Publicly owned bank could be useful, if done right

  • By James McCusker
  • Thursday, December 18, 2014 1:35pm
  • Business

Is a publicly owned bank a good idea for Seattle, or for any community in our state? It could be, if it is organized differently from most government adventures in finance.

The criteria for success for a startup bank are the same for a publicly owned bank as an investor-owned bank. In addition to having enough capital, management ability, risk recognition, and operational expertise, there is one major requirement: an unserved or underserved market.

Recently, Seattle City Councilman Nick Licata invited experts on publicly owned banks to present ideas and information to the council’s Finance Committee. They pointed out that Germany’s public banks have been around for centuries and are major players in the business loan sector. They also noted that there is a state-owned bank in North Dakota that has been in operation since 1919.

The presentation was a preliminary one and there wasn’t time to include the economic history behind the North Dakota State Bank. World War I had created a boom in the wheat and grain markets but it all collapsed when the war ended with the Armistice in November 1918. Much of American agriculture collapsed with it, and conditions were especially severe in the grain-producing Plains states.

Over the next few years farmers were caught between rising costs and declining prices for their harvest. Loan defaults, foreclosures, and public auctions of homes, land, and equipment became all too common. Financially pressed themselves, small town bankers had to turn away their friends and neighbors just when they needed help the most. Post-war America entered the Roaring Twenties and the Jazz Age but for the agricultural sector it was mostly tears and the blues.

The Bank of North Dakota was formed as a state-run enterprise to help put together financing for farmers whose operations had some hope of surviving the market bust, a market that was underserved at the time by the already stressed local commercial banks. The state-owned bank’s operations today are primarily focused on working with private sector banks to obtain farm financing and with agencies such as the Export-Import Bank to facilitate the financing of foreign trade operations for North Dakota farm products, primarily grains. It does offer a limited range of retail banking services but not enough to be considered serious competition with private sector banks.

Another area of public banking in our country was the postal savings system that we had in this country for fifty-six years, from 1911 until 1967.

The system, which was run by the U.S. Post Office, was modelled after those commonly used in other countries to encourage thrift by the many citizens who did not have bank accounts. Our postal savings system was additionally designed to include people in rural areas who had little access to banking facilities of any sort but were regularly served by the mail system.

Both the Bank of North Dakota and the Postal Savings system offer models, and lessons, which have applicability to a publicly owned bank in Seattle or any other community in the state. The primary lesson is that the market to be served — the “target market” — must be both identified and underserved.

The second lesson is that the new bank has to fit into the existing financial market structure. There are operational issues to be resolved and if the publicly owned bank is perceived as competing with the private sector, political issues also may emerge.

Banks are not rare institutions in Seattle but that does not mean that there aren’t any underserved markets. Even in healthy economic times the combined effects of loan automation and un-scalable operating costs, for example, have made it very difficult for many smaller businesses to obtain bank loans, which creates an underserved market for a publicly owned bank.

The ups and downs of the national and regional economy create another underserved market and here a publicly owned bank would be helpful to us all. In an economic downturn, reduced state and local spending tends to be pro-cyclical — pushing the local economy further downward and making things worse.

Commercial lending tends to be very volatile and often shrinks dramatically in a downturn. The ability of a publicly owned bank to make loans to smaller businesses in an economic contraction would help stabilize the local economy and could save a lot of jobs. It would be, essentially, making national economic policy more effective by implementing it at ground level, where it counts.

To be effective at anything, though, it is crucial that a publicly owned bank be specific, clear, and realistic about its objectives and its markets. And it is equally important that it be capitalized adequately for the risks it intends to take on. Anything less would be just one more Bertha-like hole to pour taxpayer money into.

James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

Black Press Media operates Sound Publishing, the largest community news organization in Washington State with dailies and community news outlets in Alaska.
Black Press Media concludes transition of ownership

Black Press Media, which operates Sound Publishing, completed its sale Monday (March 25), following the formerly announced corporate restructuring.

