Higher Rates Paid on Some Out-of-State Bank Accounts

California consumers earn less interest on certain kinds of bank accounts than consumers nationally, Federal Reserve economists confirmed Tuesday.

After a monthlong review of interest rates and other factors, the federal bank economists said they found that the lower deposit rates are mainly limited to accounts with costly transaction charges, such as money market deposit accounts.

The lower rates paid on some accounts do not necessarily prove or disprove a lack of competition, the economists said in a report issued by the Federal Reserve Bank of San Francisco in a weekly newsletter.

But they said the lower rates may stem from the high cost of providing special services and maintaining an extensive branch banking system, rather than a lack of competition.

After adjusting for loan losses, they also found that California banks’ profits paralleled the average profits of banks across the country during the past five years.

“Overhead expenses are substantially higher in California than in other populous states and in the U.S. as a whole,” the economists said. “This could suggest that California banks, operating in a less competitive market, are not forced to operate as efficiently as are banks elsewhere.”

Last fall, several consumer groups, led by Consumers Union, demanded that Gov. George Deukmejian and the state attorney general investigate an apparent lack of competition among California banks. The groups also wanted to know why interest rates paid by California banks on some deposits are lower than in other states.

There are more than 5,000 bank branches in California and the state’s five largest banks operate about half of them, the report said. In contrast, banks in New York and Illinois operate far fewer branches and offer limited retail customer services, according to the report.

“It’s very disappointing to say Californians have to pay more (for loans) and earn less money because California banks have such a high overhead,” said Harry Snyder, West Coast regional director of Consumers Union in San Francisco.

Snyder said his organization’s demand for an inquiry stemmed from a weekly review of interest rates paid by banks across the country.

“I found that California banks on average are charging more than 4.5% more for consumer loans and paying a point and a half less on deposits,” Snyder said.

Snyder said he was disappointed at the Federal Reserve Bank economists’ conclusions.

“We are hoping that John Van de Kamp, state attorney general, will take a harder, more critical look at this,” Snyder said.

Jonathan Neuberger, an economist with the Federal Reserve Bank, said the first part of the study dealt with interest rates paid on deposits. Next, the economists plan to study the rates charged for bank loans. He cautioned that the report only presents preliminary conclusions.