Pros, cons of state bank addressed at hearing

The state’s bankers are concerned with Gov. Phil Murphy’s state bank idea, saying it is an unnecessary move that could disrupt the local network of banks.

The idea was discussed at the Assembly Financial Institutions and Insurance Committee hearing Monday — the first such legislative discussion of what was one of Murphy’s campaign issues.

Assemblyman John McKeon (D-Madison) said the idea of a state bank in New Jersey is rife with challenges, but acknowledged that the state needs to do something to think outside the box and boost its economy.

Though the Assembly has yet to produce a bill, testimony Monday relied largely on public comments made by Murphy and a state Senate bill recently introduced by Sens. Nia Gill (D-Montclair) and Richard Codey (D-Livingston).

The bill calls for a 13-member board and allows the bank to help with leasing and selling land, sell federal funds, receive deposits from public sources and other financial institutions, and make transportation project loans, education loans and small business loans.

In recent months, experts have discussed the idea of the bank in comparison with city banks around the country, and in comparison with the precedent set in 1919 with the state bank in North Dakota.

Michael Affuso, executive vice president of the New Jersey Bankers Association, said that the comparison to North Dakota is an unfair one, since North Dakota’s bank was aimed at serving farmers in a state with a much more spread out population.

That is nothing compared to the densely populated state of New Jersey, even with its few banking deserts.

“According to government data, the state bank is unnecessary and will not do what advocates believe it will do,” Affuso said.

Affuso cited a 2011 paper from the Federal Reserve Bank of Boston, which addressed the idea of a state bank that was being floated in Massachusetts.

The report concluded that even the North Dakota bank doesn’t operate independently, but rather as a partner to the local network of banks.

McKeon suggested that a partnership would be a better option for the state anyway.

Of the criticisms that have helped garner support for the state bank idea, Affuso said two of three are untrue, and that the solution to the third — offshore holding of state money — can be determined with the local banks.

According to the state budget, $1.5 billion of New Jersey money is invested in foreign banks.

The state treasurer could be directed to break up that total into blocks that local banks could bid on, Affuso said.

The size of the blocks could vary, making it easier for smaller banks to also get a piece of the pie.

Two of the other criticisms are that local banks, despite holding municipal deposits (which accrue interest), don’t invest locally, and that the banks aren’t doing a good job of lending to low-income customers and small businesses.

Municipal banking represents 20 percent of local bank business, according to Affuso.

He said the criticisms of local benefit are not accurate, based on FDIC data, which has shown lending from local banks consistently trends upwards.

When it comes to small business lending, Affuso agreed to criticisms that some institutions are not taking advantage of the U.S. Small Business Administration programs.

“SBA lending is a very small piece of small business lending, total,” he said. “If you only look at SBA, you get an unclear picture of what’s going on.”

Of the 140 banks that exist in New Jersey, 95 are represented by NJ Bankers.

New Jersey Citizen Action is one of the proponents of the state bank. It has been working on laying the groundwork for a state bank since 2016.

Executive Director Phyllis Salowe-Kaye said the group has a vision that would not disrupt existing financial institutions in the state, but, rather, work with them.

The group has met with Murphy and had a number of discussions about the idea, and will be releasing a white paper from the last two years of researching the potential benefits of a state bank in New Jersey from a national as well as regional perspective, she said.

Salowe-Kaye said that relying on a volatile Wall Street and slow responses from Washington, D.C., especially after Hurricane Sandy, were not smart decisions for the state. Especially at a time when the state is faced with a crumbling infrastructure and an ongoing battle of who should be footing the bill for the Gateway project, she said.

“New Jersey is in the throes of tough times and we will continue to face enormous economic challenges in the foreseeable future,” she said.

NJ Citizen Action brought together a number of financial experts, nonprofits including the NAACP and Latino Action Network, and consultants to help develop a strong basis and grow support for the state bank idea.

The white paper will address key stakeholders, including government, the banking industry and advocates, Salowe-Kaye said.

“None of us are under the illusion that the state-owned public bank would be a panacea,” she said. “We have an extraordinary opportunity to work here at the state level and become a forward-thinking government in New Jersey.”

The hearing Monday is one of many planned as legislators look to develop practical policy for the governor’s vision.