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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 unrealistic and have overlooked the challenges in establishing such an entity. 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.
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.
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. 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.
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.
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