Month: March 2018

On Banking, Heitkamp Forgets Where She Lives

by Matt Stannard
March 14, 2018

Elizabeth Warren is in a bloody fight with the handful of Democrats who support new GOP legislation to roll back Dodd-Frank requirements on banks. The new legislation loosens regulations for smaller “community” banks, but also for the biggest, too-big-to-fail, often criminal banks at the top of finance capital’s food chain. One of the Democrats joining the GOP in that rollback effort is North Dakota’s Heidi Heitkamp, who said of Warren on this matter, “She doesn’t live where I live.”

But Heitkamp lives in the state with the country’s only public, state-owned bank, the Bank of North Dakota. And although she told The Atlantic‘s Russell Berman a sob story about “Democrats [watching] as smaller banks and lenders in their states have been eaten up by larger institutions, due in part to the added burden of regulations created by Dodd-Frank,” there are a couple of half-truths at play here, and Heitkamp should know better.

First, Dodd-Frank has been little more than an exacerbating factor on what was already a steep decline in community bank viability. As J.V. Rizzi wrote in American Banker a few years ago:

There are many things to dislike about the Dodd-Frank Act. Causing the demise of community banks, however, is not one of them . . .  the number of community banks with assets under $100 million dropped from 13,000 in 1995 to 2,625 in 2010–before Dodd-Frank was enacted. The number of small community banks had dropped under 1,900 by 2014.

Second, and even more to the point of why Heitkamp’s position is so weird: the Bank of North Dakota has kept community banks alive in that state through financial support for community bank loans, and regulatory compliance support. The results have been astounding if one compares North Dakota’s community banking scene to the rest of the country. I once explained why in a blog post I wrote for the Public Banking Institute:

Public banks offer unique benefits to community banks, including collateralization of deposits, protection from poaching of customers by big banks, the creation of more successful deals, and . . . regulatory compliance. The Bank of North Dakota, the nation’s only public bank, directly supports community banks and enables them to meet regulatory requirements such as asset to loan ratios and deposit to loan ratios. . . . [I]t keeps community banks solvent in other ways, lessening the impact of regulatory compliance on banks’ bottom lines.
We know from FDIC data in 2009 that North Dakota had almost 16 banks per 100,000 people, the most in the country. A more important figure, however, is community banks’ loan averages per capita, which was $12,000 in North Dakota, compared to only $3,000 nationally. . . . During the last decade, banks in North Dakota with less than $1 billion in assets have averaged a stunning 434 percent more small business lending than the national average.

Stacy Mitchell reached a similar conclusion:

With 89 small and mid-sized community banks and 38 credit unions, North Dakota has six times as many locally owned financial institutions per person as the rest of the nation. And these local banks and credit unions control a resounding 83 percent of deposits in the state — more than twice the 30 percent market share that small and mid-sized financial institutions have nationally.

And so did Ellen Brown, who provides some background on how BND was mandated to help with compliance:

In order to help rural lenders with regulatory compliance, in 2011 the BND was directed by the state legislature to get into the rural home mortgage origination business. Rural banks that saw only three to five mortgages a year could not shoulder the regulatory burden, leading to business lost to out-of-state banks. After a successful pilot program, SB 2064, establishing the Mortgage Origination Program, was signed by North Dakota’s governor on April 3, 2013. It states that the BND may establish a residential mortgage loan program under which the Bank may originate residential mortgages if private sector mortgage loan services are not reasonably available. Under this program a local financial institution or credit union may assist the Bank in taking a loan application, gathering required documents, ordering required legal documents, and maintaining contact with the borrower.

So Heitkamp’s invocation of North Dakota is curious. I can’t say I’m surprised though: BND has saved conservative North Dakota’s financial ass countless times, but state officials and electeds hate acknowledging this–in fact, they almost never do in mainstream contexts.

Warren’s criticism of the new Senate bill is sound. The bill ultimately exempts all but only the top 12 banks in the country from regulations and stress tests. The worst thing Warren is guilty of in this instance is believing (or acting as if she believes) that for-profit banking can be saved at all. We can have that debate another time (I personally believe capitalism makes the consolidation or death of small banks inevitable without massive state intervention). But Heidi Heitkamp’s omission of her own state’s success in propping up an otherwise anemic community bank industry is, to use current parlance, sad.

Matt Stannard writes on cooperative economics, law, and sustainable farming. He was policy director at Commonomics USA and a board member of the Public Banking Institute.


Activists Urge California Public Bank Not Limit to Cannabis Revenue

Grassroots public banking activists respond to CA Treasurer’s Request for Information

by Matt Stannard
March 3, 2018

Commonomics USA (the organization I used to be policy director for, and for which I still serve as a consultant), along with public banking advocacy groups from Los Angeles, Santa Cruz, San Jose, Oakland, San Francisco, Santa Rosa, and Eureka, California, have written a response to California Treasury Secretary John Chiang’s Request for Information concerning a public bank in California, which was written after a year’s worth of public hearings on California’s cannabis banking problem.

