State Powers Have Positive Impact on Banking

State-authorized powers for savings banks and commercial banks suffered a serious blow in May, despite their long record of positive contributions to local economies, consumers, and the banking industry.

A House Banking subcommittee backed an administration proposal to remove the power of state-chartered banks to make equity investments of any kind.

The subcommittee also voted to require advance Federal Deposit Insurance Corp. approval for the exercise of any other state power not approved for national banks. Another subcommittee vote would restrict the use of any state power to banks that meet minimum capital requirements.

These moves were not based on rational analysis. No evidence has been presented that state powers caused problems in the bank or thrift industries.

Helping Offset Losses

On the contrary, significant anecdotal evidence attests to the very strong positive contribution the exercise of these powers has made to banks' bottom lines. The powers have been especially useful in helping to offset losses from traditional activities such as real estate lending.

So why the Capitol Hill move against state powers?

First there is the legislative belief that, if Congress hasn't sanctioned an activity, it must be bad.

Second is the desire to affix blame for the S&L crisis outside the Washington Beltway. There is still a strong belief in Congressional hallways that state powers were responsible for S&L failures.

Built-In Advantages

In reality, state powers offer a number of advantages to consumers, to community banks, and to the financial system as a whole:

* State powers promote asset diversity. Recently, the United States has witnessed the problems that occur when institutions become too heavily concentrated in one area, such as commercial real estate loans. Profits on assets in one area can help compensate for shortfalls in others.

* State powers provide ways for community banks to meet community reinvestment obligations.

State powers have greatly facilitated New York's Community Preservation Corp. and the two programs developed by the Massachusetts Bankers Association to aid affordable housing and minority businesses.

* State powers permit the financial system to "audition" a product or service on a limited scale, then adopt it nationwide once it proves its value. NOW accounts, adjustable rate mortgages, and many other products and services we now think of as standard began as state innovations under state authority.

* State powers offer flexible financial management tools that promote profitability. For example, banks with charters that permit flexibility are not forced to make unprofitable loans merely because of limitations on where they can put their money.

Support from Treasury

They can increase profitability by taking advantage of economic shifts within the community, moving money to the places where it is most needed and which offer a market rate of return.

The Treasury Department agrees that the advantages are many and the risks few. In its study of the banking system released earlier this year, Treasury finds that "many state-chartered banks have exercised their broader authorities both prudently and profitably" and that, "in general, these activities do not pose unusual risk to the deposit insurance fund." As yet, no authority has offered evidence to the contrary.

Despite the lack of evidence, T. Timothy Ryan, director of the Office of Thrift Supervision, continues to call state powers "risky." He also continues to raise the specter of state powers permitting banks to own junk bonds - a red herring that is being used to frighten legislators into voting for restrictions whose consequences many appear not to understand.

Other arguments against state powers are based on the vague idea that deposit insurance was not "intended" to cover deposits placed in investments other than those of national banks. Nothing could be further from the truth.

Existing Powers

Deposit insurance was designed to protect the payments system, not to authorize any specific type of bank investment. Federal insurance was clearly extended to state-chartered commercial and savings banks, many of whose current powers were in existence at the time of the extension.

Current law makes any state-authorized power subject to examination and approval by state and federal regulators. The FDIC has full authority to disallow any activity - sanctioned by state or federal government - that poses a risk to the insurance funds.

Some state-chartered banks have failed or experienced portfolio difficulties, but their failure rates are lower than the failure rates for national banks. And the reasons for failure appear to center on the declining real estate market and the recession, not on the exercise of state powers.

The entire nation wants a sound banking industry. But refusal to permit states to respond to regional diversities with necessary, specially designed banking tools does not promote soundness.

Such short-sightedness of members of Congress, if continued, can only lead to increasing bank failures and decreasing credit availability - the opposite of the results intended.

Mr. O'Brien is chairman of the National Council of Savings Institutions and chairman and chief executive of Emigrant Savings Bank, New York.

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