LD237 An Act To Establish a State Bank Coming to a Vote in Maine Legislature – Rebuttal to Lloyd LaFountain

Mainers Please: contact your Rep or Senator and ask for a yes vote on LD237 and amendment.for a STATE OWNED BANK..

Rebuttal of MainePublicBanking.com to testimony of Lloyd P. LaFountain on LD237 Amended

8th Maine Legislature, First Regular Session
The Joint Standing Committee on Insurance and Financial Services
Testimony of Lloyd P. LaFountain Ill,
Superintendent, Bureau of Financial Institutions

Senator Whittemore, Representative Lawrence, and members of the Committee:

My name is Lloyd LaFountain and I am the Superintendent of the Maine Bureau of Financial Institutions. On behalf of the Bureau and the Administration, I am here to testify in opposition to LD237, An Act to Establish A State Bank, as amended. The proposed amendment would establish a state-owned bank to be named the Maine Green Bank.

LD237 is the latest iteration of a public state bank bill that has been before the Legislature at least four times in recent history. Similar bills have come up numerous times in other states around the country. To my knowledge all other states have declined to endorse the concept and there are no modern examples of success for a state owned bank. The lack of modern examples that would provide models for Maine to follow is an indicator of the risk, scope and cost of such an undertaking.

>> Bank of North Dakota, which is still operating profitably, provides a model public bank in the United States. Multiple other public bank models exist around the world, including public banks in Switzerland, Germany, Japan, China, India, and Brazil. Growth rates in these public banks economies has been higher than in areas without public banks and their economies were not as severely impacted by the global 2008 crash..

At past hearings on this type of legislation, the State Treasurer, the Finance Authority of Maine (FAME), the Department of Economic and Community Development (DECD), among others, expressed concerns about whether a state-run bank would help the State and its citizens. These organizations already have infrastructures, programs and missions similar to the Green Bank proposal. We heard that if a problem is identified, it may well be solved within these organizations and at less expense.

>> The Finance Authority of Maine (FAME) and the Maine Department of Economic and Community Development were unable to stop the economic Tsunami which followed the 2008 financial collapse, but North Dakota kept growing throughout the crisis. In recent years the Finance Authority of Maine (FAME) and Department of Economic and Community Development were unable to prevent decimation of Maine’s manufacturing, and paper industry. Economist James Breece, Ph. D., concluded in his overview of Maine’s economy: Maine’s “Economic output ranks 46th in the country and output per worker ranks 48th (out of 50 states); Per Capita Personal Income grew 3% in 2014 and ranks 33d in the nation; and Maine has experienced a LOST DECADE in terms of employment.” FAME is not a bank and does not provide working capital loans for farmers. North Dakota has a Financial Authority similar to FAME, a housing authority similar to MaineHousing and Bank of North Dakota. Bank of North Dakota is a bank. These organizations have not succeeded in rescuing Maine’s economy. Because they are not banks they are unable to provide the liquidity needed to extract Maine from its liquidity trap, identified by Lord J M Keynes. No organizations have resources equal to the proposed Green Bank. The State of Maine has one-fourth the public financing per capita of the State of North Dakota, which has about half of Maine’s population.

Proponents of the prior bills often cited that a key reason for a public state bank is to expand access to credit. I would note that Maine state-chartered financial institutions fared well during the last recession. They maintained adequate capital and remained keenly interested in lending to credit worthy borrowers. In addition, the Bureau’s survey of foreclosure activity by Maine state-chartered financial institutions revealed that they avoided making predatory loans that led to disruption in the real estate market.

>>Maine has a much higher foreclosure rate and loan delinquency rate than North Dakota, which has the only state-owned bank, because the 2008 recession was not even felt in North Dakota. Maine’s employment level has not yet returned to its 2007 level, one decade after the beginning of the financial collapse. North Dakota has lower foreclosure rates, smaller bankruptcy rates, lesser past due loan rates, lower unemployment rates, smaller tax burden, lower negative equity, higher educational spending growth per capita, better credit ratings, and more stable property values.

The Committee should also be aware of the risks associated with forming a state-owned bank.

>>The risks in not forming a state-owned bank are to wallow in the economic stagnation experienced during the lost decade or loss of state funds in one of the many worldwide private institutions Maine invests in. The state money invested in global financial institutions is now at higher risk, while a local public bank would provide a safe fiduciary as well as strengthening the local economy.

The Committee has heard, or will hear, about the Bank of North Dakota model and that bank’s positive contribution to the state’s general fund. Whether a state~owned bank established in Maine’s economic and banking environment would enjoy the same success as the Bank of North Dakota is uncertain.

