A New Model to Bank On

Jim Houser, co-owner of Hawthorne Auto Clinic in Portland, Ore., saw an opportunity to increase his sales of ​“plug-in” electrical charging kits for the locally popular Prius hybrid cars. But when he talked with his bank about a loan for enlarging his shop, which employs 14 full- and part-time workers, he got the distinct sense ​“that it would be a waste of time to formally apply for a loan.”

“Credit has dried up out there,” says Houser, co-chair of one of the state’s small business organizations, The Main Street Alliance. ​“It is hurting small businesses tremendously.”

Mahlon Vigesaa, president and CEO of CenterPointe Community Bank in the rural region of Hood River, Ore., has a different credit problem. There’s a promising wind power project in the bank’s service area that needs to borrow $6 million. A large out-of-state bank turned down the developer’s request, which Vigesaa would love to finance. But it’s too big for CenterPointe to do on its own. 

“Big banks are not lending in small-town America,” says Barbara Dudley, co-chair of the Oregon Working Families Party. ​“They are either not lending or lending overseas,” thus slowing economic recovery and job creation. 

North Dakota’s public option

But Dudley and a surprisingly diverse coalition – including bankers and businessmen like Houser and Vigesaa – see a solution to these two distinct but related credit failures: the creation of Oregon’s own state bank. 

Proponents want the bank to be modeled on the 92-year-old Bank of North Dakota, the country’s only state bank. BND relies on state deposits of tax dollars; its chief aim is to help community banks make loans. Such banks are common in other industrialized countries, as they were in 19^th-century America.

BND was founded in 1919 by populists of the Nonpartisan League reacting to exploitation of farmers by out-of-state banks, railroads and grain millers. During its long history, the bank encouraged sustainable growth in good times (for example, offering the first federally insured college loans). And it has reduced hardships for the state’s government, farms and businesses in tough times, from economic downturns to the aftermath of floods. Now the bank has attracted attention for its role in helping to keep the state’s unemployment rate the lowest in the nation. (High prices for the state’s energy and agricultural products had much to do with that as well.) 

With a history of conservative management, BND generally follows conventional market criteria and makes a profit. Half that profit ($350 million since 1997) is usually returned to the state’s general fund, but it also serves to help the state weather fiscal problems. The bank is also focused on encouraging economic growth. That mission leads it to avoid diversions (such as speculation in derivatives) and to defer to both community bankers and policymakers on economic strategy. 

“We’re not an influencer of the character [of the state’s economy],” bank president Eric Hardmeyer says. ​“We are an enabler. We follow very much the strategic direction of the state and of local economic development entities.”

How to build a bank

Over the last two years, a coalition in Oregon of community bankers, small business owners, labor unions, farm organizations and various progressive groups (including the Working Families Party) has endorsed a state bank in Oregon. Dudley first proposed the bank early in 2009 at a Jobs With Justice conference on the economic crisis. 

Initially, progressive groups in the state responded to the refusal of bailed-out big banks to loan with a campaign to ​“move your money” or ​“fire your bank.” But then, still angry about the concentration and globalization of finance, their focus turned to how to make sure people’s money was used to generate local jobs and economic growth. Interest in a state bank grew. 

Organizers recognized ​“this would never go anywhere if we didn’t have the support of community bankers,” Dudley says. Eventually, even the Oregon Bankers Association endorsed the watered-down proposal, although privately big banks still oppose a state bank, Vigesaa says, and some progressives worry that banks will have too much influence on any final proposal. Otherwise, the main opponents are antigovernment conservatives, even though BND has bipartisan support in generally conservative North Dakota.

Roughly a dozen other states are also considering legislation either to study the feasibility of a state bank (a move already mandated by the Massachusetts legislature), set up a bank (as in Maine) or create a scaled-back alternative state agency for financing economic development (as in California and Oregon). Oregon is ​“far ahead of the pack,” Dudley says, both in building its coalition and in promoting legislation that would set up a precursor state agency that could be later converted into a full-fledged bank. But after approval by Oregon’s House and Senate committees this year and winning support from a bipartisan majority of the legislature, the Republican co-chair of the Ways and Means Committee blocked the bill from coming to a vote.

Following the BND strategy, most state-bank advocates propose that the state government would first issue bonds (or use alternative strategies) to establish the bank’s capital reserves. Then it would deposit short-term holdings of tax and other revenue in the state bank, rather than in large national or multinational banks as states typically do now. It would not accept other deposits, such as from individuals. To encourage community banking, such a state bank – or ​“Main Street Partnership Bank,” as some proponents prefer – would primarily participate in local loans initiated by community banks or in special lending programs directed by the state legislature.

The state bank’s participation would expand the amount of money community banks could loan to finance small business needs. For example, the Center for State Innovation, affiliated with the University of Wisconsin, calculates that an Oregon state bank would raise annual lending by about $1.3 billion, generate about 5,400 new jobs and cost the state nothing, while bringing in $69 million in earnings to the state general fund over a decade.

A state bank would also likely boost confidence in lending during uncertain times. For example, from 2007 to 2009, when the national credit crunch was tightest and bank lending dropped farther than it had in 70 years, BND increased business lending by 35 percent, helping to counter the downturn.

“Absolutely,” BND has the effect of increasing bank and business confidence in North Dakota, says Hardmeyer. ​“That’s one of the big benefits, the risk sharing. We can’t sit on our hands. We need to be out there working with the banking community, delivering funds to customers. If we didn’t, what would be the point of this institution?”

The presence of more state banks in the United States could have hugely positive effects: increased lending to local and small businesses, less concentrated banking, more resilient responses to economic crises, more jobs, more state revenue and more local control of the economy. The federal government could also create jobs and stabilize the economy with a complementary national infrastructure bank, which President Obama supports, or even a broader national investment bank, as some economists have proposed.

“We definitely would be able to make more loans” if there were a state bank, community banker Vigesaa says. And that, Houser says, ​“will make it easier for small businesses.” Though a state bank is no panacea, it sure beats pervasive state austerity plans as a way to create jobs and strengthen local economies.