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i"':"bra r ^ 15, 1937

Branch, Group and Chain Banking
Growth of Branch Banking
Increasing Ratio of Branches to Banks
Distribution of Branches
Status of Group Banking
Distribution of Group Banks
States in 7Jhich Branch Banking Is Prohibited
States 7/hose Banking Laws Contain No Provision with
Respect to Branch Banking
States in vUhich Branch Banking Is Restricted to the
Head Office City or County
States in Fnich Branches Kny Be Established Beyond the
Head Office County But Not Throughout the State
States in Uhich State-wide Branch Banking Is Permitted
Interstate and Inter-district Group Banking
Changes Since 1931
Branch Banking Statutes
Federal Law
State Laws
State-wide Branch Banking
Beyond County of Head Office But Not State-wide
Head Office County Only
Head Office City Only
No Statutory Provision
Branches with Limited Junctions
Conditions under Which Branches May Bo Established
Statutes Affecting Group Banking
Federal Law
State Laws with Regard to Bank Holding Companies
Ownership of Bank Stock by Banks and Trust Companies
Capital Requirements for Establishment of Branches
Present Capital Requirements of Federal Lav/
Capital Requirements of State Laws
Effect of Present Requirements
Possible Modifications in Capital Requirements of Federal
Branch Banking Extension
National Policy for Branch Banking Areas
The Need and Advantages of Additional Branch Banking
Obstacles to Additional Branch Banking
Advantages and Disadvantages of Group Banking
Disadvantages and Evils
Restriction of Group Banking
A Proper Branch Banking Area
Considerations with Respect to Various Branch Banking Areas


Branch, Group and Chain Banking
Three methods may "be distinguished "by which the same interests
operate a hanking business at more than one office —
and chain systems.

"branch, group

In a branch system there is but one legal entity

of which the several offices are a part.

A group system comprises

separately incorporated banks ,-^with or without branches? which are
owned or controlled, directly or indirectly, by a corporation, business trust, association, or other similar organization.

Chain banking

is similar to group banking except that control is held or exercised by
an individual or a group of individuals.
On December jl, 1935 ^each of S04 commercial banks was operating
one or more branches.-^ Of the total of

branches included in thesa

branch systems, 1 , 6 1 7 were located in the same cities as the head offices
of the banks, 6 1 7 outside the head office cities but in the same counties
as the head offices of the banks,
noncontiguous counties.

in contiguous counties, and 53^ in

Suring the past decade there have been numerous

liberalizations in the laws with respect to branch operation and the
proportion of commercial banking facilities represented by branches has
increased considerably.

1/ Official statistics on group banking have always been confined to
groups comprising 3 or more banks.
2j A statistical analysis of branch and group banking as of December 31,
1936 will be undertaken later, if desired. The data needed for such
an analysis usually do not become available for several months after
the end of the year.
3] Section 5^55 TJ»S.B«S, defines the term 11 branch" as ffany branch bank,
branch office, branch agency, additional office, or any branch place
of business ... at which deposits are received, or checks paid, or
money lent ." The term "branch" is used in that sense in this memorandum, although it is recognized that some State laws make a distinction
between "branches" and certain other types of "additional offices,

Because of the difficulty of determining the essential facts, particularly where nonmember banks are involved, fully comparable statistics
are not available with respect to group banking*

However, a recent sur-

vey shows that on December "jl, 1935 there were 6l group banking systems
consisting of 3


similar control*

^ore banks operating under some form of corporate or
There were 5^3 ^anks embraced in these groups.


all of the banks were located in c i t i e s other than those in Yvrhich the
principal places of business of the respective groups were located and
correspond in many respects, therefore, to branches operating outside
the head office cities of their parent banks*

Since 193^ numerous

group banks have been converted into branch offices of affiliated banks*
Ho recent survey of chain banking has been made*

It would be im-

possible to determine the extent or degree to which chain banking exists
without data obtainable only through questionnaires returned by banks and
special reports by the Federal Reserve banks and other supervisory authorities*

At the end of 1931> when the last survey of chain banking was made,

176 chains comprising 3 or more banks each were reported.

The total num-

ber of banks in these chains was 903.
Under existing laws branch operation is not permitted in some States.
In others branches are permitted only in the head office city, the head
office county, or in groups of counties.

In still other States a bank

is permitted to operate branches anywhere within the State.
This situation with respect to branch operation is to be contrasted
with that of operating a multiple office system through e:roups , many of
which operate banks in two or more States unrestrained by any legal limitations in this respect.

Some groups operate in more than one Federal

H:-serve district, and. there is no legal "barrier to their spread across
the country.

Many of the groups were formed after 1927 and obtained

some of the advantages of multiple office banking which were denied by
the restrictions placed upon branch operation.

Numerous conversions

of group banks into branches have occurred in recent years after laws
were liberalized with respect to branch banking.

Growth of Branch Banking

Increasing Ratio of Branches to Banks* _ The proportion of coinnercial
banking facilities represented by brandies is much creator today than it was
a decade ago and appears to be increasing.

The increase in the ratio of

branches to total banking offices of confercial banks in recent years as
compared with the condition 15 years ago is striking, as is shov/n by the
following table:



1935 ,

Nunber of
bank si'
(head offices)

Nmiber of
3, S34

Ratio of
branches to
banking botai banking

l/Exclusive of Mutual Savings Banks and private banks| inclusive of such
Morris Plan and industrial banks, trust corapanies without deposits,
and other banking institutions as are included in State banking
2/The figures of branches of individual banks are not as of any uniform date.
3/End -of-year figures; data not available as of Juno 30.

The table shows that branches comprise 17.5 percent of total banking
offices, compared with 4.3 percent in 1S20«

The decreasing number of banking

offices is, of course, accounted for principally by the large number of bank
suspensions and mergers.

Largely because of suspensions and mergers of some

of the branch systems, the number of branches also declined during the
depression period 1930-1933.

The net reduction during 1930-1933 in the

number of "branches, however, was only 22. percent, compared with a J? percent reduction in the number of hanks.

It is significant that of recent

months since the stabilization of "hanking the number of individual banks
continues to decrease and the number of branch offices to increase*
ing the 11 months ended November 30> 193^»


example, the number of com-

mercial banks has decreased by about 148 while branch offices of commercial banks have Increased by about 80, principally as a result of the conversion of 58 banks Into branches*
A large part of the recent growth in the number of branches has taken
place in States In which the establishment of branches was not permitted
a few years ago*

For example, in Iowa there were 125 "branch offices 1j

on December 31, 19359

Wisconsin 105 > in Indiana 47, and in Oregon 42*

The establishment of branch offices in these States has served to replace
in part the banking facilities of which many communities were deprived by
the disturbances which culminated in the banking holiday of 1933*
Distribution of Branches« - There were 3

"branches In operation on

December 319 1935» l>3'-9 "being operated by national banks and 1,785 "by
State banks«
Of the total, 1 , 6 1 7 branches were located in head office cities.
This figure is but slightly larger than it was 12 years ago*

On the

other hand, the number of branches outside the head office cities,
is almost double that of 19?-^•

Nearly U00 such branches were established

during 193U and 1935*

1J The laws of Iowa, Wisconsin, Arkansas, and New Mexico permit the establishment of offic es tliat have only limited banking functions* These offices are not termed Tfbranches,! by State law; in fact the law of Iowa
prohibits ubranch banking."

The number of branches located outside of the county of the head office was 280.

Of this number 224 were loco/ted 25 miles or less from

their head offices, 166 from 26 to 50 &iles from their head offices, lU2
frori 51 to 100 miles from their head offices, and
from their head offices.

more than 100 miles

Of the latter number all but 6 7 were located

in California, where State-wide branch banking has had its greatest
California accounted for more branches than any other State, 79^»
located for the most part outside the head office cities.

In New York,

where branch systems may now operate in areas larger than counties but
not State-wide, there were 606 branches, nearly all confined to head
office cities.

