New Mexico Public Bank – Why?

Greater Albuquerque Chamber of Commerce

Seems like this session we’ve been running into a few bills that really seem like a solution in search of a problem. This is one of those. HB 236, sponsored by Representative Patricia Roybal Caballero would create a “public bank,” i.e. a bank owned and operated by the state of New Mexico. The House Commerce and Economic Development Committee sent the bill on to the House Judiciary Committee on a straight partisan vote of 5-4.

Why, you might ask, would we want a state owned bank? Well, proponents say this bank would be a source of capital for individuals and businesses not otherwise served by private commercial banks or other government programs. They specifically point to funding green energy projects, for example. Proponents are critical of the state depositing funds with private institutions on “Wall Street” and want all the money to stay in the state. The bank would be funded from $50 million out of the general fund and $50 million from the Severance Tax Permanent Fund. They say that the public bank would not have a retail presence, would not compete with local banks but rather would make “partnership” loans. The public bank would be a governmental agency, governed by political appointees and subject to legislative appropriations each year.

New Mexico community banks spoke in opposition to HB 236. As Jerry Walker, President of the Independent Community Bankers Association stated, “It’s important for the committee to understand that this bill is not creating a bank but creating a new state agency operating under the guise of a bank… Community banks are the economic engine of the state, making 60% of small business loans and 80% of agriculture loans.”

Albuquerque Chamber President and CEO Terri Cole spoke in opposition to the bill: “We’d like to emphasize two points made by the Federal Reserve of Boston in 2011, when they looked at public banks. Essentially, their report said that states (1) should be able to identify the specific market failure that a public bank would address (2) study ways that existing quasi-public agencies might be able to meet their needs instead. This is wise advice for us today. In New Mexico, it’s unclear what problem this legislation is seeking to solve. What has the private sector not adequately provided, such that the government jumping into the business of banking is the only and best solution?”

As the many community bankers pointed out, there is plenty of liquidity with which to make loans and that all deposits made to community banks stay in New Mexico. If public funds were to be withdrawn from community banks, this could very much undercut their business.

There’s only one public bank in the U.S. in the state of North Dakota. That bank was founded in 1919 before most banks were started in this state – obviously not a condition that exists today. Several states and cities have looked into creating a public bank and all have dropped the idea because:

• It takes a huge amount of capital to start up a bank – money that could better be used for other needed services.
• Not only does it take a lot of money to start up but then the taxpayers are on the hook for any failures. Almost by definition, the bank would be taking on loans that private lenders won’t and, therefore, there is a higher risk profile. This inevitably will result in a higher default rate.
• The Regulations and Licensing Department identified many issues that speak against creation of a public bank including a potential violation of the “anti-donation” clause in the state’s constitution, the likely inability of the public to receive FDIC insurance, lending and payment systems the potential for political governance to result in poor economic decisions.

After all the discussion, we end up where we started – what problem is this solution in search of? There’s a lot of needs in our state that, in our view, have a higher priority. Like many states before us, let’s just put this one on the shelf.