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R@§< Dep< ill o June 14,1974 Traditionally, commercial banks in the United States have been able to operate banking offices within only one state— and in some states, they have been restricted to only one office within the state. There have been a few exceptions where banks have retained long-estab lished branches in other states, but in most cases, state boundaries have marked the limit for branching. System's wire transfer facilities, banks transfer funds and carry out transactions in Government securi ties. They buy and sell excess reserves in the Federal-funds mar ket, which is now one of the key national money markets. The restriction on these markets is not distance, but the size of the trans action; for example, a typical mini mum for Federal funds is $100,000. Even so, this general prohibition has not prevented the development of some interstate banking activi ties. The largest banks operate nationally in lending and in limited competition for deposits. With the development of electronic payment systems and remote automatic tellers, the significance of formal prohibitions against the establish ment of out-of-state offices will be reduced still more. In addition, large banks send the lending officers of their national divisions across the country seeking new customers, and they also establish representative offices in the major financial centers to de velop local business. In both these cases, deposits and loans are carried on the books of a bank office lo cated in the state in which the bank is incorporated. Yet, despite this legal requirement, the fact remains that the business was solicited in another state. Hence, for the na tion's larger businesses, banking is not restricted by state boundaries, any more than are their other trans actions. The few remaining unit-banking states are now facing growing pres sures to allow branching or its equivalent, while other states (such as California and New York) are actively considering laws which would permit entry by out-of-state banking organizations on a recipro cal basis. The needs of business and the development of technology have created a particular form of interstate banking, so that the individual bank is no longer com pletely bound by state lines. Nationwide services Commercial banks compete in na tional markets in several different ways. Through the Federal Reserve1 1 Digitized for FR A SER Developments in marketing and in electronic technology also permit national-banking facilities to be offered to the ordinary consumer. Credit cards, through the system of national interchange of cards, al ready provide a form of interstate banking for consumer credit. Future developments could perhaps give consumers— through their plastic cards— direct access to their bank deposits via remote terminals or automatic tellers on a 24-hour basis. (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. Many banks began to expand in re lated financial fields following the amendment of the Bank Holding Company Act in 1970. Although a commercial bank may be restricted by state boundaries in many activi ties, the parent holding company can serve as a vehicle to expand into other states by forming sub sidiaries specializing in bankingrelated services. In particular, bank holding companies can operate consumer-finance companies, mortgage companies, leasing com panies and other approved lines of business in more than one state. Consequently, commercial banks have available another indirect means of interstate operation that nominally would be closed to them. International banking Despite the formal barriers to branching, commercial banks are able under long-established Federal legislation (the Edge Act) to estab lish out-of-state banking subsidi aries to conduct international bank ing. Edge Act subsidiaries are per mitted to make loans and accept deposits only if they result from international trade or finance. Still, they represent an important form of interstate banking competition, especially among the larger banks. These subsidiaries also provide in direct benefits for their parents be cause (like representative offices) they develop contacts which can stimulate domestic business— even though by law they are limited to the field of international business. In addition, foreign banks (unlike U.S. banks) have been able to estab-2 2 Digitized for FR A SER lish multi-state offices. Under exist ing laws, foreign banks can open branches in several states, assuming they gain the permission of the states concerned, because these offices operate under individual state charters and thus are covered by state rather than Federal banking laws. Foreign banks thus can main tain branches in New York or Illinois or Massachusetts, for example, and conduct a full-scale domestic banking business in each. They can also form banking subsidiaries with state charters. These subsidiaries have the same privileges as other state banks, but, unlike branches of the parent bank, they come under the Bank Holding Company Act which limits their formation to one state. Foreign bank entry is permitted in only ten states— five of them in the Twelfth District— and