RESULTS OF INTERSTATE BANKING AND BRANCHING ACT

A new study from the Federal Reserve Bank of New York lays to rest the arguments of critics who claimed bank deregulation would hurt small businesses, and it boosts the case of those who want to take deregulation even further.

The findings relate to the Riegle-Neal Interstate Banking and Branching Act of 1994, which gave banks more freedom to merge and operate across state lines. Self-styled consumer groups predicted this would kill off independent local banks and thousands of small businesses which depend on them for capital.

Some of the findings of this and other studies:

• Although the law sparked a record number of bank mergers, newly-merged banks actually increased their small business lending.
• This has resulted in a $439 billion -- or 10.3 percent -- increase in the total value of loans to small businesses over two years
• While traditionally smaller banks have been the primary source of loans to small business, this loan market is too lucrative for banks of any size to ignore -- so large banks still make 35 percent of small business loans each year.

Another fact overlooked by merger critics is that merger deals often took place among the small fry of the banking world.

Fully 60 percent of mergers in the past two years have been between two banks small enough that their merger did not create a "big" bank. And these still-small banks increased small business lending more than any other category of banks over the past two years. Finally, in 1995 alone, charters for new, small banks were up 300 percent over 1994.

Deregulation advocates say it is also time to overturn the 1993 Glass-Steagall Act and allow banks to offer financial services such as insurance, securities underwriting, mutual funds and pensions.

Source: John S. Barry (Heritage Foundation), "Banking Deregulation Works," Investor's Business Daily, March 28, 1996.

According to Federal Reserve Chairman Alan Greenspan, the stability of the savings and loan industry could again be undermined. The S&Ls and their commercial bank competitors are arguing over how much responsibility each industry has to make up a share of the losses experienced in the late 1980s.

While no one expects another crisis on that scale, there is the growing possibility of default on $8.2 billion in bonds issued by an agency called the Financing Corporation established in 1987 to help pay for an early bailout package.

Regulators say savings institutions are required to pay hefty premiums into the industry's depleted deposit insurance fund, while banks pay little or nothing into their industry's fund.

As a result, healthy savings institutions are moving deposits into affiliates that qualify as banks.

• Because the bank insurance fund is fully capitalized, healthy banks now pay only a token $2,000 a year into their fund.
• Savings institutions, by contrast, pay 23 cents for each $100 of deposits -- or $230,000 for a relatively small S&L with $100 million in deposits.
• The savings industry's fund is required to have $1.25 on hand for each $100 of deposits held by the industry, but at the end of last year had only 47 cents for each $100.
• The Treasury Department says the fund's current $3.4 billion could be wiped out by the failure of a single large savings institution or several medium-sized ones.

Not only is the fund badly undercapitalized, but because nearly half of the premium income is used to pay holders of the Financing Corporation bonds, regulators say that the risk of the fund defaulting on the bonds was also increasing.

A measure attached to the vetoed budget bill would have charged savings institutions a one-time assessment of $6 billion to lift the insurance fund to its required level. It would also have spread responsibilities for paying interest on the bonds across both the banking and savings industries.

Bankers say that -- having rebuilt their own fund at no cost to taxpayers -- they should not be required to ante up about $12 billion to help relieve an obligation of a principal competitor.

Source: Richard W. Stevenson, "Fight Over Picking Up Tab for S&L Bailout Renewed," New York Times, March 20, 1996.