Frequently Asked Questions


What are publicly-owned banks? Why do we need them?

Public banks are financial institutions owned by government entities, such as cities, states, and nations. The initial capital for a public bank often comes from a government appropriation or the proceeds of a loan arranged for the purpose of making the initial investment, but there are also other ways this money could be acquired. They include (a) reinvesting money from idle state and local funds – funds that must currently be maintained as “rainy day” funds because state and local governments do not have the sorts of instant credit lines available to banks; and (b) setting the bank up as a DBA of the state, making all of the assets of the state assets of the bank.

Both public and private banks do two fundamental things: (1) Keep account of our money, and (2) issue credit (i.e., loans). Money and credit can create, slow, or accelerate economic activity. A bank matches borrowers and depositors, and profits from the spread difference between the interest paid to get funds (supplied by depositors or other lenders) and the interest collected on loans and investments made by the bank. Transaction fees add to profits. If private shareholders own the bank, the profits go into private hands and investment accounts. If government owns the bank, the profits go into public hands and offset the costs of government operations. Most states dispense their investment funds through revolving loan programs, in which the funds are lent, repaid, and lent again. A “bank” has several significant advantages over this current loan arrangement – advantages that states give away by depositing and/or investing their assets in out-of-state banks.

First, a “bank” can leverage its capital assets. At an 8% capital requirement, $8 in capital can be leveraged into $100 in loans. That assumes the bank can come up with the deposits to back the loans; but if it doesn’t have the deposits, it can borrow them. And that is a second major advantage of a “bank”: it can borrow deposits from other banks at the Fed funds rate, currently set at a very low 0.2%. Rather than borrowing from Wall Street banks at 5% and having to worry about such things as credit ratings, interest rate swaps, and late fees, the state can fund its projects through its own bank, by backing the loans with its own revenues deposited in the bank with no interest having to be paid to itself; and until it can acquire the necessary deposits, it can borrow short-term from other banks at an extremely reasonable 0.2%.

Other advantages of public banks are that they serve the public interest and can take a long-term view of public investment strategies. Private banks operate in their own private interest and are concerned with maintaining the positions of management and satisfying their shareholders’ requirements for quarterly profits and a healthy stock price.

Publicly-owned banks hold their elected officials accountable for the banks’ lending, investment and other operations. A by-product of public banking is to offer local counter-cyclical relief from credit contractions in the private banking system.

Would publicly-owned banks provide unfair competition to local privately-owned banks?

No. Witness North Dakota, which currently has the only state-owned bank in the U.S. It also has more local banks per capita than any other state. The Bank of North Dakota (BND) helps local banks with capital requirements, partners with them and participates in loans. For local banks, “competition” comes from the consolidation of the banking industry, whereby large banks gobble up smaller community and regional banks, or steal their customers when they participate in loans. This consolidation is reflected in the U.S. Department of Justice’s HHI comparative statistics on the relative competitiveness of major metropolitan and rural banking markets. Recessions threaten smaller banks more than larger, “too-big-to-fail” banks. Thus, a public bank, by placing its deposits with small and regional banks, can actually improve the soundness, security and independence of those banks, adding to competitiveness. When local banks disappear, often decades of knowledge about local lending context disappears with them.

Don’t we already have a national public bank in the Federal Reserve, with a network of regional Fed banks around the country? How would a publicly-owned central bank differ from this? How would a publicly-owned state bank differ?

Ownership and control of the Federal Reserve System is a mixture of private ownership with some federal oversight. The Federal Reserve Act is designed primarily to serve private banking interests. A publicly-owned state bank would be 100% owned by the state government, without private shareholders. Its profits would be entirely assets of the state, and its mandate would be to serve the state.

The Federal Reserve System is composed of twelve district banks that, combined, play distinct roles as a central bank and bankers’ bank.

As the central bank of the U.S. government, the Federal Reserve is the government’s banker, buying and selling U.S. Treasury bonds through “Open Market Operations,” and regulating the national money supply. The Federal Open Market Committee (FOMC) formulates and implements national monetary policy by setting the short- and long-term interest rates for government securities. The FOMC has twelve members, seven selected from the Fed’s Board of Governors, and five rotating among the presidents of the Federal Reserve Banks, with the President of the New York Fed serving continuously.

The larger role of the Federal Reserve, however, is as a banker’s bank serving private banking interests, supporting the liquidity, standards and safety needs of its member banks. Member banks of the Federal Reserve must subscribe to its stock in an amount of 6% of each bank’s capital and surplus, of which only 3% is actually paid in, and the second 3% is subject to call by the Federal Reserve. The profits of the Federal Reserve Bank are split between a statutory 6% dividend to the member national banks and the U.S. Treasury. In 2010, the Federal Reserve Bank paid $78.4 billion to the U.S. Treasury.

Fed Chairman Ben Bernanke has declared that extending credit to state and local governments is beyond his legal mandate. For states to have viable credit systems like those underwriting Wall Street and the federal government, they need to set up their own state-owned banks.

How would a publicly-owned bank be different from a privately-owned one?

First, the mission of the publicly-owned bank is to serve the public interest, while that of the privately-owned bank is to serve its shareholders by delivering profits.

Second, the profits of the publicly-owned bank would be returned to the public, with the benefit of increased public services and reduced taxes. Conversely, privately-owned banks increase taxpayer costs through compounding interest, and the loss of other benefits that would be derived if the publicly owned bank were leveraging public funds for local needs, such as the effect such projects have on the economy’s of local communities.

