Pot banking: What are they smoking?
Industry faces financial conundrum
What do you think about a bank focusing just on one industry? Is this a good idea or a recipe for disaster? If you were in this industry, would you put your money in a bank catering specifically to your industry?
Imagine you were a wine producer and only one bank was allowed to take your deposits and provide other banking services; what would happen if there was a bad harvest? Would a bank focused just on the industry be able to weather the downturn? This is essentially what is facing in the marijuana industry.
Why is the marijuana industry so unique? Marijuana is still illegal under federal law. Attorney General Eric Holder has sent out various memos that basically stated the federal government will not enforce federal law against marijuana operators except under certain circumstances. The direction from the attorney general has been in the form of guidance; no laws have been changed.
As a result of the federal laws and banks lacking clear guidance (in the form of a law), traditional banks will not openly embrace the marijuana industry. A few weeks ago, MBank (a West Coast marijuana-focused bank) announced a new venture into Colorado. A week later, Mbank stated it would not be able to offer accounts in Colorado. Many speculate this occurred as a result of pressure from the FDIC and other regulators.
Last year, the Colorado Legislature passed a bill that would authorize a marijuana credit union/ CO-OP model for banking. The new bank would focus on the marijuana industry and be able to take deposits, provide merchant services, etc. This was seen as the best solution to help the burgeoning industry; recent reports from the Colorado Department of Revenue indicate taxes on the marijuana industry generate more than $8 million a month. Commissioner of Financial Services Chris Myklebust was charged with making the credit union a reality.
A new Colorado marijuana credit union was soon conceived and created to finally bank the industry. The news was met with great fanfare and even greater expectations to finally have a long overdue solution to the cash model currently in place.
The marijuana credit union has yet to open its doors – and for good reason. The first issue facing the new credit union is lack of depository insurance. A bank must have deposit insurance to make sure deposits are safe.
Fast forward to 2015, and the new marijuana credit union is trying to get off the ground. This credit union has applied for depository insurance with the NCUA (National Credit Union Association, which is the credit union version of the FDIC). I consider it highly unlikely it will be approved (why would the NCUA want to approve a bank focused on a new industry and expose other banks to this risk?). The alternative floated is to get private depository insurance.
Would you put your money in a bank with private deposit insurance (not insured by the FDIC or NCUA)? What happens when there is another banking crisis like the one we just experienced? Assume that fourth corner is able to get private insurance. This insurance company likely only insures a handful of banks. When the next crisis arrives, the private insurers risk is spread out over a small number of institutions as opposed to the FDIC or NCUA that has several thousand institutions it insurers. The private insurer would be unlikely to make good on all of its promises to make sure depositors do not lose any money. It would be ill-advised to put funds into a privately insured bank; cash under a mattress would be a safer bet. Although a depositor would not fare well during a bank crisis insured by a private insurer, there are bigger issues for the fourth corner.
Marijuana will, over time, become an agricultural commodity. It will be cultivated just like tobacco and be subject to price variations just like any other commodity. Would anyone in their right mind ever think of creating a bank just for tobacco farmers or corn farmers? The answer is a resounding no! Why would one bank want to take on the risk by narrowing their focus and eliminating their diverse clientele? The first and most crucial lesson in any basic finance class is: Diversity substantially reduces risk. Unfortunately, the Legislature's pushing a single-commodity credit union missed this lesson somewhere down the line.