in some cases banking powers are quite re stricted. But foreign banks can operate in the several states (New York, California and Illinois) con taining the nation's key financial markets, and thus they are able to lay the foundations for a larger interstate-bank network. Foreign banks control less than 2 percent of the nation's deposits, partly because of the limited number of states per mitting such operations, but they are quite important in certain mar kets, and account for 141 percent /2 of all large-bank business loans. Moreover, their share is likely to grow, as other banks follow the ex ample first set by U.S. banks over seas and try to develop similar business here. Legislative proposals The Federal Reserve System is con sidering a legislative proposal which would bring all foreign banks under national, and not just state, jurisdic tion. This proposed legislation would remove the existing interstate advantages enjoyed by foreign banks. The object is not to prevent interstate banking as such, but rather to establish the same ground rules for both foreign and domestic banks, and in the pro cess bring foreign bank operations under Federal Reserve control for monetary policy purposes. Foreign-bank branches and agencies in the U.S. would be treated as "banks," as their statechartered subsidiaries already are, and hence would come under the provisions of the Bank Holding Company Act. All future foreignbanking operations would be limited to only one state, but foreign banks would have the option of establishing domestic-bank holding companies for conducting certain nonbanking operations. Nonbank subsidiaries engaged in permissible activities could, of course, operate nationally. Existing branches and agencies may be allowed to main tain their established operations under a "grandfather" clause. The Bank Holding Company Act, which now forbids interstate bank ing formations, contains a provision whereby bank acquisitions across state lines would be allowed. Sec tion 3(d) of the Act permits inter state acquisition of banks by hold ing companies if states give specific 3 Digitized for FR A SER permission, and this would apply to domestic as well as foreign banking organizations. Enabling legislation has already been introduced in Cali fornia and New York which would allow any out-of-state (including foreign) holding company to form or acquire a bank subsidiary with several offices, providing the other state grants reciprocal privileges. The prospect exists of California banks conducting a full-scale bank ing business in New York City, and vice versa, through holding com pany operations. Such legislation would make the law match actual practice. Large banks now compete in wholesale banking nationwide, and the establishment of one or two offices in major outof-state financial centers would ease the mechanical problems of competing for business. The direct effects on consumer lending would be less significant, because in the absence of branch networks, it is more difficult to build up a con sumer-type business. Nevertheless, some competitive benefits would arise to reinforce the pressures building up through the various electronic-payment systems for the nationwide expansion of consumer lending. In international banking, the benefits for domestic banks of having affiliates on both coasts would be obvious. Foreign banks would be able to maintain existing opportunities to compete, while U.S. banks would be able to match their foreign counterparts in gain ing broader access to a nationwide market. Robert Johnston c = d (2 ® uojSu!qsB/v\ • MBin • uo S o jo • BpeA8|\] . oiiepi IIB M E H • B !U J O J!| B 3 • B U O Z JJV p *|i|C3 'o s s jiu u j ue$ ZS2 ON JLIWM3d OlVd s p r e g p j a m p i s d f o Q n p jn B ® 8®^[[ BANKING DATA— TW ELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Loans (gross) adjusted and investments* Loans gross adjusted— Securities loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other Securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD's) Weekly Averages of Daily Figures Amount Outstanding 5 /2 9 /7 4 Change from year ago D o llar' Percent + + 82,890 64,524 1,199 22,924 19,210 9,259 5,232 13,134 78,540 21,363 666 55,083 17,848 27,304 7,325 14,175 Change from 5 /2 2 /7 4 + 9,314 + 8,476 - 565 + 2,787 + 2,983 + 917 - 550 + 1,388 + 7,569 + 936 + 25 + 6,467 351 + 7,106 325 + 4,869 297 200 — 32 — 55 + 37 + 18 + 16 + 81 + 571 + 60 -I- 200 + 86 26 + 195 — 22 + 33 + 12.66 + 15.12 — 32.03 + 13.84 + 18.38 + 10.99 — 9.51 + 11.82 + 10.66 + 4.58 + 3.90 + 13.30 1.93 + 35.18 — 4.25 + 52.32 Week ended Week ended 5/29/74 5/22/74 Comparable year-ago period 34 258 224 46 439 -3 9 3 + 1,316 + 1,213 + 755 + + + 294 Member Bank Reserve Position Excess Reserves Borrowings Net free ( + ) / Net borrowed (—) - 30 415 385 - Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases ( + ) / Net sales ( - ) Transactions: U.S. securities dealers Net loans ( + ) / Net borrowings ( —) 287 403 * Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120. Phone (415) 397-1137. Digitized for FR A SER B>|SB|V ® A cS ® S > ® 'j| jj p j ® j p ® J aovisod s n nvw s s v id isaid Selected Assets and Liabilities Large Commercial Banks •