10:30 am - Wednesday June 28, 2017

GenNex Public Banking System in USA

The thought for this post occurred thanks to the article on “Economic struggles spur calls for consideration of public banking” by Tracy Loew in ‘USA Today’ recently.

More and more states in the USA are joining the bandwagon and are in a hurry to introduce legislation to create public banking system the way North Dakota has successfully created and running the nation’s only state-run bank.

I am forced to revisit the Indian experience some four decades ago when Madam Gandhi fresh from authoring and presenting a paper on ‘Stray thoughts on Bank Nationalization’ in her party’s annual conference, took next the courageous step to nationalize 20 leading private banks in India. In a way this stray paper acted as a catalyst to the nationalization of banks in India.

Why this Indian story retold after 40 years now?

There is a valid reason. At the time of nationalization of banks in India, everyone in the world called this step a retrograde. Self proclaimed modern economists of the world then, predicted that India would never ever progress in its development journey as this has taken away the private entrepreneurship.

However, everyone including those modern economists witnessed subsequently the massive transformation of modern India due to the nationalization of banks. This nationalization became overnight the only tool to facilitate the development of Indian economy.

Orderly credit delivery was successfully achieved. It had paid rich dividends during the last four decades. The nationalized banks became the largest employer in the organized sector in India providing employment to a large number of educated unemployed. Bank branches were opened in the then neglected rural areas. Financial inclusion was attempted and succeeded even though it was not proclaimed.

Now let us look at the recent happenings in the international financial markets. Though the reasons for the melt down of the markets and the massive erosion of private wealth of investors are well known, the respective governments and regulators have recognized that confidence has to be shored up in the financial system.

It has taken about forty years for us to come to the realization that financial markets when left to the free market enterprise may not always ensure the stability of the financial system and only the governments can provide much needed confidence, strength and support to the financial system in times of adversity and to ensure they are safe, solid and strong.

One may need to consider and provide for the following in the ‘GenNext’ Public Banking System

  • Global Approach to its regulation
  • Strike a balance between risk and return
  • Appropriate remuneration arrangements
  • Stipulating deferred pay and period of deferral
  • Stringent conditionality for prudential capital
  • Enunciation of Financial inclusion

In short, supervision of such public banking system has to be radically different in almost every aspect – with more resources, better skills, a more intensive approach and far greater focus on key prudential issues of capital, liquidity and asset quality.

Going by the Indian experience thus far, one can hope for public banking system to address and avoid bank failure, tax payer losses and wider economic harm (prevalent in extant system) with their management style, governance and culture.

Safety, security and strength of such a public banking system will be a public concern, not just a concern for shareholders.

One may agree!

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