Third, the employees of a publicly-owned bank are public servants earning civil service wages, versus the millions in salaries and bonuses paid at private banks; so, with publicly owned banks, the public interest is not sacrificed to short term gains of a few.

Who would benefit from a publicly-owned bank?

We the People and our common wealth, including the governmental entities to which we belong and the public lands that we share, and the environment in which we live, according to the priorities that we assign, would all benefit by publicly owned banks.

How could a publicly-owned bank help an economically struggling state?

Among other things, publicly owned banks offer counter-cyclical relief by (1) issuing badly needed credit at low, or no, cost to the state, thus providing a means of revitalizing infrastructure and other services that are now endangered (according to studies, interest paid to private banks represents 30 to 50% of the cost of most public projects); (2) supporting local and regional banks by participating with capital and expertise in loan programs that address local and regional needs; and (3) providing support for residential and agricultural financing that acts as a bridge during times of economic contraction, as the Bank of North Dakota did during the Great Depression.

Where would the state get the money to start a state-owned bank? Would taxes need to be raised?

The initial capital for a public bank often comes from a government appropriation or the proceeds of a loan arranged for the purpose of making the initial investment, but there are also other ways this money could be acquired. They include (a) reinvesting money from idle state and local funds – funds that must currently be maintained as “rainy day” funds because state and local governments do not have the sorts of instant credit lines available to banks; and (b) setting the bank up as a DBA of the state, making all of the assets of the state assets of the bank, such as the Bank of North Dakota (BND) is set up.

These options would not entail an increase in taxes. In fact, once the bank was up and running, taxes could most likely be reduced, since the profits of the bank would return to the public coffers, and the interest burden on state bonds could be reduced if not eliminated. In the past decade, the BND has returned over $300 million to the general fund of the State of North Dakota.

Aren’t North Dakota’s oil revenues responsible for the state budget surplus?

That is no doubt one factor in the state’s success, but many states with oil revenues are foundering. Something else must be contributing to North Dakota’s stunning success.

The data shows that the Bank of North Dakota (BND) has contributed more to the state budget over the last 15 years than oil taxes have generated. Over the last decade, the BND has contributed over $300 million to the state.

More to the point, did the oil companies operating in North Dakota direct any of their profits to supporting local banks, underwriting mortgages and loans to other businesses and start ups, students and farmers, reduce the cost of municipal bond issues or come to the aid of Grand Forks in its epic fire and flood? No, of course not.

Meanwhile, the oil industry itself has been and will be aided by the BND. Because the export capacity for shipping the oil to refineries has been reached, BND has been asked by the state legislature to fund a $100M loan to build the first petroleum refinery in the U.S. in nearly 40 years. If this legislation passes, oil industry refinement capacity will be expanded because of funds provided by BND.

I don’t trust a public bank any more than a private bank. What can be done to ensure ethical management?

The simplest way to eliminate dubious investing by a public bank is to shine light on every deal by requiring the posting of all documents relating to a public transaction on a website. This information would include who is benefiting from it, how many other deals they have sold the SBA, what fees the seller is earning, who is buying, who approves it, how many other deals they have done with this seller, and so on, together with a summary of the amount invested and the terms. The great difference from a private bank is that the latter can hide important information about deals, which enables them to make “shadowy” business without any supervision, which has been a major cause for the present recession.

Wouldn’t a government run bank lead to waste and a large bureaucracy?

No — just as Social Security and Medicare have low overhead, while private insurance rates are going through the roof to support hefty profits for their shareholders. In fact, if you figure in all the advantages and look at the low overhead of a publicly owned bank such as the Bank of North Dakota (one central office of approximately 160 employees for the whole state), it is extremely efficient relative to the revenue it produces for the state’s general fund.

Aren’t public banks a form of socialism?

The Constitution of the United States specifies a number of services that the government is required to provide; for example, a military, a postal service. etc. These services are not based on economic philosophy (capitalism, socialism, etc.); rather, they are sovereign requirements. The Constitution vests Congress with the power “To coin Money, regulate the Value thereof …” This, too, is a sovereign requirement, and should not be characterized as an economic philosophy. It’s also worth noting that the states are forbidden to issue “bills of credit” (currency), which implies only Congress may do that.

In the 18th Century, when the Constitution was written, coins were the most prevalent form of money. Today, most money comes from bank credit. Regulating the value of money can only be done today by regulating bank credit, which is properly a public utility. All of our money today is backed only by “the full faith and credit of the United States.” The credit of the United States is an asset of the people and is properly dispensed and administered through publicly-owned banks using sovereign currency as legal tender.

Lenders say they have money to lend, but that there are not enough creditworthy borrowers. Is this a valid argument?

This is a disingenuous argument, because it is the banks that choked the money supply in the first place, causing foreclosures, bankruptcies, joblessness, and bad credit. In late 2011, there was $3 trillion less money in circulation than before the crash three years earlier. Why do the banks choose to stop lending and create a money drought? Because this is how they obtain the fruits of our labor at fire sale prices.

It’s just at the notorious banker Andrew Mellon said, “During depressions, assets return to their rightful owners. The banks believe they are the rightful owners of our society’s assets because they own the money (bank notes that they pass off as sovereign currency). This is why we must take back control of the money creation process and replace the private central banks and create public banks that leverage the public’s money in the public interest. This is how to create liquidity on Main Street, restore jobs, and create a democratic economy.

This text originally appeared on the Public Banking Institute’s website.