fedgazette Roundup (2011-2015)

Spotlight (again) on state-owned banks

David Fettig | Vice President of Public Affairs

Published October 12, 2011

As reported in a fedgazette interview last year with the president of the Bank of North Dakota, a number of states and even a few countries are curious about the idea of a state-owned financial institution. The Bank of North Dakota is the only one of its kind in this country, and the state has had a one-of-a-kind economy through the recent recession and slow-growth period. And some are drawing a correlation.

Massachusetts was so intrigued by the question of whether North Dakota’s state-owned bank proved a financial bulwark during the recent crisis that it enacted legislation in August 2010 to, among other things, “study the feasibility of establishing a bank owned by the commonwealth or by a public authority constituted by the commonwealth.”

The Federal Reserve Bank of Boston has obliged with its own study on this question, suggesting that the evidence for state benefits is mixed, the startup costs are substantial and there may be better alternatives to address state financial needs. The report provides useful background and analysis on the broader issues of state-owned banks, and the Boston Fed also has posted a webinar presentation for a quick overview.

The Boston Fed suggests a two-step plan for Massachusetts: First, clearly identify economic goals; second, carefully consider all options to address those goals before assuming that a state-owned bank is the answer. For example, the report reminds state lawmakers that the financial landscape has changed since the crisis and that there are new federal programs in place to address credit problems; in other words, a full reassessment is in order.

And it is always useful to recall the words of Eric Hardmeyer, president of the Bank of North Dakota, from his fedgazette interview, which the Boston Fed report also cites: “I think that we’ve played a significant role in the state’s recent success, but to quantify a role and tell you what that is would be difficult. But certainly to lay the success of the state’s economy at our feet wouldn’t be appropriate either.”