THE COMMITTEE BILL PRESERVES COMMITMENT TO COMMUNITY

REINVESTMENT

Consumer and local community groups have expressed concerns about increased concentration levels, possible reduced services for low-income areas, and increased prices for consumers and borrowers if geographic restrictions on banking are removed. The hearing record described above actually suggests that costs will decrease to consumers and greater convenience will result. The committee bill also contains concentration level restrictions and does not affect the application of federal or state antitrust laws that do not have the effect of discriminating against out-of-state institutions. In addition, the groups expressed concern that nationwide branching would enable banks to take deposits in local communities and invest those funds elsewhere-leaving less credit available in the community.

The Committee understands the concerns expressed by the consumer and community interest groups and believes that banks have an obligation to promote economic growth, including the credit needs of their communities and low- and moderate-income neighborhoods. Accordingly, the Committee bill as reported ensures that the principles of the Community Reinvestment Act (CRA) will be observed under the system of interstate banking. The bill amends the CRA to require separate evaluations of a bank's record of performance in each state in which it has branches. If a bank has branches in two or more states within a single metropolitan area, regulators must evaluate the bank's performance in that multistate metropolitan area. Additionally, in considering acquisitions of banks, the Federal Reserve must review a bank holding company's subsidiary banks compliance with state community reinvestment laws. These measures are intended to ensure that banks operating across state lines continue to meet their obligations to the communities they serve in all the states in which they conduct business. The Committee also notes the November 3, 1993, testimony of Chris Lewis of the Consumer Federation of America:

Interstate branching will promote large banks, with centralized operations. This removal of power from the local level reduces the decision-making authority of branch managers and will decrease the accountability of a banking corporation to the needs of local communities.

However, as noted earlier, increased interstate banking under present law has not meant a reduced role for smaller banks. From 1986 to 1992, banks with assets of less than $1 billion maintained a market share of approximately 20 percent of nationwide assets and increased their market share in a majority of the states having a relatively large amount of interstate banking. As Under Secretary of the Treasury Frank Newman testified November 3, 1993:

Despite progressive consolidation at the state and national levels, the level of concentration in local urban and rural markets has remained virtually unchanged for almost two decades.

SUMMARY OF MAJOR PROVISIONS

Interstate banking and consolidations

Beginning one year after enactment, the Interstate Banking and Branching Act of 1994 permits a bank holding company, that is adequately capitalized and managed, to acquire or establish banks in any State. States may limit bank holding company acquisitions to banks that have been in existence for up to five years. States, however, may not discriminate among out-of-state acquirers. Beginning two years after enactment (unless a state opts in at an earlier date) the bill provides that a state may permit a bank holding company to combine its bank subsidiaries located in different states into a single bank with branches serving a multistate area. A state may opt out of interstate combinations at any time, but combinations approved before a state opted out would be grandfathered.

Interstate expansion by bank holding companies under the bill is subject to concentration limits. A bank holding company would be prohibited from making an interstate acquisition that would result in the holding company controlling more than 25 percent of the deposits held by insured depository institutions in a particular State, unless the host State eliminates this limitation entirely or has a lower concentration restriction. A bank holding company also would be prohibited from making an interstate acquisition that would result in the holding company controlling more than 10 percent of nationwide deposits held by insured depository institutions. The concentration limits do not supersede nondiscriminatory antitrust laws, which will continue to govern banking mergers and consolidations as before.

Interstate branching

If authorized by state law, the legislation would permit interstate branching on a de novo basis. The legislation provides that if a host state elects to authorize interstate branching, it must do so expressly, and may not discriminate against out-of-state banks and bank holding companies. Interstate branching authority granted by the states is limited to institutions that are adequately capitalized and managed.

Passage of this legislation will not limit the states' authority to conduct effective banking supervision or administer local laws, including tax and consumer protection laws. The chartering authority would continue to examine and supervise any out-of-state branches of its state-chartered banks. The law of the host state would apply to an interstate branch as if the branch were a branch of a bank chartered in the host state or in the case of a national bank, having its main office in the host state. Host state banking authorities are given express authority to examine branches of out-of-state statechartered banks. The bill, in providing new authority for interstate branching, would not affect whatever branching rights might exist under current law. The Community Reinvestment Act would be amended to require separate evaluations of performance in each state and in any metropolitan area crossing state lines.

In short, this bill permits interstate expansion while allowing states to impose limitations on de novo acquisitions and concentration. The bill also ensures effective supervision and protection of

consumer rights. Certain aspects of the bill are described in more detail below; a section-by-section analysis of the bill follows.

Minimum age conditions

One condition applicable to certain interstate bank holding companies preserved by the bill would allow, if a state so chose, to prohibit interstate acquisitions of new banks. Instead, the out-of-state bank holding company may be restricted to acquiring banks that have been in existence for a minimum period of time, up to five years. The minimum age condition may not discriminate among out-of-state acquirers. States can permit acquisitions of de novo banks.

State supervision of interstate branches and related issues

The legislation does not affect the supervision of bank subsidiaries located in different states owned by the same bank holding company. These subsidiaries will continue to be subject to supervision by the state banking supervisor in the case of state-chartered banks, as well as the appropriate federal agency for all banks. The bill assures that the states will continue to regulate banks that establish interstate branches-regardless of the manner in which the branch is established. Multistate state banks may be visited by the state banking agency of the chartering State. The host State also may determine compliance with its banking laws, including intrastate branching, consumer protection, fair lending, community reinvestment and taxation by a branch of an out-ofstate state bank, and may ensure that the activities of a branch are not conducted in an unsafe or unsound manner. National banks will continue to be examined by the Comptroller of the Currency and the bill does not affect the application of state laws to national banks.

