Full text of Economic Review (Federal Reserve Bank of Atlanta) : May 1983, Volume 68, Number 5

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Economic
Review

v FEDERAL RESERVE BANK OF ATLANTA

fecial issue:

MAY 1983

INTERSTATE BANKING

TAKING INVENTORY

• ALTERNATIVE AVENUES

J> INTERSTATE EXPANSION AND BANK COSTS
Vt.

F I N A N C I A L CONGLOMERATES
UACY RESTRICTIONS

•

• CAPITAL ADE-

• TECHNOLOGYS ROLE

THE CANADIAN EXPERIENCE • TRADE GROUPS'
.VIEWS • REGIONAL FORCES

Waves
QRange

Economic
Review

FEDERAL RESERVE BANK OF ATLANTA
President:
William F. Ford
Sr. Vice President and
Director of Research:
Donald L. Koch
Vice President and
Associate Director of Research:
William N. Cox
Financial Structure:
B. Frank King, Research Officer
David D. Whitehead
Larry D. Wall
National Economics:
Robert E. Keleher, Research Officer
Mary S. Rosenbaum
Regional Economics:
Gene D. Sullivan, Research Officer
Charlie Carter
William J. Kahley
Database Management:
Delores W. Steinhauser
Payments Research:
Paul F. Metzker
Visiting Scholars:
James R. Barth
George Washington University
James T. Bennett
George Mason University
George J. Benston
University of Rochester
Gerald P. Dwyer
Emory University
Robert A. Eisenbeis
University of North Carolina
John Hekman
University of North Carolina
Paul M. Horvitz
University of Houston
Peter Merrill
Peter Merrill Associates
Communications Officer:
Donald E. Bedwell
Public Information Representative:
Duane Kline
Editing:
Gary W. Tapp
Graphics:
Susan F. Taylor
Eddie W. Lee, Jr.
The E c o n o m i c Review seeks to inform the public
about Federal Reserve policies a n d the economic
environment and, in particular, to narrow the gap
between specialists and concerned laymen. Views
expressed in the Economic Review aren't necessarily
those of this Bank or the Federal Reserve System.
Material may be reprinted or abstracted if the Review
a n d author are credited. Please provide the Bank's
Research Department with a copy of any publication
containing reprinted material. Free subscriptions a n d
additional copies are available from the Information
Center, Federal Reserve Bank of Atlanta, P.O. Box
1731, Atlanta, G a 3 0 3 0 1 (404/586-8788). Also contact the Information Center to receive Southeastern
E c o n o m i c Insight, a free newsletter on economic
trends published by the Atlanta Fed twice a month.

To the reader
The barriers that have separated segments of
the financial services industry since the 1930s are
under serious attack Market forces constitute a
gathering wave of change that threatens to render
the old barriers obsolete. This issue, coordinated
by the Atlanta Fed's Financial Structure team,
focuses on one of those barriers.
In the 1930s, Congress enacted banking
legislation that effectively constructed three "walls"
intended to separate and insulate various types of
financial institutions. The three walls may be
labelled the "Glass-Steagall wall," (which separated
commercial banking from the securities business),the
"Regulation Q wall" (which limited price competition
among banks by imposing interest rate ceilings),
and the "McFadden wall" (which was intended to
loosen branching restrictions within states but
effectively prohibited interstate banking). In 1956,
The Douglas Amendment to the Bank Holding
Company Act augmented the McFadden wall by
prohibiting bank holding companies from acquiring
banks outside their home office state unless the
laws of the target state explicitly provide for such
entry.
All three walls are showing signs of decay.
Competitive market forces within the financial service
industry are wearing down the Regulation Q wall.
They also are putting serious strains on the GlassSteagall wall as all depository institutions gain
authority to offer expanded products.
The McFadden-Douglas wall remains intact, but
market forces are surging around and over it.
Questions concerning the prohibition of interstate
banking will become more important as price and
product deregulation continues. This special issue
of t h e E c o n o m i c Review examines t h e situation

surrounding this third wall: where does interstate
banking stand now and how is it likely to develop
in the future?

MAY 1983, E C O N O M I C REVIEW

FEDERAL RESERVE B A N K O F A T L A N T ^

Interstate Banking:
Taking Inventory ..
Although "interstate banking" is prohibited, the
fact is that banking organizations already are
providing financial services across state lines.
How are these services being provided legally,
and what is the extent of this interstate financial
activity?

The Financial
Conglomerates

Regional Forces for
Interstate Banking

The potential impact of nonbank financial conglomerates on the financial markets is enormous.
The Atlanta Fed reviews the current strengths,
weaknesses and likely evolution of some of the
major nonbank conglomerates.

Market forces, especially at the state and regional
level, are gathering strength and could force
regional relaxation of interstate banking limitations. Is it desirable (or even possible) to maintain
the existing barriers for long?

Alternative Avenues to
Interstate Banking

Interstate Expansion
and Bank Costs

Tne shape of the financial services industry will
depend largely on which of several pathways the
industry takes to interstate banking. An analysis
of the major proposals and their potential impact.

Will Capital Adequacy
Restrictions Slow the Development
< of Interstate Banking?
46
$ Regulatory constraints on banks' capital adequacy may prove to be a significant limitation on
v growth of interstate banking organizations.

" The Canadian
• Experience with
Nationwide Banking

Does the Canadian experience with nationwide
banking hold any lessons useful to the U. S.
debate? Will the U. S. industry, for example, become
* more concentrated in a smaller number of banks?

Conclusion

Will bank costs rise sharply if banks expand
beyond their home state? If so, these rising costs
could limit the extent of interstate banking.

Technology and
Interstate Banking

While regulatory barriers against interstate banking
still stand, technological developments threaten
to render those barriers obsolete. To what extent is
retail electronic banking already operating across
state lines, and how will the technological "new
wave" foreshadow legal and regulatory change?

Trade Groups
Choose Sides.

Opinions on interstate banking are as varied as
they are abundant. This article pinpoints key
issues and reviews the policy positions of some
major lobbying groups in the financial industry.

Statistical Supplement

> ->•

Interstate
Banking:
Taking
Inventory
U.S. banking organizations now
control over 7,000 interstate
offices. Even if present
prohibitions
are lifted, however, the evidence
suggests that interstate bank
expansion will evolve slowly and
will be limited to the more
attractive markets.

