Here's how the Federal Reserve really operates
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Beating Wall Street at Its Own Game — The Bank of North Dakota Model
January 15, 2025 | by Ellen Brown
North Dakota is staunchly conservative, having voted Republican in every presidential election since Lyndon Johnson in 1964. So how is it that the state boasts the only state-owned bank in the nation? Has it secretly gone socialist?
No. The Bank of North Dakota (BND) operates on the same principles as any capitalist bank, except that its profits and benefits serve the North Dakota public rather than private investors and executives. The BND provides a unique, innovative model, in which public ownership is leveraged to enhance the workings of the private sector. It invests in and supports private enterprise — local businesses, agriculture, and economic development – the core activities of a capitalist system where private property and enterprise are central. Across the country, small businesses are now failing at increasingly high rates, but that’s not true in North Dakota, which was rated by Forbes Magazine the best state in which to start a business in 2024.
The BND was founded in 1919, when North Dakota farmers rose up against the powerful out-of-state banking-railroad-granary cartel that was unfairly foreclosing on their farms. They formed the Non-Partisan League, won an election, and founded the state's own bank and granary, both of which are still active today.
The BND operates within the private financial market, working alongside private banks rather than replacing them. It provides loans and other banking services, primarily to other banks, local governments, and state agencies, which then lend to or invest in private sector enterprises. It operates with a profit motive, with profits either retained as capital to increase the bank's loan capacity or returned to the state's general fund, supporting public projects, education, and infrastructure.
According to the BND website, more than $1 billion had been transferred to the state's general fund and special programs through 2018, most of it in the previous decade. That is a substantial sum for a state with a population that is only about one-fifteenth the size of Los Angeles County.
The BND actually beats private banks at their own game, generating a larger return on equity (ROE) for its public citizen-owners than even the largest Wall Street banks return to their private investors.
Why So Profitable? The BND Model
For nearly a century, the BND maintained a low profile. But in 2014, it was featured in the Wall Street Journal, which reported that the Bank of North Dakota "is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. (JPM) and hasn't seen profit growth drop since 2003." The article credited this success to the shale oil boom; but North Dakota was already reporting record profits in the spring of 2009, when every other state was in the red and the oil boom had not yet hit.
The average return on equity (ROE) of the BND from 2000 through 2023 (its latest annual report) was 19.51%. (ROE = net profit divided by shareholder equity.) Compare JPMorgan Chase (JPM), by far the largest bank in the country, with 2.4 trillion in deposits. Its average ROE from 2000-23 was 11.38% over the same period. For a detailed breakdown, see here.
Note that these respective returns are for shareholder/owners. The BND has only one shareholder, the state itself. State pension funds can buy stocks, but state general funds typically do not invest in them. Their money is held in banks as deposits, which pay a lower return than bank stock. The California Pooled Money Investment Account (PMIA), for example, held an average $166 billion in California state funds in fiscal year 2023-24, in a variety of investments including federal bills, bonds, notes and securities; time deposits and CDs; and corporate bonds and commercial paper. It yielded only 3.927% during that fiscal year. A state-owned bank on the BND model could have generated a five times higher return for the state.
How could the BND have outperformed JPM, the nation’s largest bank? Most important, it has substantially lower costs and risks than private commercial banks. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; has no private shareholders; and has low borrowing costs. It engages in old-fashioned conservative banking and does not speculate in derivatives, so it has no losses or risk from derivative trades gone wrong.
The BND does not need to advertise or compete for depositors. It has a massive, captive deposit base in the state itself, which must deposit all of its revenues in the BND by law. Most state agencies also must deposit there. The BND takes some token individual deposits, but it does not compete with local banks for commercial deposits or loans. Municipal government deposits are generally reserved for local community banks, which are able to use those funds to back loans because the BND provides letters of credit guaranteeing them. The BND also has a massive capital base, with a sizable capital fund totaling $1.059 billion in 2023, along with deposits of $8.7 billion.
Among other costs avoided by the BND are those for fines, penalties and settlements arising from government and civil lawsuits. Since the year 2000, JPM has paid more than $40 billion in total fines and settlements to regulators, enforcement agencies and lawsuits related to anti-competitive practices, securities abuses and other violations; and it is still facing several hundred open legal cases.
The State's Deposits Are Safer in Its Own Bank
The BND is not only more profitable but is safer than JPM. In fact federal data show that JPM is the most systemically risky bank in the country. The BND, by contrast, has also been called the nation's safest bank. Its stock cannot be short-sold, since it is not publicly traded; the bank cannot go bankrupt, because all of the state's revenues are deposited in it by law; and it will not suffer a run, since the state would not "run" on itself.
Compare JP Morgan Chase, which has over $1 trillion in uninsured deposits, the type most likely to be withdrawn in a crisis. In 2023, the FDIC insurance fund had a balance of only $116.1 billion – only 5% of JPM's total deposits of $2.38 trillion. JPM also had major counterparty risk in the derivatives market, with $61 trillion in total derivatives or $628 billion in netted derivatives. That's five times those of Credit Suisse, a SIFI (Systemically Important Financial Institution) which went insolvent in 2023.
Not just the Bank of North Dakota but North Dakota's local banks are very safe, aided by the BND with liquidity, capitalization, regulation, loan guarantees, and other banker's bank services. No local North Dakota banks have been in trouble during this century, but if they were to suffer a bank run, the BND would be there to help. According to its former CEO Eric Hardmeyer, the BND has a pre-approved fed funds line set up with every bank in the state; and if that is insufficient for liquidity, the BND can simply buy loans from a troubled local bank as needed.
Today state governments typically deposit their revenues in giant Wall Street banks designated as SIFIs, including JPM; but those banks are riskier than they appear. They "insure" their capital with interconnected derivatives backed by collateral that has been “rehypothecated” (pledged or re-used several times over). The Financial Stability Board in Basel has declared that practice to be risky, "as highlighted during the 2007-09 global financial crisis." The five largest Wall Street depository banks hold $223 trillion in derivatives — called a "ticking time bomb" by the Bank for International Settlements — and they have a combined half trillion dollars in commercial real estate loans, also very risky in the current financial environment.
Under the Dodd Frank Act of 2010, a SIFI that goes bankrupt will not be bailed out by the government but will be recapitalized through "bail ins," meaning the banks are to "bail in" or extract capital from their creditors. That includes their "secured" and "collateralized" depositors, including state and local governments. Under the Bankruptcy Act of 2005 and Uniform Commercial Code Secs. 8 and 9, derivative and repo claims have seniority over all others and could easily wipe out all of the capital of a SIFI, including the "collateralized" deposits of state and local governments. The details are complicated, but the threat is real and imminent. See fuller discussions here and here, David Rodgers Webb's The Great Taking, and Chris Martenson's series drilling down into the obscure legalese of the enabling legislation, concluding here.
Even if the SIFIs remain solvent, they are not using state deposits and investments for the benefit of the state from which they come, and often they are betting against the public interest. The BND, on the other hand, is mandated to use its revenues for the benefit of the North Dakota public. Other states would do well to follow North Dakota's lead.
Please go to Web of Debt to continue reading.
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