Statement by Richard F. Syron, President, Federal Reserve Bank of Boston, 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 appreciate this opportunity to appear before you to discuss the issues surrounding interstate banking and branching. Today I will confine my remarks to issues related to the ways that interstate banking can improve credit flows, rather than to specific issues that are addressed in the various legislative proposals.
Current restrictions on interstate banking and branching are an anachronism; they reflect the state of banking when local banks were almost the exclusive source of loans, deposits, and services for both businesses and individuals. These restrictions are incongruous in the present banking environment, in which banking products have no geographic boundaries and are frequently provided by other financial intermediaries. The breakdown of geographic and institutional barriers is the inevitable outgrowth of improvements in technology and in information processing. As bank products have standardized and the economies of scale in information processing have grown, it has become much easier to provide cost-effective service independent of location.
Any new legislation should seek to promote the most efficient banking structure. By allowing bank management to choose a banking structure that improves its ability to diversify and that reduces its costs, banks will realize efficiency gains that will benefit borrowers and depositors alike. Alterations to our antiquated banking structure are already occurring without federal legislation. Not only do intermediaries far removed from the customer's location provide many banking products, but, in addition, a large number of states, including all six New England states, have adopted interstate banking laws. Thus, in many banking areas we already have de facto interstate banking.
I will first describe the limited interstate banking that has been in operation in New England for some time. Unfortunately, the expansion of New England bank holding companies under regional compacts has not extended much beyond the region.
Second, I will discuss the de facto interstate provision of many banking services that is already in place; for example, the markets for mortgage loans, consumer loans, and large business loans are now national in scope. Loans to small and medium-sized businesses remain primarily limited to local markets, however, and thus will continue to be adversely affected by any restrictions on the flow of bank capital across, geographic boundaries.
Third, I will describe the ways in which the recent regional economic shock has affected the availability of credit to small and medium-sized businesses in New England. The economic shock would have been less severe if banks had been better diversified through wider interstate banking and branching.
Finally, I will show that new evidence from New England suggests that large, multistate banks can offer improved services to borrowers and depositors without impairing the viability of small community banks because the markets served by smaller banks are often quite distinct from those in which the large banks operate.
Limited Interstate Banking
In New England
New England has had limited interstate banking for some time. Maine first allowed nationwide reciprocal banking in 1978 and later dropped the requirement of reciprocity. Regional reciprocal banking was first allowed in Connecticut in 1983, in Massachusetts in 1984, and in New Hampshire in 1987. All three states revised their laws in 1990, as Connecticut and Massachusetts adopted nationwide reciprocal banking and New Hampshire adopted nationwide interstate banking without requiring reciprocity. Agreements that allowed regional reciprocal banking that later converted nationwide reciprocal agreements were adopted in Rhode Island in 1984 and in Vermont in 1988.
The laws adopted in the mid-1980s to allow regional mergers were utilized by many of our largest bank holding companies. For example, among the two largest bank holding companies in New England, Bank of Boston has subsidiaries in all six New England states, and Fleet Financial Group has subsidiaries in every New England state except Vermont. …