Although interstate banking is prohibited by
the McFadden Act and the Douglas amendment
to the Bank Holding Company Act, the fact is
that banking organizations are providing financial
services across state lines and have been doing
so for some time. Four gateways allow commercial
banking organizations to offer financial services
on an interstate basis. First, "grandfather" provisions of banking legislation allow some banking
organizations to maintain full-service commercial
banks in more than one state. Second, the GarnSt Germain Depository Institutions Act of 1982
allows banks and savings and loan associations
to acquire failing institutions across state lines.
Third, and perhaps more importantly, the 4(c)8
provisions of the Bank Holding Company Act
allow bank holding companies to establish or
acquire nonbank subsidiaries that are not subject
to the prohibitions on interstate banking. And
fourth, other nonbank subsidiaries may establish
offices across state lines, i.e. loan production
offices and Edge Act corporations, allowing their
parent organization to provide financial services
on an interstate basis.
In addition, the BHC Act allows bank holding
companies t o acquire or establish banking subsidiaries in states which explicitly permit such ». «
entry. This article will describe various ways in «
which bank holding companies provide interstate
»
financial services and will inventory their activities
on a state-by-state basis. This should give us
some idea of the extent to which bank holding <r *
companies are actively supplying interstate financial services. The numbers presented in this v
inventory represent the best available information
but may not include all activities or offices.
Therefore, the figures represent activities and
offices documented by ourinventory and should
be viewed as a minimum.

Grandfathered Interstate Banking

Legislation and regulation tend to follow " ,
actual events in the marketplace. This is especially m ' )
4 MAY 1983, E C O N O M I C REVIEW '

»*

>
Table 1 . Foreign and Domestic Bank Holding Companies With Subsidiary Banks In More Than One
State

Home State

Number
of States

First Interstate Bancorporation

First Bank System, Ine
Northwest Bancorporation
Otto Bremer Foundation
Financial General Bancshares, Ine
General Bancshares Corporation
First Security Corporation
Citicorp
Bank of Montreal*
Canadian Imperial Bank of Commerce*
The Bank of Tokyo, Ltd*
Barclays Bank Limited*
The Sumitomo Bank, l t d *
The Royal Bank of Canada*
Banco Central, S A *
J.P. Morgan & Company
The Girard Company
NCNB Corporation
Chase Manhattan Corporation
Provident National Corporation
Northern Trust Corporation
Maryland National Corporation
Philadelphia National Corporation
First Maryland Bancorp
Equitable Bancorporation
Chemical New York Corporation
Manufacturers Hanover Corporation
Pittsburg National Corporation

MN
MN
MN
DC
MO
UT
NY
NY
NY
CA
NY
CA
NY
NY
NY
PA
NC
NY
PA
IL
MD
PA
MD
MD
NY
NY
PA

5
7
3
5
3
3
3
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2

Bank Holding Company

States In Which
Banks Are Located

AZ, CA, CO, ID, MT, NM, OR,
NV, WA WY, UT
MN, MT, ND, SD, Wl
IA, MN, MT, NE, ND, SD, Wl
MN, ND, Wl
DC, MD, NY, TN, VA
IL, M O TN
ID, WY, UT
DE, NY, SD
CA, NY
CA, NY
CA, NY
CA, NY
CA, HI
NY, PR
NY, PR
DE, NY
DE, PA
FL, NC
DE, NY
DE, PA
FL, IL
DE, MD
DE, PA
DE, MD
DE, MD
DE, NY
DE, NY
DE, PA

Source: Federal Reserve Board as of 1 2 / 3 1 / 8 2
•Foreign banking organizations

true in banking. Market participants first become
creative in terms of supplying financial services,
and then legislators and regulators react to the
evolving market circumstance. Reacting t o
changing market conditions means that legislators are constantly faced with restricting given
activities after innovative organizations have
engaged in the activity. In some cases it would
be detrimental or impossible to require the
organization to cease the activity even though a
* general prohibition is deemed desirable. In such
„ cases, one equitable approach is to allow the
innovative organization to continue but not
expand the activity in question. Such a clause is
then written into the legislation and is termed a
"grandfather provision." A number of domestic
fc and international banking organizations enjoy
FEDERAL RESERVE BANK O F ATLANTA

such grandfather provisions with respect to
prohibitions on interstate banking.
W e were able to identify 21 domestic bank
holding companies that controlled banking
subsidiaries in more than one state. One of these
organizations controlled banking subsidiaries in
11 states, one had banking subsidiaries in seven
states, t w o had subs in five states, four had
banking subsidiaries in three states and the
remainder were represented in only t w o states
(Table 1). In total these 21 banking organizations
control 138 banks and 1,369 branch offices in 22
states. This means that almost half of our states
house banks controlled by out-of-state holding
companies.
In addition to domestic holding companies
controlling interstate banks, seven international
5

!
Table 2. Foreign Banking Organizations Controlling Interstate Offices

State

Number of Foreign
Banking Organizations
Controlling Interstate
Offices by State
of Residence

Banks

Branches

California
District of
Columbia
Florida
Georgia
Hawaii
Illinois
Louisiana
Massachusetts
New York
Oregon
Pennsylvania
Texas
Washington

Number and Type of Interstate Office
Locations by Type of Office

—
—

1
—

1
58

Edge Acts

—

4
37
7

—

103*

Agencies
63
—

10
2

40
1

103

—

1
28

—

116

—
—

Total Number of
Interstate Offices
Controlled by Foreign
Banking Organizations
Headquartered Outside
the State

3
1
4
60

7
6

9
10
254

* 1 6 of these organizations that have offices in more than one state are international
organizations having no resident state—i.e. agency offices of international banks
Source- Federal Reserve Bank of New York, as of 6-30-82.

