Interstate Bank Bill Fuels Furor : New Coalition Emerges Against State Measure

SACRAMENTO —  The titans of East Coast banking have long battled California’s entrenched and competition-wary banking industry in an unsuccessful effort to penetrate the deposit-rich Golden State.

After nearly a decade of protectionist battles, however, California’s big banks have suddenly abandoned the fight, endorsing legislation that, for the first time, would open the state’s borders to the likes of Chase Manhattan, Citicorp and other Eastern financial giants.

Supporters of the hard-fought agreement promise that if the Legislature acts swiftly, the resulting competition will provide a veritable boon for consumers: higher interest paid on deposits, lower rates charged on loans, even cut-rate fees on credit cards.

Yet in the months since the accord was struck, intense opposition has arisen from an influential coalition of community banks, savings and loans and, surprisingly, from consumer groups that traditionally have been among the strongest supporters of nationwide banking.

While they concede that bank customers are likely to benefit at first, these groups charge that the real aim of the big New York banks is to export deposits from California to underwrite their troubled loans in other states and foreign nations.

And they fear that the intense competition generated by the out-of-state banks’ entry in California could spark an “interest-rate war” that would eliminate many smaller financial institutions and concentrate power among the few giants that survive.

“This is no longer a fight between two powerful special interests, the big banks of the East versus the big banks of the West,” said Judith Bell, a Consumers Union lobbyist. “Those special interests have now teamed up against the public interest.”

Stakes Are High

For both sides it is a high-stakes battle, sparking an intense lobbying effort that has fueled the reelection coffers of dozens of legislators. The campaign is expected to escalate in August when lawmakers return from their summer vacation for a hectic, final three-week session.

“They are making an all-out pitch to kill my legislation,” Assemblyman Charles M. Calderon (D-Alhambra), author of the interstate banking bill, complained of his opponents. “They’ve made this a do-or-die issue with legislators.”

Although California, with its $450 billion in consumer deposits, remains the nation’s richest prize in the battle over interstate banking, the fight taking place in Sacramento is illustrative of a trend that is sweeping through state capitals from coast to coast.

Five years ago, only four states had interstate banking laws. Today, almost half have opened their financial borders. Nearly 40 states are expected to have acted by year’s end.

Depression-Era Law

Yet all of this activity is occuring despite a federal Depression-era law that prohibits banks from moving outside their state borders. (The so-called Bank Holding Company Act, however, made an exception for financial institutions like the parent company of Los Angeles’ First Interstate Bank, which already had out-of-state holdings when the law was enacted.)

Congress’ aim was to keep banking power widely dispersed. But the Supreme Court last year all but dismantled the law by ruling that banks could merge with other institutions across state lines where regional agreements have been approved.

Even where there are no such agreements, banks were finding ways to skirt the law by opening offices that either lend money or take deposits, but not both. These limited-purpose banks, the courts have ruled, are not governed by interstate banking regulations, nor are the massive credit card operations and automated tellers set up by many of the big New York banks in states all over the nation.

Western Division

Citicorp, for example, already has a Western division headquarters in a 42-story downtown Los Angeles building only blocks from Bank of America, which for years had fought successfully to kill interstate banking bills. In turn, Bank of America set up its own corporate lending office in New York City. Meanwhile, retailing giants like Sears jumped on the financial services bandwagon with their own nationwide “consumer banks” that are not covered by the same regulations that govern full-service banks.

“While we sat here and argued with the (New York) banks, Sears and those others were going merrily on their way,” said Gus Bonta, executive director of the California Bankers Assn. “They have become our real competitors.”

The realization that interstate banking was coming despite all their efforts to block it prompted the big California banks to abandon their fight this year. But the agreement came only after a compromise was negotiated that gave the California banks a crucial advantage.

Time Differential

Under the pact, the Eastern banks could enter California only after 1990. But California banks would be free to immediately expand into the Western states where they could boost their business and gird themselves for the fight ahead. The four-year delay also would give Congress time to consider a nationwide interstate banking law.

“This not only allows (California) banks to batten down the hatches here,” Calderon said, “but to penetrate other markets and get a head start.”

The savings and loan industry and other opponents put their muscle behind a rival proposal by Sen. Alan Robbins (D-Van Nuys) that would allow regional banking in the West but would indefinitely delay the entry of Eastern banks into California.

With little room for compromise, the result has been a legislative stalemate, jeopardizing the much-heralded East-West agreement that had been expected to end the bitter fight over interstate banking.

Time for Decision

“What we’ve attempted to do is push them (backers of the Calderon measure) farther and farther down the line so all they have now is three weeks to come to some sort of an agreement,” confided Craig Hudson, Western regional director of the Independent Bankers Assn. of America, which represents 170 smaller California community banks that oppose the accord.

Many of these institutions have good reason to worry.

A record number of banks are expected to either fail or need government assistance by the end of 1986, federal officials have predicted.

While the largest of California’s savings and loans have been earning big profits of late, major losses on loans continue to plague many smaller institutions. Two-thirds of the 25 money-losing savings and loans placed under special federal regulatory supervision last year were based in California.

Higher Interest Rates

“No doubt (New York banks) would offer above-market interest rates and other inducements to attract customers, but that is only for the short term,” said Kirk Hallahan, senior vice president of the California League of Savings Institutions. “Our concern is that if we set out to meet the competition, our existing institutions would be forced to increase the rates they pay on deposits. They will have to pass that on to their borrowers.”