>>Everything in the future is uncertain. It is uncertain whether we will have another financial collapse like 2008, but it is more likely that a Bank of North Dakota model would improve Maine’s economy than continuing on the path that has clearly proven that it is not working.

Undertaking the creation of a state-owned bank involves risk with no guarantee of similar performance.

>>Maine’s current financial risks are far higher than the risk of creating a state-owned bank. The Treasurers Cash Pool invested on Wall Street could disappear with another meltdown. Cash would be safer in our own bank. Nothing is guaranteed, but with a qualified team, and management there is a high probability that the state-owned bank will be successful and help raise living standards of the people of Maine.

A new institution could not be expected to contribute to the state’s general fund for many years after initial capitalization.

>> Who knows? If the Green Bank invested in renewable energy and other growing sectors it could be successful soon with a qualified team and good management.

It is likely the bank would have to retain earnings for several years in order to ensure solvency and create a cushion against operational and loan losses.

>> This statement is pure speculation. The Treasurer’s Cash Pool now contains substantial funds, obtaining under 1%, almost no yield, invested in uninsured securities, some foreign, that could capitalize a state-owned bank, instead. Maine Green Bank could underwrite 50 to 80% of participation loans by existing state or local origination and risk assessment partners following the BND model. It would share risk with partners, strengthening all parties. If deposited in a State-owned bank, Maine Treasurer’s Cash Pool would stimulate Maine economic activity, instead of France, England, Canada, Japan, Netherlands, and Minnesota, as it is now doing.

Which brings me to the issue of capital. Start-up capital is essential to a banking organization. Capital is the foundation for bank operations. It is the money put at risk by investors or the organizers of mutual banks and credit unions and serves as a cushion against losses. When a bank functions well, it can add to capital. Capital is depleted during times of economic stress and unexpected losses from bad loans, cybercrime, data breaches, or poor management.

If capital is significantly eroded, then the organization becomes insolvent. An insolvent bank no longer has the ability to meet its obligations. Under the amended proposal, if the Maine Green Bank became insolvent it would be unable to pay obligations to Maine citizens and to Maine government instrumentalities. This is because the proposal requires deposits into the Maine Green Bank from the Treasurer and all instrumentalities of the State amounting to 30% of their cash, which may be withdrawn by those organizations at any time (by loan).

>> We envision that the Treasurer and instrumentalities would keep a minimum balance of 30% of their cash in checking accounts in the Maine Green Bank, as banks do. This could be negotiated between the Green Bank and instrumentalities; if the fraction is too high, perhaps accommodation could be reached. We envision that Green Bank would provide checking accounts and depositors would write checks on those accounts to pay their debts. We do not envision that the minimum balance of deposits may be withdrawn by organizations at any time whether by loan or in any other way. We don’t see how capital could be significantly eroded. Many of the loans will be with blue chip organizations. They will be fine. If loans go bad for the Green Bank then they would also go bad for its partners who have much more experience operating in Maine.

Unmet obligations would include the cash deposits of Maine consumers, the Treasurer, and government instrumentalities, such as the University of Maine, FAME, Maine Maritime, Maine Municipal Bond Bank, and Maine Housing to name a few.

>> Maine consumers won’t be depositing funds in the Green Bank. The Green Bank will be only for institutions. This is the Conceptual Design Phase. There will not be this often-repeated “insolvency” with its “unmet obligations.” The biggest crisis that retail banks now face is the chance of a run on the bank. Runs can’t happen on the Green Bank because minimum deposits are required by law. The second biggest crisis that retail banks face is a 2008-like derivatives crash. This can’t happen either because the Green Bank cannot trade in derivatives. Thus chances of the Green Bank failing are almost nil. Careful and thoughtful design of Green Bank’s systems and competent management will prevent problems..

Loss of operating cash for these organizations could create financial crises across state government.

>> The chance of the bank failing are almost nil. Any Maine agency that lost cash could create a crisis. A few years ago in the Maine Turnpike Authority a case happened with lost funds. If Minnesota-based U S Bank, without Maine branches, that issued Treasurer’s checks some time ago lost operating cash, could it not also create financial crises across state government? Was Minnesota-based U S Bank examined by the Maine Bureau of Financial Institutions? I don’t think so. Since Maine Green Bank would be within Maine Bureau of Financial Institutions jurisdiction, hopefully, Maine Bureau of Financial Institutions could spot the problem before it became big enough to cause a crisis. Of course careful, mindful, thoughtful design of the Green bank’s systems and competent management would be essential for success. I think that the people of Maine are as smart as the people of North Dakota. If North Dakota can operate a public bank for 98 years without financial crises across state government, so can Maine.

The forced deposits could also restrict activities of government instrumentalities if their operating cash gets tied up in long term development loans.

