In recent legislative sessions, a recurring topic has been the creation of a state bank in New Mexico. Proponents of a public bank have been unrealistic and overlooked the challenges of creating such an entity. The most salient point of opposition would be the significant financial commitment of the state for the state bank to become well capitalized. As a result, New Mexico taxpayers’ money would be at risk because a state bank would not have deposit insurance such as FDIC insurance. The state bank would also not be subject to extensive federal and state regulation and examination oversight, which is necessary to protect depositors and keep a bank safe and sound. Given these facts, it is particularly important to weigh the potential savings from not paying bank charges against the potential expenses of operating a state bank.
Any state-supported institution, even if run by bona fide actors, is potentially susceptible to political pressure. The danger of a public bank is that it could be influenced to make decisions based on political favors rather than sound underwriting practices. The sad reality is that many institutions can stray from their purpose when subjected to the vagaries of political pressure. Although private sector banks have extensive experience in deposits and lending, this is not the expertise and function of the state. This could lead to risky lending 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 market radically different from what exists today. Importantly, the Bank of North Dakota works in conjunction with private sector banks, while the proposals in New Mexico would place the state bank in direct competition with private sector banks. Notably, the Bank of North Dakota channels its public lending programs through community banks and cooperates rather than competes with local banks, helping to meet capital and liquidity needs. Even with the collaboration with private banks and its long history, the Bank of North Dakota has faced constant political pressure.
It is worth examining the studies of public banks conducted throughout the country. The City of San Francisco conducted a study of public banks which estimated that an investment of between $184 million and $3.9 billion would be required to operate a public bank, depending on its objectives, and that it would take between 10 and 56 years to break even. Proponents of a state bank claim it will generate profits, but this is highly questioned. Is it worth considering whether a start-up state-owned bank can achieve the size and scale necessary to provide all necessary banking services while achieving profitability or would this put taxpayers at additional risk? A state bank could also negatively impact the state’s credit rating, with credit agencies factoring the potential risk of operating a state bank into their decisions.
New Mexico has its fair share of problems, but it’s highly questionable that a state bank would tackle any of them. It would most certainly eat up desperately needed public funds for infrastructure, education, health and safety, and community development. And, ultimately, a state-owned bank would replicate the services that are efficiently provided by private sector, tax-paying banks in competitive, highly regulated markets throughout New Mexico.