Calderon countered that these institutions oppose his bill simply because “they do not want to compete.”

“I do not believe they are concerned about California consumers,” he charged, but “only about their special interests.”

But consumer groups argue that the independent banks and savings and loans provide the bulk of loans for low-cost housing and an array of consumer services. Should a number of these institutions be forced into insolvency by the entry of the big New York banks, consumers would pay the price, they contend.

Loans to Foreigners

As evidence, they point to banking industry figures showing that as much as 70% of the commercial loans and about half of other types of loans by New York’s biggest banks are to foreign nations. By contrast, savings and loans devote about 80% of their money to local real estate loans, industry officials said.

If the outside banks gain significant control of the market, said Bell of the Consumers Union, it “will reduce the amount of credit available to California home buyers and developers.”

New York banking executives, however, downplay that scenario, contending that smaller institutions, because of their close relationship with their customers, are unlikely to be affected by interstate competition. They also maintain that New York banks are committed to investing the deposits they collect from consumers within California.

“If the New York banks or others are going to make a dent and be profitable, they will have to be responsive to the local California market,” said Jim Murphy, executive director of the New York State Bankers Assn. “I really think the argument that New York banks will divert funds out of California is a myth.”

Minimizing Exports

While nothing in the law prevents banks from exporting deposits out of state or out of the country, good business sense dictates keeping much of the money in the community.

Suzanne Weeps, a spokeswoman for New York’s Citicorp, said that while the bulk of commercial loans by major New York banks are to foreign countries, at least half of her bank’s consumer loans are domestic and “it’s that business that has grown most rapidly.”

“If you just look at it from a purely common sense view,” she said, “you are in a community and the last thing you want is that community to go down hill.”

Many of the consumer objections to interstate banking had been addressed in an earlier version of Calderon’s bill that required the incoming institutions to offer $500 million in housing loans and $100 million in agricultural loans to California businesses and consumers. It also required the banks to cash government checks for the public at no cost.

The New York banks had agreed to similar concessions in their negotiations on interstate banking bills in several other states. But in California, the provisions were quietly removed from the bill primarily at the insistence of the big California banks that feared other states would attach similar conditions on their bid for entry.

Certain Types of Loans

“The next step is to dictate to everyone already here that they have to make certain types of loans,” said Bonta, who negotiated the changes in the bill for the California bankers. “We strongly believe, as does the entire industry, that credit allocation is bad public policy.”

The move to alter the proposal, more than any other factor, prompted consumer groups to line up against the Calderon bill.

“That made us suspicious that they might indeed want to come into California and take California deposits for their loans in Saudi Arabia or elsewhere,” said Harry Snyder, Consumers Union’s West Coast director. “They backed out of their promises to us . . . so there is really very little trust left.”

With both bills stalled in the Legislature, the lobbying has intensified.

Money for Campaigns

The savings industry, a traditional supporter of Democrats in the Legislature, has contributed more than $1 million to various campaigns in the last three years. While the industry’s strength has been diffused in dealing with a long list of bills, Calderon said savings and loan lobbyists are busy “reminding the leadership of both houses how solidly they have supported Democrats over the years.”

Meanwhile, the New York banks, which have been able to focus their lobbying efforts solely on the interstate banking bill, have greatly stepped up their political contributions. In the last three years, four of New York’s largest banks have contributed more than $180,000 to the campaigns of California lawmakers, a third of that in the first three months of this year alone, according to an analysis by Consumers Union.

Much of that has gone to legislative leaders, including Assembly Speaker Willie Brown (D-San Francisco) and Senate President Pro Tem David A. Roberti (D-Los Angeles), as well as other important statewide figures, such as Republican Gov. George Deukmejian.

More Lobbying Money

Meanwhile, Citicorp and Chase Manhattan alone spent more than $153,000 in lobbying expenses in 1985 and are well on the way to doubling that total this year.

Some lobbying has taken place far from Sacramento. At a recent New York fund-raiser put on by a major investment banker, for example, Los Angeles Mayor Tom Bradley and Brown both pledged to work to change interstate banking laws so that out-of-state banks could open full-service offices in California, according to one banker who was present. That reception, attended by major Wall Street corporate executives, raised $31,000 to be split equally between Bradley and Brown, said Brown spokeswoman Susan Jetton. Brown has signed on as a co-author of Calderon’s measure.

With only about a month left before the Legislature adjourns for the year, one of the major obstacles facing backers of interstate banking is convincing lawmakers that California banks are sincere in supporting the entry of their New York competitors.

As recently as last year, James H. Gray, then president of the California Bankers Assn., warned his member banks in a letter that interstate banking was no more than a veiled attempt at “cherry picking” by New York City bank holding companies.

Echoing some of the same complaints voiced now by savings and loans and consumer groups, Gray wrote: “They get to leave a dwindling retail market with a declining population and gain access to the best economy in the world. In return, California’s banking industry is left holding an empty bag.”

Confronted with this and similar statements at a recent Senate hearing on his bill, Calderon could offer little explanation for the California banks’ sudden change of heart.

“In the course of their exuberance for their (former) position, they were probably taking liberties and stretching exactly what the truth may or may not be,” Calderon said sheepishly. “I’ve been guilty of that myself, I’m afraid to say.”

Pausing, he continued: “Like Paul on the road to Damascus, they were struck with a blinding light and they now see the truth.”