Congress considered a number of bills that provided for interstate acquisitions in 1985. The bills contained measures designed to protect local interests. The need for such legislation became less pressing after the Supreme Court, in a 1985 decision, upheld the validity of the regional agreements discussed above. Northeast Bancorp, Inc. v. Board of Governors, 472 US 159 (1985). Individual states, thus, were able to craft legislation compatible with their varying local and regional interests under the Douglas Amendment framework, which allowed broad state authority to permit interstate acquisitions conditionally, or not at all. Many states imposed conditions restricting de novo entry and specifying the minimum age of banks eligible for acquisition by out-of-state banking holding companies. A substantial number of states also limited the share of statewide deposits that could be controlled by an out-of-state banking organization. Some states have permitted interstate banking subject to conditions requiring the acquiror to make a contribution to economic activity in the state.

INTERSTATE BANKING AND BRANCHING WILL PROMOTE COMPETITION

Interstate banking

AND STABILITY

One of the critical elements of the bill is to eliminate remaining, disharmonious local law restrictions on interstate bank holding company acquisitions of banks in different states. Secretary of the Treasury Bentsen, in an October 25, 1993, speech outlining the Administration's banking agenda, stated, "We currently have a de facto system of interstate banking. But it's a patchwork system, and it's clumsy."

The Federal Reserve has repeatedly called for removal of the remaining restrictions on interstate banking. As Federal Reserve Governor John LaWare testified at the Committee's October 5, 1993, hearing:

In short, the states have made it 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, but in an inefficient and high cost manner. In brief, the Committee believes that phasing out the Douglas Amendment will bring rationality to a system that is already well on the way to nationwide banking. The Committee also anticipates that reducing the barriers to interstate banking will have several benefits.

First, such a reform will promote diversification of asset and liability portfolios that will strengthen the banking system. Geographic restrictions make it difficult for banks to diversify their deposit bases and loan portfolios, leaving them vulnerable to downturns in the local economies where they do business. While banks currently have some ability to diversify their risks, such as by purchasing loan participations from banks in other regions, they are hampered by the lack of a physical presence in those regions. Without such a presence, banks may have only a partial under

standing of the local economy and the assets they are purchasing. Geographic diversification will help alleviate this problem.

Second, interstate banking allows banks the ability to access additional markets, where funds may be less expensive, where lending demand is higher, or where risk and diversification factors are favorable. This would have helped the banking industry, and the taxpayers who stand behind the federal deposit insurance guarantee, in the past. For example, according to the October 5, 1993, testimony of acting FDIC Chairman Hove:

The insurance funds have absorbed major losses in recent years in rescuing large banking organizations with assets concentrated in a few industries or a limited geographical area. During the 1980s, for example, slightly more than 80 percent of failed-bank assets were in just four states: Texas, Illinois, New York, and Oklahoma. Perhaps if they had been more geographically diversified, banks in these states might have been better able to weather the financial storms that beset local and regional energy, agricultural, and real estate markets.

Governor LaWare of the Federal Reserve Board testified at that same hearing:

* * * the elimination of geographic restraints would provide an important tool in diversifying individual bank risk, providing for stability of the banking system, and improving the flow of credit to local economies under duress.

Thus, reducing these restrictions will bolster the safety and soundness of the banking industry and thereby lessen the vulnerability of the Bank Insurance Fund and the risk to the American taxpayer.

Third, removing the remaining restrictions on interstate banking will promote efficiency in the banking system. Branch consolidation, following repeal of the Douglas Amendment and amendment of the McFadden Act, will also increase the banking industry's profitability. A study by McKinsey & Company estimates that the cost savings to the banking industry from mergers, that would be encouraged by repeal of interstate banking and branching restrictions, could total $10 billion to $15 billion in annual pretax earnings (American Banker, June 10, 1991). These savings could be used to replenish bank capital, increasing the ability of the banking industry to absorb losses. Greater efficiency in the banking industry will reduce the strain on the deposit insurance fund and protect taxpayers.

Nonetheless, the Committee does not believe that increasing the opportunities for interstate banking will reduce the important role of regional and community banks. These institutions, with special knowledge of their communities, contribute to the vigor of local economies throughout the country. Ballard Cassady, the former Banking Commissioner of Kentucky pointed this out at the Committee's November 3, 1993, hearing at which he stated:

*** successful banks have traditionally been those that best meet the needs of the market they serve. Large banks have adapted somewhat but small community banks

have excelled at personalized service when needed, espe-
cially in loaning to small business. That is where the
knowledge of borrowers and local credit conditions are
major factors and most likely to be possessed by the small-
er community bank.

Smaller regional and community banks have already demonstrated their ability to compete in markets where national and international institutions have a presence. There is every reason to believe that properly managed and capitalized smaller banks will continue to thrive in the new banking environment.

Fourth, the passage of interstate banking legislation will lead to increased customer convenience and greater bank industry competition. Federal Reserve Chairman Alan Greenspan testified on this point, at an April 23, 1991, hearing:

What interstate banking promises is wider consumer choices at better prices and, for our banking system, increased competition and efficiency, the elimination of unnecessary costs associated with the delivery of banking services, and risk reduction through diversification. Interstate combinations and branches

There also will be several benefits from the adoption of the new interstate combination provisions contained in the bill. These benefits will include greater consumer convenience; lower operating costs and greater operating efficiency for banks; increased competition in the banking industry; enhanced ability of U.S. banks to compete internationally; and greater diversification of risks and services in the banking industry. In addition, the states' experience in permitting full intrastate branching bear out the benefits to be expected from enabling states to make interstate branching generally available.

