Michigan Credit Union League: State Bank

Brief:
Michigan’s economy has been hard hit by a loss of manufacturing jobs, people seeking jobs out of state, and the recent housing market crash. Therefore, some lawmakers in Michigan have proposed the idea of opening a state-owned bank to inject more money into Michigan's slumbering economy. Michigan lawmakers, including State Rep. Vicki Barnett (D-Farmington Hills), the Senate Democratic Caucus, and Lansing Mayor and gubernatorial candidate Virg Bernero have announced a Michigan state-owned bank as a way to infuse money into Michigan’s economy. Bernero and Senate Democrats would model their plan after North Dakota, making loans to businesses and university students, buying down small banks' endangered mortgages, and maybe even issuing low-interest credit cards. Senate Democrats also suggest capitalizing the proposed bank with the proceeds of a $150 million economic development bond sale. Rep. Barnett’s original plan would have driven perceived profits from the institution bank into state revenues, and utilized this entity as a wholesale source of cheap funding to put more money in state coffers. Furthermore, under her original plan, the state-owned bank would leverage the assets of state buildings (and other liquid assets if allowed) to loan money to community banks and credit unions in an effort to increase the liquidity. However, her new plan would be to leverage treasury funds to increase lending to Michigan businesses that fit certain criteria. For example, a business that has a history or that has real estate collateral that has devalued to cause problems with securing credit. Two models would be created, one for credit unions and one for banks. Since banks can accept both deposits and investments, through stock, qualifying loans would receive an investment of a certain amount per the loan size which would help provide additional regulatory capital. Since credit unions are cooperatively owned through their members and cannot accept investments through stock, treasury funds would be placed into credit unions through a special rate CD program.The idea of state-owned bank stems from North Dakota which is the only state in the nation with a state bank and a thriving economy. North Dakota has a nationally low unemployment rate – most recently just 5 percent – and a $1.2 billion 2009 budget surplus. Also, while 24 states raised taxes by more than 1 percent last year and 25 states made no significant tax changes, North Dakota was the lone state to actually cut taxes. As other states struggled through the worst downturn since perhaps the Great Depression, North Dakota’s personal income has grown by more than 40 percent, and its wages have grown more than 30 percent. Analysts say North Dakota's state bank has broadened the availability of credit by partnering with private banks to cheaply loan money to real estate developers, farmers, students and businesses. The bank has earned $300 million for the state's treasury during the last 10 years. As a result, candidates from Massachusetts to Oregon are touting government-owned banks as the solution to states' ills, with Michigan recently jumping onboard. Established by legislative action in 1919, the mission of the Bank of North Dakota (BND) is to promote agriculture, commerce and industry in the state. In this role, the Bank acts as a funding resource in partnership with other financial institutions, economic development groups, and guaranty agencies. In contrast to most commercial banks, BND is not a member of the Federal Deposit Insurance Corporation (FDIC). North Dakota Century Code 6-09-10 provides that all deposits in BND are guaranteed by the state. The deposit base of BND is unique. Its primary deposit base is the State of North Dakota. All state funds and funds of state institutions are deposited with BND, as required by law. Other deposits are accepted from any source, private citizens to the U.S. government. The state Industrial Commission oversees BND, which includes the Governor, who acts as chairman, the Attorney General and the Commissioner of Agriculture of the State of North Dakota. The Bank also has a seven-member Advisory Board appointed by the Governor that is knowledgeable in banking and finance. The Advisory Board reviews the Bank's operations and makes recommendations to the Industrial Commission relating to the Bank's management, services, policies and procedures.

To date, bill language has not been made public, so it is currently unknown what the actual effect of a state-owned bank would be on credit unions. However, more than likely public funds originally deposited into financial institutions, including funds from universities, cities, townships, public libraries, and public school districts, would move their accounts out of financial institutions and into a newly created state-owned bank, if this potential legislation became law in Michigan. This bill would likely impact banks most because the majority of public funds are held with banks, but it would also impact deposits to credit unions, since they also house public funds. Not only would business be taken away from banks and credit unions, but so would the opportunity to provide services and products to consumers and gain relationships with potential new members.

The MCUL is opposed to the idea of a state-owned bank. Besides business being taken away from credit unions and more competition added to the financial field, state government is in no position to take on more duties right now, nor can it afford the added debt required to launch such a venture. First of all, Michigan would have to start from scratch. Second, North Dakota's economy is one-tenth the size of Michigan's, and its population is below 700,000, compared with 10 million here. A larger proportion of its income is derived from agriculture, food processing is its most important industry and it profits handsomely from petroleum, coal and natural gas -- all likely bigger factors in its prosperity than owning a bank.

The historic objection to state-owned banks is the possibility that political influences would lead to bad practices -- backing risky mortgages, for example, in pursuit of a social goal. If the bank lost money from such loans, taxpayers would be left holding the bag. We also question whether it's wise to entrust our elected officials with overseeing a bank when they have struggled year after year to balance the state's books.

Gov. Jennifer Granholm recently unveiled a state partnership under which 335 Michigan credit unions will help ease the money crunch by lending at least $43 million to small businesses. That kind of public-private format, while modest at this point, makes more sense than adding a state-owned bank to a bureaucracy that's already $1.7 billion costlier than its projected income. We'd suggest political leaders focus on making Michigan a more competitive state and leave responsible financing to the credit unions.

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At this time, the MCUL is still researching the issue but is leaning in opposition.