banking organizations control banks in more
than a single state. Table 1 identifies and locates
these organizations. Prior to the Bank Holding
Company Act of 1956, international organizations could establish banks in more than
one state. Following 1956, however, any international organization controlling more than one
U.S. bank fell under the Holding Company Act
and became subject to the Douglas Amendment.
Grandfather provisions allowed these organizations to continue their interstate system but
restricted the organization from expanding
outside its declared home state. In total, seven
international bank holding companies control
seven banks in states other than the state in
which they are based. Of the seven foreign
holding companies controlling banks in more
than one state, five declared New York as their
state of residence and two declared California
(Table 2).
Fifty-three international banks have interstate
branches, 25 of which are home officed in New
York and 24 in California As Table 2 shows, 71
percent of their interstate branches (73 in
6

number) are located in either New York or
Illinois. As would be expected, most of the
interstate branches of foreign banks are located
in our larger cities and trade centers. These
organizations then have established an interstate i
presence of full service banks in some of our „ ,
most attractive markets.
In addition to the 103 interstate branches *
established by foreign banks, they have established
116 interstate agency offices and 22 interstate *
Edge Act offices. This brings the total number of
interstate offices of foreign banks and holding
companies to 254 (Table 2).
v '
The door to interstate banking is not completely
closed. The Douglas A m e n d m e n t allows bank t{
holding companies to acquire banks on an „
interstate basis if the target state passes legislation
that specifically allows out-of-state holding" ,
companies to acquire instate banks. To date, five
states have passed such legislation. 1 Two other

I
'Utah passed reciprocal legislation in 1981 but repealed same in 1983.

M A Y 1983, E C O N O M I C R E V I E W *
r i
i

T a b l e 3. Interstate Savings a n d L o a n Associations a n d Their G e o g r a p h i c Coverage
(March 7, 1983)
Parent

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

H o m e Office L o c a t i o n s

Northeast Savings, F A
City FS & L N
Empire of America, FSA
Carteret S & L A FA
Perpetual American FS&LA
H o m e Savings of A m e r i c a
FS & Los A n g e l e s
Glendale FS&LA
First N a t i o n w i d e Savings
FS & LA
California FS & LA
W o r l d S & L A A FS&LA
First FS&LA of Arizona
Bay Savings Bank
National Permanent FS&LA
First FS&LA of
Puerto Rico
Charter FS&LA
Equitable FS&LA
Union FS&LA of Evansville
Farm a n d H o m e SA
M o u n t a i n w e s t S&L
The Benj Franklin FS&LA

Interstate Locations

CT
NJ
Ml
NJ
VA
CA

CT,
NJ,
MI,
NJ,
VA
CA,

CA
CA

CA, FL
CA, NY, FL

CA
CA
AZ
MI
DC
PR

CA, G A FL, NV
CA, KS, C O
AZ, TX
MI, VA
DC, M D
PR, VI

GA
MD
IN
MO
UT
OR

GA, A L
MD, DC
IN, KY
MO, TX
UT, WY
OR, ID, W A UT

M A NY
FL
FL, NY, TX
FL
DC, MD
FL, IL MO, TX

Source: Federal Home Loan Bank Board

states, Delaware and South Dakota, allow entry
through limited purpose banks, and both have
actually experienced entry by out-of-state
holding companies. In addition, Iowa, Illinois,
and Florida allow expansion by out-of-state
banking organizations that operate banks or trust
companies under grandfather provisions.
A l t h o u g h interstate d e p o s i t - t a k i n g is prohibited, many interstate banking services exist,
and more c o u l d d e v e l o p in t h e f u t u r e even
w i t h o u t changes in t h e federal laws p r o h i b i n g
interstate banking. Three recent avenues for
establishing an interstate b a n k i n g presence
or position are t h r o u g h t h e purchase of up t o
5 percent of v o t i n g stock, p r e f e r r e d convertible stock,and franchise agreements among
banks.
The Bank Holding Company Act specifies that
it "shall be unlawful, except with the prior
approval of the Board, . . . for any bank holding
company to acquire directly or indirectly ownershipor control of any voting shares of any bank, if
after such acquisition, such company will directly
or indirectly own or control more than 5 per
FEDERAL RESERVE BANK O F ATLANTA

cent of the voting shares of such bank,
"2
This clause leaves the door open for bank
holding companies to acquire up to 5 percent of
the voting shares of a bank without Board
approval. As a result, some bank holding companies
have taken the opportunity to invest in banks
across state lines, establishing associations of
banks that may work together for their common
benefit. These investments have taken the form
of 4.9 percent voting stock ownership, nonvoting
preferred stock that automatically converts to
voting stock should the prohibition on interstate
banking be removed, or simple franchise agreement among banks.
Whatever the path, the result is a potential
interstate network of banks large enough and
geographically dispersed enough to offer products
and services no one bank may have been
capable of offering separately. These formal and
informal agreements represent a form of geographic

'Section 3(a) Bank Holding Company Act of 1956.

positioning for the day when interstate powers
are granted. Texas Commerce Bankshares, for
example, has investments in banks in Wyoming,
Colorado, Arizona, Oklahoma and Louisiana.3
While no comprehensive list of these investments
and agreements was available, w e are aware of
these methods to establish an interstate presence.
To date the Federal Reserve Board has approved
t w o preferred stock deals, has disapproved one
which is being restructured and has at least
seven others pending.
The Bank Holding Company Act does not
prohibit individuals from acquiring more than
one bank. Neither does it require individuals to
file an application with the Board regarding the
acquisition of bank stock either within a given
state or on an interstate basis.4 W e know that
interstate banking groups controlled by individuals
exist, but w e have no accurate measure of the
number of these groups or the number and
geographic dispersion of the banks involved. To
this extent, our inventory again is understated.
Another avenue for interstate expansion was
opened by the emergency provisions of the
Depository Institutions Act of 1982 allowingoutof-state organizations to acquire troubled banks
and insured mutual savings banks under certain
circumstances. 5 Although these provisions have
not been used to allow interstate bank acquisitions
to date, they do provide an avenue for interstate
expansion. 6 The Federal Home Loan Bank Board
began allowing interstate mergers of savings and
loans in 1981, allowing only four that year. In
1982, however, 16 such mergers were allowed
and today 29 interstate savings and loan systems
exist (Table 3). Although these cases are limited,
the provisions of the Gam-St Germain Depository
Institutions Act and the fact that the Federal
Home Loan Bank Board is actively allowing S&Ls
to merge across state lines indicates increasing
pressure for further relaxation of the prohibition
on interstate banking.
Commercial banks are the only financial
services suppliers effectively constrained geographically today, and even these constraints do