Maygen Hetherington, executive director of the Historic Downtown Snohomish Association, laughs during an interview in her office on Thursday, Feb. 15, 2024, in Snohomish, Washington. (Ryan Berry / The Herald)
Maygen Hetherington: tireless advocate for the city of Snohomish

Historic Downtown Snohomish Association receives the Opportunity Lives Here award from Economic Alliance.

FILE - Washington Secretary of State Steve Hobbs poses in front of photos of the 15 people who previously held the office on Nov. 22, 2021, after he was sworn in at the Capitol in Olympia, Wash. Hobbs faces several challengers as he runs for election to the office he was appointed to last fall. (AP Photo/Ted S. Warren, File)
Secretary of State Steve Hobbs: ‘I wanted to serve my country’

Hobbs, a former Lake Stevens senator, is the recipient of the Henry M. Jackson Award from Economic Alliance Snohomish County.

Mark Duffy poses for a photo in his office at the Mountain Pacific Bank headquarters on Wednesday, Feb. 14, 2024 in Everett, Washington. (Annie Barker / The Herald)
Mark Duffy: Building a hometown bank; giving kids an opportunity

Mountain Pacific Bank’s founder is the recipient of the Fluke Award from Economic Alliance Snohomish County.

Barb Tolbert poses for a photo at Silver Scoop Ice Cream on Thursday, Feb. 29, 2024 in Arlington, Washington. (Annie Barker / The Herald)
Barb Tolbert: Former mayor piloted Arlington out of economic brink

Tolbert won the Elson S. Floyd Award, honoring a leader who has “created lasting opportunities” for the underserved.

Photo provided by 
Economic Alliance
Economic Alliance presented one of the Washington Rising Stem Awards to Katie Larios, a senior at Mountlake Terrace High School.
Mountlake Terrace High School senior wins state STEM award

Katie Larios was honored at an Economic Alliance gathering: “A champion for other young women of color in STEM.”

The Westwood Rainier is one of the seven ships in the Westwood line. The ships serve ports in the Pacific Northwest and Northeast Asia. (Photo provided by Swire Shipping)
Westwood Shipping Lines, an Everett mainstay, has new name

The four green-hulled Westwood vessels will keep their names, but the ships will display the Swire Shipping flag.

A Keyport ship docked at Lake Union in Seattle in June 2018. The ship spends most of the year in Alaska harvesting Golden King crab in the Bering Sea. During the summer it ties up for maintenance and repairs at Lake Union. (Keyport LLC)
In crabbers’ turbulent moment, Edmonds seafood processor ‘saved our season’

When a processing plant in Alaska closed, Edmonds-based business Keyport stepped up to solve a “no-win situation.”

Angela Harris, Executive Director of the Port of Edmonds, stands at the port’s marina on Wednesday, Jan. 24, 2024, in Edmonds, Washington. (Ryan Berry / The Herald)
Leadership, love for the Port of Edmonds got exec the job

Shoring up an aging seawall is the first order of business for Angela Harris, the first woman to lead the Edmonds port.

The Cascade Warbirds fly over Naval Station Everett. (Sue Misao / The Herald file)
Bothell High School senior awarded $2,500 to keep on flying

Cascade Warbirds scholarship helps students 16-21 continue flight training and earn a private pilot’s certificate.

Rachel Gardner, the owner of Musicology Co., a new music boutique record store on Thursday, Jan. 18, 2024 in Edmonds, Washington. Musicology Co. will open in February, selling used and new vinyl, CDs and other music-related merchandise. (Olivia Vanni / The Herald)
New Edmonds record shop intends to be a ‘destination for every musician’

Rachel Gardner opened Musicology Co. this month, filling a record store gap in Edmonds.

MyMyToyStore.com owner Tom Harrison at his brick and mortar storefront on Tuesday, Sept. 6, 2022 in Everett, Washington. (Olivia Vanni / The Herald)
Burst pipe permanently closes downtown Everett toy store

After a pipe flooded the store, MyMyToystore in downtown Everett closed. Owner Tom Harrison is already on to his next venture.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.