The free market for banking services in the United States isn’t
a free market at all.
The truth is the biggest commercial banks in America operate
with virtual impunity as a government-subsidized,
So, why don’t we drop the pretense that government-owned banks
don’t belong in a free market economy and create a network of
honest state-owned banks to compete with so-called private
We should. In fact, we have an almost 100-year-old U.S. bank as
a model to copy.
A Single-Bank American Branch Is Proving the Model
It’s the Bank of North Dakota, the only state-owned bank in
America. The unique one-branch bank was founded in 1919 under a
It has no automated teller machines and no investment bankers. But
it’s more profitable than Goldman Sachs and JPMorgan Chase
Co., with a return on equity 70% higher than either of those
immensely profitable institutions.
The Bank of North Dakota’s Standard Poor’s credit rating
is double-A-minus, and according to
The Wall Street Journal
, “That is above the rating for both Goldman Sachs Group Inc. and
J.P. Morgan, and, among U.S. financial institutions, second only to
the Federal Home Loan Banks, rated double-A-plus.”
And no, the bank isn’t profitable just because of North Dakota’s
newfound shale oil wealth.
In a Feb. 23, 2015, article titled “This Publicly-Owned Bank Is
Outperforming Wall Street,” noted attorney, would-be California
treasurer, and the founder and president of the Public Banking
Institute Dr. Ellen Brown says the bank is healthy and
The reasons she indicates are “The BND’s costs are
extremely low: [it has] no exorbitantly-paid executives, no
bonuses, fees, or commissions; only one branch office; very low
borrowing costs; and no FDIC premiums (the state rather than the
FDIC guarantees its deposits).”
Brown goes on to say “These are all features that set
publicly-owned banks apart from privately-owned banks. Beyond that,
safer for depositors
, and provide a non-criminal alternative to a Wall Street cartel
caught in a laundry list of frauds.”
That a state-owned bank exists in a Republican stronghold is
surprising. What’s not surprising is the bank’s model.
While BND offers some retail banking services and in 1967 was
the first bank in the country to make federally insured student
loans, it’s essentially a “wholesale” bank. It makes loans to
companies in partnership with community banks in the State.
BND gets the bulk of its deposits from the state of North
Dakota. The state deposits its tax revenues, fees, and cash
balances with the Bank. In turn, BND provides loan monies to
partnering community banks who know their customers and make
The Bank of North Dakota doesn’t compete with community banks,
it augments them. It channels state money into the local economy
through partnering banks who earn fees and profit
Here Are Two (Rare) European Banking Systems That Work
Two other countries that Americans respect because of their
economic and banking prowess, Germany and Switzerland, have
successful state-owned or state-controlled banks that are similar
in structure and function to the Bank of North Dakota.
Germany, a country of 82 million people, became the world’s
biggest exporter in 2003. It lost that title to China, with a
population of 1.3 billion people in 2009, but it remains the engine
of European growth thanks to its exports.
Economists and German manufacturers credit Germany’s
state-controlled, cooperative Sparkassen (savings banks) and the
country’s Landesbanken (state-owned, regional, predominantly
wholesale banks) with the country’s exporting success. These banks
serve Germany’s Mittlestand, or small to medium-sized businesses,
which acting alone or as a network are the backbone of the German
Sparkassen, which originated in 1778, operate regionally as
savings and commercial banks under the auspices of local
authorities. Shareholders of regional Sparkassen are either single
cities where they operate or multiple cities convened into an
administrative district. These savings banks operate in restricted
geographic areas, but can act as a cooperative when making larger
loans. Depositors are protected under a Joint Liability Scheme.
Germany’s Landesbanken, more wholesale than retail banks, are
predominantly owned by the country’s savings banks through regional
associations. The seven Landesbanken, besides acting as clearing
banks for the Sparkassen, make loans themselves and perform
commercial banking services on behalf of public and private
Like the Bank of North Dakota, both Sparkassen and Landesbanken
are effective in serving “local” businesses. And like BND they
efficiently and effectively funnel back profits and taxes to the
government bodies that control them.
