If Phil Murphy gets his way, New Jersey would become the second state to own a bank.
Murphy, a Democrat running to become the state’s governor, doesn’t have history on his side as numerous other efforts to create state-owned banks have failed. Still, it hasn’t deterred the former banker from trying to follow a model pioneered in North Dakota.
Under Murphy’s proposal, New Jersey would deposit government money into the bank, which could then use the funds to invest in areas such as business and infrastructure rather than turn to “costly” Wall Street bond markets.
“It will work in tandem with our community banks and credit unions — serving as a partner not a competitor,” Murphy, a former Goldman Sachs investment banker, touts on his campaign website. “Its profits will be returned to the people of New Jersey as non-tax revenue, not lost in fees to Wall Street.”
Murphy called out an unnamed bank that held more than $1 billion in state deposits but “only made three loans through the federal government’s most popular small-business lending program.” Those actions are “simply unacceptable,” he said on his website.
The proposal is getting the attention of New Jersey bankers.
One of the biggest worries is that a state-run bank could take municipal deposits away from established banks, said John McWeeney, CEO of the New Jersey Bankers Association. The state’s municipal deposit program has almost $20 billion comprised of funds from school districts and local governments.
Community banks hold about $13 billion of those deposits, which are an integral source of liquidity, said McWeeney, who has tried unsuccessfully to meet with representatives for Murphy’s campaign.
A state-run bank “is a big issue to many of our member banks,” McWeeney said.
A lack of details is disconcerting for David Hanrahan, president and CEO of the $475 million-asset Capital Bank in Vineland, N.J., which holds roughly $60 million in government deposits.
“It’s difficult to have a thoughtful position on [the plan] at this point,” Hanrahan said, noting that government funds make up about 15% of his bank’s deposits.
“I can tell you that the idea of government deposits leaving state banks is concerning,” Hanrahan added. “Many of the banks in New Jersey … rely on local government deposits to fund the loans that we make to the residents and businesses and government units in our community.”
Murphy’s opponent, Republican candidate Kim Guadagno, is against the plan.
“After spending 20 years working for Goldman Sachs … Murphy wants to turn State Street into Wall Street by using our tax money to start his own bank,” Guadagno said in a prepared statement.
“Not only would a public bank explode state debt, it would put state revenues for critical services at risk,” Guadagno added. “Let’s call Phil Murphy’s wacky plan for what it is: a backdoor way to give his Wall Street friends jobs and let them make risky investments using our hard-earned tax money.”
Murphy’s plan has backers, including Walt McRee, a former chairman of the Public Banking Institute and co-director of Banking On New Jersey, a group that wants to form a state bank.
A state bank could underwrite community banks’ municipal deposits, getting around restrictions small institutions “have in using government money which has to be collateralized,” McRee said.
Other efforts to form state banks have failed due to interference by big banks, McRee claimed.
The only state with such a bank is North Dakota, which formed its institution nearly a century ago. The $7 billion-asset Bank of North Dakota’s dealings include student loans, commercial lending and agricultural finance.
Citizens in North Dakota can still apply for business and ag loans through a local bank, Eric Hardmeyer, Bank of North Dakota’s president and CEO, said in a recent article he wrote for the Prairie Business Magazine. The state bank steps in to help local banks take on the risk of a loan.
“Every state or community is unique and needs to consider their goals for pursuing a public bank,” Hardmeyer said in a statement to American Banker. “Bank of North Dakota’s model works because of our strong partnership with the local banking and economic development community.”
Efforts elsewhere have lost steam after gaining some popularity after the financial crisis. The number of bills tied to state banks has decreased in recent years, said Heather Morton, a legislative analyst at the National Conference of State Legislatures.
Massachusetts studied the issue before deciding that the move would be too costly, Morton said. While other states conducted studies, there “there really hasn’t been much that has been either adopted or enacted,” she said.
Murphy, if elected, will need to convince a number of groups to sign onto his plan. Support from the banking industry would depend on the plan’s missing details.
“It’s somewhat difficult for us to assess without knowing all the facts,” McWeeney said.