Sources of Revenue:

Special Fund

Legislation creates:

A New Program

Fiscal Note Summary

Effect this measure will have on costs and revenues of state government.

Estimating revenue accruing to state government is problematic under this bill for a number of reasons. First, the amount of state deposits that would flow to the bank from state agencies is unknown. Although the bill requires deposit of public funds into the proposed bank, that requirement is explicitly subject to the contingency of existing law and constitution. Thus the anticipated level of actual deposits into the bank is difficult to determine. Perhaps the Office of the Treasurer would have such data. Second, the interest that the bank would have to pay on those deposits is not set in the bill and would likely fluctuate depending on the overall interest rate environment. Third, the bill requires the bank to make loans at below market rates and on terms, for some of the loan programs, that are favorable to borrowers at the possible detriment of the bank. Fourth, the bank must pay for an independent CPA firm to audit activities. All deposits in the bank are not insured by the FDIC but rather are backed by the state itself and the cost of that liability is difficult to estimate. There would be a substantial increase in costs to state government for a number of reasons. First, the Board of Banking and Financial Institutions (BBFI) is given considerable authority and responsibility for the bank’s operations. Under current law, the BBFI only meets quarterly. We would expect the BBFI to have to meet monthly to fulfill its oversight function and have the required regular meetings with the advisory board. As currently structured, the BBFI has no staff of its own, but rather relies on staff from the Division of Financial Institutions, so increased staff resources from the WVDFI would be required.

Fiscal Note Detail

Effect of Proposal	Fiscal Year
Effect of Proposal	2014 Increase/Decrease (use"-")	2015 Increase/Decrease (use"-")	Fiscal Year (Upon Full Implementation)
1. Estmated Total Cost	0	4,084,000	4,084,000
Personal Services	0	3,452,800	3,452,800
Current Expenses	0	632,000	632,000
Repairs and Alterations	0	0	0
Assets	0	0	0
Other	0	0	0
2. Estimated Total Revenues	0	0	0

Explanation of above estimates (including long-range effect):

Increases are based upon three factors 1.) the need for more meetings of the BBFI; 2.) the added examinations to be performed by the staff of the WVDFI; and 3.) the personnel and overhead costs for the bank itself. Revenues are extremely difficult to estimate since de novo banks typically lose money in the first years of operation and the proposed bank will have to make loans at below market rates at terms that may not be advantageous from the bank’s perspective. The estimates are based upon pro rata current costs for the quarterly BBFI meetings which are assumed to be monthly upon creation of the bank, the cost of oversight and examinations conducted of other banks by the DFI and the assumption that the bank would be a moderately sized bank with approximately $200 million in assets with the typical costs of personnel (approx. 1.7% of assets), premises (approx. .3% of assets) and the cost of an external CPA audit of such a bank.

Memorandum

There is apparently only one state-owned bank in the country, the Bank of North Dakota and therefore it is difficult to determine all policy considerations that must be made. A study commission was authorized by the Massachusetts legislature to evaluate the feasibility of such a bank for that Commonwealth. That commission concluded that there was no compelling rationale to establish such a bank in Massachusetts. Here is a link to that study: http://www.bos.frb.org/economic/neppc/researchreports/2011/rr1102commission.pdf Among the reasons given by the Massachusetts commission for its conclusion were: (1) a state-owned bank would involve significant initial capital investment without a clear need justifying such a commitment; (2) public funds could be exposed to an unacceptably high risk if deposited in a state-owned bank; and (3) Massachusetts already has s network of public agencies, quasi-public agencies, and non-profits which offer various lending programs and services, including lending to support infrastructure. The decision to establish a state-owned bank is significant and should not be taken without a thorough study of both the goals of having such a bank would be as well as the attendant risks involved in taking such a step. Capitalizing the bank would take a significant commitment and pulling public funds out of existing commercial banks could disrupt local economies. Another consideration that should be addressed is the objectivity of the regulator of the bank. Would there be a potential conflict of interest for state agencies, the WVDFI and the BBFI, to oversee a state-owned institution? Any study should also address how best to ensure that the bank itself is insulated from external pressure so that it can adequately analyze lending requests and make prudent underwriting decisions.

Person submitting Fiscal Note: Robert Lamont
Email Address: blamont@wvdob.org