>> “Forced deposits” mischaracterizes the 30% minimum balance requirement. When 30% of cash for daily operations is deposited in an account in the Green Bank, it shouldn’t restrict activities of government instrumentalities. The Green Bank won’t be lending its deposits. No banks do. It will be creating new money when it lends it, as other banks do. Page 7 of “Modern Money Mechanics” Federal Bank of Chicago says “Of course, they (banks) do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts”. This is also in my book.

Further, funds deposited in the Maine Green Bank would not be insured by a federal agency such as the FDIC or NCUA.

>> FDIC or NCUA can only insure up to $250,000 of the deposits. Treasurer Cash Pool funds are much more than $250,000 , they are measured in millions, and none of Maine’s cash is completely insured now. But, being in a Maine fiduciary institution, instead of in various unsecured worldwide entities will make Maine’s cash safer.

Without such insurance, the only safety net for depositors is the full faith and credit of the State of Maine and, ultimately, the tax payer.

>> FDIC or NCUA agencies can only insure up to $250,000. Because Treasurer Cash Pool funds are much more than $250,000 they aren’t insured now. Today, if FAME funding is increased, taxpayers pay for it. Green Bank won’t require more taxes, when it lends, because it can create money when it lends it. It has to keep a required reserve of usually at least 10 percent that cannot be loaned. We propose keeping 30% in reserve for a safety cushion.

I would note also that, even if the bank were solvent, some of these organizations maintain investment portfolios with returns that may well exceed deposit returns offered by a Maine Green Bank.

>> Irrelevant. It doesn’t matter what returns these organizations make elsewhere. But I strongly doubt these organizations will obtain a higher return than Maine Green Bank. Bank of North Dakota has been earning record returns over 15% returns for 13 years.

Given these concerns, creation of a state bank carries risk and it is inadvisable to create a Maine Green Bank without a significant cash injection in order to absorb losses through bad times and bad decisions.

>> These concerns are invalid. We need the active participation of community leaders who are mindful and investigative and help set up organizations and systems to insure that Iceland-type looting doesn’t happen. Maine Green Bank will not carry additional risk if it is properly designed and staffed by competent management, and will substantially reduce the risk of loss of existing investments. The only chance of increased risk would be if it were very poorly designed, or very poorly managed. Very few public banks have failed, except in Iceland after they were privatized, when they were looted by their management, which is shown at the beginning of the full length movie, Inside Job. Funds available in agencies’ cash are far more than minimum needed to create a public bank. Iceland’s stable economy before bank privatization was due to its 3 public banks. The $1B in the Treasurers Cash Pool should be enough to create a stare-owned bank. It can issue bonds if it needs more capital.

Prior bills have indicated $20 million dollars was required at start-up to fund a loan and investment program. Even that amount may not be sufficient for its purposes.

>> There is over $1B in the Treasurers cash pool. That is more than enough to start a public bank. Plus there is cash in instrumentalities accounts and the right to issue bonds..

I would note that industry averages for capital are around 10% of assets. Thus, a $1 billion bank would require $100 million in capital. A bank would have little impact on the Maine economy without high capital contributions. By way of example, Maine’s largest state-chartered banks range from $1 billion to $3.5 billion in assets.

>> State-owned banks are entirely different from private banks. The $1 B in the Treasurers cash pool is enough to start a public bank. The capital requirement mentioned sounds like the Reserve Requirement set by the Federal Reserve. Our simulation assumed that 30% of funds would be reserved for this and other purposes.

The bill, as amended could also impact the stability of Maine’s community banks. If every state instrumentality must deposit funds into the Maine Green Bank, and if the Maine Green Bank also attracts individual customer deposits in competition with the private sector, there may be significant deposit outflows from Maine financial institutions, compromising their ability to do business, make loans, and contribute to economic growth.

>> Maine consumers will not be depositing funds in the Green Bank. The Green Bank will be for state institutions only. The Green Bank’s impact on stability of Maine’s community banks would be to strengthen them and make them more profitable. North Dakota Banks are 3 times more profitable than Maine Banks. North Dakota has a lower loan delinquency rate and lower foreclosure rate than Maine, because it has a state-owned bank and Maine doesn’t. Yet. MAINE GREEN BANK WILL NOT COMPETE WITH PRIVATE BANKS.

Also, in past hearings on this type of legislation, opponents indicated there may be constitutional prohibitions on pledging the full faith and credit of the State-—a question that would ultimately have to be resolved by the Legislature or Judiciary.

