There’s no single solution to the thorny problem of how to restructure our financial system, but one of the most promising strategies involves creating state-owned banks that can bolster the lending capacity of local banks, helping them grow and multiply.
North Dakota is the only state, so far, that has a
publicly owned bank. Founded in 1919, the Bank of North Dakota (BND) was a populist response to dynamics similar to those we face today. The state’s struggling farmers, tired of being at the mercy of powerful out-of-state financial interests that controlled the availability and cost of credit, decided they needed a bank better aligned with their own interests.
BND is wholly owned by the state, which deposits all of its money, except pension funds, with the bank. BND does not compete with local banks; it does not solicit retail banking business and has no branch offices or ATMs.
Instead, BND partners with local banks to expand their lending capacity. Much of BND’s $2.8 billion loan portfolio consists of “participation loans.” These are business loans originated by local banks, which then invite BND to finance a portion of the loan (and share part of the risk). This enables local banks to make more loans and maintain more diverse portfolios.
Thanks largely to BND, North Dakota has a more robust community banking network than any other state. It has 35 percent more local banks per capita than South Dakota and four times as many as the U.S. average. Small local banks account for 60 percent of deposits in North Dakota, compared to only 16 percent nationally.