In Ohio, where branches may bo established in contiguous

counties, 1 6 9 branches wore in operation, confined mostly to head office

In each of 5 other States, Michigan, Iowa, New Jersey, Massa-

chusetts and Wisconsin, there were in operation in excess of 100 branches.
In each of 22 other States the number of branches ranged from 10 to 31.
In each of 9 other States the number of branches in operation was less
than 10, while in the 9 remaining States no branches were operated.
The total number of branches in operation at the end of 1935 ^ d
the number outside the head office cities, by States, were as follows:

New York
New Jersey
North Carolina
Rhode Island

Number outside head
office city














Dist. of Colo
South Carolina
South Dakota
New Mexico
West Virginia
New Hampshire
North Dakota

Number •outside b
office 1 .'ty















There were no branches reported in operation in the following States:
Colorado, Florida, Illinois, Kansas, Missouri, Montana, Oklahoma, Texas,
and Wyoming*

In one of these States, Montana, the State law permits

establishment of branches in the head office county and adjoining counties
upon consolidation of banks*

The limited area to which branch operation

would have to be confined, as well as anti-branch banking sentiment, has
operated against the establishment of branches®

The Northwest Bancorpora-

tion and the First Bank Stock Corporation control most of the larger banks
in Montana

and, in this manner, provide the substantial equivalent of

branch banking.

_ 8 ~

Status of Group Banking

It is perhaps only natural that the holding company should have found
its way into banking as it has into other fields of business enterprise,
since in the absence of legislation permitting State-wide branch banking the
bank merger or consolidation movement in the 19201 s, so pronounced in some
of the larger cities, could be approximated in the rural sections only by
a holding company.

Before the enactment of legislation in recent years

permitting the extension of branch banking or broadening the branch banking
areas, some group interests expressed the belief that group banking in some
respects was a better form of multiple office banking than branch banking.
Most of the group heads, however, conceded that group banking was merely an
alternative to branch banking.

The distribution of group systems in

non-branch States, and the conversion during 1335-1955 of many group banks
into branches in States that have liberalized thoir branch laws, substantiate
this view.
Distribution of Group Banks. _ A survey made as of December 51, 1935
on the basis of data available in the records of the Board and the Federal
Reserve banks disclosed that there were 61 group hanking organizations in
operation at that time, each comprising 5 or more banksi/•

These 61 groups

embraced 514 national banks> 59 State bank members, 155 insured nonmembor
banks and 15 non-insured banks, or a total of 545 member and nonmeraber banks.

1/ The survey covered • (1) Banks controlled by a "holding company affiliate'" as defined in Section 2(c) of the Banking Act of 1933, as amended;
(2) banks which would have been under the control of a holding company
affiliate if the Reconstruction Finance Corporation capital investment
were disregarded; (o) other banks included in what is generally regarded
as a bank group, even though the affiliation did not technically conform to Section 2(c) of the Banking Act of 1955.

Some of the "banks in those groups operate branches, notably the
Bank of America National Trust and Savings Association, San Francisco, which has over 400 branches*

A total of 87^- branches were

being operated by 71 of the 5^3 banks included in the 6l groups.
Group banking has had its greatest development in States in
which branch banking either has not been permitted at all or only
under narrow restrictions.

The extension of branch banking privi-

leges in recent years has resulted in the conversion of many
group banks into branches.

In recent months some group systems

have enlarged their fields of operations by purchasing additional
banks and converting them into branches*
States in which Branch Banking is Prohibited. - At the end of
1935 there were 15^ group banks in 7 of the 9 States in which the
establishment of branches is prohibited, distributed as follows:


West Virginia


The Northwest Bancorporation controlled


of the group banks

in Minnesota and the First Bank Stock Corporation controlled hi.
Both of these holding companies operate in several States.


Florida 8 of the 2,k group banks belonged to the Almours Securities
group, 7 t 0 the Atlantic National Bank group of Jacksonville,
Florida, and 9 to 2 other groups.

In Te;cas 8 of the

group banks

- 10 -

"belonged to the Republic National Bank group of Dallas and 5 to
the Mercantile National Bank group of Dallas,

In Nebraska 7 of

the 11 group banks belonged to the Northwest Bancorporation.
The laws of Kansas, in which there are no group "banks although
branch banking is prohibited, authorize the banking authorities to
examine any corporation holding as much as one-fourth of the stock
of any bank or trust company.

This factor and the agitation of

unit banks against both branch and group banking may account for
the fact that group banking has had no development there.


laws of Colorado, where there also are no group banks, appear to
contain no provisions which might tend to prevent the operation
of group banking systems.
States Whose Banking Laws Contain No Provision with Respect
to Branch Banking;* - There were U3 group banks at the end of 1935
in four of these States, distributed as follows:
North Dakota
New Hampshire






The 30 group banks in North Dakota were all controlled by
the Northwest Bancorporation and the First Bank Stock Corporation.
Although there are no group banks in Oklahoma, there appears
to be nothing in the laws of the State that would prevent the

- 11 -

development of group banking.

There was in fact a fairly large

group there before the banking holiday in 1933»


there is a

chain" of 9 hanks controlled by Thurmond Brothers.
States in Which Branch Banking is Restricted to the Head
Office City or County. - There were S3 group banks in five of
these States, distributed as follows:
New Jersey




In Massachusetts the Old Colony Trust Associates group
controlled 15 "banks and the National Shawmut group 7*
Tennessee the Hamilton National Associates controlled 12
banks, besides 6 banks in Georgia where branches may be
established only in the head office city.

In New Jersey

the IS banks belonged to 5 different groups.
There appears to be nothing in the laws of Delaware,
Louisiana and Alabama, in which there are no group banks,
preventing the development of group banking.

A group of 7

banks in Alabama, headed by the First National Bank of Birmingham, was converted into a branch system in 1935 "^-pon the
enactment of enabling legislation.
States in Which Branches May Be Established Beyond the
Head Office County but Not Throughout the State. - There were
172 group banks at the end of 1935
distributed as follows:


of these States,

- 12 -

New York



NOT; Mexico




In Nov/ York, where a State bank nay establish branches only within the
banking district, as defined by statute, in which its head office is located,
there were 50 group banks, of which 20 belonged to the Marine Midland Corporation and the remainder to 6 different groups.

In Pennsylvania the 47 group

banks at the end of 1955 arc accounted for principally by tho Mollbank Corporation and Union Trust

Company which controlled 25 banks.

The status of

the Mollbank Corporation as a holding company affiliate has since been
terminated by distribution of stock of the subsidiary banks, but the Union
Trust Company, which like the Mellbank Corporation is controlled by the Mellon
interests, is still a holding company affiliate with 4 subsidiary banks.
Seven other groups in Pennsylvania controlled a total of 22 banks at the end
of 1955.

In Wisconsin 18 of the 24 group banks belonged to the Wisconsin

Banksharos Corporation.

In Montana the 27 group banks all belonged to the

First Bank Stock Corporation and tho Northwest Bancorporation.
of the 15 group banks belonged to the BancOhio Corporation.

In Ohio all

In Iowa 6 of tho

11 group banks belonged to the Janes F. Toy group and 5 to tho Northwest
Tho existonco of group banking systons in some of tho States may bo
explained partly by tho fact that tho branch banking area, as defined by
State lavs, is not sufficiently wide to permit the conversion of some of the

- 13 -

group banks into branches*

In New York, for example, some of the bank-

ing districts fixed by statute are relatively small, comprising as few
as three or four counties, while the banks in the Marine Midland group
are located in a number of the banking districts.

In Wisconsin and Ohio

the limitations of the branch banking area effectively prevent the Wisconsin Bankshares Corporation and BancOhio Corporation, respectively,
from converting some of their banks into branches.

The high capital re-

quirements applicable to national banks establishing branches outside
of their head office cities also retard the conversion of banks into
Mississippi, which has no group banking, prohibits the incorporation in the State, or admission to business in the State, of any corporation to operate banks in groups or chains.

Arkansas prohibits any per-

son who owns 50 percent or more of the capital stock of three or more
banks from borrowing from such banks.

There appears to be nothing in

the laws of New Mexico to prohibit the development of group banking
States in Which State-wide Branch Banking Is Permitted. - There were
91 group banks at the end of 1935

States which permit State-wide branch

banking, distributed as follows:

South Dakota
Ehode Island


South Carolina
North Carolina


- Ik ~

These banks v/ere distributed through 12 States and belonged to 19
different groups.

