Fed Bid to Curb New State Bank Powers Targeted : Prop. 103 Insurance Clause Adds More Importance to California Regulators’ Plan

At a time that state-chartered banks in California are poised to get new powers to sell insurance, state regulators are planning to fight attempts by the Federal Reserve Board to restrict these moves into new lines of business by state banks across the country.

John R. Paulus, deputy superintendent for policy at the State Banking Department, said the agency will repeat its longstanding opposition to efforts by the Fed to exert more control over the investments that state banks are allowed to make.

On Monday, the board of the central bank in Washington proposed that the state-chartered subsidiaries of banking companies be forced to obtain Fed approval to engage in non-bank businesses, such as insurance and real estate development.

Part of the motivation was to protect the banking system from the massive losses incurred by thrifts in states where they have used more permissive laws to make heavy investments in risky non-banking business, particularly real estate. California has been among the most permissive states in allowing expanded powers for thrifts.

A majority of the 444 banks in California are chartered and regulated by the state, but they tend to be smaller, community banks. Most big banks are nationally chartered, although First Interstate of California, the fourth-largest bank in California, is a state-chartered bank.

Currently, state-chartered banks are regulated solely by the states and the Federal Deposit Insurance Corp., which also insures state and national bank deposits. The banking industry and FDIC complained that the Fed’s proposal represents an unwarranted power grab, and they will oppose it.

Could Sell Insurance

The issue has become more important to California banks and consumers because Proposition 103 allows state-chartered banks to begin selling full lines of property, casualty and auto insurance.

The insurance industry has challenged the measure’s constitutionality, but if the the state Supreme Court upholds the proposition, banks here would have a coveted new non-banking power.

The insurance industry has fought hard across the country to prohibit banks from entering its turf. The potential new competition in California has been overshadowed by public concern over the impact of the Proposition 103 on the existing insurance companies in the state.

State-chartered banks in California can now make investments in real estate and enter almost any line of business except insurance through stock ownership. State banks have had a mixed response to the broader powers, which are prohibited for nationally chartered banks.

More than 100 of the 273 state-chartered banks in California have received approval from the banking department to invest in real estate and 71 are actively using it, according to state officials. In addition, more than 50 banks are using the stock buying powers, either to accumulate stock for their portfolios or to own non-bank businesses.

“Our position has been for a long time that banks need expanded powers,” said Paulus in a telephone interview from his office in San Francisco. “Our position has been that the California Legislature has granted these powers to the banks and put in sufficient controls. We think banks in California are exercising these powers very conservatively.”

Fall Within Limit

Despite the popularity, the total investment in real estate by banks at the end of 1987 was only $170 million and stock investments totaled $200 million, according to state figures.

Bank investments in both categories fall below the limit established by law, which restrict real estate investment to 10% of an institution’s total assets and equity investment to 25% of its capital.

Gary C. Zimmerman, an economist at the Federal Reserve Bank of San Francisco, said the new insurance powers contained in Proposition 103 will mean that state banks will have some of the broadest powers of any banks in the western United States, if the measure is upheld. He said it may also lead some national banks to switch to state charters, a step some California banks already have taken.

Zimmerman recently completed a study of the powers available to state banks in the nine states within the San Francisco Fed district. The study concluded that the non-traditional activities have been used cautiously and do not represent a large portion of the income or assets even for the most active banks.

Alaska and Hawaii do not permit any non-traditional businesses, the study said. Utah and Nevada permit direct real estate investment, but few banks have taken advantage of it. Idaho does not expressly authorize or prohibit any non-bank activities, but banks there appear to be engaged only in insurance brokerage.

Zimmerman found that the most active Western states in expanding bank powers have been Arizona, California, Oregon and Washington.

Arizona permits the widest range of activities. Along with real estate and stock investments and insurance brokerage, a 1987 law granted banks investment banking powers, such as underwriting mutual funds. But the study said banks appear not to have exercised those powers yet.

Oregon does not permit stock investments or securities underwriting, but a 1987 law allows insurance businesses and real estate investments. Few banks are engaged in those activities, according to the study.

In Washington, the law forbids insurance business, but banks can invest in real estate. Last year, the state granted banks the right to underwrite securities, but the study said banks generally have not taken advantage of the opportunity.

The study said the majority of the banks are small, conservative and reluctant to move into riskier areas where they may lack management experience. It also said many of the laws are new and state regulators have been reluctant to approve requests by banks to enter activities in which they cannot demonstrate expertise or financial resources.

The Fed, however, wants to rein in the broader powers granted to some state-chartered banks in large part because of what occurred in the savings and loan industry. In the early 1980s, many state regulators went well beyond their federal counterparts in allowing thrifts to invest in stocks and real estate and other non-banking lines.

Those investments, particularly in real estate, have been blamed for the billions of dollars in losses plaguing the savings and loan industry.

While the Fed does not regulate the state-chartered banks, it could impose its restrictions on institutions owned by bank holding companies. The holding companies are regulated by the Fed. More than 100 of the state-chartered banks in California are owned by holding companies, including the biggest, Los Angeles-based First Interstate.