It was only during the credit crisis that Germans came to
realize their Landesbanken had overreached their regional focus. In
search of yield in foreign mortgage-backed securities to compete
with more aggressive German universal banks like Deutsche Bank and
Commerzebank, losses on Landesbanken speculative holdings
devastated the once conservative system. While the Landesbanken
have recovered, the big private banks have been hit with repeated
lawsuits and are sitting on untold billions of dollars of
For its part, the Swiss public banking system, based on shared
ownership with regional Cantons that oversee the partially private
shareholder-owned banks, operates similarly to BND and German
public-owned or controlled banks.
In Switzerland – not unlike Germany’s big private banks who
amassed $600 billion of toxic assets heading into the 2008 credit
crisis – it was big private Swiss banks, like UBS, that suffered
huge losses and still deal with repeated and ongoing fraud charges
by global regulators.
The Swiss National Bank, Switzerland’s central bank, unlike
America’s Federal Reserve System, is operated for the benefit of
its minority private shareholders and its majority shareholders,
Switzerland’s twenty-six Cantons. The SNB, for the past 100 years
has paid its shareholders and the Cantons an annual “dividend.” For
the most part, the SNB pays out 6% of its net profits. Last year
the Cantons split about $1.15 billion.
The Bank of North Dakota, and both German and Swiss publicly
owned or controlled banks prove that private banks aren’t the only
free-market solution to providing critical banking infrastructure
to big, modern Western economies.
The Too-Big-to-Fail Banks Are Effectively Government
All America’s too-big-to-fail banks are currently government
subsidized now, so, they’re not free-market competitors.
The implied government safety net these banks enjoy, which
proved to be a lifesaver in the financial crisis, draws depositors.
It provides them with cheap funding, lowers the cost of
capital-markets funding operations, provides innumerable
protections from regional bank competitors, and systematically
undermines community banks across the country who don’t have the
economies of scale to pay for the increased regulations big banks
brought upon the entire industry.
William K. Black, Associate Professor of Law and Economics at
the University of Missouri-Kansas City and a former bank fraud
investigator, recently said of the TBTF private banking oligopoly,
“Conditions of weak corporate governance in banks provide fertile
ground for quick enrichment for both bankers and politicians – at
the ultimate expense of the taxpayer.” He added, “In such
circumstances politicians can offer bankers a system of weak
regulation in exchange for party political contributions.
Government-owned banks, on the other hand, have less freedom to
engage in speculative strategies that result in quick enrichment
for bank insiders and politicians.”
Dr. Brown, author of the critically acclaimed book
Web of Debt
and its 2013 sequel
The Public Bank Solution
has a lot more to add. In her correspondence to me yesterday she
wrote, “Public sector banks lend counter cyclically, making more
loans when private banks are pulling back. Public banks are also
safer for depositors, avoiding bank runs and bail-ins. Public
depository banks are not merely revolving funds. They can leverage
the local government’s capital at 10 to 1, backed by the
government’s own deposits.”
Building Businesses Rather than Bonuses
On the subject of big Wall Street banks’ impact on borrowers,
Dr. Brown doesn’t mince words, telling me, “The fees alone paid to
Wall Street banks by the city of Los Angeles exceed what the city
pays to repair its streets. California school districts have
succumbed to capital appreciation bonds on which they will be
paying as much as 20 times principal by the time the loans are paid
off. Meanwhile, the Bank of North Dakota is making 1% loans to
school districts – as well as 1% loans to startup farmers and
startup businesses, and 1.7% variable rate for loans to North
To get full access to all Money Morning content
including our latest Premium Report, “How to Make 2015 Your
Wealthiest Year Ever,” click
About Money Morning:
Money Morning gives you access to a team of ten market experts
with more than 250 years of combined investing experience –
. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and
BloombergTV – deliver daily investing tips and stock picks,
provide analysis with actions to take, and answer your biggest
market questions. Our goal is to help our millions of
e-newsletter subscribers and Moneymorning.com visitors become
smarter, more confident investors.
© 2015 Money Morning and Money Map Press. All Rights Reserved.
Protected by copyright of the United States and international
treaties. Any reproduction, copying, or redistribution
(electronic or otherwise, including the world wide web), of
content from this webpage, in whole or in part, is strictly
prohibited without the express written permission of Money
Morning. 16 W. Madison St. Baltimore, MD, 21201.