The existence of group banks side by side with branch

banks in some of the States listed above, notably the Western States, is
explained partly by the existence of two or more holding companies, each
having subsidiary banks, some with branches©

It is due also to the fact

that legislation permitting State-wide branch banking was not enacted in
some of these States until 1933*

Since that time many of the banks be-

longing to groups in these States have been converted into branches.


tain factors tend to postpone the conversion of group banks into branches,
such as minimum capital and other requirements made by supervisory authorities, especially with respect to member banks; personnel problems; the desire of the holding company to acquire additional stock of the controlled
bank before converting it into a branch; the need of determining whether or
not the interests of the holding company would best be served by the conversion; and the existence of strong anti-branch sentiment or desire to
test gradually the state of public feeling with respect to branch banking*
In summary, of the 5^3 banks belonging to groups at the end of 1935,

15^ \?ere located in 7 States in which the extension
of branch banking was prohibited;
4-3 in U States in which there is no statutory provision for the establishment of branches;
83 in 5 States in which the establishment of branches
is restricted to the head office city or county;

- 15 -

172 in 6 States in which branches may be established
beyond the limits of the head office county but
not throughout the State;
91 in 12 States in which State-wide branch banking
is permit ted*
Interstate and Inter--Si strict Group Banking* - Only 2 banks in the
United States, both national, have interstate branches*

All of the k

branches of these banks were established many years ago, before the operating banks became national associations*

In contrast with these

isolated instances of interstate branch banking, there are a number of
group banking systems that cross not only State but also Federal Reserve
district lines*
At the end of 1935 t^e Northwest Banco rpo rat ion controlled 9^" "banks
scattered through Minnesota, North Dakota, Montana, Nebraska, Wisconsin,
South Dakota, and Iowa*

These banks were located in 3 Federal Reserve

districts, Minneapolis, Chicago, and Kansas City, and in k different
Federal Reserve bank or branch zones, namely, those assigned to the Federal Reserve Banks of Minneapolis and Chicago and to the Federal Reserve
branches at Omaha and Helena*
The First Bank Stock Corporation had S3 banks located in Michigan,
Minnesota, Montana, South Dakota, and North Dakota*

All of them were in

the Minneapolis Federal Reserve district, but some of them were located
in the zone (the entire State of Montana) assigned to the Helena branch*
The Transamerica Corporation controlled 6 banks operating in California, Oregon, and Nevada at the end of 1935*

Since then it has ac~

- 16 cmired control of a national 'bank in Washington and additional "banks in
California and Nevada,

The principal "bank in the Transamerica group

has over Hoo "branches.

The "banks and "branches in the Transamerica group

are all in the San Francisco Federal Reserve district.

Some of them are

located in the territory assigned to the head office of the Federal Reserve bank and others in the territories assigned to the Los Angeles,
Portland, Salt Lake City, and Seattle branches.
Some of the important groups confine their operations to a single

The Marine Midland Corporation of Buffalo, for instance, has

20 banks, all in the State of New York.

Some of them, however, are

located in the Buffalo branch zone, and others in the Federal Reserve
bank (head office) territory.
The BancOhio Corporation controlled 13 banks at the end of 1935>
all located in Ohio.

Some w;re in the Cleveland Federal Reserve bank

zone and others in the Cincinnati branch zone.
The Wisconsin Bankshares Corporation of Milwaukee controlled IS
banks, all in Wisconsin.

Some were located in the Chicago Federal

Reserve district and others in the Minneapolis district.
The following summary table shows the groups which on December 31>
1935 comprised 5 or more banks and which operated in more than one
State, in more than one Federal Reserve district, or in more than one
Federal Reserve bank or branch zone.

- 17

Number of banks in group
Name and location of
principal office of grouo

Total ional
banks members


Nuiaber of States, Federal Reserve ban]: and
branch zones, and Federal Reserve districts
in -which the group has
banks or branches
States Zones jDistricts

Northwest Bancorporation
Minneapolis? Minnesota








First Bank Stock Corporation
Minneapolis , ffiinnesota








Transarneri ca Corporation
San Francisco, Calif•








James F. Toy Bank Stock Trust
Sioux Falls, 8. Dak.








First Security Corporation
Ggden, Utah








Rav/lins Securities Company
and J. E. Cosgrif.f
Salt Lake City, Utah






Vollmer Securities Company
Lewi ston, Idaho







Old National Corporation
Spokane, Washington




















Anglo National Corporation
San Francisco, California


Windber Trust Company group
Windber, Pennsylvania


Citizens & Southern Nat. Bank
S avannah, G e orgia







Hamilton National group
Chatt an oo ga5 Tenne s see







Marine Midland Corporation
Buffalo, New York








BancOhio Corporation
Columbus, Ohio








Wisconsin Bankshares Corp.
Milwaukee, Wisconsin








First National Bank group
Louisville, Kentucky









1/ In tho case of this group the statement shows the current situation rather than
the situation on December 51, 1955.

Changes Since 1951* ~ The latest previous survey of group banking,
made as of the end of 1051, indicated that there were 97 bank groupsi/ in
operation comprising a total of 978 banks•

By the end of 1955, the

affiliations in many of these cases had been terminated by the dissolution
of the holding company, by disposing of control of subsidiary banks> by
closing of some or all of the banks in the group system, or by converting
some of the subsidiary banks into branches.

In the latter class are the

following ;
Number of banks
in group on
Dec* 5.1» 1951
Hartford Connecticut Trust Co* group, Hartford, Conn,
First National Bank group, Birmingham, Ala,
First National Bank group, Seattle, Wash,
United States National Corporation, Portland, Ore.
Worcester County Bank & Trust Co., Worcester, Mass.
First National Investment Co*, Boise, Idaho


Subsidiary banks in all of these groups were converted into branches
upon the enactment of legislation during recent years permitting the establishment of branches^/.

The last two were converted into branch systems partly

incident to the reorganization of constituent banks necessitated by their
weakened condition*

1/ As previously indicated, the current definition of a "bank group" as used
in this memorandum is practically the statutory definition of a "holding
company affiliate" contained in the Banking Act of 1955. There was no
such legal definition in existence at the end of 1951, and accordingly
some of the bank groups surveyed at that time did not necessarily conform
to the current definition* In general, however, the 1951 survey, like
the present one, covered those situations where 5 or more banks were
associated under a centralized corporate or similar control, as
distinguished from control exercised by an individual or group of
individuals, a relationship commonly termed "chain banking",
2/ Legislation providing for the establishment of branches, or extending the
territory in which branches might be established, was enacted during
1931-1955 in 22 States.

- 19 In addition to the group banking affiliations which have been completely
terminated since 1931 by conversion of subsidiary banks into branches, a
number of groups which are still in existence have converted some banks
into branches since the enactment of enabling branch legislation*


Number of "banks
converted into
branches during
Old Colony Trust Associates of Boston, Massachusetts,
associated with the First National Dank of Loston
Northwest Incorporation, Minneapolis, Minnesota
First Security Corporation, Ogden, Utah
Marino Bancorporation, Seattle, Washington
Old National Corporation, Spokane, Washington
Anglo National Corporation, San Franc:!sco, California
Wisconsin Bankshares Corporation, Milwaukee, Wisconsin


The movement for conversion of group banks into branches is still in

In recent months some groups have acquired additional banks

which have been converted into branches.
Among the group relationships that have been terminated since 1931
because of dissolution of the holding company or because of the closing of
some or all of the affiliated banks are the following:
Number of banks and
branches in group on
December 51, 1951
Detroit Bankers group
Guardian Detroit Union group
Exchange National Bank group, Tulsa, Oklahoma
Financial Institutions group, Augusta, Maine
C* J. Weiser, Inc., Decorah, Iowa
Central Republic Bank & Trust Company group, Chicago, 111.
National Republic Bancorporation, Chicago, 111,



The relationship between the banks In trio last two groups was somewhat

However, the fact that nearly all of the affiliated banks suspended

indicates the existence of a close relationship between them.




Branch Banking Statutes
Federal Law. - The National Bank Act has been liberalized with respect to
branch banking twice in the past decade.

By tho McFaddon Act of 1927

national banks were given power to establish branches in tho head office city
in those States whore State institutions had such powers, in addition to
continuing the operation of existing branches wherever located.

No special

capital requirements were stipulated by the McFadden Act for the establishment or operation of branches.
The Banking Act of 1935 extended the power of national banks so that
they may establish branches within any area in the State in which the national
bank is situated provided that establishment of branches within such area, is
authorized to State banks bv affirmative provisions of State lav/.

They may

also continue to operate any branches which were in lawful operation on
February 25, 1927, when the McFadden Act was passed.
The Banking Act of 1933 also included certain stipulations with respect
to minimum capital for banks establishing branches outside the head office

Those provisions, which have had the effect of preventing the establish-

ment of branches by national banks in some cases, aro discussed elsewhere in
this memorandum.
State bank members of the Federal Reserve System nay establish branches
under the same conditions and limitations as national banks.

A State bank

applying for membership may continue to operate any branch which was in lawful
operation on February 25, 1927, without regard to location, but as to any
branch established after that date the bank must comply with the capital and
other requirements governing the establishment of branches by national banks.

