New Interstate Banking Bills to Help Consumers : But Californians Won’t Benefit for Years--and Gains May Be Short-Lived

California consumers will benefit--eventually--from interstate banking legislation approved last week by state lawmakers.

The benefits of increased competition in California banking will not be felt for several years and may prove to be short-lived, according to bankers, industry analysts and consumer advocates.

The bills allow cross-border mergers of banks and savings and loans in a 12-state Western region beginning next July. In 1991, banks from New York and other Eastern states would be allowed to acquire financial institutions in California so long as those states allow California banks and thrifts to do business on the East Coast.

The California legislation and Texas’ approval of interstate bank acquisitions last week moved the country markedly closer to full nationwide banking, a trend that has been resisted by bankers and lawmakers almost since the founding of the Republic.

The Giants Dominate

The locally owned community bank has held a position of reverence in the American psyche rivaled only by the family farm, even as financial markets have become increasingly global and electronically driven. But while consumers and politicians complain of the dwindling number of community banks, the vast majority of people keep their accounts and finance their purchases at a relatively small number of financial giants.

Nearly 60% of all deposits in the nation’s 14,150 banks are held by just 75 big banks, representing one-half of 1% of the total number of banks.

The current fragmented banking system arose from a desire to preserve states’ rights and to prevent over-centralization of the nation’s financial system. The thinking was that local credit decisions should be made locally, by people who live in and share a community’s interests.

Institutions such as California’s Bank of America and New York’s Citibank essentially are national banks already, however, offering credit cards, mortgages and business loans coast to coast and around the world. But a longstanding federal prohibition on interstate branch banking has prevented such banks from opening full-service branches outside their home states.

That wall is crumbling, however. Last year, the U.S. Supreme Court authorized states to draw up regional banking compacts, and many states are going further, permitting acquisitions of banks by out-of-state institutions from around the country.

“Almost 40 of the 50 states now have some form of interstate legislation. They’ve decided it wasn’t worth waiting for Congress to act” on some form of full nationwide banking, said James McDermott, chief of research at the Wall Street investment house of Keefe, Bruyette & Woods, which specializes in banks.

“Interstate banking is increasingly becoming reality,” he said.

Allows Breathing Space

California’s banking legislation gives local financial institutions four years of breathing space before the nationwide “trigger” date of 1991, and most observers expect the law to produce little noticeable change in the California banking landscape before then.

Consolidation of smaller banks and acquisitions by major banks will continue, slowed slightly, perhaps, by the desire to conserve resources for the more competitive era to come.

California banks and thrifts will continue to expand selectively into neighboring states and will shop for bargains among troubled Texas banks, which have been crippled by problem loans to farmers, oilmen and real estate developers.

Executives of several big New York banks said they would continue to push credit cards to California customers and would try to establish or expand lending relationships in California through their mortgage finance and commercial loan offices here.

The real fun begins in 1991, however, when California’s rich banking market is opened to banks from New York and other Eastern states. Out-of-state banks will pay heavy premiums to buy existing banks and gain a foothold in California and other Western states. Marketing efforts will be intense.

Competition for Market

Analysts expect a period in which consumers will enjoy higher interest rates on deposits and cheaper loans as banks compete for market position, name recognition and customer loyalty.

“What concerns me is that you will have some people who will come in and buy market share, pay higher rates on deposits than they have to and charge lower rates on loans than they should, just in order to build market share quickly,” said George Leonard, president and chief executive of MeraBank in Phoenix, Arizona’s largest savings institution.

“Short term, this will benefit the consumer. Longer term, I think that when you have people in other cities that are making decisions that affect borrowers in Arizona, they may not understand the dynamics of the marketplace.”

Leonard also predicted that early bargains for consumers would fade after an out-of-state bank or thrift attracts a solid customer base in a new territory.

Michael Roster, a banking law expert with the Los Angeles law firm of McKenna, Conner & Cuneo, expressed concern that out-of-state banks would milk California customers’ deposits and lend the money elsewhere, a concern shared by consumer groups. He also said he worries that an increasingly national banking system will take financial decision-making out of local hands.

“It would be a shame if the farmer in Fresno or the restaurateur in Santa Monica is dependent on decisions made elsewhere,” Roster said.

But Frank Partel, senior vice president for nationwide banking at New York’s Chase Manhattan Bank, said Roster’s fears are groundless.

Local Decision-Making

“I don’t think Chase is going to consolidate decision-making in New York. In Ohio, Maryland and Florida (where Chase operates subsidiary banks), we’ve moved decision-making down into the local market. Chase has found a way to operate in 100 countries. A market 2,600 miles away is not going to be that unique for a company involved in global banking.”

He said the entry of New York banks into California will provide credit and other banking services to individuals and small businesses that are not now served by California institutions “because of problems in the thrift industry and some of the major California banks.”

Consumer advocates fought the banks on the legislation, not because they oppose interstate banking but in hopes of adding provisions that would force banks to finance low-income housing and low-cost banking services for the poor. They were not successful.

Sought Protections

“We always thought that interstate banking should happen, but we wanted these protections in the bill,” said Judith Bell of Consumers Union. She said consumers will see little advantage during the four-year interim period because California banks will expand into other states while few banks in neighboring Western states will be strong enough to compete in California.

“In 1991, we should see full interstate banking. That’s a long time to wait. But in the long term, it should increase competition,” she said.