Access to capital is as traditional a West Virginia problem as choosing your favorite pepperoni roll. Private banks have formed, consolidated, gone under, prospered and slogged along in our nearly 157 year history. More recently, the marked lack of urban banks in the Mountain State is underscored, as small businesses struggled to find lenders who would even consider processing Paycheck Protection Program (PPP) loans. The time is nigh for a serious discussion of a publicly owned state bank.
State banks finance public works. Roads, parks, bridges, schools, affordable housing, local agriculture, student loans and other community-driven projects are sorely needed by a state seeking invigoration. A state bank can bring these projects to fruition where the private sector wants.
A state bank would operate akin to a private bank, but with two distinct differences: lower interest rates; and profits and interest reinvested back into state programs.
Lower interest rates and profit reinvestment equates to more benefit captured on West Virginia’s main streets and less on Wall Street.
Funded through tax deposits and other internally-generated principal, a state bank is backed by the full faith and credit of the state itself, not the FDIC.
The concept is not novel, and national momentum is gathering.
Legislatures in New York, Massachussets, New Jersey, California, and Maryland are taking steps to analyze the benefits a state bank would offer their citizens. One need look no further for a successful example than the North Dakota State Bank (NDSB).
Established in 1919, the NDSB is a paragon for West Virginia. NDSB has the highest lending rate from local banks, the most banks per capita (10 per 100,000 people), and is often credited with North Dakota’s incredible resilience after the 2008 recession. In fact, North Dakota’s state budget was in surplus both pre and post 2008.
All of this is indicative of a state bank complementing rather than competing with existing local banks, as is often (and erroneously) discussed in some banking circles.
A healthy economy benefits all banks, but more specifically, a state bank can work with private banks through participation loans that minimize everyone’s risk. Indeed, the operating policy of the NDSB is to be “helpful to and to assist in the development of state and national banks and other financial institutions and public corporations within the state and not, in any manner, to destroy or to be harmful to existing financial institutions.”
West Virginia could adopt the same wording both literally and in spirit.
A West Virginia State Bank can mitigate future economic downturns and facilitate direct access to capital.
In the first round of PPP lending, banks in North Dakota issued about 11,000 PPP loans (or about 1,444 per 100,000 residents) In comparison, West Virginia’s rate pales at almost a third of that, or about 439 PPP loans per 100,000. Even more telling is North Dakota’s average of approximately $5,000 in PPP loans per private sector worker (first in the nation, and most of that within the first PPP round), compared to West Virginia’s $2,300 (47th in the country), according to the SBA’s first and second round PPP stats.
Under CARES and PPP, stimulus decisions are left in the hands of private banks. And there is nothing nefarious about this, per se. Quite the opposite, I know many West Virginia banks worked tirelessly to assist their customers. But, when it boils down to it, banks operate as businesses, and are ill-equipped to meet the challenges we have asked them to under CARES.
Many West Virginia small businesses who never received PPP can tell you the obvious flaws in this schematic.
The failures of the CARES Act are demonstrative of the need for states to give serious consideration to their future fiscal well-being. A state bank must be part of this discussion.
As a practicing attorney advising clients through their PPP loan and forgiveness applications, it was evident to me that many small businesses and sole proprietorships slipped through a wide mesh net.
West Virginia has unique strengths and weaknesses where a “one size fits all” approach falls short. One theme I began to notice was a lack of banking relationships in the state. Many of the folks I advised could not name their banker at their local bank, and most did not carry any debt.
There are many reasons why businesses and individuals do not have strong banking relationships, and one can speculate: distrust of banks and debt, a lack of branches in their community (this was also a recurring theme), pride in running a business debt free, or simply no need to establish such a banking relationship.
Yet the fact remains: strong banking relationships from an array of banks lends to a stronger small business economy.
Let’s delve further.
A recent study by the Institute for Local Self-Reliance found that a significantly larger number of federal relief funds under CARES found their way to small businesses in states where small banks have a greater market share than large banks. Small community banks have also been found to be more profitable, in part because of their ability to better assess risk at a local level.
Yet, since 2009, the number of small banks in the country has been cut by one third. West Virginia is no exception.
Similar to North Dakota, West Virginians are historically slow to accept change. It took the Non-Partisan League’s control of the North Dakota Governor’s Office in 1918 to achieve passage of the NDSB. As it happens, we have a similar movement organizing in West Virginia.
Stephen Smith, gubernatorial candidate for the Democratic Party, is the only candidate currently supporting the creation of a state bank, and rightly so. A state bank must be championed by those who share its basic principles. It must reflect local needs and values rather than solely profit driven motives.
There are, of course, many constitutional, legislative and administrative implications that must be resolved. Critics who say a state bank is a permanent solution for a temporary problem ignore the potential increase in liquidity on the state’s balance sheet. However, the benefits can be seen both on and off the balance sheet. In essence, banking and credit become sustainable public utilities.
Fiscal responsibility and utilizing the fruits of our own labor are not partisan issues: they are West Virginia values. In a state where money has historically blown to the four corners, let us start a system that circulates more money in West Virginia for longer, to better projects. Let us open an account with a state bank.