State Laws. - Surveys and digests of State statutes relating to "branch
hanking have "been prepared from time to time since 192.4 "by the Board1 s

These surveys show that the number of States authorizing some

form of branch banking has increased from lb in 192.4 to 34 in 193b, and
the number of States either prohibiting or without provisions regarding
branch banking has decreased from 32 in 1924 to 14 in 1936. 1j
As is brought out below, the growth in the number of States authorizing branches has been due to an increase in the number of States permitting branches on a State-wide basis and in the number of States permitting them in areas beyond the city of the head office*

These changes

in the direction of liberalization have taken place largely during 19311936; in such cases the year in which the present provisions were enacted
is shown In parentheses after the name of the State. 2j
State-wide Branch Banking* - Branch systems could under the law
operate on a State-wide basis in 9 States in 1924.

In June 193^ there

were 17 such States as follows:
Connecticut (1933)
Idaho (1933)
Maine ( 1 9 3 3 )

Michigan (1933)
Nevada (1933)
Horth Carolina
Oregon (1933)
Rhode Island

South Carolina
South Dakota (1933)
tTtah (1933)
Washington (1933)

1/ Branches or additional offices have also been permitted throughout this
period in the District of Columbia, the political boundaries of which
are the same as those of the city of Washington.
Zj The classification of States in 1924 and 193^
exactly comparable
in some instances, due to different interpretations in 1924 and 193^ of
the provisions of State branch laws; these differences do not, however,
affect the conclusions in an important degree. In Virginia, for example,
a bank may establish branches in the head office city without regard to
population and in other cities with a population of 50,000 or more. In
addition a bank may open branches in the head office county or adjoining counties by purchasing other banks.

- 22
Only 2 States, Delaware and Georgia, whose statutes in 192*4 authorized State-wide "branch hanking do not permit it now*

The establishment of

new branches in both these States is restricted to the head office city.
Actions of a restrictive character taken in the years before 1930 were
associated among other things with popular sentiment against the chain
store movement and with "bitterness

resulting from a spectacular failure

of a branch or chain banking system*

There were 12 head office city and

2*4 other branches in operation in Delaware and Georgia at the end of 1935*
Beyond County of Head Office but Not. State-wide* - In 192*4 branches
could under the law be established beyond the county of the head office
but not on a State-wide basis in 1 State, Maine, \?here State-wide branch
banking is now permitted.

In June 193& there were 9 States in which

branches could be established beyond the county of the head office but
not on a State-wide basis, as follows:
Arkansas (1935)*
Iowa (1931)*
Mississippi (193*0

Montana (1931)
New Mexico (1935)*
New York (193U)

Ohio (1931)
Pennsylvania (1935)
Wisconsin (1932)*

*These States authorize only limited power "offices."
As previously indicated, however, these are referred
to in this memorandum as "branches," in view of the
provisions of Federal law*
Head Office Comty Only. - Branches were permitted by law to be
established within but not beyond the limits of the head office county in
1 State in 192*4*

In June 1936 there were 6 such States as follows:

Alabama (1935)
Indiana (1931)

Massachusetts (193*0

New Jersey


*Banks in Allen, Calcasieu, and Jefferson Davis parishes
may operate branches in any one or more of these parishes*

- 23 Head Office City Only. - Branches were permitted by law to he established within hut not beyond the limits of the head office city in 5
States in 192^#

In June 193& there were only 2 such States, Delaware

and Georgia, both of which permitted State-wide branch banking in 19214-fi
Of the 5 States which limited branches to the head office city in 192^,
Mississippi, New York, Ohio, and Pennsylvania by June 1 9 3 6 permitted
branches or additional offices beyond the county of the head office
but not on a State-wide basis and Massachusetts permitted them within
the county of the head office city.
Prohibited^ - Branches were prohibited by statute in 1 7 States in
192^ hut in only the following 9 States in June 1 9 3 6 :





West Virginia

Ho Statutory Provision,, - In 192^,15 States had 110 statutory provisions with respect to branch banking*

This situation was limited to

the following 5 States in June 193&:



In 6 States in which establishment of branches is either prohibited
or not provided for by statute, some branch offices existed for one
reason or another on December 3 1 , 1935®

There were 30 such branches

in Kentucky, 6 in Minnesota, 2 each in West Virginia and Nebraska, and
1 each in New Hampshire and North Dakota.

The establishment of the 3O

branch offices in operation in Kentucky 011 December 31, 1935j has been



made possible by a court ruling to the effect that a State bank may
establish offices separate and apart from its main office for the pur^
pose of receiving deposits, paying checks and keeping records of such
Branches with Limited Functions. - The laws of Iowa, Wisconsin,
Arkansas, and New Mexico permit the establishment of offices that have
only limited banking functions.
but not make loans.

They may receive and pay out deposits

It is not known to what extent, if any, these of-

fices receive applications for loans and arrange with the parent bank,
by telephone or telegraph, to have the proceeds of the loan credited
immediately to the deposit account carried by the applicant at the

In any event they are not termed "branches" by State law;

in fact the law of Iowa prohibits "branch banking*"

In South Dakota,

North Carolina , and Mississippi full power branches are authorized
under some circumstances and limited power offices under other circumstances.
Conditions Under Which Branches May Be Established* - The law of
Montana provides that no branch may be established except by consolida-r
tion of banks, and the laws of H other States contain a similar restriction with respect to branches to be established in certain circumstances.!./
The laws of Arkansas and Iowa provide that no branch may be established in
a place where there is already a banking office, the law of Wisconsin provides that no branch shall be established where there are already adequate
banking facilities, and the laws of 5 other States contain a similar restriction with respect to the establishment of branches in certain cir~
1/ For example, if the branch is outside the head office city, in a
place under a ccrtain population, etc.

- 25 -


The statutes of 10 States provide a somewhat less severe

restriction to the effect that no branch may be established except by
consolidation or in a place where there is no banking office, but in
most cases this applies only to branches to be established in certain

Some States have one requirement for the establishment of

branches in certain circumstances and a different requirement for the
establishment of branches in other circumstances, and thus there is a
certain amount of duplication in any such compilation.

However, 22

different States have statutes which, in at least some circumstances,
restrict the establishment of branches to consolidations, places without
another bank, or an alternative between these two*
The statutes of 10 States contain provisions restricting the
establishment of branches to places of a specified population


some cases these population restrictions practically confine branch
banking to the places in which it now exists.

For example, the law of

Alabama provides that a State bank may establish a branch at any place
within- the county in which it is located, but another provision of the
law restricts the establishment of branches to counties having a population of over 250,000.

This effectively restricts branch banking to

Jefferson County, in which the City of Birmingham is located.

Statutes Affecting Group Banking;
Federal Law.--Before the enactment of the Banking Act of 1955, Federal
law, which has closely restricted the extension of branch banking, contained
no provision whatever designed to control the other forms of multiple office
banking, namely, group banking and chain banking.

The Banking Acts of 1953

and 1955 contain provisions which bring group banking under some degree of
Federal control, but they do not restrict the area of operations of a bank
group and a "holding company affiliate", accordingly, may operate banks in
any part of the country*
The principal restrictive provision in Federal law with respect to
holding company affiliates is the requirement that such an organization must
obtain a voting permit from the Board of Governors before it can legally
vote the stock of member banks controlled by it.

In order to obtain such a

-permit, the holding company affiliate must agree to certain conditions.


principal conditions prescribed in the law are that the holding company affiliate must submit to examination by Federal authorities and must agree to
build up a portfolio of readily marketable assets, other than bank stocks,
equal to a certain percentage of the bank stocks controlled by it.


Board of Governors also prescribes specific conditions in connection with
each voting permit, all designed to strengthen or to maintain the strength
of the holding company .and the banks controlled by it and to improve their
operating practices.
The law also imposes certain restrictions on the amount and conditions
under which credit may bo extended by a member bank to its holding company,
regardless of whether or not the holding company chooses to apply for a
voting permit.

Holding company affiliates are also required to submit

reports as of the same call dates as condition reports rendered by member

These reports must be published by the member banks in the same

manner as their condition reports.
These provisions of Federal law and the conditions prescribed, pursuant
thereto do not, however, prevent the acquisition of additional member and nonmember banks, no matter where located.

Thus, if a given bank group cannot

expand its field of operations by establishing branches because of prohibitory
provisions of law, it may accomplish essentially the same thing by acquiring
and operating additional banks, provided only that it complies with provisions
of law pertaining to voting permits, etc.
State Laws with Regard to Dank Holding Companies^ - Only in the following
5 cases do State laws appear to be designed to prevent the control of banks
by holding companies %

Formation of any corporation, or the admission
of any foreign corporation to do business
in the State, for the purpose of operating
banks in groups.