United States Banker, January 1983, p. 15.
"See "Change in Bank Control Act," Title VI of the Financial Institutions
Regulatory and Interest Rate Control Act of 1978.
5
See footnote 1.
6
The Depository Institution Act of 1982 allows closed insured commercial
banks with assets of $ 5 0 0 million or more and insured mutual savings
banks with assets of $ 5 0 0 million or more and in danger of failing to be
acquired by an out-of-state bank or bank holding company with priority
given in the following order acquisition of similar institutions in the same

Map 1
Resident State of Bank Holding Companies Controlling
Interstate 4(c)8 Subsidiaries

Total: 139

>»

not apply to all commercial banks under all
conditions. The fact that a commercial banking
organization in one state may acquire a failing
institution in another state inevitably will result
in commercial banks facing competition from
interstate banking organizations. 7 Because of the
criteria for such acquisitions, the degree of
competition may be limited at first; yet as the
failing institution recovers and takes advantage
of its association with an interstate parent, local
bank competitors will resent such relationships.
Geographically constrained banking organizations
will feel that a t w o way competitive street is
necessary. As the number of such acquisitions
across state lines increases, support for repeal of
interstate bank prohibitions will also increase.
The emergency provisions of the Depository

state; acquistion by same type of institution in different states; acqusition by
different types of institutions in the same state; and acquisition by
different types of institutions in different states.
'The degree of interstate expansion through the emergency provisions
will be limited by the requirement that the failing institution must have at
least $ 5 0 0 million in assets It may be possible, however, for a number of
weak institutions to be consolidated in order to meet this requirement
An organization in Tennessee is currently attempting such a consolidation.
"Section 2(c) of the Bank Holding Company Act of 1956.

8 MAY 1983, E C O N O M I C R E V I E W '

Institutions Act of 1982 may in fact be unlocking
the door to full interstate banking.
Given the number of interstate banking organizations, the extent of their geographic coverage,
the other unmeasured forms of interstate banking,
and the potential avenues for still further expansion,
the actual extent of interstate banking is probably
far greater than might be assumed given the laws
prohibiting it.

Nonbank Subsidiaries
,*

For purposes of the Bank Holding Company
Act, a bank is defined as " . . . any institution . . .
which (1) accepts deposits that the depositor
has a legal right to withdraw on demand, and (2)
engages in the business of making commercial
loans." 8 Therefore an organization that offers
both demand deposits and commercial loans
may be defined as a commercial bank, and,
Í* hence, would fall under the interstate banking
restrictions. The laws prohibiting interstate banking
limit the ability of a formal banking organization
to offer both demand deposits and commercial
loans at a single location in more than one state.
• * But by separating the demand deposit and
commercial lending functions it is possible for
banking organizations to circumvent the interstate
^
restrictions and provide interstate financial services. Indeed, nothing prevents a commercial
bank in one state from advertising and accepting
demand deposits or savings deposits from
consumers in another state. Many large com. . mercial banks aggressively sell large certificate of
deposits on an interstate basis. They employ
calling officers to seek out major accounts
nationwide, and they market their credit cards
nationwide. In addition, commercial banks are
offering such financial services as cash management, electronic funds transfer accounts, loan
' p a r t i c i p a t i o n s and a variety of correspondent
banking services that know no state boundary.
These are all examples of services offered across
state lines that d o not require the bank to
establish a physical presence.
By separating the demand deposits and
commercial lending functions, however, a banking
organization can establish a physical presence
• across state lines. One way for bank holding
companies to accomplish this is through the
creation or acquisition of nonbank subsidiaries.
The nonbank subsidiaries do not constitute a
commercial bank and, hence, are free to open
»5 offices on an interstate basis. National banks

, .

FEDERAL RESERVE BANK OF ATLANTA

may undertake a number of the same 4(c)8 type
activities allowed to bank holding companies
(Table 4). For the most part, however, these
activities are constrained to the state in which
the parent bank is located.

Identifying Interstate 4(c)8 Offices
W i t h the assistance of the eleven other
Federal Reserve District Banks, we were able to
piece together a composite picture of holding
companies throughout the nation that controlled
interstate 4(c)8 subsidiaries and the number of
interstate offices each controlled. Although an
application is required prior to a 4(c)8 subsidiary
opening a new office, no consolidated records
were available. Each District Federal Reserve
Bank compiled a list of holding companies with
interstate 4(c)8 offices and provided the office
locations on a state-by-state basis. In a few
instances it was necessary to contact holding
companies directly to obtain the desired information. This article presents the best information
available on 4(c)8 interstate activity, but the data
may not be 100 percent inclusive. The numbers
represent an actual count of those institutions
and office locations of those institutions w e
identified as being involved in 4(c)8 services on
an interstate basis. Therefore, the numbers may
understate the extent of interstate activity.
In total there are 3,201 one-bank holding
companies and 430 multibank holding companies
in the United States (Table 5). Of the 3,631
holding companies capable of establishing or
acquiring interstate offices of 4(c)8 subsidiaries,
only 1 39 or approximately four percent elected
to d o so. Of those 139, 68 were one-bank and 71
were multibank holding companies. One common
characteristic of holding companies electing to
go interstate through their 4(c)8 subsidiares was
their absolute size. Of the 50 largest banking
organizations in the country, 42 have interstate
4(c)8 subsidiaries. Of the 100 largest banking
organizations, 70 have 4(c)8 subsidiaries that
control interstate offices; of the top 1 50 organizations, 102 have interstate 4(c)8 subsidiaries.
Therefore, as a generalization, large bank holding
companies are the most likely to provide interstate
financial services through offices of their 4(c)8
subsidiaries. They are also the organizations
most likely to undertake interstate banking if or
when the prohibitions are lifted.
Table 5 also indicates that these 139 holding
companies control 382 4(c)8 subsidiaries which
collectively have at least 5,500 offices outside
9

