Piecemeal Geographical Deregulation: Caution vs. Economics

Article excerpt

Rarely a day passes without a new report of a state legislature debating a bill authorizing a regional compact or a reciprocal agreement with another state heralding the seemingly inexorable shift toward geographic deregulation.

Congress has shown little inclination to confront interstate banking so the states are developing unique solutions. It is no wonder that pundits decry the crazy patchwork quilt pattern of bank regulation.

It presently appears that the most likely form of geographical deregulation or limited de jure interstate banking is the regional compact with delayed implementation. Reciprocity agreements with a time delay allow "breathing room" for the banks within a state to map a strategy to protect their franchise.

States vary in proposed or enacted legislation, but competition between contiguous states tends to prevail. The exact nature of the agreement depends, according to Peter Merrill of Peter Merrill Associates, on the attitudes of existing banks, which are influenced by bank size and geography. Geography Is Relevant

Larger regional banks face antitrust issues with intrastate mergers and competitive concerns, while community banks grapple with mundane problems such as survival, higher funding costs, and higher relative capital requirements.

Geography is relevant due to the health of the local economy and the strength of the dread invaders from nearby states. California and New York banks, for instance, must feel like wallflowers at a country dance.

Given the trend toward regional compacts, the nontrivial question arises, "Does it make economic sense to delay implementation?"

First, consider that in the U.S. de facto interstate banking already exists. Crafty innovators have developed loan-production offices, franchises, Edge Act firms, ATM networks, and credit cards, to name just a few. More direct assaults on McFadden-Douglas Act restrictions through thrift and bank acquisitions portend that the days of sticking one's head in the sand are nearly over. Communications Technology

The greatest challenge to geographical restrictions emanates from communications technology. Electronic banking may quickly displace much of the traditional distribution system for certain customer segments. State boundaries will hardly halt communications signals from satellites circling the Earth.

Another perspective of interstate banking is that economies of scale or scope will cause the evolution of a highly concentrade banking structure with only a few, gigantic banks. …