Freeze on New S&Ls; Deprives Savers, Communities

Many new savings and loan associations have drifted from the traditional role of providing home financing. Some have dabbled unsuccessfully in new areas opened up to them by financial deregulation and have ended up as dismal failures.

As a result, state and federal regulators are understandably turned off by groups applying to establish new S&Ls.; Federal regulators currently maintain a moratorium on insurance of accounts for new California S&Ls.; And the California S&L; commissioner has denied applications for 20 new state S&Ls; during the past 90 days.

The attitude of regulators toward new S&L; applicants is unsurprising. Troubled S&Ls; have kept the government watchdogs busy, even as regulators have been beset with limited staffs and budgets and with a critical need for more-experienced and better-trained examiners, appraisers and supervisors.

Moreover, new S&Ls; are easy targets. They have absolutely no political clout, no heavy hitters, no constituency.

But there is a need for some new S&Ls;, especially ones that are willing to provide community-oriented financial services. How many times do we have to learn that big is not necessarily perfect, efficient or even smart?

Most S&Ls; provide lackluster service. If the number of S&Ls; were to double overnight, service undoubtedly would be faster and friendlier. A prohibition on new S&Ls; is bound to result in fewer innovative services and an increase in basic service charges.

There is generally strong grass-roots support for newly opened, locally oriented S&Ls.; Not only do customers want to open savings accounts and want a home loan, they also want a “piece of the pie.” They want to be shareholders in the S&L; with which they’re doing business.

While most locally based S&Ls; disappeared when they were acquired or merged into larger S&Ls;, often at a tidy profit to the owners, the needs of many communities continue to demand special local attention.

Large S&Ls; with 100 offices or more love affluent communities, but they are turning their backs on certain non-affluent communities. Given the mediocre service they offer and the lower level of potential business, these branches may be only marginally profitable. Many are targeted for closure.

New community-oriented S&Ls;, however, make a thriving business under the same circumstances, resulting in new employment, new business, and wide community support.

Record profits reported by the large S&Ls; are an indication of the huge business awaiting new institutions. The industry has made a miraculous recovery since 1982 when deregulation and high interest rates proved so devastating.

Of course, “unsavory elements” should not be allowed to enter the savings and loan business. That is part of the regulators’ screening process.

Fact is, many S&Ls; have been launched by impressive management teams with a reputation for honesty and community involvement. They are staffed by veterans of the business. Many new S&Ls; have been successful because of their self-discipline and adherence to good banking principles.

New S&Ls; are now asked to meet tough financial standards. Recently, the few new California S&Ls; that were allowed to open just before the federal moratorium on account insurance were required by federal regulators to maintain capital at a level twice that mandated for existing S&Ls.; Principal stockholders are required to personally guarantee that high capital level for a three-year period.

The chief executive officer and all senior officers and directors must be approved by regulators, who must provide detailed biographical and financial statements, even fingerprint cards that are said to be used for an FBI check.

New S&Ls; wouldn’t be a burden to the Federal Savings & Loan Insurance Corp. If you added all the deposits of the S&Ls; that opened in the United States in the past three years, you wouldn’t even make a ripple in the insurance fund, low as it is.

The risk of new S&Ls; is minimal while the benefits are substantial and long lasting. Prohibiting new S&Ls; for too long would lead to atrophy in the S&L; business at a time when deregulation makes it even more important to assure the highest level of service to the public.