Allowable N o n b a n k Activities
The Bank Holding Company Act of 1956 as amended
in 1970 defines a bank holding company as"—any
company which has control over any bank or over any
company that is or becomes a bank holding company
by virtue of this Act." The term company includes all
legal entities except individuals—that is corporations
partnerships, trusts or associations. Individuals are
excluded and consequently may own any number of
banks or other financial institutions in any number of
states without coming under the provisions of the act.
For purposes of the act, the term "control" was
defined as controlling directly or indirectly 25 percent
or more of any class of voting securities of the bank or
company, or controlling the election of a majority of
directors or trustees of the bank or company, or the
Board of Governors of the Federal Reserve System
determines that the company directly or indirectly
exercises a controlling influence over the management or policies of the bank or company. 9 This latter
provision gives the Board of Governors wide latitude
in determining what constitutes control, and hence,
what is or is not a holding company.
Section 4(c)8 of the Bank Holding Company Act
states the criteria the Board must apply before allowing
bank holding companies to engage in certain nonbank
activities. Some of those nonbank activities are prohibited to individual banks but the majority are activities
in which nationally chartered banks may engage. 10
Under 4(c)8, a bank holding company may be exempted
from the general prohibition against acquiring or
establishing nonbank activities and allowed to acquire.
"shares of any company the activity of which
the Board after due notice and opportunity for
hearing has determined (by order or regulation)
to be so closely related to banking or managing or controlling banks as to be a proper
incident thereto. In determining whether a
particular activity is a proper incident to banking
or managing or controlling banks the Board
shall consider whether its performance by an
affiliate of a holding company can reasonably
be expected to produce benefits to the public,
such as greater convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking
practices."
To be considered a permissible nonbank activity for
bank holding companies, the activity must pass two

See Statutory Appendix to Regulation Y.
See Dale S. Drum, "Nonbanking Activities of Bank Holding Companies
Economic Perspective, Federal Reserve Bank of Chicago March/April,
1977.
" S e e for example, Harvey Rosenblum, "Bank Holding Companies: An
Overview" Business Conditions, Federal Reserve Bank of Chicago.
,0

tests. First, it must be closely related to the activities
in which banks engage. This is a rather vague criterion
in light of the "incidental powers" accorded banks
through Section 8 of the National Bank Act of 1 8 6 4
which states that banks may " e x e r c i s e . . . all such
incidental powers as shall be necessary t o carry on
the business of banking...". Given this vagueness it is
not surprising that the Board of Governors has no
published statement of the criteria it uses to determine
activities closely related to banking. Researchers
have observed, however that the Board has approved
activities in which banks have historically engaged, or
activities complementing services normally provided by
banks or activities in which banks clearly possess
technical skills. 11 If the activity satisfies at least one of
these criteria, it may be proclaimed a permissible
activity if it also passes the second test: that providing
the service through a nonbank subsidiary may reasonably be expected to produce net public benefits.
The Board may approve a nonbank activity either by
order or by regulation—adding the activity to the "laundry
list" of approved activités as set forth in Regulation Y,
Section 4(c)8. If the activity is approved by order, then
every future applicant wishing to undertake that activitiy must justify the activity to the Board. Effectively,
this amounts to a case-by-case review and opinion.
On the other hand, if the activity is approved and
added to approved activities listed in the regulation, a
future applicant need not justify the activity and an
application may be approved under delegated authority
at the Reserve Bank level if all other conditions for
delegated authority are met.
To date, the Board has approved and added to the
"laundry list" 17 activities in which bank holding companies may engage by either establishing de novo
nonbank subsidiaries or acquiring nonbank subsidiaries
The approved activities are set forth in Table 4.
Through an application process one bank and multibank holding companies may gain approval to establish a nonbank subsidiary to engage in any or a
combination of activities. By definition, a nonbank
subsidiary is not a bank and, hence, does not fall
under regulations or laws that apply only to banks.
The nonbank entities are, therefore, capable of unrestricted geographic expansion both intrastate and
interstate. 12 Since the vast majority of the approved
nonbank activities are activities in which banks may
engage, i.e. "activities which are closely related to
banking or managing or controlling b a n k s . . . " , t h e
4(c)8 provisions effectively allow bank holding companies to provide financial services similar to those
provided by banks but on an interstate basia

August, 1973; or Samuel H. Talley: "Developments in the Bank Holding
Company Movement", Proceedings of a Conference on Bank Structure
and Competition, 1972, Federal Reserve Bank of Chicago.
2
ln two cases, bank holding companies have received approval to acquire
troubled S&Ls with the condition that bank branching laws would apply
to the acquired S&Ls.

MAY 1983, E C O N O M I C R E V I E W

Table 4. Permissible Nonbank Activities for Bank Holding Companies Under Section 4(c)8 of Regulation Y
February, 1983
Activities permitted
by regulation
1. Extensions of c r e d i t 2
Mortgage banking
Finance companies:
consumer, sales, and
commercial
Credit cards
Factoring
2. Industrial bank, Morris
Plan bank, industrial loan
company
3. Servicing loans and other
extensions of credit 2
4. Trust c o m p a n y 2
5. Investment or financial
advising 2
6. Full-payout leasing of
personal or real property
7. Investments in community
welfare projects 2
8. Providing bookkeeping
or data processing
services 2
9. Acting as insurance agent
or broker primarily in
connection with credit
extensions 2
10. Underwriting credit life,
accident and health
insurance
11. Providing courier services 2
12. Management consulting for
all depository institutions
13. Sale at retail of money
orders with a face value of
not more than $1000,
travelers checks and
savings bonds 1 - 2
14. Performing appraisals of
real estate 1
15. Issuance and sale of
travelers checks 1

Activities permitted
by order

Activities denied
by the Board

1. Issuance and sale of travelers
checks 2 - 6
2. Buying and selling gold and silver
bullion and silver coin 2 - 4
3. Issuing money orders and generalpurpose variable denominated
payment instruments 1 - 2 - 4
4. Futures commission merchant to
cover gold and silver bullion and
coins 1 - 2
5. Underwriting cetain federal, state
and municipal securities 1 - 2
6. Check verification 1 - 2 - 4
7. Financial advice to consumers 1 - 2
8. Issuance of small denomination debt
instruments 1
9. Arranging for equity financing of real
estate 1
10. Acting as futures commissions
merchant 1
11. Discount brokerage 1
12. Operating a distressed savings and
loan association 1
13. Operating an Article XII Investment
Co. 1
14. Executing foreign banking unsolicited
purchases and sales of securities
15. Engaging in commercial banking
activities abroad through a limited
purpose Delaware bank 1
16. Performing appraisal of real estate
and real estate advisor and real
estate brokerage on nonresidential
properties. 1
17. Operating a Pool Reserve Plan for
loss reserves of banks for loans to
small businesses 1
18. Operating a thrift institution in Rhode
Island
19. Operating a guarantee savings bank
in New Hampshire 1
20. Offering informational advice and
transactional services for foreign 1
exchange services

