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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
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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
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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

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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


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Selected Assets and Liabilities
Large Commercial Banks

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