West Virginia

Holding of bank stock by a corporation to
perfect control of a bank, (The ownership
of bank stock for investment purposes is
not prohibited,)

New Jersey

Holding by a corporation of more than 10% of
the stock of more than 1 bank or trust company.


Acquisition by a corporation organized or
licensed to transact business in the State
of more than one-fourth ox the stock of any
bank or trust company,,


Holding by any person of more than one-half of
the stock of any bank or trust company.

1/ Discussion based on provisions of State banking laws without regard to
other provisions of State law.

In spite of the apparent intent of the lm;, there are some group banks
in each of tho above States except Mississippi.

It may bo that control over

tho banks in such States is hold by a method not specifically prohibited by

For example, in the case of the First National Bank of Louisville,

trustees hold control over several banks.

In Washington the exist office of

some group banking possibly is explained by tho fact that the lav; appears to
prohibit a corporation organized or li con sod to transact business in tho Stai/j
from acquiring control over additional banks but not from continuing existing
control over banks.

It is understood from newspaper reports, moreover, that

tho Transamorica Corporation during 1956 acquired control of the National
Bank of Tacoma, Washington.

In view of tho provisions of State law referred

to above, control of this bank may bo held by an individual in behalf of the
Corporation, or the Corporation may hold it directly on the ground that such
holding does not constitute the transaction of business in the State.


West Virginia and Now Jersey the existence of some group banking perhaps is
partly explained by the fact that tho restrictive provisions of law aro not
very dear, particularly with respect to the acquisition of control of banks
and trust companies by other banks and trust companies.
The laws of the following 5 other States contain miscellaneous provisions
designed to afford some measure of supervision of tho operations of bank
holding companies or to control somewhat, tho relations between the holding
company and the controlled banks;


Requires a holding company to obtain a voting
permit, as the Fodoral statute does, before
it may vote the stock of controlled banks.


Authorises tho banking authorities to examine any
corporation holding as much as one-fourth of
tho stock of any bank or trust company.


A person owning 50 percent of the capital stock
of three or nore banks or trust companies nay
not obtain loans from such institutions.


Restricts dealing between bank holding companies
and their banking affiliates.


Prohibits the holding of more than 10 percent of
the stock of any bank or trust company by any
corporation unless 75 percent of the stock of
both the corporation and the bank or trust company is voted in favor of such relation-; . .ip.
A corporation controlling a majority of the stock
of any bank or trust company is subject to
supervision and examination, must file reports,
is subject to double liability, and may be
required to correct unsound practices.
When more than 10 percent of the stock of a bank is
controlled by another corporation, the bank may
not establish a receiving and paying station,
the substantial equivalent of a branch office.

Minnesota lav; recognizes the existence of group banking by prohibiting
any bank from advertising in any way that it derives any financial strength
from association with any other bank or banks by way of a holding company or
other similar structure,

Pennsylvania recognises the existence of group

banking by providing that any corporation owning bank stock may vote the
stock by its president.

No provision, however, for supervision of holding

companies exists in either of those States.

There appears to be nothing in

the laws of the 36 other States relating to the acquisition of bank stock by
holding companies or relating to chain or group banking,
Ownership of Dank Stock by Banks arid Trust Companies^ - The laws of some
States also contain provisions with respect to tho acquisition of bank or
trust company stock by banks and trust companies.

These provisions vary

widely from State to State and are difficult to summarize.
1/ Discussion based on provisions of State banking laws without regard to
other provisions of State law®

- 30 In general, it appears that commercial "banks in approximately half the
States are prohibited from acquiring any bank or trust company stock or are
limited as to the amount that may be acquired; the laws of 1J other States
contain no provisions with respect to the acquisition of such stock by commercial banks; and the laws of Arizona, New Jersey, Pennsylvania, and South
Carolina permit commercial banks to acquire such stock apparently without
limitation, although Arizona requires the approval of the Superintendent of
Banks *
The laws of about half the States (though not always the same States
that impose similar restrictions on commercial banks) prohibit trust companies from acquiring bank or trust company stock or limit the amount that
may be acquired; the laws of 12 States apparently contain no provision with
respect to the acquisition of such stock by trust companies; and the laws
of Arizona, Arkans as| Coloradoj Louisiana, Maryland, Michigan, Montana,
Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania,and Utah permit trust
companies to acquire such stock apparently without limitation, although
Arizona and Utah require the approval

the State banking department*

Insofar as State law is concerned, therefore, there is no reason why
trust companies in a number of States may not acquire control of banks and
operate group banking systems.

There are, in fact, a number ojf bank groups

that are headed by trust companies which own the controlling interest in
the stock of other banks»

There are also some groups which are headed

either by a national bank or by a State bank, which controls other banks
through trustees, subsidiaries or otherwise.
systems are the following:

Among these two types of group

Number of bonks
in group on
December 51,1955
Grquids controlled through ownership of
bank stock by trust companies
Ogdens'burg Trust Co., Ogdensburg, N. Y*
Union Trust Company, Pittsburgh, pa*
Commonwealth Trust Co., Pittsburgh, pa*
Peoples-Pittsburgh Trust Co*, Pittsburgh, Pa,
Eastern Trust & Banking Co., Bangor, Me*
United States Trust Company, Paterson, N-» J.


Groups controlled by a bank through trustees,
subsidiaries, or otherwise
Atlantic National Bank, Jacksonville, Fla*
National Shawmut Bank., Boston, Mass*
Republic National Bank & Trust Co., Dallas, Texas
Mercantile National Bank, Dallas, Texas
Citizens & Southern National Bank, Savannah, Ga.


It will bo noted that some of the groups controlled, by a bank or trust
company, or by interests which control the dominant bank or trust company,
operate in States which have prohibited or restricted, branch banking, or which
still do so.

The group systems in most of these cases doubtless were formed

for the purpose of providing a form of multiple office banking.

- 32 Capital Requirements
for Establishment of Branches
Present Capital Requirements of Federal Law» - The National Bank
Act contains two provisions which stipulate special capital requirements for banks establishing branches outside the head office city*
One of these provisions fixes a minimum capital based on the population of the State and of the largest city in the State for banks
establishing branches outside their head office cities.

It reads as

"No such (national banking) association shall establish a branch outside of the city, town, or village in
which it is situated unless it has a paid-in and unimpaired
capital stock of not less than $500,000: Provided* That in
States with a population of less than one million, and which
have no cities located therein with a population exceeding
one hundred thousand, the capital shall be not less than
$250,000: Provided, That in States with a population of less
than one-half million, and which have no cities located therein
with a population exceeding fifty thousand, the capital shall
not be less than $100,000."
The second provision requires the capital to be fixed also with
reference to the number of branches operated and the number of places
in which they are situated.

It reads as follows:


The aggregate capital of every national banking association and its branches shall at no time be less than the
aggregate minimum capital required by law for the establishment of an equal number of national banking associations
situated in the various places where such association and
its branches are situated."
Both of the above provisions are applicable also to State bank
members of the Federal Reserve System.
The second provision of the National Bank Act quoted above has
been construed to mean that a national bank operating one or more

- 33 branches outside its head office city must have one "unit11 of capital
(that is, the same as is required for a non-branch national bank) for
the head office city and for each other city in which it has one or
more branches.

This interpretation is consistent with the ruling that

a national bank with branches only in the head office city is not required to have any more capital than one with no branches whatever.
Capital Requirements of State Laws, - Capital requirements for
State banks operating branches vary so widely that it is difficult to
analyze them authoritatively.

A survey of the applicable State laws

indicates, however, that in only lU States is there a minimum capital
requirement for branch systems, apart from a requirement based on the
number of branches or the amount of deposits; in only 5 of these States
(Maine, Oregon, Washington, Alabama, and Connecticut) is the requirement as high as $500*000.

In 11 States the aggregate minimum capital

must be the amount required to organize banks located in the head
office and branch cities.

In about 10 States there are no statutory

provisions whatever requiring additional capital to establish branches.
Effect of Present Requirements, - The present provision of the
National Bank Act, that no national bank located in a State with a
population of 1,000,000 or more may establish any branches outside
the head office city unless it has a capital of at least $500,000,
effectively prevents the establishment of national bank facilities
in small communities, even in the same county, which are deprived
of all "banking facilities.

It does so, furthermore, in spite of the

fact that, except in five States, State "banks are not subject to such
high capital requirements.

