The New York State Bankers Association is using a state small-business loan program to pick a fight with the Community Bankers Association of New York State, a thrift trade group.

The commercial bank group, which represents both large and small banks, is trying to derail legislation that would let thrifts and savings banks take part in the Excelsior Linked Deposits Program, a successful lending initiative that links cheap state deposits with small-business lending.

At stake is $100 million in deposits and the ability to generate crucial new business without much risk.

But commercial banks are not aligned on the issue. The group representing small banks exclusively, the Independent Bankers Association of New York State -- which came up with the idea for Excelsior -- has refused to take sides.

"We don't need these kinds of internecine arguments," said John Pritchard, executive director of the independent bankers group.

Through Excelsior, the state has made $100 million available to banks at cheap rates. Banks lend those deposits to small businesses with similar reductions in rates.

However, only commercial banks can participate. Thrifts and savings banks, because of their charters, have been shut out.

'Valid and Legitimate'

"We think this is a severe curtailment of community-oriented banking institutions from engaging in a valid and legitimate service to the community," said Robert O. Lehrman, president of the thrift group. "It has the potential for taking business away from a perfectly deserving institution."

The state bankers association, however, argues that, if thrifts were allowed to participate, they would be accepting deposits from the state government, which only commercial banks are legally allowed to do.

"Our longstanding view is that there are distinctions between charters that bestow advantages depending on which charter you choose," said Michael Smith, president of the state bankers association. "One of the last remaining advantages for banks in this state is public deposits. There should not be any unilateral granting of authority for thrifts in the area of deposits."

Promoting Compromise

But Mr. Lehrman of the thrift group argued that Excelsior's deposits are linked deposits, not public deposits. "This is clearly not a public deposit issue," he said. "The lender is an intermediary and a servicer in this case. This is a jobs issue, an economic issue."

Distinguishing between linked and public deposits was grappled with by the independent bankers group, as well. "We debated that issue," Mr. Pritchard said. "We decided to remain neutral on it.

The group, however, is still trying to negotiate a compromise. One proposal is to broaden thrift participation in the New York Business Development Corp., a catchall state program that makes it easier and less risky for financial institutions to invest in small businesses, especially in underserved areas.

However, bills allowing thrifts to take part in the Excelsior program are pending in committees of both the New York Assembly and Senate. The state comptroller has called for thrift participation in the program and, to date, no legislator has taken up the commercial banks' cause.

The state bankers association has filed a formal opposition paper with the Legislature and is vigorously lobbying against the bills, according to all participants.

Persuading Legislators

"The legislative arena, especially in the later part of the session, is always an uncertain one," said Mr. Lehrman. "But in the end, we think, the lawmakers will agree with us that this is in the public interest."

Mr. Smith of the state bankers association said the whole issue of thrift powers should be dealt with, instead of granting powers "piecemeal."

"The difference between banks and thrifts has blurred," he said. "But on the public deposit issue, the difference is clear. Thrifts have been given all manner of advantages. This is one of the last advantages we have left."

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