Bank of North Dakota Model

Discussion

Ellen Brown (?):

" The BND Model

The Bank of North Dakota has a massive, captive deposit base. All of the state’s revenues are deposited in the bank by law. Most state agencies also must deposit with the BND. Although the bank takes some token individual deposits, the vast majority of its deposits come from the state itself. The BND does not compete with local banks for commercial deposits or loans. Municipal government deposits are generally reserved for local community banks, which are able to use those funds to back loans because the BND provides letters of credit guaranteeing them.

The BND also has a massive capital base. The bank was originally set up as “North Dakota doing business as the Bank of North Dakota.” That means that technically, all of the assets of the state are assets of the bank. Beyond that technical pillar, the BND has built up a sizable capital fund. By the end of 2010, it had capital of $327 million. It had $4 billion in assets, of which $2.8 billion were loans; and it had deposits of $3 billion.

Unlike private banks, which are legally bound to think first of the quarterly profits of their shareholders, the BND is obligated by its mission statement to serve the community. Like private banks, a publicly-owned bank has the ability to create money in the form of bank credit on its books, and it has access to very low interest rates. But the business model of private banks requires them to take advantage of these low rates to extract as much debt service as the market will bear. A public bank can pass these low rates on to residents, and recapture the interest on public projects.

State infrastructure projects are effectively interest-free, since the bank returns interest to the state in the form of an annual dividend. The result is to reduce their cost by an average of 40% over the life of the loan. The BND’s revenues have been a major boost to the state budget. In the first decade of this century, it contributed over $300 million to state coffers, a substantial sum for a state with a population that is only about one-fifteenth the size of Los Angeles County. In April 2011, the BND reported annual profits of $62 million, setting a record for the seventh straight year. These profits belong to the citizens, and they are generated without taxation. According to a study by the Center for State Innovation, the BND added nearly as much money to the state’s general fund from 2007 to 2009 as oil and gas tax revenues did. Unlike the Federal Reserve, which is not authorized to lend directly to state and local governments except in very limited circumstances, the BND can help directly with local governments funding. When North Dakota went over-budget one year, the BND acted as a rainy day fund for the state; and when a local town suffered a massive flood, the BND provided emergency credit lines. Having a cheap and ready credit line with the state’s own bank reduces the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks. While Wall Street banks were being bailed out by the taxpayers and were drastically cutting back on local lending, the BND was increasing its local lending and showing record profits. The Bank’s loan portfolio has shown a steady, uninterrupted increase in North Dakota lending programs ever since 2006. Every year from the 2008 banking crisis up through 2012, the BND has reported a return on investment of between 17 percent and 26 percent. The BND also serves the local banks. It acts as a mini-Fed for the state, providing correspondent banking services to virtually every financial institution in North Dakota. It offers a federal funds program that in 2011 provided secured and unsecured federal fund lines to 113 financial institutions, with combined lines of almost $400 million. Federal fund sales averaged over $10 million per day, peaking at $41 million one day in July. The BND also provides check-clearing, cash management and automated clearing house services for local banks.

Local banks are willing to take on more risk when the BND participates in their loans. Because the BND assists local banks with mortgages and guarantees their loans, local North Dakota banks have been able to keep loans on their books rather than selling their mortgages to investors to meet capital requirements. As a result, they were able to avoid the subprime and securitization debacles.

By partnering with the BND, local banks can also take on local projects in which Wall Street has no interest, projects that might otherwise go unfunded. The BND participates in loans for building hotels and infrastructure. Due to this amicable partnership, the North Dakota Bankers’ Association endorses the BND as a partner rather than a competitor of the state’s private banks."