In Arkansas, Iowa, and Wisconsin, State

"banks may establish additional "offices" for the receipt and payment
of deposits without being required to increase their capital at all*
In contrast, a national bank in any of these States with a capital
of $50,000 would have to increase its capital tenfold to establish
a branch office In an adjoining town.
The effect of this provision of la?/ is not so restrictive in the
case of a national bank located in a State with a population of less
than 1,000,000 and no city larger than 100,000, and even less restrictive in the case of a State with a population below 500,000 and no city
larger than ^)0,000.

In the latter case a national bank located In a

• city and having a capital of $100,000 may establish a branch

in another small city without increasing its capital, if State banks
are allowed to establish such branches.

The law as it stands.not only

discriminates seriously against national as compared with State banks,
but as between national banks which happen to be located in different
Of even greater immediate importance Is the fact that some State
banks are precluded from joining the Federal Reserve System solely
by reason of the fact that State bank members may establish branches
outside their head office cities only on the same terms as national

Furthermore, no State bank being admitted to membership may

retain any such branches established after February

, 19^-7 > the

date of the passage of the McFadden Act, unless it meets the capital

_ 35 ~
requirements above referred to.

The Federal Reserve Bank of Chicago

recently advised the Board of an informal application for membership
that was dropped as soon as the restrictive provisions of law wore
called to the attention of the inquiring bank,

A recent survey indi-

cates that out of something over kOO nonmember banks(other than mutual
savings banks) operating one or more branches outside the head office
city, over 300 are ineligible for membership by reason of the special
capital requirements applicable to such branch systems.

This figure

includes 93 banks in Iowa, mostly with only one branch office, which
would have to increase their capital stock from the present aggregate
amount of

570,000 to an aggregate of $U6,500,000, in spite of the

fact that their deposits amounted on December 31* 1935? to only $71

In Wisconsin there are 59 nonmember banks in the same situa-

tion, in North Carolina 27, in Indiana 21, and in Virginia 20.
Some of the nonmember branch operating banks have deposits of
over $1,000,000 and would, therefore, be automatically deprived of
deposit insurance after July 1, 19^2, because of being ineligible for
Federal Reserve membership unless the Board waived the high capital

If, for example, a State bank in Iowa with a capital

of $100,000 and depos its of $1,000,000 and operating one branch in
an adjoining small city wished to have its deposits insured after
July 1, 19^2, it would have to become a member of the Federal Reserve

In order to be eligible for membership from the standpoint

of capital requirements, it would have to increase its capital from
$100,000 to $500,000 unless the Board waived the capital requirement.

- 36 If the Board did waive the capital requirement and admitted the "bank
with a capital of only one-fifth of the minimum prescribed by law, the
bank apparently could continue to operate the branch it already had,
but after becoming a member bank it could not establish even one additional branch without increasing its capital to $500,0000
Furthermore, although the Board could, under the existing provisions of law, waive the capital requirements for a bank with deposits
of $1,000,000 or more, it could not do so in the case of a bank having
lower deposits.

As a consequence, another banl.i in Iowa with a capital

of $100,000 and deposits of, say, $500,000 and operating an out-of-city
branch could not come into membership under the waiver provision; that
is to say, the smaller bank would be required to have a capital of at
least $500,000 to be admitted to membership, while the larger bank
might, through the exercise of the waiver by the Board, be admitted
with a capital of only $100,000.
There are about HOO nonrnember banks operating one or more branches
outside the head office city, 300 of which would be prevented from
joining the Federal Reserve System because of the special capital requirements applicable to branch systems*

These requirements also dis-

criminate against national banks as compared with State banks, and
against a national bank in a populous State as compared with a national
bank in a State with less population.

These provisions, moreover, defi-

nitely make it impossible for both national and State member banks to
establish branches in locations where it might be desirable to provide
such facilities either de novo or in replacement of existing small banks.

Possible Modifications in Capital Requirements of Federal Law. Because of the inequities with respect to the capital requirements for n
tional and State member banks which establish branches, modifications in
the law have been suggested from time to time.

For example, it has been

proposed that the law be amended eliminating the requirements: (l) that
national or State member bank which establishes branches outside the hea
office city have a minimum capital of $500,000, $250,000 or $100,000, de
pending on the size of the State of location; and (2) that the aggregate
capital of a bank and its branches shall not be less than the aggregate
minimum capital required for the establishment of an equal number of national banks in the various places where the bonk and its branches are

For the provisions eliminated, the proposal would substitute

the legal requirements: (l) that a "bank having branches shall have capital adequate in relation to its deposit liabilities and other corporate
responsibilities; and (2) that such capital shall not be less in any
case than the amount required by State law of State banks operating the
same number of branches in the places where the bank's branches are
Provisions of the character proposed are appropriate if the Federal
Government continues its policy of permitting each State to define the
extent to which national banks may operate branches within its borders.
If, on the other hand, tho Federal Government should determine upon a
national policy with respect to branch banking, it would not be consistent to allow individual States to specify capital requirements with
respect to national banks operating branches.

In such a circumstance

any State could effectively prevent tho establishment of branches by a

- 3* national "bank within its "boundaries by setting unreasonably high capital

If Federal authorities wore required to fix different

capital requirements in different States because of provisions of State
laws, the capital requirements would not be determined solely on the
basis of adequacy.

- 39 Branch Banking Extension
National Policy for Branch Banking Areas. - Because of the developments of the past few years, the possibilities of branch systems operating on a State-wide basis exist in a considerable portion of the country.
The outlook at present is for a continued opening up along State lines,
if the Federal Government continues to allow the States individually to
define the branch banking area for both State and national banks#


would seen appropriate to consider whether it would not be sounder from
a national point of view for the Federal Government to adopt a logical
area for operation of branches by national banks regardless of State

The prohibition or restriction of branch banking has been circum-

vented to some extent by group banking, which at best is merely a cumbersome style of branch banking.
The Need and Advantages of Additional Branch Banking.

There is a

steady movement in the direction of converting small unit banks into
branches of larger banks.

Some that cannot be converted into branches

because of legal restrictions are being merged into other banks or are
being acquired by bank groups.

A large proportion of all commercial

banks, however, continues to be in the smaller size groups.
ber 31, 1935?

As of Decem-

re than 9 >000 of the 15,000 commercial banks had total

loans and investments of less than $500,000 each.

Many of these, of

course, are well managed and year after year make excellent returns on
their Invested capital, but they are the exception which proves the rule.
The rate of failure among banks of this size has been relatively high
and their earnings record has been so poor on the average as to suggest
that their economic justification is dubious.

During the decade and a

- bO half ending in 1935» 53 such "banks failed for every 100 in existence
at the beginning of the period*

This record nay he contrasted with a

rate of failure of 30 per 100 for all tanks with more than $1,000,000
of loans and investments.

It is true, however, that the high rate of

failure among snail hanks is associated with the fact that they were
most numerous in agricultural areas, which have been affected by serious
difficulties of readjustment since the war.
It is believed by many that the substitution, slowly and under full
control, of branches of strong, well managed banks for we ale independent
banks should result In a stronger banking structure.

A structure changing

in this way should bring to the general public (l) greater safety and increased mobility of funds; (2) more uniform and lower money rates; and
(3) more efficient banking services, including greater availability of
bank credit to borrowers and to local communities.

Banks operating

branches have greater opportunities for diversification of assets and
deposits, better bank management, and economics in operation than small
unit banks have.

If there were more opportunity for branch operation,

the urge to operate groups would be lessened.
There are many localities which today are without banking facilities, especially in the States where the law does not permit branch

These communities cannot supply a sufficient amount of

business to support a separately incorporated bank.

However, branches

with either full or limited banking powers could serve them economically.
Because of legal restrictions against branch banking, the only way
that banking facilities could be provided in many localities was by the
establishment of independent unit banks, even when there was considerable
doubt whether the community could support a bank or whether there would

-1+1 be a permanent need, of banking facilities.

Once established an indepen-

dent bank often is continued in operation long after it has ceased to
be a profitable venture until finally it becomes insolvent, entailing
losses to depositors and stockholders.

A branch in similar circum-

stances not only costs less to establish and operate but is easier to
discontinue when the facilities are no longer needed, thereby avoiding
the heavy losses that come from continued operation of an obviously
unprofitable undertaking.

This would be particularly useful in newly

developed territories or in communities into which new industries have
If it is found that a given country bank is too small to operate
successfully, arrangements sometimes can be made to sell its business
to a bank in another community, but in many States under present laws
there is no way to replace the first bank by a branch.

