This will be my final President’s Message as I complete my second tour of duty as NMBA President. I was honored to be asked to complete Lonnie Talbert’s term. As you probably know, Lonnie has recently been named CEO of the ATM Industry Association.
After a very successful 2022 Legislature, during which we defeated HB 75 (State-Owned Bank Authorization), I continue to be concerned that the state-owned bank issue is raised session after session. So, I decided to get ahead of the curve and prepare an op-ed to be provided to all news outlets concerning our position on this matter. So, the remainder of my message is my op-ed. I hope that it hits the mark. Please don’t hesitate to share your feedback.
State Bank Op-Ed
In recent legislative sessions, a recurring topic has been the establishment of a state-owned bank in New Mexico. Advocates for a state-owned bank have been completely unrealistic and have overlooked the massive challenges in establishing such an entity. Perhaps the most salient point in opposition to would be the significant financial commitment from the state to have the state bank become well-capitalized. As a result, New Mexico taxpayer dollars would be at risk because a state-owned bank would not have deposit insurance such as FDIC insurance. Nor would the state bank be subject to extensive federal and state regulations and examination oversight, which is necessary for protecting depositors and preserving the safety and soundness of a bank. Given these facts, it is particularly important to weigh any potential cost-savings from not paying bank fees against the potential expense of operating a state bank. Accordingly, the transition to a state-owned bank has the potential to be very costly to taxpayers due to unintended consequences.
Any state-backed institution, even if operated by good-faith actors, is potentially susceptible to political pressure. The danger of a state-owned bank is that it could be influenced to make decisions based on political favors as opposed to sound underwriting practices. The unfortunate reality is that many institutions can stray far from their intended purpose when subjected to the whims of political pressure. While private sector banks have extensive experience taking deposits and making loans, this is not the expertise and function of the state. This could cause risky loans to be made due to a lack of expertise and sophistication, putting taxpayers at risk. Politics is a business of strong emotions and currying favors to get one’s way, not necessarily compatible with the business of banking.
The only state-owned bank in America is in North Dakota, which was established in 1919 in a dramatically different marketplace than what exists today. Several other state-owned banks were formed in the United States and all have failed. It’s important to note that The Bank of North Dakota works collaboratively with private-sector banks, while proposals in New Mexico would have the state-owned bank directly competing with private sector banks. Notably, the Bank of North Dakota routes its public lending programs through community banks and cooperates rather than competes with local banks, aiding with capital and liquidity requirements. Even with the collaboration with private banks and its long history, the Bank of North Dakota has faced consistent political pressure, often putting its viability in question. One must realistically believe that if a state-owned bank established in 1919 has faced many challenges, then a state-owned bank established in the current marketplace would be subject to much greater pressure.
From a financial standpoint, it is worth looking at public bank studies conducted around the country. The city of San Francisco conducted a public banking study that estimated an investment between $184 million and $3.9 billion would be needed to operate a public bank, depending on its goals, and it would take anywhere between 10 and 56 years before it would break even. Proponents of a state-owned bank assert that it will generate profits, but that is very much in question. It’s worth considering if a startup state bank can reach the size and scale to provide all necessary banking services while achieving profitability or would it put taxpayers at additional risk? A state bank could also adversely impact the state’s credit rating, with credit agencies weighing the potential risk of operating a state bank in its decisions.
New Mexico has its fair share of problems, but it’s hugely debatable if a state-owned bank would address any of them. It would most certainly consume public funds that are desperately needed for infrastructure, education, health and safety, and community development. And, ultimately, a state-owned bank would be replicating services that are provided efficiently by tax-paying, private-sector banks in a competitive, highly regulated markets throughout New Mexico. The potential downside to the state and risks to taxpayers far outweigh potential rewards, particularly given the landscape of modern banking and finance. A state-owned bank, in a utopian scenario, could possibly work and provide all necessary banking services. But we’re far from living in a utopia and, given the myriad issues that face most states and the constant presence of political pressure, a state bank shouldn’t be high on anyone’s priority list at this moment. It uses up valuable time and energy that could be spent dealing with pressing issues that can be handled more immediately and effectively.
