BANKING/FINANCE : Closing of 2 S&Ls; Does Little to Lower Deposit Rates, Trade Group Discovers

Part of the thinking behind the closing of two insolvent Orange County savings and loans in June was to remove from the market two institutions that were offering about the highest interest rates nationwide on certificates of deposits.

Such rates, healthy S&Ls; have argued, constituted unfair competition and caused well-run thrifts to raise their rates for deposits, thus lowering profits.

As it turns out, the liquidation of American Diversified Savings Bank and North America Savings & Loan, both in Costa Mesa, has had only a minor effect in lowering deposit rates in California, Arizona and Nevada, according to recently published information in a newsletter published by the California League of Savings Institutions.

The state trade organization said the closings lowered the industry’s regional cost of funds--what S&Ls; pay in interest to attract deposits--by less than 0.1 percentage point. American Diversified had been offering rates that were 1.56 percentage points above the national average, and North America had been paying rates that were 1.45 points higher.

The regional index for the average cost of funds was 7.618% in June when the two S&Ls; were closed. The index fell the next month to only 7.593%, the league reported.

It seems that lending rates, like the prime interest rate, have a much greater effect on what institutions are willing to pay to attract deposits. Lending rates have been going up since April, so rates paid to depositors eventually inched up as well. The regional index for cost of funds hit 7.847% in September, the league reported.

In closing the S&Ls; in June, federal regulators paid out a record $1.14 billion to depositors of American Diversified and refunded $209 million to North America depositors.