The Regulatory Quandary of Interstate Banking: Can States Keep Tabs on Sprawling, Multistate Companies? or Must Fed Run the Show?

By Easton, Nina | American Banker, October 17, 1985 | Go to article overview

The Regulatory Quandary of Interstate Banking: Can States Keep Tabs on Sprawling, Multistate Companies? or Must Fed Run the Show?


Easton, Nina, American Banker


WASHINGTON -- One day in 1986, teams of bank examiners will descend upon Sun Trust BAnks Inc. of Atlanta and its subsidiaries for a routine review of the company's financial condition.

What makes this examination noteworthy is that the regulators will be in two states at once -- Sun-Trust has 44 banks divided between Georgia and Florida. And the examination, which may be model for the future, will include representatives of both states' banking departments, as well as federal regulators.

This super-exam, during which the regulators will look at 80% of the holding company's $16 billion in assets on a single day, is just one of the ways that state regulators are responding to the advent of interstate banking. "We need to look at all of the organization at one time so we can see the whole picture with a wide-angle lens," said John Kline, Georgia's deputy commissioner of banking and finance.

Across the country, states are planning similar joint examination and supervision programs with their neighbors, and they are breaking down legal barriers to sharing financial reports with other regulators. At the federal level, regulators are working to improve their ties to state agencies; top Federal Reserve System officials acknowledge that these relationships are spotty.

Despite these intensive efforts to gear up for interstate banking, many policymakers are raising concerns about regulators' ability to effectively police large institutions once they cross state lines.

"Interstate bankings should strengthen financial institutions as they diversify their markets and increase their efficiency," said Elaine B. Weis, Utah's commissioner of financial institutions.

But, she added, "it's also an invitation to abuse."

"In my own mind the jury is still out" on the regulators' ability to adapt to interstate banking, said Rep. Buddy Roemer, D-La., a member of the House Banking Committee.

Among the potential scenarios that troubled policymakers raise:

* Could a bank holding company with subsidiaries in several states hide assets from examiners by shuffling them across borders -- not unlike the scheme that helped bring down the Tennessee banks controlled by the Butcher brothers?

As one Federal Reserve System official put it: "The need for gaining a comprehensive picture becomes greater. You don't want a situation where an asset quality problem is camouflaged so that it is less likely to come to the attention of supervisors on a timely basis."

* A bank holding company has its flagship bank in its home state. When the flagship bank's financial fortunes sour, the holding company drains the assets of a small out-of-state bank to help turn it around.

The home state regulators are likely to permit the holding company to destroy the out-of-state bank, argues Ms. Weis. "If it's a choice between your bank being closed or mine, I'll always say yours."

These are the kinds of concerns that plague regulators looking out over the current landscape of interstate arrangements that, for the most part, confine bank holding companies to specific regions of the country. But many regulators say that the potential for mischief will multiply if Congress ever permits banks to move into any state they desire.

"I don't think there's any question that [regulating interstate banks] is going to have its difficulties," said William Taylor, the Fed's chief of banking supervision and regulation. "Conceivably, a bank holding company could have 53 different regulators."

Mr. Taylor explained that in the interstate environment it will become more difficult for regulators "to look at each component part and understand it."

"You're going to have to have very tight coordination and controls on the shifting of assets in banks," he said.

A Blow to Dual Regulation

Some experts predict that interstate banking will erode the dual bank regulatory system that is so rooted in the country's commercial banking history and has enabled banks to opt for state or federal regulation. …

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