Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions Supervision, Regulation and Deposit Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, June 22, 1993
I am pleased to appear before the subcommittee on behalf of the Federal Reserve Board to discuss issues associated with interstate banking. For many years, the Board has believed that full interstate banking would benefit bank customers and lead to a stronger and safer banking system. Although we have concerns about certain specific provisions of the bills before you, we strongly support the thrust of these legislative initiatives. I would like to explain the reasons for our support and to evaluate the concerns voiced by the critics of interstate banking. To assist the subcommittee in its deliberations, the appendixes to my statement provide an up-to-date summary of state laws regarding interstate banking, a discussion of recent trends, and several statistical tables that provide relevant information.(1)
Interstate banking is now a reality and has been for some time. For years, both domestic and foreign banks have maintained loan production offices outside their home states, have issued credit cards nationally, have made loans from their head offices to borrowers around the nation and the world, have solicited deposits throughout the United States, have engaged in a trust business for customers domiciled outside the banks' local markets, and - through bank holding companies - have operated mortgage banking, consumer finance, and similar affiliates without geographic restraint. Since the early 1980s, moreover, the individual states have modified their statutes to permit - under the Douglas Amendment to the Bank Holding Company Act - out-of-state bank holding companies to own banks within their jurisdiction. Indeed, today only Hawaii prohibits bank ownership by out-of-state bank holding companies.
Although state legislatures have supported interstate banking and more than one-fifth of domestic banking assets are already held in banks controlled by out-of-state bank holding companies, the Board believes that congressional action is needed. Our dual banking system has a desirable genius for resisting government-imposed uniformity, but the large number of significant differences among the states impedes the interstate delivery of services to the public and reduces the efficiency of the banking business. The differences in state laws are discussed in the first appendix to this statement, but notable examples include restrictions on the home state of banking organizations allowed to enter some states, reciprocity requirements in some other states, the prohibition of de novo entry, and variable caps on the deposit shares of new entrants in still other states. In short, the states have made clear that they accept - and perhaps prefer - interstate banking, and their legislatures have made interstate banking a substantial reality today, but actions at the state level have resulted in a hodgepodge of laws and regulations that permit interstate banking in an inefficient and high-cost manner.
Restrictions on both intrastate and interstate banking were imposed in an era in which commercial banks were the dominant provider of financial services to households and businesses. These restrictions were clearly intended to limit competition and thereby insulate local banks from market pressures. Over time, branching and other geographic restraints became part of the totality of regulations designed to protect bank profits through limitations on entry and deposit rate competition. In recent years, however, banks have seen their market position eroded by nonbank providers of financial services that are not subject to bank-like regulation. Indeed, the unwinding of the historically protected position of banks, such as the removal of deposit rate ceilings, has proceeded on most fronts as a lagged response to market developments that had themselves been encouraged by those same restraints on banks. Attempts to maintain antiquated geographic restrictions will only protect inefficient banks, disadvantage consumers of bank services (particularly those like small businesses that still have relatively few alternative sources of credit), encourage the entry of less regulated nonbank competitors, and increase the stress on the safety net as the long-run viability of banks is undermined. …