In Fed's Bank of New York Decision, Regional Interstate Banking Wins

By Fraust, Bart | American Banker, May 17, 1984 | Go to article overview

In Fed's Bank of New York Decision, Regional Interstate Banking Wins


Fraust, Bart, American Banker


NEW YORK -- The Federal Reserve Board late Tuesday turned back a legal argument that the Bank of New York Co. hoped would enable it to buy a Connecticut banking company regardless of whether regional interstate banking zones are deemed constitutional by the courts.

The decision was the latest victory at the bank regulatory agency level for regional interstate banking, a movement that proponents say gives regional institutions time to consolidate their ranks and that opponents say is unconstitutional.

While the ruling focuses on New England, the decision has implications for other regions of the nation that are planning interstate banking zones. Besides the New England zone, the regional zone that has advanced the farthest is in the Southeast, where Georgia has enacted enabling legislation and Florida and South Carolina are about to do so.

In another New England interstate banking development, Hartford National Corp. said Wednesday it will apply to establish a national bank in Providence, R.I. Beginning in July, Rhode Island will let in banks from other New England states if their home states provide reciprocal treatment for Rhode Island banks.

Also, shareholders of RIHT Financial Corp., a Providence bank holding company, on Wednesday approved a plan under which RIHT would be acquired by the Bank of Boston Corp.

The Fed's decision and the announcements by Hartford National and RIHT came as a federal appeals court in New York was studying the constitutional issues raised by laws in Massachusetts and Connecticut allowing interstate banking only within the New England region.

In the Bank of New York decision, the Fed again urged Congress to act swiftly on the interstate banking issue.

The Fed noted that "if the New England regional approach to interstate banking is emulated in other areas of the country, there is a potential danger that the result could be to divide the country into a number of banking regions.

"The board believes that the public policy issues that are raised by the regional approach are inherently national and would be best resolved by congressional action."

A spokesman for the Bank of New York called the Fed decision "a setback" and said "efforts to complete the acquisition will continue."

The Bank of New York decision was the second time in the last month that the Fed has denied an interstate banking plan; it recently rejected a plan under which Mellon National Corp. of Pittsburgh would have bought a New Jersey banking firm. Not Run-of-the-Mill Arguments

Both Mellon and the Bank of New York employed unconventional arguments worthy of medieval logicians.

Mellon unsuccessfully argued that its acquisition of Heritage Bancorp Inc. of Jamesburg, N.J., was permitted because Heritage since 1813 has operated a Philadelphia branch. Mellon is appealing the Fed decision.

The Bank of New York's argument was based on use of the word "an" in a section of the Douglas Amendment, the federal law curbing the interstate banking activities of bank holding companies.

In August 1983, the Bank of New York agreed to acquire Northeast Bancorp Inc. of New Haven, Conn., for $199.6 million in stock. The deal cannot be completed until federal or state laws are changed to permit interstate banking.

The Bank of New York in February applied to the Fed to acquire Northeast.

The New York bank's argument ran like this:

By enacting a statute last year authorizing the acquisition of Connecticut banks by other New England bank holding companies, the Connecticut legislature eliminated within Connecticut the federal prohibition on interstate banking.

Once a state allows any out-of-state bank holding company to acquire a bank within that state, it has authorized acquisitions by all bank holding companies, the Bank of New York argued.

Bank holding companies are prohibited from buying banks in another state "unless the acquisition of such shares or assets of a state bank by a out-of-state bank holding company is specifically authorized," according to language contained in the Douglas Amendment. …

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