Unhappy with what they say is unfair competition for coveted municipal deposits, New York State's community bankers are asking for more stringent regulation of indirect municipal investment pools.

The bankers complain that lighter regulation saves money for investment pools run by third parties, letting them offer higher yields on some products to entice municipalities away from banks.

And that competitive edge is seen as having allowed the state's primary investment pool operator, MBIA Inc. of Armonk, to rake in more than $800 million of deposits from more than 350 municipalities since its pool was established in 1989.

"Our concern is that you have a dual system operating in New York that places banks at a competitive disadvantage," said Michael Smith, executive vice president of the New York State Bankers Association. "What we want to do is level the playing field."

But MBIA, a nationwide municipal bond insurer, argues that its pool - named Class, for cooperative liquid assets securities system - doesn't require as much regulation as banks get because it's limited in function.

"Banks are different than a group of governments making investments," said Francie Heller, executive vice president of MBIA Municipal Investors Service Corp.

"Banks do have other regulatory oversight," she said, "but they perform other functions. It's very confusing to compare a bank to what governments in New York State are allowed to invest in."

The fight over who will invest government money comes as a set of 1992 reforms in the state's municipal finance law expires. The reforms expanded the list of collateral that banks could accept but imposed new requirements on its protection.

Bankers want the same rules they must follow in accepting municipal deposits applied to the investment pools.

And they claim that investing through the pools harms communities, because the deposits aren't available for banks to reinvest through loans.

"When municipal entities trade with pools, what it does is put community banks at a competitive disadvantage by taking deposits out of the community that would in turn fund community loans," said Martin J. Doorey, spokesman for NBT Bancorp in Norwich.

Investment pools - such as MBIA, and small cooperatives among a few municipalities - were first permitted under a 1988 ruling by the state comptroller setting guidelines for their investments and operations.

At stake in the current debate are more than $10 billion of public deposits statewide at a time when community banks nationwide are seeking more deposits to fund loan growth.

"It's a major concern for community banks around the state," said John Pritchard, executive director of the Independent Bankers Association of New York State. "The concern lies in terms of siphoning off loanable deposits out of the community."

Ms. Heller dismissed another banker concern: safety of investments. Investment decisions are still made by the municipalities, she said.

"There's no greater risk in governments' investing cooperatively versus buying it directly," Ms. Heller said. "It's the same securities. The discretion is never out of the hands of the governments."

And even if pools had never been established, the $800 million in MBIA still might not have been put in banks, said Michael A. Genito, president of the New York State Government Finance Officers Association and director of finance for the town of Ramapo.

"It's just another tool in the toolbox," Mr. Genito said. "We don't invest in CLASS over and above a bank CD unless we feel that the yield is better for us."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.