Is a publicly owned bank a good idea for Seattle, or for any community in our state? It could be, if it is organized differently from most government adventures in finance.
The criteria for success for a startup bank are the same for a publicly owned bank as an investor-owned bank. In addition to having enough capital, management ability, risk recognition, and operational expertise, there is one major requirement: an unserved or underserved market.
Recently, Seattle City Councilman Nick Licata invited experts on publicly owned banks to present ideas and information to the council’s Finance Committee. They pointed out that Germany’s public banks have been around for centuries and are major players in the business loan sector. They also noted that there is a state-owned bank in North Dakota that has been in operation since 1919.
The presentation was a preliminary one and there wasn’t time to include the economic history behind the North Dakota State Bank. World War I had created a boom in the wheat and grain markets but it all collapsed when the war ended with the Armistice in November 1918. Much of American agriculture collapsed with it, and conditions were especially severe in the grain-producing Plains states.
Over the next few years farmers were caught between rising costs and declining prices for their harvest. Loan defaults, foreclosures, and public auctions of homes, land, and equipment became all too common. Financially pressed themselves, small town bankers had to turn away their friends and neighbors just when they needed help the most. Post-war America entered the Roaring Twenties and the Jazz Age but for the agricultural sector it was mostly tears and the blues.
The Bank of North Dakota was formed as a state-run enterprise to help put together financing for farmers whose operations had some hope of surviving the market bust, a market that was underserved at the time by the already stressed local commercial banks. The state-owned bank’s operations today are primarily focused on working with private sector banks to obtain farm financing and with agencies such as the Export-Import Bank to facilitate the financing of foreign trade operations for North Dakota farm products, primarily grains. It does offer a limited range of retail banking services but not enough to be considered serious competition with private sector banks.
Another area of public banking in our country was the postal savings system that we had in this country for fifty-six years, from 1911 until 1967.
The system, which was run by the U.S. Post Office, was modelled after those commonly used in other countries to encourage thrift by the many citizens who did not have bank accounts. Our postal savings system was additionally designed to include people in rural areas who had little access to banking facilities of any sort but were regularly served by the mail system.
Both the Bank of North Dakota and the Postal Savings system offer models, and lessons, which have applicability to a publicly owned bank in Seattle or any other community in the state. The primary lesson is that the market to be served — the “target market” — must be both identified and underserved.
The second lesson is that the new bank has to fit into the existing financial market structure. There are operational issues to be resolved and if the publicly owned bank is perceived as competing with the private sector, political issues also may emerge.
Banks are not rare institutions in Seattle but that does not mean that there aren’t any underserved markets. Even in healthy economic times the combined effects of loan automation and un-scalable operating costs, for example, have made it very difficult for many smaller businesses to obtain bank loans, which creates an underserved market for a publicly owned bank.
The ups and downs of the national and regional economy create another underserved market and here a publicly owned bank would be helpful to us all. In an economic downturn, reduced state and local spending tends to be pro-cyclical — pushing the local economy further downward and making things worse.
Commercial lending tends to be very volatile and often shrinks dramatically in a downturn. The ability of a publicly owned bank to make loans to smaller businesses in an economic contraction would help stabilize the local economy and could save a lot of jobs. It would be, essentially, making national economic policy more effective by implementing it at ground level, where it counts.
To be effective at anything, though, it is crucial that a publicly owned bank be specific, clear, and realistic about its objectives and its markets. And it is equally important that it be capitalized adequately for the risks it intends to take on. Anything less would be just one more Bertha-like hole to pour taxpayer money into.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.