That RFI (an RFI is a standard business and governmental procedure made prior to undertaking large projects) was released in late January. But there was a problem with it: It did not reflect the public demand that sparked it. And, given the final direction and gestures of the Working Group, that was a surprise and disappointment.

It should be noted (I’m presently working on a longer piece telling this story) that the public banking movement overwhelmed, and fundamentally changed the focus of, what was initially a reluctant Cannabis Banking Working Group. In early sessions of the CBWG hearings, Chiang went out of his way to instruct participants not to advocate for public banks in general; early scholars invited to the San Diego session insisted public banks were not feasible, and the Working Group was even, at times, jovially dismissive of the idea.

But everywhere the CBWG went, members of the public, during the open comment periods, insisted not only that the Working Group consider a public bank for cannabis revenue, but that it consider a public bank categorically. While Chiang continued to insist that comments be limited to the problem of banking cannabis revenue, members of the public ignored that limit and advocated for the general benefits of public banking.

Chiang’s eventual response was impressive: Rather than further scolding members of the public, the Working Group announced a previously unscheduled hearing in Los Angeles devoted exclusively to the question of public banks, and further, that such a discussion should not be limited to cannabis revenue, but be inclusive of general arguments for and against public banking.

I continue to admire Chiang for that piece of brave leadership (among the privileged, public banking is still seen as a fringe movement, even after New Jersey’s new governor, Phil Murphy, campaigned on creating one in that state). Chiang could have taken a safer way out. Many of us are glad he didn’t.

Nevertheless, the Working Group’s RFI does limit itself to “studying the various administrative and operational structures for organizing a public bank or state-backed financial institution to serve the cannabis industry.” And this has raised the ire of the many groups across California demanding divestment from big private banks and the embrace of a radically democratic model of public finance (more radically democratic, even, than anticipated by the rather conservative, fossil fuel-supporting, pro-police state Bank of North Dakota).

The letter in response, linked below, argues that the best way to envision a public cannabis bank is by envisioning a public bank that is not limited to cannabis:

We invite you to share our vision: a network of public banks (intrastate municipal/regional banks and interstate state banks) that provides a distinct alternative to depositing public monies into Wall Street banks, reflects California’s environmental priorities and social values, and becomes California’s legacy for future generations.
Public banking, at its core, is a shift in the state’s role from mainly providing bank regulatory oversight to also providing banking services, thereby addressing commercial banking market failures. Public banking shares the original ambitions of the postal service, delivering mail to every household, and the rural electrification program, electrifying all of rural America. In our envisioned network, each public bank will provide banking services to its defined community – filling gaps where the market has failed to fully provide affordable deposit, credit, and other investment services. State banks would provide low-cost (probably internet-based) deposit services to large segments of the unbanked population and create pools of credit for large infrastructure projects, affordable housing, and student loans. Municipal and regional banks would focus on developing the small business lending and local investment market; developing financially-responsible alternatives to predatory financial schemes, such as bail bonds and payday lending; and financing local infrastructure projects, including renewable energy and disaster recovery.
The failure of the market is profound and more widespread than is commonly understood. The lack of banking services for the cannabis industry is only one example of this failure. Over 20% of California households are un/underbanked, as documented in 2015 by the FDIC. And, given the ongoing disaster recovery efforts in northern and southern California, the lack of immediate and affordable credit for municipal governments as these communities struggle to rebuild after the fires and floods is a clear shortcoming of the market. Unfunded infrastructure, unfunded new Community Choice Energy organizations, and unfunded affordable housing for public service workers can be financed through a state or municipal public bank. Finally, the state’s revenue shortfall and liquidity crisis during the Great Recession, made worse by the refusal of banks to honor the state-issued IOUs, is another critical example of the need for credit. Without a broader vision, this particular public bank effort by your office may be perceived as exclusive or discriminatory. Such a perception so early on in the public bank feasibility process may be cause for otherwise avoidable resistance from both the public and the Federal Reserve, which may view a public bank “dedicated entirely, or predominantly, to the cannabis industry” as concentrated deposit risk. Moreover, since the Federal Reserve is tasked with addressing financial inclusion, it may be receptive to an expanded definition of financial inclusion based upon a critical analysis of the market failures of the commercial banking system.

While the letter includes specific suggestions that will be helpful to the cannabis industry (such as automated retail cannabis payments), its larger message is that a whole-state, economic and ecological justice approach to public banking is advantageous for the limited policy objective of cannabis banking, because more stakeholders will sign on, and even because the Federal Reserve will be more likely to entertain giving a Master Account Number to a broadly-mandated bank than a narrow one whose only purpose is to circumvent (or, to put it more charitably, make up for the gaps in) federal law. Thus, the response letter suggests “conduct[ing] an ‘intersection’ study throughout state government and its agencies that identifies the specific state social, economic, and environmental policy objectives that a public bank can achieve.”

The letter may be downloaded here:
030218 Letter in Response to RFI