A public bank is a financial institution owned and operated by a government entity rather than by private shareholders, created by legislation to hold public deposits and lend in ways that serve economic development. Because the government itself is the owner, the bank’s priorities look fundamentally different from a commercial bank’s: deposits get channeled back into local lending, infrastructure, and partnerships with community banks instead of into shareholder returns. The Bank of North Dakota, established in 1919, is still the only state-owned general-service bank operating in the United States. It holds roughly $6.1 billion in loans.1Bank of North Dakota. BND Call Report June 2025
Who Owns and Runs a Public Bank
A public bank is created through specific legislation that defines its ownership, mission, and governance. The government entity that creates it is also its sole owner. North Dakota’s enabling statute declares that the state “shall engage in the business of banking” and maintain a system “owned, controlled, and operated by it, under the name of the Bank of North Dakota.”2North Dakota Legislative Branch. North Dakota Century Code Title 6 Chapter 09 That explicit legislative mandate is what separates a public bank from a government-backed lending program or development authority.
Governance runs through a politically accountable body rather than a private board. At the Bank of North Dakota, a three-member Industrial Commission made up of the Governor, the Attorney General, and the Agriculture Commissioner oversees the institution.3Bank of North Dakota. BND Leadership The people running the bank answer to voters. That also means the bank’s strategic direction can shift with elections.
Newer chartering frameworks add more constraints. California’s Assembly Bill 857 requires any local government to complete a viability study before applying for a charter, limits the state banking commissioner to issuing no more than two public bank licenses per calendar year, and caps the total number of authorized public banks at ten.4California Legislative Information. California Assembly Bill 857 The law defines a public bank as a nonprofit corporation wholly owned by a local agency or joint powers authority, a narrower structure than North Dakota’s state-owned model.
What a Public Bank Actually Does
The day-to-day work of a public bank looks nothing like your local branch. Public banks generally do not compete with commercial banks for retail customers. No consumer checking accounts, no credit cards, no ATM networks. They function as wholesale institutions, working behind the scenes to support the financial system that serves the public directly.
The foundation of the operation is the bank’s role as the government’s official depository. North Dakota law requires all state funds, including those of state educational and industrial institutions, to be deposited in the Bank of North Dakota.2North Dakota Legislative Branch. North Dakota Century Code Title 6 Chapter 09 That captive deposit base gives the bank a large, stable pool of capital that doesn’t depend on attracting retail customers or paying competitive interest rates.
Lending is where the public mission becomes concrete. Rather than originating consumer loans directly, a public bank typically participates in loans originated by local community banks and credit unions. A small-town bank without the capital to fund a large agricultural loan on its own can partner with the public bank, which buys a share of the loan and assumes part of the risk. This participation model expands the lending capacity of local institutions without replacing them. The Bank of North Dakota also lends directly for specific programs, including student loans through its DEAL Student Loan program.5Bank of North Dakota. DEAL Student Loan
The lending criteria reflect the public mandate. A public bank can accept lower returns on loans that serve a policy goal, such as affordable housing or small business development in underserved areas. Private banks walk away from those deals because the risk-adjusted return doesn’t satisfy shareholders. A public bank doesn’t have shareholders to satisfy.
Where the Money Comes From and Where the Profits Go
A public bank’s capital structure is unlike anything in commercial banking. Its primary funding comes from the government deposits it holds by law. Because those deposits are mandatory rather than voluntary, the bank doesn’t face the same liquidity risks a commercial bank manages when depositors chase better rates. That stability lets the bank make longer-term lending commitments.
Profits generated by operations flow back to the government owner rather than to private shareholders. The Bank of North Dakota has transferred hundreds of millions of dollars to the state’s general fund over its century of operation, effectively turning government deposits into a revenue-generating asset for taxpayers. The bank also retains a portion of earnings to maintain adequate capitalization.
When additional capital is needed beyond what retained earnings provide, the government owner can make legislative appropriations or back the bank with the state’s full faith and credit. Solvency ultimately rests on the government’s taxing authority rather than on the ability to raise private capital.
How Deposits Are Protected
One of the most common misconceptions about public banks is that they carry standard FDIC insurance. The Bank of North Dakota is not a member of the FDIC. Instead, North Dakota Century Code Section 6-09-10 provides that all BND deposits are guaranteed by the full faith and credit of the State of North Dakota.6Bank of North Dakota. BND Operations The state’s general fund and taxing authority stand behind the deposits rather than the federal insurance fund.
