Should the state be in the banking business?

Posted April 22, 2011, at 7:27 p.m.
Last modified April 23, 2011, at 7:33 a.m.

A Portland lawmaker has proposed creating a state bank to hold Maine’s revenues and to partner with other banks to provide access to affordable credit to businesses.

Rep. Diane Russell, D-Portland, sponsored LD 1452 to create the Maine Street Economic Development Bank effective July 1, 2013. The bank would be generally modeled on the Bank of North Dakota, established by that state in 1919.

Russell said she has heard from small business owners that access to affordable credit is still difficult in Maine. The idea for a state bank would be to hold state revenues. While some state revenues are housed in Maine community banks, a majority of the funds are in national banks, said Russell.

“Instead of investing in Wall Street, we can invest in Main Street,” said Russell. “A public bank would be designed to get capital out into places where it isn’t right now.”

The bank would not take deposits from individuals, so it would not compete for customers, she said. Russell said the bank would work with community banks to get capital out through partnership loans that would be secured by the state bank. Such loans are already in play in Maine through the Finance Authority of Maine and the Maine State Housing Authority, she noted.

Russell said she saw the state bank as a way to take control of where Maine’s revenues are invested and plow that money back into the local economies. In addition, any income from the bank’s investments would go to the state’s rainy day fund, she said.

“We keep talking about jobs, but we don’t have any big ideas. We need to take a moment and just stop and think about what the long-term economy should look like, and sort of reverse engineer from there,” said Russell. “Let’s see some big, innovative ideas. Let’s have a real conversation about what our economy should look like.”

Christopher Pinkham, executive director of the Maine Bankers Association, said his group is opposed to the bill.

“We think all of the tools and resources that are needed for Maine are available right now with the current banks,” said Pinkham.

Pinkham noted that the only way for a bank to make money is to lend it, and to lend it puts it at risk — which he suggested wasn’t an appropriate action to take with tax dollars. And the fiduciary responsibilities the treasurer has with regards to investing the state’s money are fairly complex, as are the rules around the Maine Public Employee Retirement System funds, said Pinkham. Not having state cash securitized and protected would be “a very unusual approach to how to use state money,” he said.

He also dismissed suggestions there isn’t enough capital to be loaned in the marketplace.

“We have ample deposits to serve loan demand — we don’t have enough loan demand,” said Pinkham.

Those businesses that can’t get credit may be in industries that are not performing, or they may lack solid business plans, he said.

According to the Bank of North Dakota’s website, the bank is not a member of the Federal Deposit Insurance Corporation. Instead, all BND deposits are guaranteed by the full faith and credit of the state of North Dakota. And while all state funds and funds of state institutions are required by law to be deposited in the BND, other deposits are accepted from any source, unlike Russell’s proposal.

BND opened with $2 million of capital. Currently, the bank has more than $270 million in capital. North Dakota began using bank profits in 1945 when money was first transferred into the general fund, according to the site, and since then, capital transfers have become the norm to augment state revenues. Since 1945, BND has returned more than $555 million to the general fund.

BND spokesman James Barnhardt said at least 20 to 30 states have looked at North Dakota’s model in hopes of doing something similar, though he wasn’t sure if any of them have actually moved beyond studies to implementation, though the website said BND is the only state-owned bank in the nation.

BND works in partnership with financial institutions, said Barnhardt, and enhances their ability to make loans. There are certain reasons the bank works well in that state, he said, including a propensity of agriculture businesses, large geography and small population. And while many point to the bank as a prime reason for North Dakota’s strong economy, other aspects such as oil and natural gas resources and booming ag sectors are in the mix as well, he said.

“We’re just one small component of why North Dakota is doing well,” said Barnhardt.

Russell’s bill is scheduled for a public hearing on May 3 in the Insurance and Financial Services Committee.

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