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Banking & Finance
AN EIGHTH DISTRICT PERSPECTIVE
WINTER 1985

1985—The Year of Interstate Banking?
Only a few years ago, most bankers were decidedly
opposed to the concept of interstate banking. Many analysts
point out that despite this opposition, financial services have
become available on a nationwide basis. As evidence they
cite the national financial networks of some automobile com­
panies, insurance firms, retailers and nonbanking financial
institutions. Large banks have also been active in offering
interstate financial services. It is estimated that domestic
banking organizations today have over 7,000 interstate
facilities such as loan production offices and mortgage
lending centers. Recent evidence suggests that a growing
number of smaller banks have joined the larger institutions
to play an active role in the evolution toward wider interstate
banking. Much of the debate among bankers as well as
legislators now centers on finding the most appropriate bank­
ing strategy for achieving this end.
One option being studied widely is the development of
regional banking pacts, which empower banks from states
of a defined region to acquire or establish banks in other
states within the region. One modification to this approach
being considered by many state legislatures is a ‘‘trigger
period’’ of a number of years after which banks of the region
would be open to full nationwide banking. The main
rationale for regional banking zones as an intermediate step
toward nationwide banking is to permit the smaller regional
banks to grow to a size that allows them to compete effec­
tively with the larger money center banks.
In the coming year, legislatures in most Eighth District
states will consider some form of regional interstate bank­
ing. This issue briefly examines the main arguments for
and against interstate banking and provides a state-by-state
synopsis of current legislative developments in the
District.

Background of the Debate
The McFadden Act, passed in 1927 and
amended in 1933, subjects the branching
authority of nationally chartered banks to the
banking laws of their resident state. With all
state laws prohibiting interstate branching,
both state- and national-chartered banks have



been restricted to single-state branching. The 1956 Bank
Holding Company Act eliminated another potential form
of interstate banking by barring bank holding companies
from acquiring banks in other states. The Douglas Amend­
ment, however, provides one avenue around the act’s in­
terstate prohibitions. This amendment gives individual states
the right to permit acquisitions of banks in that state by outof-state companies. This amendment has been cited as
justification for the formation of regional banking pacts.
In January 1985, however, Citibank challenged the con­
stitutionality of the regional banking zone established by
the states of Connecticut and Massachusetts, alleging the
pact to be a restriction of interstate commerce. A Supreme
Court ruling, expected in early summer, is likely to influence
future banking legislation considered by state legislatures.

The Debate

The controversy over wider geographic banking markets
exists at a number of levels. Some bankers are opposed to
bank expansion beyond county lines. Others can accept
intrastate branching but fear banks from neighboring states.
Still others propose regional banking pacts, but forbid entry
by banks from certain states or from other regions. In each
case, the primary argument against the expansion of each
bank’s offices beyond some arbitrary geographic limit is
the allegation that banks from another area (the next county,
the next state or New York City) would drain deposits from
a local area and leave insufficient funds to meet local credit
needs. Supporters of this view suggest this could occur if
a non-local bank aggressively bid away deposits from local
banks by offering higher interest rates, then used the deposits
to fund loans in another area. The net im­
pact would be a reduction in the local
availability of loanable funds.
Advocates of interstate banking counter
with
the observation that many small banks
THE
are already very active in redistributing local
FEDERAL
RESERVE
funds to other regions through routine federal
RANK of
funds sales to larger banks. Banks lend
ST. IX>t IS
surplus funds to other banks through the
federal funds market, often on an overnight

basis. For example, over the last six quarterly Call Reports,
U.S. banks with less than $100 million in assets, on average
were net sellers of $17 billion of funds (equivalent to near­
ly 5 percent of their deposits) to larger banks. Such sales
may reflect a lack of local loan demand or the opportunity
for higher returns in other regions. Regardless of the cause,
the federal funds market functions as a vehicle for
redistributing loanable funds from regions of excess supply
to areas of excess loan demand.
Proponents of interstate banking point out that, while
capital can indeed be drained out of an area, it can also be
infused into an area if economically justifiable. Building
on the same concepts behind the federal funds market, they
argue that a banking organization with a wider geographic
scope could more readily supply loanable funds to areas
and industries that would use them most productively. The
Farm Credit System, for example, functions as a vehicle
whereby Wall Street investors provide funds for loans to
farmers in rural areas across the country. In 1984, the Farm
Credit System sold over $98 billion of debt instruments in
major financial markets for this purpose. Thus, farmers and
other rural businessmen do not rely solely on local deposits
for loanable funds.
Another frequent argument is that interstate banking
would lead to increased concentration, allowing the remain­
ing banks to exercise monopoly-like power in dictating the
terms of deposit and loan agreements. Such an anti­
competitive result would allegedly occur if mergers and ac­
quisitions sharply decreased the number of banks and limited
the number of options for borrowers and savers.
States that have allowed statewide branching do not find
this to be true. During a period of statewide branching in
California, for example, the number of banking organiza­
tions increased from 209 in 1975 to 364 in 1982, while the
share of deposits at the state’s six largest banks fell. This
trend has been noted in several other states as well. If small
banking organizations have survived statewide banking in
California, they also would be likely to survive in the com­
petitive environment of nationwide interstate banking.

