Bank of North Dakota – Case Study of the only state owned bank in US

Wow! I did not know about this at all.  Bank of North Dakota in the state of North Dakota is the only state-owned bank in US. It was opened in 1919 as North Dakota farmers  were having difficulty securing adequate credit at a  reasonable cost.

Unlike India where we have banks owned by Central government and are called state-owned/public sector banks, here state-owned bank means owned by state. US Federal govt is not in any business of owning banks. BND is the only state govt owned bank in US.

It has come across as a nice professionally run bank with low NPAs and high profitability and returns. It also just has one branch in Bismarck and has not really expanded throughout the state. Its deposits are not insured by FDIC but are guaranteed by the full faith and credit of the State of North Dakota.

The deposit base of BND is unique. Its primary deposit base is the State of North Dakota. All state funds and funds of state institutions are deposited with Bank of North Dakota, as required by law. Other deposits are accepted from any source, private citizens to the U.S. government.

There were talks post crisis that State governments in US should also have their own government-owned banks. They thought this might have helped them ward off crisis. Their own bank could have infused more liquidity/credit and also provided some dividend to help in fiscal crisis.

Boston Fed did a superb study looking at whether State of Massachusetts should have a bank modelled like Bank of Dakota. Their analysis shows the experience have been mixed. Overall research shows Bank of North Dakota has played some role in development of North Dakota State but not really an exclusive role.

There are 4 reasons for setting a state-owned bank:

• Stabilizes the state’s economy — NDakota always had lower employment than US   but higher income volatility. The ND economy fared well in the crisis but was because of its own reasons. BND had little role
• Provides local businesses improved access to credit — Less exposed to wall street kind of credit. Agri and energy sectors main business in region and hence little impact from the crisis. There was liquidity crunch but was resolved mainly by other agencies. BND played a small role
• Augments the lending capacity of small community banks — BND plays a major role here but this may not work in other states. ND has small banks which can be helped but other states have large banks which might see state bank as a competitor.
• Helps fund state government through profit — ND govt treats dividend from BND as revenue and not for fiscal stabilization. State has developed rainy day funds for fiscal stabilization and other states should do the same as well

Overall, not much evidence in support of state-owned banks. Main achievement of BND is support of small banks but other states may not find this a main reason.

Moreover, cost of setting a new state-owned bank for states like Massachusetts would require huge capital base which might be difficult to raise in these times.

 Initial capital required to set up a state-owned bank could be  substantial, depending on desired scale.  BND capitalized through $2 million bond issue in 1919. Today’s equivalent in MA would be about $3.6 billion, about 21  percent of state’s direct debt outstanding

So what are the suggestions:

• First identify the relevant problems. 
• Then consider the degree to which a state-owned bank would address these problems, based on the  available evidence and its relevance. 
• Also consider alternative solutions that do not require up-front capitalization, such as reforms of  public or quasi-public agencies

Superb paper.  There is some nice history os US banking system and states as well.