1. Insurance premium funding
(combined sales of mutual
funds and insurance)
2. Underwriting life insurance
not related to credit
extension
3. Sale of level-term credit life
4. Real estate brokerage
(residential)
5. Armored car
6. Land development
7. Real estate syndication
8. General management
consulting
9. Property management
10. Computer output microfilm
services
11. Underwriting mortgage
guaranty insurance 3
12. Operating a savings and loan
association 1 - 5
13. Operating a travel
agency 1 - 2
14. Underwriting property and
casualty insurance 1
15. Underwriting home loan life
mortgage insurance 1
16. Investment note issue with
transactional characteristics 1
17. Real estate advisory
services 1

'Added to list since January 1, 1975.
'Activities permissible to national banks.
3
Board orders found these activities closely related to banking but denied proposed
acquisitions as part of its " g o slow" policy.
•"To be decided on a case-by-case basis
5
Operating a thrift institution has been permitted by order in Rhode Island, Ohio, New
Hampshire and California
S u b s e q u e n t l y permitted by regulation.
Source: Federal Reserve Board

FEDERAL RESERVE BANK O F ATLANTA

Map 2
Number of Interstate Subsidiaries of Holding Companies
Home Officed in the State

Total: 3 8 2

the state in which the parent holding company
resides. Map 1 indicates that 56 of these holding
companies (41 percent of the total) with interstate
4(c)8 subsidiaries reside in 10 northeastern
states (Maine, N e w York, Massachusetts, Rhode
Island, Connecticut, Pennsylvania, N e w Jersey,
Delaware, Maryland and Virginia). The highest
concentration of holding companies controlling
4(c)8 subsidiaries with interstate offices is in the
northeastern portion of the nation.
M a p 2 shows the n u m b e r o f 4(c)8 subsidiaries
controlled by holding companies home officed
in a given state. In total the 139 holding
companies control 382 4(c)8 subsidiaries with
interstate offices. Approximately fifty percent of
the 4(c)8 subsidiaries (191) have parent holding
companies that reside in the Northeast, specifically the northeastern coastal states from Virginia
to Maine plus Pennsylvania (Maine, New York,
Massachusetts, Rhode Island, Connecticut,
Pennsylvania, N e w Jersey, Delaware, Maryland
and Virginia). And as Map 3 shows, these 191
subsidiaries controlled better than 64 percent
(3,472) of all interstate 4(c)8 offices. Therefore,
the vast majority of holding companies controlling
4(c)8 subsidiaries with interstate offices are
I

Map 3
Total Number of Offices: All 4(c)8 Subsidiaries

Total: 5,500

based in the Northeast. In fact, New York and
Pennsylvania alone accounted for 22 percent
(30) of all holding companies with interstate
4(c)8 subsidiaries. Holding companies in those
t w o states controlled 124 separate interstate
subsidiaries, 33 percent of the total, and 1,874
(34 percent) of the total interstate offices. This is
not surprising given the number of large holding
companies in this area. If interstate positioning
through 4(c)8 subsidiaries is any indication, large
organizations, especially those in the Northeast,
are the most likely to become active in interstate
banking if and when the laws permit.

Types of Financial Services Provided
A nonbank subsidiary may provide more than
one 4(c)8 activity at a given location. For
instance, a nonbank subsidiary primarily engaged
in consumer finance activity may also provide
c r e d i t life i n s u r a n c e a n d Leasing a c t i v i t i e s .
Therefore, there is a difference between the
number of 4(c)8 services provided and the
number of 4(c)8 subsidiaries and the number of
offices of 4(c)8 subsidiaries. Table 6 summarizes
the number of 4(c)8 activities provided through
12 MAY 1983, E C O N O M I C REVIEW

Table 5. Bank Holding Companies, Number with Interstate 4(c)8 Subsidiaries'
and Offices of Interstate 4(c)8 Subsidiaries by State
Interstate C o m p a n i e s
Home State of
Holding Company

Total Number of
Holding Companies
Home Officed in State
OneBank

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
DC.
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Oklahoma
Ohio
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virgina
Wisconsin
Wyoming
TOTAL

Multi
Bank

Total

16
3
5
47
42
104
7
7
12
48
49
3
6
316
66
268
323
43
47
2
3
14
18
286
26
175
34
283
2
6
8
19
19
9
51
250
16
3
32
11
5
41
40
283
17
4
5
7
9
82
29

9
1
0
2
6
22
3
3
1
29
22
0
1
7
1
16
8
1
1
4
4
13
24
15
0
40
7
0
0
4
11
4
11
1
4
6
17
5
3
0
0
4
10
59
5
1
9
1
1
28
6

25
4
5
49
48
126
10
10
13
77
71
3
7
323
67
284
331
44
48
6
7
27
42
301
26
215
41
283
2
10
19
23
30
10
55
256
33
8
35
11
5
45
50
342
22
5
14
8
10
110
35

3,201

430

3,631

Number of
Holding Companies

4
—

0
1
5
1
2
—

1
3
4
—

1
5
3
2
2
1
—

1
6
4
1
3
1
7
—

Number of
Subsidiaries

Number of
Offices

—

1
28
1
5
—

3
4
7

—

1,171
50
157

—

1
24
11
2
2
1

2
70
38
3
2
5

—

1
18
10
3
21
1
7
—

—

1
636
1
13

1
102
34
6
585
2
7
—

2
—
—

—

19
4

96
9

—

1
11
2
11
3
3

1
12
8
28
16
7

—

8
2
10

14
2
37

6
2
2
—

5
4
—

2
—

139

—

1,593
226
—

1
12
27
283
167
86

—

7
10

86
42

—

3
—

382

7
—

5,500

Source: Federal Reserve Board Data Base as of December 31, 1981
Note: Data on holding companies with interstate subsidiaries is based on data from the District Federal Reserve Banks
except in the 11 th and 12th Federal Reserve Districts where w e contacted the holding companies. This data
based on December 31, 1981, figures, is a snapshot of a constantly changing situation and is not intended as an
exhaustive listing.