panies has expressed support for the bill.
Illinois
The Illinois Bankers’ Association will sponsor
legislation to allow regional reciprocal banking with con­
tiguous states. No trigger to full nationwide banking is in­
cluded. Together with three farm groups, the Independent
Community Banks of Illinois has formed the Illinois Coali­
tion for Competitive Banking for the purpose of opposing
interstate banking legislation.
Indiana
A bill for reciprocal banking with the four contiguous
states recently has been introduced into committee with the
support of the Indiana Bankers’ Association, the Indepen­
dent Bankers’ Organization and the Indiana League for
Economic Development. The bill contains no provisions
for moving to full nationwide banking.
Kentucky
In July 1984, the state enacted a bill allowing reciprocal
banking with contiguous states. The bill has a two-year
trigger, after which the state would be open to banks from
any state having reciprocal banking provisions.
Mississippi
No interstate banking legislation is expected in 1985.

In spite of the preceding arguments and evidence, a survey
of legislative proposals in Eighth District states suggests
that the regional approach will serve as an intermediate step
to full-scale nationwide banking. A summary of current pro­
posals in Eighth District states follows.

Missouri
A minimum of four different interstate banking bills will
be introduced in the 1985 state legislature. Three of the four
endorse the contiguous state branching concept. Two of
these three would set trigger dates for expanding to
nationwide banking. The Missouri Bankers’ Association
plan includes an expansion of bank powers, but does not
call for a trigger date. One of the regional bills includes
a provision to allow banks from any state to enter immediate­
ly on a de novo basis if their entry would cause them to
pay a yet-to-be-determined amount in state taxes. This pro­
vision essentially would allow banks outside of the con­
tiguous state region to “ buy their way into the state’’ ahead
of the trigger date. This bill tentatively includes provisions
requiring an out-of-region bank to demonstrate how its en­
try would benefit the state. The fourth bill calls for the im­
mediate adoption of full nationwide banking. The Missouri
Independent Bankers’ Association opposes any form of
interstate banking.

Arkansas
A regional interstate banking bill has recently been
introduced into a legislative committee. The bill calls for
reciprocal banking privileges with all southeastern states
ranging from Louisiana to Virginia and Washington D.C.
The Arkansas Bankers’ Association is neutral on the pro­
posal, but the Arkansas Association of Bank Holding Com­

Tennessee
An interstate banking bill supported by the governor and
the Tennessee Bankers’ Association will be proposed. The
bill would allow interstate banking with the eight states con­
tiguous to Tennessee plus West Virginia, South Carolina,
Louisiana, Indiana and Florida. The Independent Bankers’
division of the TBA has taken a stand opposing the measure.

Legislation in the Eighth District

—Kenneth C. Carraro
2




FEDERAL RESERVE BANK OF ST. LOUIS

WINTER 1985

EIG H TH D IS T R IC T B A N K IN G D A TA
(dollar amounts in millions)
Sm all W eekly Reporting Banks*

REGION i
(eastern Missouri and southern Illinois)

Nov 1984

Selected Assets
U .S. Treasury and G overnm ent Agency
Securities
O ther Securities
Federal Funds Sold

$

Total Loans and Leases-Gross
Secured by Real Estate
Com m erical and Industrial
To individuals

659
180
126

Dec 1984
$

672
178
143

Jan 1985
$

654
181
112

Percent Change
Jan - Dec 84
1 4 .1 %
-2 0 .2
-1 2 .8

1,499
660
463
256

1,499
655
455
271

1,496
64 6
466
271

12.9
12.2
13.2
22.1

2,407

2,433

2 ,3 9 8

7.1

Selected Liabilities
Total Deposits

REGION II
(Arkansas, northern Mississippi, western Tennessee)