The bill specifically provides that an interstate branch of a national bank established pursuant to this bill, shall be subject to the laws of the host state, including those that govern intrastate branching, consumer protection (including applicable usury ceilings), fair lending, and community reinvestment as if it were a branch of a national bank having its main office in the host state. With regard to branches of out-of-state state banks, similar host state laws would apply as if the branch was part of a bank chartered by the host state.

The bill states, however, that nothing in it affects sections 5197 of the Revised Statutes or section 27 of the Federal Deposit Insurance Act. Accordingly, the amendments in this bill that authorize insured depository institutions to branch interstate do not affect existing authorities with respect to any charges imposed by national and state banks for interstate extensions of credit.

The bill does not affect the existing ability of the states to administer and enforce tax provisions applicable to interstate branches. The states' current authority to tax business enterprises that operate across state lines will extend to interstate bank branches. The bill leaves it to each state to adopt whatever approach it deems appropriate and has no impact, for example, on whether the state will require separate reporting or combined reporting. Thus, the states

are free to adopt appropriate approaches consistent with the Constitution and other Federal laws.

Community Reinvestment Act

Amendments to the Community Reinvestment Act contained in the bill are intended to close a potential loophole in CRA coverage of an interstate bank. Without them a bank might have attempted to redesignate the geographic area of service on which its CRA record is judged to include the entire United States-which would avoid assessment of whether the branch was meeting the credit needs of discrete communities from which it is taking deposits. This is something that the bill attempts to avoid by requiring stateby-state CRA assessments of a bank's activities.

Banking concentration

Relaxation of the historical restrictions on interstate banking is not intended to allow large banks to acquire undue financial power nationwide or in individual states. The bill contains specific provisions to safeguard against such developments. It provides that state and federal antitrust laws will continue to apply to interstate banking and branching transactions. In addition, as an additional safeguard the bill contains statewide and nationwide concentration limits. A bank holding company may not receive the required regulatory approval under the Bank Holding Company Act to acquire a bank in another state, if the bank holding company would control, after the acquisition, more than 10 percent of the insured depository institution deposits of the United States. In addition, a bank holding company may not receive regulatory approval to acquire a bank in another state if the bank holding company would control, after the acquisition, 25 percent or more of the deposits in insured depository institutions in the state or such lower limit as may be provided under state law. The Federal Reserve Board would determine whether an institution exceeded the concentration limits. The state banking supervisor may waive the statewide concentration limit in a manner that does not have the effect of discriminating among out-of-state acquirers. Also as under current law, all bank mergers must be approved by Federal banking regulators and satisfy the antitrust laws.

Foreign banks

The bill does not change the existing provisions governing interstate banking by foreign banks operating in the United States, contained in section 5 of the International Banking Act of 1978 (12 U.S.C. 3103). The states may continue to permit a foreign bank to establish and operate, outside its home state, branches with restricted deposit taking powers. Under the bill, foreign banks also will be able to acquire and combine banks on an interstate basis if they use the structure required of domestic U.S. banking organizations.

Regulatory approval

The bill requires regulatory approval of both interstate acquisitions and interstate combinations. Bank holding company acquisi tions would continue to require regulatory review by the Federal

Reserve Board pursuant to section 3 of the Bank Holding Company Act. The bill specifically requires the Board, in acting on an application for an interstate acquisition, to determine that the acquiror is adequately managed and capitalized. The Board must also consider the applicant's record of CRA compliance by its depository institution's subsidiaries.

Interstate combinations of existing bank subsidiaries into a single branch operating in more than one state also would be subject to regulatory approval. The federal banking agency with jurisdiction over the merger, consolidation or other corporate transaction resulting in the combination would be required to approve the transaction, after taking into consideration all relevant factors, including the CRA ratings of the bank subsidiaries to be combined and the views of state regulators concerning the banks' compliance with applicable state CRA laws.

Section 1. Short title

SECTION-BY-SECTION

The short title for this legislation is the "Interstate Banking and Branching Act of 1994."

Section 2. Interstate banking

Effective one year after enactment, the Douglas Amendment to the Bank Holding Company Act, restricting the ability of a bank holding company to acquire a bank in a state other than its "home" state, is repealed. In its place the bill institutes new rules governing bank holding company acquisitions of banks outside the holding company's home state.

Section 2 provides that the Federal Reserve Board may approve an application by an adequately capitalized and adequately managed bank holding company to acquire an existing bank in another state, even if state law prohibits such an acquisition.

A state may set a minimum period in which a bank to be acquired has been in existence, so long as this minimum period is no longer than 5 years, and so long as this requirement does not discriminate among out-of-state bank holding companies. A state may permit the acquisition of a de novo bank by not setting a minimum age requirement.

A bank that has been established solely for the purpose of acquiring control of, or all or substantially all of the assets of, an existing bank and that does not open for business, shall be deemed to have been in existence for the same period of time as the bank to be acquired.

In considering applications under this section, the Board must consider the applicant's record of compliance with applicable Federal and state Community Reinvestment Act ("CRA") laws.

Concentration limits

The Federal Reserve Board may not approve an application under this section if, the applicant controls, or after the application is approved would control, more than 10 percent of the total deposits of all Federally-insured bank and thrift institutions in the United States. In addition, the Board may not approve an application