May 3, 2012
BISMARCK – North Dakota’s state-owned bank captured national attention a few years ago after a banking crisis and recession caused Americans to consider North Dakota’s contrasting prosperity. Although no state yet has followed North Dakota’s example and created a government-run bank, interest in the idea hasn’t waned.
Eric Hardmeyer, president of the Bank of North Dakota, and Rick Clayburgh, president of the North Dakota Bankers Association, both Bismarck, spoke last month via teleconference about the state bank at an event that drew a national and international audience.
The Public Banking Institute, an educational nonprofit organization, reports 17 states have introduced legislation to create publicly owned banks or derivations, or for studies or task forces to determine how a publicly owned bank would operate in their jurisdictions.
However, the publisher of the Northwestern Financial Review’s “Local Banker” magazine warned states in the spring issue against modeling North Dakota. Tom Bengtson wrote that the Bank of North Dakota profits are impressive, but he urged other states to back away, given the potential for politics and conflict of interest and the lack of federal deposit insurance.
Hardmeyer and Clayburgh acknowledge the potential pitfalls but just haven’t seen them.
“What works here in North Dakota may or may not work in other states, but we know that it works here,” Clayburgh said.
A key factor in the bank’s success has been the leadership of the Legislature and state Industrial Commission, which have turned operations over to bank professionals and avoided using the bank for partisan ends, he said.
“The Bank of North Dakota works for North Dakota very well. It’s a wonderful tool for the state and it’s a wonderful tool for our banks in the state. When it started in 1919, its original mission statement was not to compete with but to work in concert and provide assistance to local banks,” he said.
Pat Artz, president of State Bank of Bottineau, said his bank calls upon the Bank of North Dakota daily for banking services. The Bottineau Bank also leverages money from the Bank of North Dakota to facilitate larger local loans that exceed its legal loan limits.
The Bottineau bank looks to corporate banks for those types of banker’s banking as well, but the trust factor with the state bank makes it the place to go for certain transactions.
“They are good, local Midwest people that are there. That’s important to me,” Artz said.
In addition, the Bank of North Dakota provides programs that aren’t available elsewhere, such as low-interest beginning farmer real estate loans that Artz said have made a difference in the Bottineau area.
Bruce Schreiner, executive vice president at Garrison State Bank & Trust, said the Garrison bank uses Bank of North Dakota services regularly. There’s advantages to using the state bank rather than a corporate bank outside the state.
“Most of these people are familiar with our area so when you call them to talk about a project, they understand it, and if they don’t, they jump in their vehicles and come up and you can talk about the project with them and show it to them,” Schreiner said.
The Bank of North Dakota’s residential lending program has proved invaluable in overcoming the challenge of lack of comparable sales information needed for appraisals, he added. Smaller towns have fewer home sales, which hinders appraisals needed by banks to establish loans.
“The Bank of North Dakota seems to understand that and they make some adjustments to the appraisals,” Schreiner said. “That makes it easier for our size of community.”
Often the Bank of North Dakota’s revenue is what first gets the attention of other states. The bank returned about $350 million to the state treasury over a span of about a dozen years.
Clayburgh said starting a state bank as a route to prosperity isn’t necessarily wise. North Dakota avoided recession for a number of reasons, including a strong farm economy and oil boom, he said.
Hardmeyer said the state bank does have a role in boosting the economy, though.
“That’s what we are all about. We are here to encourage economic development in the state and financial projects that fit into the strategy of moving the state forward. So I would hope that we have some impact on the success,” he said.
Hardmeyer said the bank’s areas of influence are in economic development, assisting small community banks to leverage additional credit and increase loans, ensuring that capital flows during tight times and financing recovery from natural disasters. A Rebuilders Loan program to provide low-interest loans to help Minot-area residents rebuild from the flood is an example.
Hardmeyer said he’s fielded inquiries from bankers, trade associations and legislators, but can only say how the bank has benefited North Dakota and not whether other states can benefit from a similar model.
Starting a state bank in current times may be more complex than it was in 1919. If North Dakota didn’t have a state bank, starting one today could be difficult, Clayburgh said.
North Dakota founded its state bank in an environment in which its rural citizens felt the need to break away from the eastern banking interests. Hardmeyer said an undercurrent of resentment toward big banks created by the financial crisis in 2008 may be fueling some of the talk about state banks.
“Times are different, but there was kind of that thread of disappointment,” he said. “The Bank of North Dakota was created because of a sense of disappointment. In a way, I see some similarity there.”