A Different Approach to Interstate Banking

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THE SUPREME COURT'S recent decision upholding regional banking compacts has placed the country's largest financial institutions at a competitive disadvantage. New York and other money center states are excluded from the banking regions now forming throughout the country. Bank holding companies located in those states are therefore prohibited from acquiring subsidiary banks within a banking region even though their rivals from neary states can do so.

This article suggests an alternative means by which bank holding companies might expand to other states even if they are not within an interstate banking region. The mechanism is interstate branching by nonmember, state-chartered subsidiary banks. Although subject to legal uncertainty, this approach holds enough promise to merit serious consideration by institutions that are currently closed out of the nation's interstate banking regions.

It is sometimes assumed -- wrongly -- that federal law prohibits all interstate branching. There are, to be sure, extensive limitations on interstate bank expansion in the U.S. code. The McFadden Act prohibits …