Interstate Expansion by Federal S&Ls; Gets Boost From U.S. Plan

The Federal Home Loan Bank Board proposed new rules Friday that would greatly increase the ability of federally chartered savings and loan associations to expand across state lines. The proposals would give a federally chartered S&L; the right to acquire healthy financial institutions in other states in exchange for rescuing a failing thrift.

Industry analysts and observers said that the rules, if adopted, could spark a boom in mergers and acquisitions as well as save money for the troubled Federal Savings and Loan Insurance Corp., the industry deposit insurance agency known as the FSLIC. The proposals also may represent another step toward unfettered branching nationwide for all savings and loans.

“This is a major, major development,” said Michael Roster, a banking attorney for the Los Angeles law firm of McKenna, Connor & Cuneo.

In California, the new proposals should get a warm reception by large, expansion-minded S&Ls; but may receive a chilly greeting from smaller financial institutions worried about unwanted takeovers. The bank board said the industry has 30 days to give their opinions on the rules.

“I’m most anxious to see interstate banking expanded,” said James Montgomery, chairman of Great Western Financial Corp. in Beverly Hills, the nation’s third-largest savings and loan holding company. “We’re very much in favor of that.”

The bank board, the nation’s principal regulatory agency for S&Ls;, has previously allowed interstate branching only when a strong thrift rescues a failing one. Despite the limitations, the current rules have allowed significant interstate expansion because hundreds of savings and loans have failed in the last five years.

Some of California’s largest thrifts--such as Home Savings of America, First Nationwide Savings and Glendale Federal Savings--have expanded all over the country by buying failing financial institutions. The latest proposals, however, stipulate that healthy S&Ls; willing to rescue failing thrifts in other states may then bargain to expand freely into several other states, preferably ones nearby.

Thus, a Florida-based thrift that agrees to buy a failing S&L; in Texas, for example, may then get the FSLIC’s permission to buy healthy S&Ls; in New Mexico, Arizona and California. Holding out that kind of incentive is intended to draw more bidders for failing S&Ls;, which in turn would bring the FSLIC a better price the failing associations, Roster said.

The FSLIC, an arm of the bank board, arranges mergers and liquidates loans when an S&L; fails. The rash of thrift failures this year, particularly in California and Texas, has severely strained the fund’s resources.

“I think if FSLIC is aggressive and creative (in using this new power), it could save hundreds of millions of dollars a year,” said Washington lawyer Thomas Vartanian, a former general counsel of the bank board.

A second part of the bank board’s proposed new rules would extend to federally chartered savings and loans the same regional interstate expansion powers now held by commercial banks and state-chartered savings and loans in some states.

That section of the rules is intended to take advantage of the U.S. Supreme Court decision last summer that upheld the right of states to form so-called regional compacts for banks and savings and loans. The compacts allow financial institutions to expand across state lines in regions where special legislation has been approved for the purpose.

The biggest compacts have formed in the Northeast and Southeast as a means of keeping out large outside competitors.

California doesn’t have one yet, but a bill pending in the Legislature would permit interstate branching by banks and savings and loans in a regional compact of nine Western states.