FEDERAL RESERVE BANK O F ATLANTA

interstate offices of nonbank subsidiaries by
section of the country. At least 4,613 offices of
nonbank subsidiaries of out-of-state bank holding
companies provide consumer finance services,
by far the most popular type of interstate 4(c)8
activity for bank holding companies to engage in.
The second most popular is the insurance
agency activity (provided through 2,440 offices),
followed by underwriting credit life (1,118
offices), servicing loans (1,995 offices), mortgage
banking (623 offices) and leasing (580 offices). 13
Interstate offices that provide check verification,
audit services, and credit cards are the least
popular. Although these services are provided
on an interstate basis, they don't require permanent physical presence.
The geographic distribution of these services is
interesting. The South Atlantic (Census Region)
states lead the nation in the number of activities
provided through nonbank subsidiaries belonging
to out-of-state holding companies. These South
Atlantic states house 1,327 offices of out-of-state
holding companies providing consumer finance
services, 214 offices offering mortgage banking
and 21 offices offering trust services. The Pacific
states are the second most popular target for
most 4(c)8 activities, but these states house
less than half the number of activities provided
through offices in the South Atlantic region.
Quite obviously, a region's size plays a part in
these statistics, but generally the primary targets
for 4(c)8 activities appear t o be the faster
growing states with substantial populations. In
terms of total number of activities offered
through nonbank subsidiaries of out-of-state
holding companies, California leads the way with
907, followed by Florida with 824, North Carolina
with 769, Pennsylvania with 640, Ohio with 614,
South Carolina with 558, Georgia with 557 and
Texas with 542. The remaining 42 states house
approximately the same number of activities
offered through offices of nonbank subsidiaries
of out-of-state holding companies as the total
offered in these 8 states.

Interstate Offices by Primary Activity
As noted above, more than one 4(c)8 activity
may be provided through a single subsidiary
office. Many activities are low profile and

Any location at which a customer may obtain credit life insurance which
is reinsured by a holding company subsidiary is included in the 1,118
offices providing underwriting credit life.

normally provide a complementary service to
some other 4(c)8 activity. For example, as Table
6 indicates, the insurance agent activity is
provided at 2,440 locations, although the interstate
offices of 4(c)8 subsidiaries primarily engaged in
this activity number only 40. The same is true for
underwriting credit life insurance; while credit
life insurance is provided at 1,118 offices of
4(c)8 subsidiaries, only 56 are primarily engaged
in this activity. Therefore, to assess the geographic
extent to which bank holding companies are
establishing a physical presence on an interstate
basis, one should focus on the number of 4(c)8
offices by primary activity. A table detailing the
number of these offices by primary activity and
by region is available from the Atlanta Fed.
At least 5,500 offices of 4(c)8 subsidiaries are
located outside the state in which the parent
company resides. Four of the primary activities
are what may be considered high profile activities:
finance company, mortgage banking, industrial
banking and trust services. While offices of some
of the other primary activities establish the
holding company's presence in an area, they are
less visible to the public. In addition, these four
highly visible activités accounted for5,189 of the
interstate 4(c) 8 offices, or95 percent of the total.
Finance companies dominate as the most popular
type of primary 4(c)8 activity. In total, subsidiaries
of bank holding companies control 4,442 finance
company offices outside the state in which the
parent company resides. This one activity accounts
for better than 80 percent of all interstate 4(c)8
offices.
A look at the geographic distribution of
interstate offices of 4(c)8 subsidiaries may
indicate which states or areas of the country will
be the primary targets for interstate expansion if
the prohibition on interstate banking is lifted.
Map 3 shows by state the number of 4(c)8
offices controlled by out-of-state holding companies. In terms of total office locations, California
has attracted more activity than any other state
with 521 offices. Florida is a distant second with
372 offices, closely followed by North Carolina
(367), Pennsylvania (320), O h i o (310) and Texas
(289). 14 Five southeastern Atlantic coast states
have attracted a good deal of the attention of
out-of-state holding companies—Virginia, North

''Pennsylvania has very attractive usury laws which may explain at least in
part the degree of nonbank entry.

MAY 1983, E C O N O M I C R E V I E W '

Table 6. Interstate Nonbank Subsidiaries: Location of Activities by Region

Mortgage Banking

214

Finance Company

149

536

1,327

Credit Cards

Factoring

Industrial Bank

Trust Company
Financial Advisor

466 389

565

208

125

140

334

105

106 103

995

167

114

580

Investment in Community Welfare

Data Processing

Insurance Agent

230

836

253 236

251

273 192

2,440

Underwriting Credit Life

407

106

159 154

1,118

Management Consulting

Money Orders, Travelers Checks

113

177

Check Verification

Audit Services

1,044 8 6 6 1,235

525

Leasing

Total Per Region
Total for U.S.

345

1,078 3,502

Servicing Loans

TYPE OF ACTIVITY

TOTAL

623

6 5 2 321

4,613

1,386 9 8 8
10,969

Source: Federal Reserve Bank of Atlanta

FEDERAL RESERVE B A N K O F A T L A N T A

Map 4
By Major 4(c)8 Activity and N umber of Offices Located
in each State
Finance Companies

Total: 4,442

Carolina, South Carolina, Georgia and Florida
Combined, these states constitute a land mass
half again as large as California but house almost
three times the number of 4(c)8 offices, 1,447
offices of out-of-state holding companies (27
percent of the total). Indeed, these five states
and Pennsylvania, Ohio, Texas and California
have been the most attractive for interstate
expansion through 4(c)8 subsidiaries and, if we
may use this as any indication, will probably be
the most attractive targets for interstate bank
expansion should the prohibition be removed.
M a p 4 , again, reveals that most interstate 4(c)8
activity has been consumer finance oriented.
Over 83 percent of all interstate 4(c)8 offices in
the nine states mentioned above as attractive
targets were finance companies. In fact, 93
percent of all 4(c)8 offices in Pennsylvania are
finance companies. This may be interpreted as
evidence that these states would be especially
attractive for consumer-oriented banks.

