structure that could invite political meddling, the bank publishes annual and quarterly reports detailing its finances.

What’s driving interest nationally isn’t the bank’s organizational structure or its storied history. It’s economics. North Dakota currently has the nation’s lowest unemployment rate at 4.1 percent. The state’s budget is running a surplus — something almost unheard of in a time of historic budget deficits in most capitals. And the bank’s profits help pad that surplus. In today’s economic and fiscal climate, just one of those reasons might be enough to fuel a push for a state-run bank. But for those advocating the idea, the benefits are obvious.

“Where’s the downside?” asks Virg Bernero, the Democratic mayor of Lansing, Michigan, who’s running for governor in that state. In his campaign, Bernero has proposed starting a state-run bank in order to jump-start lending to businesses and, he hopes, job creation.  “We have some good things bubbling up throughout Michigan, and we have some great, successful businesses. But they’re having a hell of a time because of the banks.”

 Still, North Dakota’s economy is unusual compared to the rest of the country, and certainly compared to Michigan, where the unemployment rate stands at 14.1 percent. North Dakota’s economy is based on agriculture and natural resources, not a manufacturing industry that’s been pummeled by the recession and globalization. “It is true that North Dakota enjoys a billion-dollar budget surplus,” Republican State Senator Tom George, who also is running for governor in Michigan, said in a March statement on the Senate floor. “But this is not because it has a state-chartered bank. It is because it has a strong economy based on agriculture, not manufacturing.” 

 The idea of starting state-run banks doesn’t sit well with many private banks, either. Chris Cole, senior vice president and senior regulatory counsel at I ndependent Community Bankers of America, says lending to small businesses is making a comeback and has been keeping up with demand from qualified applicants. Further, he cautions that launching a state-run bank in an economically complex state would bring its own set of problems such as having to choose between investing in one industry versus another. “T here’s just no reason for the government to get into the business of banking,” he says.

Still, some states seem interested. Last week, the Hawaii House approved a resolution asking the state to study the possibility of establishing a state-run bank there. Democratic Representative Marcus Oshiro, who chairs the finance committee, calls a state-run bank a “reasonable public option” to spur development and hold state funds. “The states have been impacted by the Wall Street bailout and fall out,” he says. “This is the perfect opportunity for states to be at the cutting edge.”