First, interstate branching allows banks to follow their customers. Bank customers could be better served by dealing with the same bank in different states. Many consumers have complained about interstate restrictions that prevent them from depositing funds or cashing checks outside the state in which their account is established. Millions of depositors cross state lines commuting to and from work, as well as in their business and personal travel. Secretary of the Treasury Lloyd Bentsen, in an October 25, 1993, speech outlining the Administration's banking agenda, gave the following example:

The Washington area is a perfect case, and it isn't unique. Down the street from my office is the branch of a banking organization that hangs out its shingle in Maryland, Washington, Virginia and a few other states. People who use this branch but have their account at a branch in Maryland or Virginia, can walk up and cash a check. They can draw hundreds of dollars out of the ATM machine, or transfer thousands of dollars between accounts. But they can't make a deposit in that branch and get a deposit slip showing the bank has accepted it * * * But imagine, in the age of fiber optics, when I can go to a machine on the streets of virtually any capital in the world and get cash

with my bank card, not being able to make a deposit at my
own bank just because that branch is in another state is
like requiring that the space shuttle stay within the school
zone speed limit. We are the only country in the industri-
alized world with this kind of artificial restriction.

Not to be ignored is the fact that similar geographic restrictions are not placed on commercial banks' competitors. Indeed, as Acting FDIC Chairman Hove testified on October 5, 1993:

Just twenty years ago, commercial banks held 40 percent of the nation's credit market assets. Today, the banking industry's share is down to 26 percent. Mutual funds, money market funds, securities firms, mortgage pools, pension funds, finance companies and corporate America have all increased their shares of the nation's financial assets at the expense of the banking industry.

Restraints that came into being in part because of concerns about undue financial power and concentration of financial resources now, unfortunately, in many cases serve to benefit banking's competitors. In these cases, the ultimate losers are consumers: they are not given the benefits of a fully competitive financial marketplace.

A second benefit from removing existing interstate branching restrictions is that greater efficiency will be promoted in the banking system. Meaningful operating efficiencies can be achieved by eliminating many redundancies in multi-state banking organizations made necessary by current law. Comptroller of the Currency Eugene Ludwig enumerated several of them at the Committee's November 3, 1993, hearing:

By reducing operating costs, interstate branching would increase returns on equity, directly strengthening the industry's bottom line. Indeed, consolidation of multibank holding company bank subsidiaries into branches would generate cost savings in a variety of ways. It would eliminate the need for multiple charters, boards of directors, and administrative structures; facilitate the consolidation of back-office operations; and allow banks to achieve greater economies in the advertising and marketing of financial services. Consolidation of banks into interstate branching networks would also reduce the burden of complying with government regulation by decreasing the number of regulatory reports that the bank must file and the number of requests for information that it receives from its supervisor.

Third, expanded branching will promote additional entry into local markets, reducing concentration and increasing competition at the local level. This means greater convenience and lower costs to consumers. Furthermore, technological advances in the decades since passage of the McFadden Act have transformed banking into an international industry. American banks, however, are handicapped in competing with foreign banks in this market and abroad as a result of current restrictions. Thus, a fourth benefit from the interstate branching provisions in the bill would be to permit

American banks to become stronger global competitors with an enhanced capacity to help U.S. exporters sell their goods in markets abroad.

Finally, a critically important benefit from the interstate branching provisions in the bill would be to permit banks to further diversify their asset portfolios. Indeed, interstate branching can help prevent failures like Bank of New England, where a regional decline in real estate values helped topple a bank heavily concentrated in that area at a huge cost to the Bank Insurance Fund. Additionally, testimony of former Deputy Treasury Secretary Robert Carswell on March 20, 1991, revealed that bank failures in the past decade were concentrated in states with limited branching rights. That point was echoed by Robert Litan, then Senior Fellow at the Brookings Institution, who told the Committee on March 12, 1991, "It is no accident that in the 1980s most bank failures were concentrated in states with limited branching rights." He added:

The nation would have suffered fewer bank failures in the 1980's had we long ago permitted nationwide branching that would have spread many banking risks more evenly throughout the banking system.

Moreover, the experience of the states that allow statewide branching is positive and it has not come at the expense of small banks. Large banks are able to expand their areas of operations and diversify their risks while small banks continue to fill an important niche in the marketplace. During the last Congress on March 20, 1991, former Deputy Treasury Secretary Robert Carswell recounted New York's experience for the Committee:

Before New York removed its geographic branching restrictions and allowed any bank to branch anywhere in the state, there were predictions that independent banks would be driven to the wall and banking would be concentrated in the hands of a few large banks that would then squeeze and drain the local economies. It simply has not happened. Independent banks have done fine providing services to old and new customers. The general level of services to consumers has improved, and prices are more uniform across the state. Some larger banks have been successful in establishing branches upstate; others have not.

Governor LaWare in his October 5, 1993, testimony echoed the same point regarding New York's experience. LaWare stated:

When state-wide branching was authorized in New York State, a number of large New York City banks sought an upstate presence by acquiring small banks in these markets. By the early 1980s the acquired banks had gained an average less than one percentage point in market share, with the largest gain less than three percentage points. The acquired bank or branches continue to have small market shares or they have been sold to local banks, as the New York City banks have exited the market.