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A Different Approach to Interstate Banking

By Miller, Geoffrey P. | American Banker, August 8, 1985 | Go to article overview

A Different Approach to Interstate Banking


Miller, Geoffrey P., American Banker


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 national and state member banks from branching outside the state where they are chartered or have their principal place of business; and the Bank Holding companies from acquiring banks in other states unless, under the "Douglas Amendment," the acquisition is authorized by the state where the subsidiary is located.

But federal law does not prohibit state-chartered nonmember banks from opening branches in another state.

This is not to say that interstate branching by nonmember banks is automatically permitted merely because federal law does not prohibit it. Banks re regulated by the states as well as the federal government. And the statute laws of almost every state prohibit out-of-state banks from opening branches in the state. These state statutes stand in the way of interstate branching by nonmember banks.

State Laws May Be Unconstitutional

Such laws, however, may be unenforceable. The Commerce Clause to the U.S. Constitution establishes the nation as an economic free trade zone. States are prohibited, under the Commerce Clause, from erecting tariffs or other barriers to interstate commerce. State statutes that discriminate against businesses from other states are routinely struck down by the Supreme Court as violating the Commerce Clause's fundamental principle of unrestricted interstate trade.

State statutes that prohibit out-of-state banks from establishing branch offices in the state, but which permit local banks to do so, seem to be an obvious case of discrimination against interstate commerce. As such, they are virtually per se unconstitutional under the Supreme Court's precedents. They could be rescued from unconstitutionality only if the state has strong and compelling reasons for favoring its own banks over banks chartered in other states.

Three primary reasons could be advanced to justify statutes that prohibit branching by out-of-state banks:

* They are not discriminatory.

* They are necessary to further important state interests.

* They are authorized by federal law.

Although these arguments have some force, none definitively rescues the statutes from presumptive unconstitutionality under the Commerce Clause.

The first argument is that a prohibition against entry by out-of-state banks does not actually discriminate against interstate commerce. The contention would be that other provisions of a state's law -- provisions that do not distinguish between in-state and out-of-state banks -- prevent out-of-state banks from branching into the state in any event.

This argument has merit in the case of unit banking states.

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