By 2016, American Samoa was desperate. Its economy and population had been shrinking for years and hopes of a turnaround fell as the verdant volcanic islands in the South Pacific withered into banking desert.
The Bank of Hawaii announced in 2012 it intended to leave the U.S. territory entirely. It agreed to hang on until a successor could be found but scaled back services.
By 2016, officials and consultants say, no new loans had been issued for four or five years. Consumers who couldn’t afford to travel to Hawaii or the mainland resorted to backyard lenders and paid usurious rates.
In their desperation, the islanders found inspiration in early frontiersman and prairie progressives who had likewise found themselves on the margins of the American economy.
The islanders are now putting the finishing touches on the first new U.S. public bank in almost a century. The development is being closely watched by other isolated regions hoping to kick-start economic renewal — and by the legal marijuana industry whose operators have struggled to enter the federal banking system.
Public banks were once relatively common in the U.S. but today exist only in North Dakota. Typically, state and local governments own the banks and deposit their revenue there. The banks then offer loans, partnerships and services to boost the local economy and hopefully turn a profit.
No loans but plenty of sharks
The seven islands of American Samoa lie about six hours southwest of Honolulu by air. The territory is slightly larger than the District of Columbia and home to 60,000 American nationals. Its largest export is processed tuna under the Chicken of the Sea and StarKist brands.
If American Samoa were a state, it would have had the slowest GDP growth of any since the recession. If it were one of the 3,000-plus counties in the U.S., its average annual earnings would place it near the absolute bottom of the list, according to Commerce Department figures.
It would be an oversimplification to trace all the islands’ woes to a lack of credit and banking services, but it’s a convenient place to start.
Bankers desert the island
The Bank of Hawaii said “geographic isolation” drove it to wind up its operations after nearly 50 years in American Samoa. Australia’s ANZ bank still has a small presence but offers limited services.
To understand why banks are scaling back and why it causes American Samoa such pain, imagine a basic small-town bank. It takes in paychecks and other deposits from locals and uses them as reserves when lending to their neighbors, who then invest in property and businesses.
That model breaks down when banks span states or countries. The big banks with tiny branches in American Samoa are happy to take deposits from locals, but when it comes to lending that money back out, it makes cold, actuarial sense to focus on bigger, safer clients elsewhere.
Federal regulators have been struggling with this problem for decades. But variations have been present since soon after the country's birth — and states have been taking matters into their own hands for almost as long.
The first wave of U.S. public banks arrived in the 1830s, when Andrew Jackson vetoed a bill to recharter the Second Bank of the United States, thrusting residents of frontier states like Indiana, Illinois and Alabama into the ranks of the unbanked. In desperation, about half of the states in existence founded public banks, some jointly owned by the private sector.
Almost all had folded by 1918, when high plains farmers still chafing at the economic stranglehold of Big Railroad and the high interest rates charged by Minneapolis and Chicago lenders voted the Nonpartisan League into full control of North Dakota's government.
Led by former socialist A.C. Townley, League politicians passed myriad populist measures, but their most prominent legacy is the public Bank of North Dakota. It opened in 1919 and lent money to farmers at lower rates and deposited cash in small banks statewide.
When your Hail Mary is a bank shot
Drew Roberts, general partner at the Utah financial services consulting firm Burton, Roberts and Meredith, first heard of American Samoa’s quest for a banking solution in 2013.
Roberts worked with government and business leaders on the islands to charter a new bank and — when that fell through — helped devise a scheme that hadn’t worked in a century.
After researching BND, leaders were convinced a public bank could work in American Samoa. Roberts started looking for retired folks who had started and run banks successfully, and who had experience (and connections) with federal regulators.
When former Celtic Bank president and chief executive Phil Ware heard their pitch to help start a government-owned bank on a tropical archipelago, he thought the consultants were crazy.
“[But] I made a few calls and found out the great need that there is down there,” said Ware, who first encountered Samoan language and culture on his mission for the Church of Jesus Christ of Latter-day Saints in New Zealand. “We need to help them get banking. How do you operate an economy without a bank?”
When Roberts first arrived in the territory and drove past an ANZ branch, he saw cars parked at the drive-through and a line of customers stretching far out the door.
