As politicians debate the pros and cons of state-owned banks, a recent skirmish involving the nation's only operating model is exposing potential flaws in the system.

The state-owned Bank of North Dakota has drawn criticism from bankers for paying lower assessment fees than other state-chartered banks. The bank will start paying higher fees after its next examination, but the higher cost may have been the harm to its reputation.

Even Robert Entringer, North Dakota's banking commissioner, admits that the complaints have merit. "Our board members simply want the [bank's] fees set on the same scale as what they pay," he says.

The bank has paid a flat fee — usually $50,000 — to the North Dakota Department of Financial Institutions for assessments. State officials will soon replace that fee with a formula based on a percentage of the bank's total assets, though an effective date has not been set. Still, Entringer says the bank's fees will likely remain below those that other banks pay for state-conducted assessments.

Some advocacy groups have touted the $5.9 billion-asset bank as a model for other states that want to form government-owned banks, mostly to reduce a reliance on the nation's giant banks. States such as Maine, Vermont and Washington have taken steps this year to create their own banks.

Not everyone is thrilled with the idea. Camden Fine, chief executive of the Independent Community Bankers of America, has described state-owned banks as "socialistic."

Some backers even admit that the Bank of North Dakota is in an awkward position in relation to other banks, partnering with them on some occasions and competing against them on others. The line between the state-owned bank and other agencies is also somewhat blurry.

At a September meeting, Linda Beall, a board member for the Department of Financial Institutions, complained that the bank's assessment fee had remained flat while fees had risen for other banks, according to the meeting's minutes. She complained that the $45 hourly rate that the bank pays for exams was "way less" than it would pay an outside auditor.

Beall, an executive at Peoples State Bank of Velva, declined to comment further when contacted by American Banker. Two other board members — Kim Larson at First State Bank of North Dakota in Arthur and Lorren Henke at Security State Bank in Wishek — had questioned the state bank's fees during previous meetings. Larson and Henke did not return calls seeking comment. Eric Hardmeyer, Bank of North Dakota's president and CEO, also did not return calls seeking comment.

The Department of Financial Institutions can make recommendations for policy changes at the bank, but it lacks the legal power to enforce changes. "I don't have the same regulatory authority over the state bank as over other institutions," Entringer says.

The bank could easily compensate state taxpayers for its lower assessment fees, says Marc Armstrong of the Public Banking Institute, which advocates for the creation of state-owned banks. "They could either reduce the amount of profits it returns to the state or pass on these fees to its partners," he says.

Despite the latest dust-up, some bankers still support the state-owned bank.

"They're a tremendous asset for all North Dakota banks," says Craig Larson, CEO of Starion Bancorp. in Bismarck. "They've got a raft of programs to help us. The vast majority of banks in the state have a relationship with the Bank of North Dakota."

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