Are State-Owned Banks the Antidote to the Too-Big-To-Fail Epidemic?

January 15, 2013 by TIME Business & Money

The American Great Plains are known for their expansive farm lands, endless horizons, and — in recent history — staunchly conservative politics. So it may come as a surprise that only state-owned bank in the U.S. (an institution more widely associated with communist China than the Republican Party) can be found in ruby-red, rural North Dakota.

That’s right, The Bank of North Dakota (BND) — the largest bank in the state by deposits — was founded by legislative mandate in 1919, and has been a mainstay of the North Dakotan economy since that time, mostly through partnering with community banks to provide loans for local businesses. And advocates of public banking are holding up the BND as an example of what government-owned banks can do for an economy.

Take for example a problem that seems obvious to many observers of the financial system, but is one for which there is no evident solution: the concentration of power in the banking industry. Since the 1970s, the concentration of power in the nation’s largest banks has grown swiftly. According to a report issued by the Federal Reserve Bank of Dallas last year, the share of assets controlled by the five largest U.S. banks has more than tripled from 17% in 1970 to a whopping 52% in 2010. This concentration of power is the main ingredient of “Too-Big-to-Fail,” as these outsized institutions pose a danger to the entire U.S. economy if one of them were to fail. But a bank’s size also can create a greater risk of failure in and of itself, the report argues, as larger banks are more difficult to manage and to regulate.

(MORE: Break Up The Banks! Dallas Fed President Calls for The End of “Too Big To Fail”)

Therefore, small, community banks are vital to the health of a financial system — and the Bank of North Dakota is an institution that is primarily focused on partnering with community banks by providing a minority of the funding for loans those banks have decided to issue, thus allowing banks to expand the funding they are able to issue at lower interest rates. The result? North Dakota’s banking industry is dominated by small financial institutions. According to a 2011 report by the Federal Reserve Bank of Boston which studied the affect of the BND on the North Dakotan economy, “banks with less than $500 million in deposits account for almost one-half of the total bank deposits in the state.” South Dakota, on the other hand, is dominated by one too-big-to-fail bank: Wells Fargo, which accounted for 73% of the bank deposits in the state in 2010.