Public Banking

There's a political action to set up a public bank in Los Angeles happening. There's also campaigns in several other states. I'm interested in what the pros and cons of public banking might be, especially in terms of Taiwan's experience.
As always, the header of each section takes you to the original source material. To get access to JSTOR you can sign up for a free account.

Let's start with a definition:
A Public Bank is a chartered depository bank in which public funds are deposited. A Public Bank is owned by a government unit — a state, county, city, or tribe — and mandated to serve a public mission that reflects the values and needs of the public that it represents. In existing and proposed US Public Bank models, skilled bankers, not the government, make bank decisions and provide accountability and transparency to the public for how public funds are used.
Public Banks are popular globally, operating on a variety of models; and new models continue to be proposed. The US, however, currently has only one public depository bank — the Bank of North Dakota (BND). All state revenues are deposited in the BND by law.

This is what the movement's website says are the benefits of public banks.
Make affordable loans to small businesses, farmers, government entities, and students
-Save taxpayers up to 50% on infrastructure projects, like bridges and trains and schools
-Eliminate billions in bank fees and money management fees for cities and states
-Support a vibrant community banking sector
-Enable sustainable prosperity
We are pioneering something truly revolutionary: a banking and monetary system that supports sustainable prosperity for all of us.

A paper in JSTOR has this excellent summary:



More info on the Bank of North Dakota
The bank was formed in 1919 with $2 million in bonds as a response to farmers who found they couldn’t get credit from out-of-state banks in Chicago, Minneapolis and New York. Today, the bank helps implement state economic development programs, lends money to businesses, serves as the depository of state funds and also functions as a "banker's bank" that performs tasks like check clearing for smaller institutions.

Much of the renewed interest in the bank stems from the same frustration driving the Occupy Wall Street movement, and Hardmeyer’s institution has come to represent something of an anti-bank. After all, advocates argue, the best way for taxpayers to occupy a bank is to own it. Instead of being bailed out by the government, Bank of North Dakota actually pays dividends to the state that shore up its coffers. Bloomberg Businessweek reported that since 1945, it has sent $555 million to the state general fund.

Instead of tightening up lending in response to the recession, BND actively tries to facilitate loans that traditional banks shy away from. “With this institution [and] its mission, it comes with a higher degree risk than what a traditional bank might be willing to tolerate,” Hardmeyer said.

When floods destroyed affordable housing in Minot, N.D. last year, the bank developed programs to help finance rebuilding. And as the western half of the state struggles with strained infrastructure in the wake of an oil boom, BND programs are helping to ensure capital is flowing to fund much-needed projects.

Yet BND doesn’t operate as a charity, and its finances are remarkably strong. Bloomberg Businessweek reported that it earned a profit of $62 million in 2010 – the seventh consecutive year it turned a record profit – and it has profited every year since at least 1971. Standard & Poor’s just increased BND's credit rating. The returns on its assets have consistently been larger than those of similarly-sized private banks, and a smaller portion of its loans have gone delinquent, according to a report by the Federal Reserve Bank of Boston. The bank has likely benefited more successful lending, lower costs and its tax-exempt status.

Yet most North Dakotans interaction with the bank is minimal. The institution operates from a single location in Bismarck, doesn't have ATMs, and doesn’t generally serve as a consumer bank. It lacks federal oversight, its loans aren’t insured by the FDIC, and its staff members are considered state government employees.

What it does do is partner with smaller, local banks throughout the state on various loan programs. In a typical transaction, a smaller bank would originate a loan, and BND could guarantee part of it or buy down the interest rate. The effect is that a business loan that might otherwise not have been made – or that might have only happened at a high interest rate -- can suddenly be offered at a reasonable price, prompting business growth and job creation.

The main intent is for the bank to serve as an economic development tool, said Hardmeyer. It works closely with the state’s commerce department, economic development corporations, and the legislature to develop programs that serve the mission. It’s overseen by a triumvirate of state officials that include the governor, the attorney general, and the agriculture commissioner, while the legislature sets its budget.

Many BND fans see North Dakota’s economy, currently enjoying a best-in-the-country jobless rate of just 3.4 percent and believe a similar publicly-owned bank could help fix financial problems elsewhere. But Hardmeyer himself downplays that optimism, pointing out that although his bank plays an important role in the state economy, North Dakota's boom likely has more to do with the energy sector. The Fed concurs: “With the possible exception of the Great Depression, BND’s contributions to stabilizing the state economy and finances appear to have been relatively minor.”

Disadvantages of Public Banks: South Africa

Disadvantages: India
India's public-sector banks are sitting on something unpleasant. One of India's strengths is its companies. In general they are profitable, well-run and have healthy balance-sheets.
But the country has long had pockets of indebtedness, too. A tradition of "promoters"--as individuals or families with controlling stakes are known--can lead firms to borrow rather than dilute down their masters' stakes by issuing shares.
A rabble of public-sector walking dead, from Air India to local electricity boards, bleed cash yet still get access to state-owned banks.
And a boom in infrastructure projects, from roads to power stations and airports, is being paid for with debt.
Some of these projects are now in trouble because of red tape and a slowing economy.

All of this fuels concern that India has a bigger bad-debt problem than the rather stable level of banks' official "non-performing" loans suggests.
Just how big is unclear because many loans have been labeled as "restructured".
This means their terms have been softened but that they are not formally recognized as bad debts.

Such restructured loans were $43 billion in March. That is just 2% of India's GDP, and as a proportion of all loans far below the level in previous Asian crises, or in India in the early 1990s, when bad loans reached a quarter of the total. It is also well below the ratio of dud debts that some say is festering in China's banks. But pockets of rot can wreak havoc. Write-downs by America's banks since 2007 amount to only 5% of its GDP. Restructured loans are still rising in India (see chart). And the country runs the risk of Spanish disease, in which evidence of rising zombie debt is cheerfully dismissed until it is too late.
Spain's regulators were complacent. At least India's are not. The Reserve Bank of India (RBI) is on the warpath. K.C. Chakrabarty, a deputy governor, says: "It's a concern. The banking system will not collapse because of this tomorrow. The system hasn't become unstable. But if this continues for one or two years, it will become unstable." The RBI plans to tighten the rules on restructured loans again, having loosened them in 2008 to protect India from the global crunch and given special treatment to infrastructure loans, deemed a national priority, in 2010.


So is India's banking system in trouble? It looks likely that a big chunk of restructured loans will turn sour. The damage will be felt by state banks, particularly smaller ones. They will struggle to raise more capital because the government is cash-strapped and reluctant to pay for more equity, yet simultaneously unwilling to dilute its stakes in the banks.
Yet there will be no explosion. Indian banks rely on deposits, not fickle wholesale markets, to fund themselves. That will buy them time. And a silver lining is that India's well-run private banks should take more market share. Still, the cost of public-sector banks' troubles will be felt by responsible borrowers who may face scarcer and dearer credit. And that will slow the wider economy, which must try to accelerate with a flabby state-controlled banking system clinging to its ankles.