New "Yardstick"

Big commercial banks have long been criticized by politicians for lavishing too much of their resources on high-yielding multinational investments and not enough on low-cost housing and other socially desirable projects in their own localities. Last week the New York State legislature moved to resolve the issue in a way that could conceivably alter the face of banking across the country. The Assembly's Committee on Banks began a series of hearings on a strongly supported bill to create a publicly financed, state-operated bank that would compete for business with private financial institutions.

Big Operation. Only one such bank now exists in the U.S.: the 56-year-old Bank of North Dakota, which is a giant in its area (four times larger than any other bank in that state) but a midget nationally. The proposed New York State Bank would be a much bigger operation. It would get all of the $3 billion or so in state government deposits now scattered among commercial banks, making it immediately one of the 25 biggest banks in the country. It would be permitted to underwrite municipal bonds, invest in job-producing industries, manage trust portfolios, and solicit deposits from companies and individuals. The bank could open branches anywhere in the state; private banks will not be allowed that privilege until January.

The bill to set up the bank, which is sponsored by Assembly Speaker Stanley Steingut and 65 other lawmakers, will be submitted for a vote in the legislature probably within 30 days. Steingut claims that he has the votes to get the bill passed in the Assembly and Governor Hugh Carey, a Democrat, would be amenable if public response is favorable. During two days of hearings in Manhattan last week, the committee heard fervent praise for the idea from several speakers, including Consumer Advocate Ralph Nader.

The move to establish a state bank reflects a growing enmity between New York State's giant financial institutions and its political leaders. Their differences reached a boiling point in February when the private banks, apparently fed up with the chronic budgetary ills of Albany and New York City, refused to bid on bonds issued by the state's Urban Development Corporation. The UDC, created by the legislature mainly to finance low-cost ghetto housing, could not pay off $104.5 million in one-year notes. The state was forced to undertake an exceedingly costly rescue operation to save the agency from bankruptcy.

Steingut denies that the effort to establish a state bank was prompted by the UDC affair. He prefers to stress that such an institution would keep money deposited in the state from being invested in development elsewhere, and serve as a yardstick to measure the performance of private banks in meeting community needs. The profits that the bank generates could possibly be channeled to the state treasury and used to defray governmental costs.

Whatever the reasons, the establishment of a state bank in New York could signal the start of a far-reaching trend. Already, lawmakers in California, Colorado, Massachusetts and Washington are watching New York's progress with an eye toward setting up state banks of their own.

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