“The first thing we thought was that it was a run on the bank,” Roberts said. Only it wasn’t an old-school bank run. It was just payday, when everybody scrambled to turn their paychecks into cash before the bank ran out of bills.
American Samoans, Roberts and Ware found, had no access to credit cards, loans or the other financial tools that other Americans take for granted. Islanders living on the mainland faced wire-transfer fees over $150 to send money home.
When Ware agreed to become the first chief executive of the Territorial Bank of American Samoa, he thought it would be a “piece of cake.”
“I had no idea,” he says now.
The Territorial Bank of American Samoa (TBAS) served its first customers in October 2016 out of a leased office handed over by the Bank of Hawaii.
It was soon lending money and opening accounts. But it couldn’t offer basic services such as direct deposits or bank transfers until the Federal Reserve signed off on its routing number.
That usually takes a couple of weeks. This time, it took a couple of years. Few federal regulators had approved a new bank in a U.S. territory before, let alone one owned by a territorial government. They fretted about TBAS oversight and its political independence.
The team behind the public bank pressed their case all the way up to the vice president's office, but it took a meeting with the freshly appointed Federal Reserve vice chair for supervision, Randal Quarles, who came from the Utah-based Cynosure Group, to break the logjam.
“He understood completely,” Roberts said. “All of a sudden, we get a call [from regulators] saying ‘we got the green light, let’s get this thing done.’”
TBAS now has a routing number and can offer cash transfers to the mainland, issue checks and provide card-swiping machines to merchants.
As with BND, the money customers entrust to TBAS is not guaranteed by the Federal Deposit Insurance Corporation. Instead, it’s backed by the full faith and credit of the territory of American Samoa.
The bank’s architects eventually plan to gain FDIC insurance and privatize the bank, although no timetable has been set.
Exporting more than just tuna
After TBAS, it appears unlikely the United States will have to wait another century to get its next public bank. The post-recession anti-bank backlash continues, and Sen. Bernie Sanders (I-Vt.), New Jersey Gov. Phil Murphy (D) and others have pushed for public banks to help revive marginal rural and urban areas.
Community banks are vanishing. Adjusted for inflation, the value of small-business loans in rural U.S. communities is half of what it was in 2004, according to a December 2017 analysis by the Wall Street Journal’s Coulter Jones and Ruth Simon.
As banks consolidate, lending shifts to safe, wealthy urban markets and capital flows away from small towns. It accelerates their economic decline, making them even less attractive to big banks, and the cycle intensifies.
North Dakota has avoided the worst of this cycle. The rural state has more banks per capita than any other and, according to FDIC data analyzed by the nonprofit Institute for Local Self Reliance, lends to small businesses at more than four times the national rate.
The public bank's partnerships help cushion private-sector banks against downturns and other economic shocks. Those partnerships also avoid questions of inefficiency and corruption that have dogged public banks such as the state-run Banco do Brasil, said Middle Tennessee State University lecturer Walker Todd, a former lawyer for the New York and Cleveland Feds.
“If you’re going to have a public bank, it better look like the Bank of North Dakota,” Todd said. “Once you start making retail loans you’re going to start looking like [Banco do Brasil].”
The vast majority of public-bank campaigns have yet to yield results, but public banking remains one of the few practical options for chartering a bank outside the watchful eye of the FDIC.
And it might not lead to undue risk. Ronnie Phillips, economics professor emeritus at Colorado State University, said that, with proper safeguards a public bank could effectively be guaranteed by steady deposits from its government.
“It’s very doable, especially these days, to have a publicly chartered bank,” Phillips said. “You don’t have to really worry about the safety and security of it because it’s a state bank.”
And you also don’t have to worry about FDIC oversight. Which might be useful if your state has legalized marijuana and the attorney general is Jeff Sessions. It doesn't bypass the Fed’s role, but it’s a step toward local independence.
Because it’s a Schedule One drug, federal regulators view cannabis-related deposits and transfers as drug money. That has forced most of the legal marijuana industry to do their business in cash, which — much as it has in American Samoa — limits growth, increases operating costs and enables tax evasion.
The industry is trapped on the margins. Large banks don’t think it’s worth the risk and federal regulators view it with mistrust. So, like frontier states in 1833, North Dakota in 1919 and American Samoa today, officials in California, Massachusetts, Washington state and elsewhere are looking into creating their own public banks.