>> The Constitutionality of the Bank of North Dakota was challenged and upheld by the U S Supreme Court. Over the years other state banks have also been upheld by various courts. This data is available on line using a key word search. Ellen Brown writes: “ In Green vs. Frazier, 253 U.S. 233 (1920), the U S Supreme Court upheld the bank’s constitutionality against a Fourteenth Amendment challenge and deferred to the state court on the state constitutional issues, which had been decided in the state’s favor.” The Bank of North Dakota is Constitutional so the Maine Green Bank will be Constitutional.

The bill as amended creates additional examination concerns. It allows the Maine Green Bank’s board of directors to establish the rules under which it would be examined.

>> Either this is false, I misread the amendment, or it was was changed since I last saw it. The Green Bank’s board of directors will follow the law, whatever it is. They will establish rules for the bank, but the rules for how the bank will be examined will be set by the examiners.

Chartered financial institutions have independent federal and state regulators that examine the institutions based on what the law says, not what the institutions’ board deems important. Here, the language of LD237 as amended would provide Maine Green Bank’s board and advisory committee ultimate authority to choose which safety and soundness principles by which it should be measured.

>> The legislature has the power by law to rescind any rules adopted by the Bank’s Board of Directors. Since “Safety and soundness” is not mentioned in the amendment, it appears that this charge is false. The Maine Green Bank’s Board of Directors will follow the law, whatever it says.

Lacking federal guaranty of deposits, state agencies would have sole responsibility to examine and audit the organization to ensure safety and soundness. These oversight responsibilities would require additional personnel costs for the Bureau.

>> We are now in the Conceptual Design phase. If any additional personnel costs arise, once Maine Green Bank is established, either it, or the Legislature, will find an equitable way to compensate the Bureau. This is a Logical or Functional Design phase issue. It is premature to talk about this now. Since this is not a roadblock, it should just be noted.

These costs would be in addition to the establishment of a physical location for the bank, and the executive and administrative salaries of the Maine Green Bank. Salaries that would have to be high enough to attract talent with experience running a bank.

>> We are now in the Conceptual Design phase. The Maine Green Bank would find a way to pay salaries that are enough to attract experienced talent. This is the work of management. It is premature to talk about this now. This is a Logical or Functional Design issue.

The Bureau is also concerned about what it must examine the proposed bank for.

>> It should be examined like any other bank is examined, including safety and soundness.

In Bureau examinations of state-chartered financial institutions, staff examines for safety and soundness of banking operations, lending policies, board procedures, compliance with anti-money laundering and Bank Secrecy Act statutes, capital adequacy, cybersecurity, and other important matters. In contrast, the examination of the Maine Green Bank would take on additional objectives For example, along with the rules created by the board; the Bureau would also have to assess whether the Maine Green Bank is operating in accordance with its stated “purposes” laid out in Section 1252. Some of these purposes include:

Increasing the per capita income of residents and families in the State;
Financing medical and dental health enterprises, facilities, equipment, laboratories, training, and all-inclusive elderly-care financing;
Lowering inequality in the concentration of wealth; and
Lowering loan delinquency rates by increasing family income, among others.
Additionally, the Bureau would have to evaluate whether the Maine Green Bank avoided certain prohibited activities. These prohibited activities include:
Investing in large real estate sprawl development projects which would eliminate
farmland or forest habitats;

>> The vision for the Maine Green Bank is that the Bureau of Financial Institutions would NOT have to assess whether the Maine Green Bank is operating in accordance with its stated “purposes” such as “Lowering inequality in the concentration of wealth.”

Investing in projects where borrowers have histories of human rights abuses;
Funding projects that damage the environment, increase greenhouse gas, acidity, or
temperature of the oceans, seas, lakes and rivers; and Underwriting stores with parking lots not designed for pedestrians, to name a few. These examples are not provided to discredit the goals of the Maine Green Bank. However, there is no method for the Bureau to determine if the stated purposes of the Maine Green Bank are being met, or whether it is engaging in a prohibited activity. The Bureau questions whether there exists cost-effective and feasible ways to examine for these unique factors at all.

>> The vision for the Maine Green Bank is that the Bureau of Financial Institutions would NOT have to assess whether the Maine Green Bank is operating in accordance with its stated “purposes” such as “Lowering inequality in the concentration of wealth.” These are the goals of the Bank and the reasons why the Bank would be created. The Bureau of Financial Institutions should evaluate safety and soundness of the bank. But if the Bureau did assess how the Bank is meeting its purposes, there is substantial data that could be researched to evaluate that. Perhaps the Bureau of Financial Institutions could hire economists, social workers, and environmentalists, or it could contract the work out to other state agencies, or private firms, or other entities.

With Best Regards,

Randall Parr

LD 237 – An Act To Establish a State Bank

Summary of LD 237