California, New York Bankers Reach Pact on Interstate Acquisitions

California and New York bankers reached agreement this week in their bitter seven-year fight over interstate banking.

The privately negotiated deal, arrived at late Thursday, would open deposit-rich California to out-of-state banks in two steps if California lawmakers concur. Participants said they expect the plan to be presented to the state Legislature in bill form as early as next week.

Beginning next January, the proposed law would allow cross-border bank acquisitions in a nine-state Western region. On Jan. 1, 1990, the arrangement would be extended nationwide.

The historic accord marks California bankers’ apparent surrender to relentless pressure from New York banks, led by giant Citicorp, to open the state to interstate banking. Virtually all California banks have signed off on the deal, according to officials of a state banking trade group. They said they expect the bill to pass with little or no opposition from California bankers.

Fight for Concessions

Consumer advocates, however, said they intend to fight for long-sought concessions for low-income bank customers and for promises that the bulk of California depositors’ funds will be kept within the state’s borders.

California banks support the plan because it gives them the right to acquire banks in neighboring states and at the same time protects them from the big New York banks for three more years. Bankers here were motivated in part by hopes that action on the state level will forestall efforts in Congress to permit full nationwide banking.

The New York banks, despite their impatience to get into California, said they are delighted. They began their effort in 1979, and numerous attempts to push interstate banking bills through the California Legislature have failed because of ardent opposition from state banks and consumer groups.

Four Major N.Y. Banks

“We’re obviously pleased with this development coming from the nation’s most-populous state,” Citicorp, the nation’s largest bank, said in a statement. “It’s a critical step in the move toward full interstate banking. Although we’d hoped the public wouldn’t have to wait so long to see its benefits, we’ll support this bill even if it has to be four years.”

Four major New York banks--Citicorp, Chase Manhattan, Chemical and Marine Midland--were represented at the negotiations that led to the accord. California banks were represented by their trade association, the California Bankers Assn.

The compromise by California bankers represents their bow to the inevitable march toward national banking that began with financial deregulation in the late 1970s and was accelerated by a U.S. Supreme Court decision last June that authorized states to form regional banking compacts.

James Gray, California Bankers Assn. president, led the talks on behalf of the California banks and said the association’s members support the plan. He said interstate banking already has arrived in the form of credit cards, electronic funds transfers and the nationwide financial networks of such giants as Sears, Roebuck & Co. and Merrill Lynch.

New York banks already have a major presence here in the form of offices that lend to businesses and provide specialized financial services. Citicorp owns a California savings and loan company as a result of the 1982 acquisition of the failing Fidelity Savings & Loan of San Francisco. The thrift is now known as Citicorp Savings.

But out-of-state banks are forbidden by state and federal law to acquire or open a full-service bank here. Recent court decisions and passage of legislation based on this week’s accord would reverse those bans.

Breathing Room

Gray said the agreement gives California banks three years of breathing room to prepare themselves for the onslaught from the big New York banks. For three years, bank acquisitions would be limited to the Western region, comprised of California, Washington, Oregon, Idaho, Utah, Nevada, Arizona, Alaska and Hawaii.

“It gives a real impetus to all of us to look at our own marketing strategies and where we want to fit in a growing, competitive marketplace,” said Gray, who also is chief executive of Harbor Bank, a small institution in Long Beach. “It gives a real reason and a time line to decide where we want to be in 1990. We have to determine if we can withstand that competition and prosper.”

Although the deal would also allow California banks to buy banks in New York, the market there is not considered nearly as fertile as California and other growing Western states.

Industry analysts said the immediate effect of California’s acceptance of interstate banking would be to drive smaller banks to consolidate to defend against unwanted suitors or to make themselves more attractive to potential buyers. In the longer term, consumers will see fewer and larger banks, just as they have seen consolidation in businesses from farming to auto manufacturing.