Beneficial Shake-up
The sheltered life of California’s banks is about to come to an end. The Legislature, by initiating interstate banking, is forcing them to compete nationally. If the Legislature is right, interstate banking will cut loan rates, raise deposit rates and make banks more responsive to consumers.
California has nearly 500 banks and more cash deposits than any other state in the country. The industry is extremely concentrated: Just four banks control 80% of California deposits. Not surprisingly, they offer some of the lowest yields on deposits in the country, and their credit-card charges are among the stiffest.
Interstate banking should change that. New York banks are already here in limited ways, but, beginning in 1991, banks from Eastern states will be allowed to open and acquire financial institutions in California so long as the Eastern states allow California’s banks to do business there. More banks with more resources, particularly the New York giants, will mean more competition. Competition will produce winners and losers. Some of California’s community banks and faltering savings-and-loan institutions will no doubt be swallowed by the big Eastern banks. And some California financial institutions will merge to fend off takeovers. Some of those unable to compete in the rate war will go bankrupt. Fewer savings-and-loans could spell a decline in the number and amount of loans for low-income housing.
But opposition to deregulation is premised on an exaggerated fear of the big banks. California community banks fill an important niche--the personal touch. They have flourished among California’s giants, and will continue to do so. If a merger or takeover threatens competition, or if it would likely result in a decrease in hometown loans or for low-income housing, the superintendent of banks is obliged to stop it. California’s banks will have five years to prepare for the onslaught from the East. From 1987 until 1991, interstate banking will be limited to 11 other Western states, none of which pose a threat to California’s banks. And the flip side of this, of course, is that California banks will be able to move into, and profit in, other states. Finally, fears that the big banks will siphon money from California are unfounded; it would be too costly for any bank to raise interest rates high enough to attract a significant amount of money.
Interstate banking is bound to shake up the industry, and it is not without its pitfalls, but on balance it is a good deal for California.