On the other

hand, where the lav; permits, it is possible to form country branch
systems through merger of banks in different comimmities, thereby
strengthening the banking structure and yet continuing to provide
banking facilities wherever needed.
Obstacles to Additional Branch Banking. - The outstanding obstacles
to obtaining legislation for the extension of branch banking ase the
opposition of unit banks to being subjected to the competition of
branch operating banks, the fear of local interests that foreign control of credit facilities might be used as a means of stifling legitimate local enterprise, and the general objection to any tendency towards
monopolistic power.

Opponents of branch banking maintain that a bank

locally controlled is more familiar with local credit needs and risks,

- 42 that in the final analysis no "branch system is better than the units
which make it up, and that the failure record of branch systems is
no better than the record of -unit banks.

They do not admit that

branch banking results in better management or more economical operation.

They argue that the Canadian banking structure derives its

strength not from the fact that it is composed of a few large branch
systems but from the fact that these systems adhere to sounder banking

It is maintained also that the people of each State should

continue to have the right to decide the extent, if any, to which there
should be branch banking in the State; that the greater mobility of
credit provided by a branch system will make it easier to transfer
funds to the larger centers to the detriment of the local corxrunities;
and that a branch system should not be permitted to discontinue banking
facilities at will as soon as it appears unprofitable to operate a

Some of the large city banks that oppose an extension of the

branch banking area doubtless are influenced by the fact that some of
the business which they derive by reason of their relationships with
numerous country banks would be transacted by the head offices of
branch systems.
Every student of banking,, however, is conscious of the hazard
which would accompany a too rapid amalgamation of banks into branch

Supervisory authorities should have and exercise adequate

power to prevent this.

They should also have adequate power to cur-

tail unneeded banking facilities, whether they be provided by unit
banks or by branches.

- u3 Advantages and Disadvantages of group Banking
Advantages* - Many of the advantages over unit hanking claimed for
branch banking are also urged for group banking.

A group system affords

a better opportunity for improving bank management; for a wider range of
services to its banksr customers, particularly those in outlying towns;
and for the shifting of surplus lending power from one community to
The investments of the banks in a group may be better managed
through the employment of expert investment counsel by the head office
of the group*

A well managed group can effect economies in operation

and increased efficiency by centralizing the purchase of supplies and
equipment, by prescribing a uniform accounting procedure for all banks
in the group, by centralizing audits, as well as by maintaining central
or at least uniform credit files*

It is possible for general credit

and operating policies to be formulated at the head office of the group,
making it unnecessary for each bank to go into these matters and eliminating the need of certain experienced, high salaried personnel at each office*

Where the management is cooperative with supervisory authorities,

the uniformity of operating methods and accounting procedure, centralization of auditing, periodic credit inspections, and general supervision
by the holding company make it easier to examine the banks in a group
and examiners1 criticisms can be rendered more effective through the
group management*
All of these advantages of group banking, however, are also




characteristic of "branch banking and usually in greater degree.
There are some who feel that group banking affords more local
independence than branch banking—that a bank acquired by a group
will continue to be operated by a local board of directors and officers familiar with local problems, while if converted to a branch
it will be operated by a manager or other officer who is definitely
subject to the orders of the head office.

Such a distinction in

operating policies does obtain in some cases, at least for a time,
after acquisition of a bank by a holding company.

It is not uncommon

for a branch system to afford a considerable degree of autonomy to Its
branches, particularly those located outside of the head office city.
On the other hand, in order to achieve the advantages peculiar to
any multiple office banking system, the bank group must sooner or
later bring all of its constituent banks under a substantial measure
of central control.

When such a situation is reached, the group bank

is not much more than a branch except that it usually is more expensive
to operate.
A group system should be able to survive periods of strain better
than a unit bank without branches although this cannot be substantiated
from available statistical evidence.

During the recent banking crisis

some of the largest bank groups were closed and some were kept open only
through large amounts of Government capital and other assistance.


peculiar character of the period during which group banking developed
makes this record inconclusive.

In the final stages of the deflation

- U5 -

ending in March 1933 many banks failed—banks with and without branches,
members and nonmembers of groups—which had been well regarded before the
depression began.
Disadvantages and Evils» ~ The fact that many of the large groups
comprise not only national and State bank members of the Federal Reserve
System but also nonmember banks is one of the most unfortunate character-^
isties of group banking®

In order to effect a simultaneous examination

of all banks in such a group, there must be cooperation among a number of
supervisory authorities—the Comptroller of the Currency, Federal Reserve
banks, Federal Deposit Insurance Corporation, and State banking departments.

The administrative problem of organizing such an examination is

considerable, and even if a satisfactory joint examination is made it is
almost impossible to enforce uniform standards of correction with respect
to the different classes of banks in the ^oup#
The existing statutes, particularly those of States, do not afford
adequate control over bank holding companies, though the banks then>selves are, of course, subject to at least as much control as non-group

The Board of Governors has power to grant or withhold permits to

the holding companies to vote the stock of member banks controlled.

If a

holding company finds it unnecessary, however, as some apparently have,
to vote the stock of member banks in order to influence their operating
policies, it is under no compulsion to obtain such a permit.

In such an

event the holding company cannot be subjected to conditions imposed by the

_ 46 ~

low, or by tho Board of Governors pursuant to law, incident to the
granting of a voting permit.

If, however, the "holding company affi-

liate" also happens to bo a technical "affiliate" within the meaning
of tho low, it will bo subject to tho provisions of law applicable
to all affiliates of noubor banks.
The organizers of bank holding companies in some instances have
been charged with having evinced too much interest in promotional
profits, as well as in tho subsequent payments of substantial dividends by the subsidiary banks.

In the race for "bigness" the prices

paid for bank stocks by holding companies sometimes have been considerably out of line with asset values and earning capacity.

In such

circumstances the management of the holding company is under temptation
to influence the payment of dividends by controlled banks not justified
bv earnings.

The dividends of the holding company depend directly on

the dividends paid by the controlled banks and the market price of the
holding company stock is affected by tho amount of dividends paid.
Moreover, in order to maintain the price of the holding company stock,
the promoters in the past have had a strong incentive to use the credit
of controlled banks for loans on such stock.

This is tantamount to the

lending of money by banks on their own stocks, a practice that is both
improper and illegal.

The active trading in holding company stocks,

especially if listed on a national exchange, is associated with the
danger that sharp market breaks in the price of such stock may lead to
loss of confidence by depositors in the safety of the controlled banks.
The wide distribution of the stock of the larger holding companies
makes it possible for a minority group of stockholders to hold effective

In some instances also holding companies have been capitalized

- 1*7 -

by the issuance of both voting and non-voting shares, with the result
that the holders of a small proportion of the shares are able to control the operations of the holding company*

In either case a minority

group may* by a comparatively modest investment in the shares of a holding company, control the loan, investment and operating policies of many
The possibilities of improper relationship between group banks and
other subsidiaries or affiliates of the holding company are also a
source of danger*

Inter-bank borrowings by means of certificates of

deposit, not properly reflected in condition statements, have been
charged to some group systems in the past.

Various kinds of business

enterprise are sometimes affiliated either directly or indirectly with
bank holding companies.

One or more of the more prominent bank hold-

ing companies, for example, are directly or indirectly affiliated with
a realty firm, coal company, industrial bank, joint stock land bank,
fire insurance company, life insurance company, title insurance company,
mortgage company, etc.
A group system has an unfair advantage over an independent national
bank in expanding multiple office operations.

In most States a national

bank cannot establish a branch outside its head office city unless it
has a capital of at least $500*000* tut


g^oup system can organize and

operate a new national bank similarly situated with a capital of as low
as $50j000.

Thus a group system may by indirection and subterfuge pro-

vide multiple banking facilities without complying with the conditions
set by Congress*
If Congress should authorize Pc&orml Hosorvo district-*

- Us wide branch "banking, for example, the possible field of operations
of some of the existing bank groups would be tremendous unless the law
provided that no group could operate banks or branches in more than one
Federal Reserve district*

For example, if national banks were authorized

to establish branches at any point in the Federal Reserve districts in
which their head offices were located, the Northwest Bancorporation presumably could establish a branch system in each of the three Federal Reserve districts in which it now operates.

These districts (Minneapolis,

Kansas City, and Chicago) embrace all or parts of l6 States, have an
aggregate population of 32 millions, and have more than one-third of the
total area of the United States.