Selected Assets
U .S. Treasury and G overnm ent Agency
Securities
O ther Securities
Federal Funds Sold

Nov 1984
$

Total Loans and Leases-Gross
Secured by Real Estate
Com m ercial and Industrial
To individuals

358
198
49

Dec 1984
$

360
201
57

Jan 1985
$

3 62
2 03
55

Percent Change
Jan - Dec 84
5 .9 %
-1 1 .5
-5 .0

1,403
510
539
269

1,410
512
544
270

1,405
512
543
2 72

8.0
30.9
0.9
2 2 .2

1,938

1,965

1 ,987

2.7

Selected Liabilities
Total Deposits

REGION III
(western Kentucky and southern Indiana)

Selected Assets
U .S . Treasury and G overnm ent Agency
Securities
O ther Securities
Federal Funds Sold
Total Loans and Leases-Gross
Secured by Real Estate
Com m ercial and Industrial
To individuals

Nov 1984
$

486
229
149

Dec 1984
$

474
233
168

Jan 1985
$

462
2 39
162

Percent-Change
Jan - Dec 84
-0 .4 %
-0 .9
-1 8 .8

1,155
439
343
281

1,177
444
356
283

1,1 7 7
446
351
28 4

16.2
12.7
12.7
19.4

1,926

1,933

1,9 4 7

4.5

Selected Liabilities
Total Deposits

'A sample of commercial banks with total assets less than $300 million.




3

EIG H TH D IS T R IC T B A N K IN G D A TA
(dollar amounts in millions)
Large W eekly Reporting Banks*
Selected Assets
Total Loans
Secured by Real Estate
To Financial Institutions
Agricultural
C om m ercial and Industrial
To Individuals
All O thers
Total Investm ents
U .S . Treasury and G overnm ent Agency
Securities maturing in:
1 y e a r or less
1 through 5 years
over 5 years
Securities of State and
Political Subdivisions

Percent Change
Jan - Dec 84

Nov 1984

Dec 1984

Jan 1985

$13,369
2,8 5 2
1,054
130
5 ,1 2 2
2,681
1,530
3,2 2 6

$ 1 3 ,6 3 3
2,8 6 4
1,134
129
5,1 6 4
2,7 4 2
1,600
3,241

$ 1 3 ,9 1 7
2 ,9 5 2
1,074
134
5,171
2 ,8 0 8
1,778
3 ,2 8 7

806
664
4 23

842
611
421

9 66
563
377

23.5
-3 8 .7
4.1

1,332

1,367

1,380

10.7

$ 16,915
5 ,0 8 5
1,275
10,558
2,021
3 ,6 7 7

$ 1 7 ,3 0 9
5 ,245
1,326
10,740
2,0 6 6
3,8 1 8

$ 1 7 ,2 6 3
5 ,1 7 7
1,388
10,699
2,1 1 9
3 ,7 3 4

1 2 .9 %
11.7
2 1 .8
2 1 .7
12.4
11.0
13.4
-2 .1

Selected Liabilities
Total Deposits
D em and Deposits
O ther Transaction B alances3
Total Non-transaction balances
MMDAs
Tim e Deposits of $ 1 0 0 ,0 0 0 or more

7 .0 %
-2 .8
5.4
12.7
9 .4
17.0

Selected Eighth District Interest Rates 4
Nov 1984
S up er N O W Accounts
M oney M arket Accounts
T im e certificates and tim e
deposits less than $10 0 ,0 0 0 :
9 2 through 182 days
over 1 year but less than 2 1/2 years
2 1/2 years and over

Dec 1984

Jan 1985

Year Ago
Jan 1984

7 .1 6 %
8.21

6 .8 6 %
7.75

6 .6 8 %
7.54

7 .3 2 %
8 .2 5

8.9 8
9.6 3
9 .8 7

8 .4 9
9 .2 7
9 .5 0

8.2 8
9.1 9
9.41

9.1 3
9.6 8
9 .7 3

2Large banks are those with total assets greater than $750 million. Historical data have been revised to incorporate adjustment factors that offset the
cumulative effects of mergers and other changes involving weekly reporting banks during 1984. These adjustment factors, which are computed each
year, are used to construct consistent time series for which year-to-year growth rates can be calculated. Adjustment factors are available upon request
from the Statistics Section of the Research and Public Information Department,
includes NOW, Super NOW, ATS and accounts permitting telephone or pre-authorized transfers.
4Average interest rates paid on new deposits by a sample of large and small commercial banks.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102