The ‘Secret Sauce’?: Understanding the Success of the State Bank of North Dakota

Interest in the United States in creating banks owned and operated by the state has increased dramatically in recent years. In 2023 or 2024, legislation was introduced in eight states to start a bank. In 2019, similar legislation was enacted in California for the creation of municipal banks. Chicago’s new mayor is evaluating plans for a city bank. An important development in favor of a state bank is the long and impressive record of the only state bank in the United States, the Bank of North Dakota (BND). It has been in existence for over a century and has been very profitable in recent years. On the surface, these facts present a strong case for starting a state bank addressing the financing needs for infrastructure, education, and underserved communities.To gain a better understanding of BND’s success and the possibilities for a successful state bank, this paper compares the financial performance of the BND to that of national commercial banks. Claims by the BND as to the sources of its success (low-cost deposits and lending acuity) are evaluated and rejected by the data. Instead, the BND’s abnormal profitability is explained fully by the exceptional growth in the North Dakota economy (largely the fracking boom), its tax-free status, and shifting risk to the State of North Dakota. The former factor is not portable to other states; the latter two factors are merely taxpayer subsidies. There is no ‘secret sauce.’The BND is a well-run bank that contributes to the North Dakota economy and, after suitable adjustments, earns normal profits. Its organization as a state bank does not create any unique efficiencies, and the BND does not provide support for a special role for a state bank. Absent efficiencies, a state bank might be interpreted as a quasi-fiscal authority that is outside the control of the legislature and avoids balanced budget restrictions operational in North Dakota and 48 other states.