It would be but a short step from

such a combined group and branch banking system


Nation-wide branch

Some of the unfavorable considerations with respect to group banking
are not the fault of group banking and some hold true also of branch and
unit banking*

In any event legislation might be enacted correcting the

important defects of group banking.. For example, consolidation of Federal supervision over banks would rectify one of the principal problems
of group banking, and Federal authorities might be given additional power
to supervise bank holding companies or to regulate their operations without regard to whether or not they choose to apply for voting permits.
The danger of overvaluing a bank is also present when one bank absorbs
another for the purpose of converting it into a branch.

The terms of

such mergers, however, either have to be approved by supervisory authorities or are more closely scrutinized by such authorities than the purchase

- U9 _

of bank stock by a holding companye

Improper relationships between banks

and affiliated organizations are not confined


group systems®


in the case of a large unit bank or branch system a minority group may
control the bank if the stock of the bank is widely distributedo

It may

be conceded that if adequate supervision and regulation has a salutary
effect 011 the practices and soundness of unit banks and branch system?,
the same thing might be achieved with respect to group banking by appropriate legislation.

The fact remains, nevertheless, that under the

existing laws and the existing division of responsibility for bank examination and supervision, group banking is a much less desirable means
of providing multiple office banking facilities than branch "banking.

Restriction of Group Banking

The circumstances under which group hanking has developed and
continues to he an important factor in the banking structure of the
United States suggest that if Congress wishes to place effective
restrictions on the area covered in multiple office operation, it
should establish a reasonable area in which banks may operate branches
and then cither prohibit group banking or restrict its area of operation to that of the legal branch area.
It might be made unlawful for a corporation, business trust, asso1/
ciation, or similar organization which holds a working control,


or indirect, over any Insured bank to acquire a working control, direct
or Indirect, over any other insured bank located beyond the same limits
with respect to the principal place of business of such corporation,
business trust, association, or similar organization as the limits prescribed by law for the establishment of branches of a national bank.
Because of certain undesirable characteristics of group banking,
public policy would do well to look towards the ultimate disappearance
of that form of multiple office operation from the banking structure.
To this end it might be made unlawful after the expiration of 5 years
from the enactment of the legislation for a corporation, business trust,
association, or similar organization to retain working control, direct
or indirect, over more than one insured bank,

proponents of the exten-

1/ Ey "working control11 is meant control of a majority of the shares of
capital stock of the bank or of 50 percent of the number of shares
voted for the election of its directors at the last preceding election; control in any other manner of the election of the majority
of the directors of the bank; or a situation where all or substantially all of the capital stock of the bank is held by trustees
for the benefit of the controlling organization.

- 51 -

sion of "branch hanking might, however, argue in good, faith against such
a drastic prohibit ion against holding companies.®

Some of them feel that

conversion of banks into branches can be facilitated by permitting a
holding company to acquire control of banks which are to be converted
into branches, rather than by confining the branch system to direct acquirement of control*

It would be necessary, however, to define the

privilege very clearly in order to avoid the indefinite continuance of
holding company operation as a substitute for branch banking®

„ 52 _
A Proper Branch Banking Area
Various suggestions have boon made from time to time as to the
area within which a national bank should be allowed to operate branches
regardless of State laws governing operation of branches by State banks.
All of these suggestions contemplate that a national bank should bo
allowed to establish a branch at any point within the area in which
the head office of the bank is located, regardless of how that area
may bo described.

Among the suggested branch banking areas are the

following, or combinations of some of the following:

(1) The entire country.
(2) The Federal Reserve district.
(3) The territory assigned to the head office of
a Federal Reserve bank or to a branch
thereof, as the case may bo,
(4) The State.
(5) Adjoining counties, regardless of State or
Federal Reserve district lines.


suggest a proviso that the aggregate
population of the head office county and
of the adjoining county must not oxcoed
a given number of persons, e.g., 100,000,
250,000, etc.
(6) The head office county.
(7) Any point not more than a given number of
miles from the head office of the national
bank, regardless of county, State or Federal


Reserve district lines.

The distance suggested

by seme is 50 miles and by others 100 miles.
(8) The "trade area" of the head office city, the "trade
area" bein? loft for determination by the Federal
banking authorities in the case of each application for the establishment of a branch.
(S) A statutorily defined "trade area", such as the area
which is nearer to the head office city of the
national bark than to any other city with a given
population, e.g., 100,000, 50,000, 25,000, etc.
(10) Any point, regardless of State or Federal Reserve
district lines, within such a distance from, the
head office of the national bank that the counties completely Included in the circular area
represented by the head office as a center and
the branch as the outer point would not have an
abrogate population In excess of a given number
of persons.

The population mentioned in this

connection is sometimes 100,000, sometimes 250,000, etc.



Considerations with Respect to
Various Branch Banking Areas
Nationwide branch hanking in this country scarcely appears to be
a practical consideration in either the near or the distant future,


one thing decades would be required to build up management and personnel
to handle a branch banking system operating in all the diverse areas of
this country*

Moreover, such systems would imply a degree of banking

concentration which would not be generally favoredc

These observations

are applicable, although to a lesser extent, to an area for branch operation defined by the boundaries of a Federal Reserve district.
The boundaries of Federal Reserve zones or territories have been
fixed with reference to economic and financial rather than political
factors and are in a sense homogeneous trade areas. I,/ If an attempt
were made by Federal legislation to give national banks the right to
operate branches anywhere within the Federal Reserve bank or branch
zone, there would be numerous possibilities for national banks to cross
State lines®

This, of course, would meet determined opposition, par-

ticularly from the States.1 rights elements*

Conversely, if Federal

statutes should stipulate that an insured State bank could not operate
a branch outside of the zone of the Federal Reserve branch, conflicts
would arise in certain States which are divided as to zone but in which
the State law permits a State bank to operate a branch anywhere within
the State*

Some of the States now permitting State-wide branch banking

which would raise the question are the following:

l/ Branch "zones" in the St. Louis Federal Reserve district are not
marked by State and county boundary lines*

Arizona — divided between Los Angeles and El Paso
California — divided between San Francisco and Los Angeles
Connecticut — divided between Boston and Hew York
Idaho — divided between Spokane and Salt Lake City 1/
Michigan — divided between Detroit, Chicago, and Minneapolis
Nevada — divided between Salt Lake City and San Francisco
North Carolina — divided between Richmond and Charlotte
South Carolina — divided between Richmond and Charlotte
Washington — divided between Portland, Spokane, and Seattle 1/
If some policy r/ere adopted with respect to branch operation in
zones, it would appear that a branch operating bank should be permitted
to establish an office at any point \?ithin 50 or perhaps 100 miles of
the head office in order that a bank located at the edge of the zone
as otherwise defined would not be prevented from serving a natural
trade area which might otherwise be just outside of the zone.


areas so defined should be large enough to provide considerable diversification of loans and deposits.
The operation of branches throughout contiguous counties would in
some areas of the United States allow a national bank to serve an area
with a diameter of as much as 3OO miles.

In other parts of the country

it would mean little more than 25 miles.

It is questionable whether in

many parts of the country a contiguous county area would serve to provide much diversification in the banking business.
Areas defined by county boundaries or boundaries of a territory
assigned to a Federal Reserve bank or branch zone might vary from time
to time and raise problems.

For example, if a given Federal Reserve

branch were discontinued and its territory either reassigned to the

l/ Recently the Spokane Branch territory, except the city of Spokane,
was reassigned to the Seattle Branch.

- 56 -

head office or divided among other branches, this might bring about an
important change in the field of operation of some banks.


in such circumstances a bank would he permitted to retain any branches
previously established no matter if they were outside the new zone


difficulties probably would arise more frequently,

though they would not be as important, in connection with changes in the
boundary lines of counties.

Sometimes a given county is subdivided, but

more recently there has been considerable agitation for consolidating
counties in the interest of more economic administration of State governments.

Such consolidations would, of course, expand the business field

of operations of banks located within the counties that consolidated.
Any branch banking area defined in terms of a certain distance from
the head office city would raise a number of individual problems.


example, if the area were 50 miles from the head office city, a national
bank located in Baltimore might operate a branch in Washington, or vice

Several of the largest cities in the United States are within

100 miles of another large city, for example, Now York and Philadelphia,
and Chicago and Milwaukee.

Problems of this character might be met by

allowing branches to be operated in other cities the population of which
did not exceed 25,000 or ^0,000.

A branch banking area limited to a

distance of 50 miles from the head office city would provide little
opportunity for multiple banking facilities in the sparsely settled
regions of the country.

It takes no account, furthermore, of the dif-

ferences in accessibility.

Places 50


100 miles apart by airline

distance but separated by a mountain range are much further apart for all
practical purposes than places in the prairie sections that are many more
miles apart*