Explain this particular sentence...Because a public bank is not a for-profit business, it can offer lower interest rates than private options, saving billions of dollars over time..
Where are the "savings"? This money was originally earning interest, not costing money.
And of course they need to incorporate the default rate on their loans, which would lower the overall return.
And looking at the Bank of North Dakota, it indeed looks like they don't save any money at all.
The vast majority of funding for the Bank of North Dakota comes from deposits resulting from tax and fee collections. The bank essentially offers below market rate loans by paying lower deposit rates back to the State, ultimately costing the taxpayer.[1]
I look at it this way:
Scenario A: city deposits their funds in a private bank where the funds earn a 1% interest rate. The private bank lends funds at 5% interest. The bank keeps the 4% difference.
Scenario B: city keeps their funds in a public bank. The public bank pays out interest at 2% and lends at 4%. Now the city is keeping the 2% difference with the added benefit of total control over its funds.
Hang on.. is that the rate the bank is lending at, or their yield, including any losses from things like defaults and costs?
> the added benefit of total control over its funds.
Actually, not quite, because one no longer has control of any funds that were lent out.
If a disproportionate number of borrowers all miss a payment during a particular month (even if the don't outright default and catch up next month), the city/bank will have to borrow those funds from the Fed. This can also happen if the city isn't the only depositor and there's a "run" on the bank. That borrowing, short-term though it may be, adds cost, and the rate is (occasionally) variable, unlike, say, many mortgages.
The point is, understanding interest rate spread is simple enough, but the reality (especially with fractional-reserve banking, which is another can of worms) is far more complicated. What seems obvious when explained with the simple model isn't actually so.
As the grandparent poster just said, it’s the spread that means this might work.
Say a current bank gives you 0.1% interest on your deposit and loans that money out at 4.5%. A new bank could pay 2% interest to the depositor and loan the money out at 3.5%. Thus the depositor gets 20x more interest, and the lender pays less.
Where are the "savings"? This money was originally earning interest, not costing money.
And of course they need to incorporate the default rate on their loans, which would lower the overall return.
Overall, a very hand wavy plan.