This arrangement works for BND because its depositors are government entities, not individual consumers. The FDIC’s standard coverage insures individual accounts up to $250,000, which matters enormously for personal savings but is a drop in the bucket for government accounts holding tens of millions.7Federal Deposit Insurance Corporation. Deposit Insurance for Accounts Held by Government Depositors A state guarantee backed by taxing authority can provide broader protection for those large balances.
Newer legislation takes a more flexible approach. California’s AB 857 requires public banks to obtain deposit insurance approved by the state banking commissioner, which can be FDIC insurance, private share insurance, or self-insurance where deposits are guaranteed by the bank’s government owners.4California Legislative Information. California Assembly Bill 857
What Public Banks Are Used For
The core value of a public bank is its ability to direct capital toward economic development goals that private markets underserve. Infrastructure financing is one of the clearest applications. When a municipality needs to fund a water treatment plant or a road expansion, a public bank can provide financing at lower cost than the bond market, reducing the interest burden on taxpayers.
The participation loan model has an outsized effect on small business and agricultural lending. By buying portions of loans originated by community banks, the public bank multiplies the lending capacity of local institutions. A community bank whose legal lending limit would otherwise prevent it from funding a large farm equipment purchase can bring in the public bank as a partner and close the deal. Lending decisions stay local. Risk spreads.
Perhaps the most valuable function only becomes visible during a crisis. When private credit markets seize up during recessions, commercial banks pull back lending precisely when businesses need credit most. A public bank can move the other way. During the agricultural credit crisis of the 1980s, the Bank of North Dakota backstopped local bank loans and provided credit to farmers who couldn’t get it elsewhere. It played a similar stabilizing role during the 2008 financial crisis, maintaining credit availability while private lenders retreated. This counter-cyclical lending is something private banks have no incentive to do.
Where Public Banks Exist Today
The Bank of North Dakota remains the only operating state-owned general-service bank in the country. The 1919 North Dakota legislature created it at the urging of the Nonpartisan League, a populist political movement frustrated by out-of-state banks that drained capital from the state’s agricultural economy.8The BND Story. The Birth of the Bank
Public banking legislation has gained traction elsewhere in recent years. California’s AB 857 created the legal framework for local public banks in 2019. New York has introduced bills to authorize both municipal public banks and a state-level public bank. Massachusetts, New Mexico, Oregon, Washington, New Hampshire, and Arizona have all introduced or advanced public banking legislation since 2023. Arizona’s 2024 bill would have created a “Sovereign State Bank of Arizona” modeled directly on BND.
None of these efforts has yet produced an operating public bank. The path from legislation to lending is long: viability studies, chartering, deposit insurance or an alternative protection mechanism, hiring experienced bankers, and building operational infrastructure to manage billions in government deposits.
The Trade-Offs
Public banking is not without serious concerns. The most frequently cited risk is political interference. When elected officials or their appointees control a bank, lending decisions can be influenced by political considerations rather than sound underwriting. Research on government-owned banks internationally has found that political turnover in bank leadership correlates with deteriorating financial performance, and the effect is more pronounced in developing countries than developed ones.
Taxpayer exposure is another concern. Because a public bank’s deposits are guaranteed by the government’s full faith and credit rather than a separate insurance fund, a catastrophic failure would fall directly on taxpayers. The bank operates with what economists call “soft budgetary constraints,” meaning the government owner can inject capital to keep it afloat in ways that would not happen with a private institution. That’s a feature during a crisis and a moral hazard in normal times.
Then there’s the challenge of competing goals. A private bank has one clear objective: profitability. A public bank juggles economic development, affordable lending, counter-cyclical support, and revenue generation for the state treasury. Those goals can conflict. Maximizing profit transfers to the general fund, for instance, directly competes with offering the lowest possible interest rates to borrowers. Managing that tension requires disciplined governance, and not every political environment delivers it consistently over decades.
A government-backed institution lending at below-market rates could also crowd out private lenders or push them to take on riskier loans to compete. BND has largely avoided this by operating as a wholesale partner rather than a retail competitor, but that restraint is a choice its leadership makes, not something the model enforces.