A bond bank is a type of government agency that purchases municipal bonds from cities, towns and other types of local government entities. Typically, this type of organization will utilize the proceeds generated by those bonds to serve as the underlying support for their own bond issues, allowing investors to purchase those issues at competitive rates and enjoy equitable returns as a result. This approach can benefit both the local entities that released a bond issue as a means of raising funds for a project, since the bank pays for the issues up front. At the same time, the bank makes use of those holdings to create issues that in turn generate more money for the bank to use in its operations.
One of the easiest ways to understand how a bond bank functions is to consider a local school district that has crafted a bond issue as a means of funding the expansion of one of the schools in the district. Rather than selling bonds to individual investors, the entire bond issue is sold to a bond bank. The bank tenders the necessary capital to the school district, which in turn can proceed with the expansion project with the money in hand to cover all expenses. Interest and principal are repaid to the bond bank in accordance with the terms of the bond issue, which in turn creates a revenue stream for the bank. While the school district is settling the bond issue, the bank is using that revenue stream to buy other bond issues and likewise sell those issues to investors. When managed properly, all parties involved benefit from the arrangement, with the bond bank making a modest profit off each transaction.
Along with school districts, a bond bank may work with a number of different types of agencies and jurisdictions that create and offer bond issues for sale. This includes state-level agencies such as highway departments, education departments, or even departments of tourism. Locally, the bond bank may work with counties to improve roadways or sewage systems in rural areas, or with cities and towns to improve existing public services or to fund the launching of new public services.
In the United States, a bond bank may be established at state level. Depending on the governmental structure of the state, the bank may be part of the overall revenue agency for the jurisdiction, or set up as a separate entity under the direction of the governor, a state comptroller, or a designated financial professional who is part of the state government structure. Most states will have specific regulations that the bank must comply with in order to operate. Like any type of banking institution, a bond bank must comply with both federal and state banking laws and is subject to various types of censure regulations are not observed.
