How to Start a Public Bank Overnight
By Ellen Brown publicbankinginstitute.org
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her nearly-300 blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN, the Progessive Radio Network.
Forming a provincial, regional, or municipal public bank need not be slow nor expensive. An online bank could be run out of a municipal Treasurer’s office and operational in a few months. And the bank could be turning a profit immediately – without spending the local government’s own revenues.
How? The way Wall Street does it with our public deposits and investments: by leveraging. We could reclaim those funds and put them to work for our local economies and communities.
North Dakota is the only US state to post a budget surplus every year since 2001. The state owns its own bank. Other local governments would do well to follow suit, not just for the promising profit potential, but as protection against a “bail in” of public deposits. Concerns are growing that we are heading for another banking crisis, one that could be far worse than in 2008. But this time, there will be no government bailouts. Instead, per the Dodd-Frank Act, bankrupt banks will be confiscating (or “bailing in”) their customers’ deposits. That includes local government deposits. The fact that public funds are secured with collateral may not protect them, as explained earlier here. Derivative claims now get paid first in a bank bankruptcy; and derivative losses could be huge, wiping out the collateral for other claims.
A municipal public bank could be capitalized with a bond issue (borrowing from the public), and this capital could be leveraged into a loan portfolio that is about eight times the capital base. The bond issue could be financed with 1/8th of the interest accruing from this portfolio. The remaining 7/8th could be pocketed as profit.
This profit could be earned immediately and without risk, by buying municipal bonds rather than issuing loans. That move could also help municipalities, by guaranteeing that their bond rates remain low in the face of threatened interest rate rises on the private market.
How to Start a Bank at Virtually No Cost or Risk
To demonstrate the safety and viability of the model, the bank can start small and build from there. For startup capital, a new bank needs anywhere from a few million to $20 million nationwide. (The amount varies from state to state.) To be cautious and conservative, however, let’s say $40 million.
Many cities have this money available in “rainy day” or reserve funds. Many others have substantial investments, often underperforming, that could be more responsibly invested as an equity position in a bank. In California, for example, a whopping $55 billion is languishing in the Treasurer’s Pooled Money Investment Account, earning a mere 0.23% interest.
Moving a portion of those funds into the state’s own bank would just be good portfolio management. State pension funds are another investment option.
If surplus funds are not available, capital can be raised with a bond issue. That is how the Bank of North Dakota got its start in 1919. Assume the interest due on these bonds is 3%. The local government’s cost of funds will be $1.2 million annually.
At a 10% capital requirement, $40 million is sufficient to capitalize $400 million in loans. But again assume the bank is started conservatively at a 20% capitalization, for a loan portfolio of $200 million.
To make those loans, the bank will need deposits. These can be acquired without advertising or other costs, by moving $200 million out of the local government’s existing deposit account at JPMorgan Chase or another Wall Street bank. (In North Dakota, all of the state’s revenues are deposited by law in its state-owned bank.) Assume the new bank pays 0.3% interest on these deposits, or $0.6 million annually as its cost of funds.
To satisfy the 10% reserve requirement for deposits (something different from the capital requirement), $20 million of this deposit pool would be held in reserve. The remaining $180 million are counted as “excess reserves,” which can be used to make an equivalent sum in loans or bond purchases.
Assume the excess reserves are used to buy local municipal bonds paying 3% annually. The return to the bank will be $5.4 million less $0.6 million in interest on the deposits, for a total of $4.8 million annually.
To recoup the cost of the bond issue, $1.2 million can be paid from these profits as a dividend to the local government. The bank will then have a net profit of $3.6 million annually; and this profit will have accrued to the local government as the bank’s owner, without needing to advance any money from its own budget.
What if the state needs its deposits for its budget?
That is the beauty of being a bank rather than a revolving fund: banks do not actually lend their deposits, as the Bank of England recently acknowledged. Rather, they create deposits when they make loans. If the state or local government needs more cash for its operating expenses than the bank has kept in reserve, the bank can do what all banks do: it can borrow. And if it has grown to be a large bank, it can borrow quickly and cheaply – from other banks through the Fed funds market at 0.25%, or from the money market at 0.15%.
A smaller public bank might want to keep a larger cushion of deposits in reserve for liquidity purposes. If it keeps 30% in reserve, in the above example $140 million would be left to invest in bonds, generating $4.2 million annually in interest. Deducting $1.8 million as the cost of servicing deposits and capital, the bank would still generate $2.4 million in profit, while providing a safe place to park public revenues.
What of the bank’s operating costs? These can be kept quite low. The Bank of North Dakota operates without branches, tellers, ATMs, retail services, mega-salaries or mega-bonuses. All those saved costs fall to the bank’s bottom line.
Ballpark operating expenses for a small but growing public bank with a President, Chief Financial Officer, Chief Lending Officer, Chief Credit Risk Management Officer, Compliance Officer, and the systems required to support a banking function are estimated at under $1 million per year. A start-up focused on municipal bonds could be operated for even less. This expense could come out of the initial $40 million in capitalization, again without impairing the local government’s own operating budget.
Manifesting the Bank’s Full Potential
Once a charter has been obtained and sound banking practices have been demonstrated, the capital ratio can be dropped toward 10%. When the bank has built up a sufficient capital cushion, it can begin to work with community banks and other financial institutions for the broad range of commercial lending that creates jobs and prosperity and generates profits as non-tax revenue for the municipality, following the Bank of North Dakota model.
The public bank can also invest in infrastructure loans to the state or local government itself. Interest now composes about half of capital outlays for public projects. Since the local government will own the bank, it will get this interest back, cutting infrastructure costs in half.
These are just a few of the possibilities for a publicly-owned bank, which can provide security from risk while generating a far greater return on the local government’s money than it is getting now on its Wall Street deposit accounts. As we peer into the jaws of another economic meltdown, moving our public funds into our own banks is an investment we can hardly afford not to make.
Key Questions and Answers for
Elected Officials and Policy Makers
Treasury Staff, Bankers,
Taxpayers and Voters
“We live under a tyranny today that is just as intolerable and unjust as that in 1776, but violent revolution is no longer an option. Our oppressors own the military and the media, and their FEMA camps are waiting for us. If change is to come, it must be peaceful and legal, beginning with a revolution in the minds and hearts of the people. The message of the Public Banking in America Conference was that we can throw off the yoke of the international financial elite by making money and credit a public utility; and the most feasible place to start is at the local level, with publicly-owned banks.” — Ellen Brown www.ellenbrown.com
Starting a bank in Canada
A Guide for incorporating banks:
To get started, please read some information regarding the OSFI approval process:
- OSFI (the Office of Superintendent of Financial Institutions) is responsible for administrating the granting of charters for banks. OSFI acts according to a number of federal statutes, mainly the Bank Act.
- You must meet the criteria of OSFI to commence the operation of a bank, a Federally Regulated Financial Institution (FRFI).
- All FRFI’s that will be taking deposits (including term deposits) will be required to become a member of the CDIC (Canada Deposit and Insurance Corporation). The only exception to this rule is for those institutions that will be taking on deposits greater than $150,000.
- Applicants may also be required to join the CPA (Canadian Payments Association).
- In addition to federal regulations, FRFI’s must seek out applicable provincial legislations that apply to the provinces in which the FRFI wants to do business.