A recent analysis of Costa Rica’s banking system by Ellen Brown, renowned author of works such as The Web of Debt and The Public Bank Solution: From Austerity to Prosperity, has been published and referenced in several online venues such as OpEdNews, EconIntersect, Counter Punch, Washington’s Blog, Global Research (Canada), and others. Brown presides over the Public Banking Institute, and she comes across as supporter and admirer of the state-owned banking system of Costa Rica, which she partially compares to the Bank of North Dakota in the United States. Is this a valid comparison?
Brown states that people from Costa Rica are surprised to learn about how the Bank of North Dakota (BND) is the only one in the U.S. that operates in a manner similar to that of Banco Nacional, Banco de Costa Rica, Bancredito (Banco de Credito Agricola de Cartago), and Banco Popular (although this one is a bit different). Let’s see if the similarities add up:
The State of North Dakota is, without a doubt, the ownership entity in control of BND. You could almost claim that BND acts as North Dakota’s Central Bank; in this sense, BND has no competitors. The state-owned banks of Costa Rica are very competitive against each other. They generally don’t have to worry about private banks such as BAC or Davivienda (formerly HSBC), since those entities only hold about 20 percent of all deposits.
Brown describes, in essence, how BND works:
The BND operates like other banks; it makes loans roughly equal to its deposits (which mainly come from the state and state agencies). So in effect it doubles its money, since the deposits are still there in the bank available for withdrawal as needed, though loaned out.
If [another state] has $40 billion in its own capital — that is, capital available to invest in a bank (as opposed to deposits) — it could be leveraged at about 10 to 1 in loans = $400 billion in loans. Deposits would be needed to clear the checks, but again they can be borrowed if not immediately available in the bank. They can be borrowed from other banks or the money market or the Federal Reserve or the Federal Home Loan Bank (the BND uses the latter). Conservative banking principles say not to get too far out of line though; 1 to 1 is still considered prudent.
The capital funds of Costa Rica’s state-owned banks, meaning the difference between its deposits and loans made, are owned by the government. This, in turn, allows the banks to insure deposits to a certain extent. Brown cites information that claims that none of the state-owned banks of Costa Rica have failed since their inception in the early 1980s as a cushion against the Latin American debt crisis. This is almost correct; one state-owned bank failed due to malfeasance, corruption and casino-style investing that would rival the Barings Bank and JPMorgan’s London Whale scandals. The government fully absorbed that loss; if we set this failure aside, the other state-owned banks have been remarkably stable for longer than three decades.
BND and the state-owned banks of Costa Rica are similar in the sense that they guarantee certain finance projects such as educational loans, municipal bonds, community improvement loans, etc. BND is more of a development bank than a retail bank, but Costa Rica’s state-owned banks serve both functions. In 2009, BND reported record profits as banks all over the U.S. failed and accepted bailout funds. As the Great American Recession and the European Debt Crisis unfolded, state-owned banks in Costa Rica enjoyed stability. Like BND, Banco Nacional et al stand ready to make loans to community development projects at the regional and community levels.
What Brown definitely gets correct with regard to BND and Costa Rica’s state banking systems is that these institutions have not succumbed to privatization or intervention from the International Monetary Fund (IMF) or the World Bank. As long as these banks remain committed to truly serving their communities, they will more than likely continue to enjoy stability and keep the aforementioned boogeymen of finance away.