Trust companies (number of offices in each state) - Florida (20), Arizona
(9), Montana (8), North Dakota (6), South Dakota (4), New York (3),
Nebraska (2), Pennsylvania (1). Hawaii (1), California (1). Illinois (1), and
Tennessee (1).

Map 5
By Major4(c)8 Activity and Numberof Offices Located
in each State
Mortgage Banking

Total: 5 8 4

Map 5 shows a more or less consistent pattern
for mortgage banking offices with the exception
that Tennessee and Illinois should be added t o
our list of attractive states.
Footnote 15 lists the number of office locations
of all 4(c)8 subsidiaries engaged primarily in
offering trust services.15 Florida is obviously the
prime target for such activities—again a consumer
or retail-oriented service. Part of this pattern,
however, may be due to the relative leniency of
restrictions that states place on entry via the trust
route. Florida, for example has no restrictions on
out-of-state organizations establishing trust companies in the state.
State laws restricting industrial banks also play
a part in the geographic distribution of this 4(c)8
activity. 16 Although there is some activity in the
Carolinas and Georgia, many states prohibit such
organizations. A number of midwestern and
western states do allow industrial banks, and that
is where most such offices are located.

'Industrial Banks (number of offices in each state) - Colorado (40), North
Carolina (12), Kansas (12), California (10), Georgia (9), South Carolina (7),
Washington (8), Utah (20), Hawaii (2), Arizona (10), Nebraska (1), and
Florida (1).

MAY 1983, E C O N O M I C R E V I E W

Map 6
Interstate Loan Production Offices
Located in each State

Total: 202

To the extentthat offices primarily engaged in
the leasing activity may be used to indicate the
wholesale banking function, it appears that California, Texas and Ohio will be prime targets for
wholesale banking should the laws permit. Each
of these states houses at least 10 offices of outof-state bank holding companies' 4(c)8 subsidiaries.
North Carolina, Illinois Missouri and Florida also
would appear to be desirable targets from this
perspective. 17

Map 7
Interstate Edge Act Office Domestic Banking
Organization

Source: Federal Reserve Bank of New York

(As of Oct 1982)

Total: 143

In addition to 4(c)8 subsidiaries, banking
organizations are permitted to establish loan
production offices and Edge Act corporations on
an interstate basis. Loan production offices can
do little more than a calling officer, but they are
useful in establishing a wholesale presence in an
area. Edge Act offices are also aimed at wholesale
customers but are limited to dealing with
organizations engaged in international trade.

Since regulatory agencies d o noi track data on
loan production offices, it was necessary to
survey banking organizations directly. Only the
largest banking organizations are likely to commit
resources to loan production offices, especially
in light of the fact that calling officers may
provide the same services without a physical
presence in an area. Therefore we surveyed the
top 200 banking organizations in the country
and found that they controlled a total of 202 loan
production offices.
Table 7 shows the number of banking organizations in each state that have established outof-state loan production offices, the number of
offices established and the number of states in
which these offices have been placed. Map 6
shows that California, Illinois, Texas, New York,
Colorado and Tennessee have attracted more
loan production offices than other states.
Following the same logic, Edge Act corporations
are established in order to follow the geographic
distribution of one's customers engaged in
international trade. There are 143 interstate

" L e a s i n g activities (number of offices in each state) - Texas (11), California
(10), Ohio (10), Illinois (8), North Carolina (8), New Jersey (5), Missouri (5),
Florida (5), New York (4), Colorado, Michigan, Kentucky, Tennessee,

Pennsylvania (3 each), Delaware, Washington, Minnesota (2 each),
Montana, Arizona, New Mexico, Nebraska Louisiana, Georgia, South
Carolina, Connecticut (1 each).

Other Nonbank Subsidiaries

FEDERAL RESERVE BANK O F ATLANTA

Table 7. Interstate Loan Production Offices

Parent State
California
District of Columbia
Florida
Illinois
Kentucky
Maryland
Massachusetts
Michigan
Minnesota
Missouri
New Jersey
New York
North Carolina
Oklahoma
Pennsylvania
Rhode Island
Texas
Virginia
Washington
TOTAL

Number of Organizations
Establishing Loan
Production Offices
5
1
1
4
2
1
3
1
2
2
1
8
2
1
2
2
2
2
2
44

Number of Interstate
Loan Production
Offices Maintained
36a
7
1
31
8
3
14
1
5
22b
2
31 c
4
1
4
6
5
12
9
202

Number of States
Entered by
LPO's
14
7
1
13
7
3
12
1
5
6
2
13
2
1
2
5
3
5
7
34

Notes:
a
b

Only 3 LPOs from California are in New York
General Bancshares Corporation of S t Louis, MO
has full service banks in Missouri, Illinois, and
Tennessee. They have 13 LPOs in Tennessee and
4 LPOs in Illinois
10 of the 31 are in California

Source: FRB— Atlanta Survey of Largest 2 0 0 Banking Organizations; data as of December 31, 1982.

Edge Act offices of domestic organizations
located in the United States. M a p 7 shows their
geographic distribution. Predictably, states with
international trade centers have attracted the
most Edge Act offices. New York attracted the
largest number, 31, closely followed by Florida
with 25 offices. California follows with 23, Texas
with 1 7 and Illinois is a distant fifth with 11 Edge
Act offices. New York, Florida, California and
Texas are prime targets for this type of wholesale
banking. Since only the largest banks may offer
services needed by international corporations,
banking organizations in the money centers
have already located offices to serve these
needs. For example, New York banks have
established 15 Edge Act offices in California and
California organizations have established five
such offices in New York. Interstate banking
would allow these organizations to provide little
more wholesale services than they are providing
today.
18

Summary of Interstate Activity
Table 8 summarizes by state the number of
interstate offices of out-of-state banking organizations. The most impressive aspect is the fact
that domestic banking organizations control at
least 7,383 interstate offices and, if w e include
interstate offices of foreign banking organizations,
the total reaches 7,840. This compares to a total
of 55,440 banking offices in the nation. Almost
1,500 of the identified interstate offices supply
all banking services. The remaining offices are
nonbank subsidiaries offering a more limited
number of banking type services. The sheer
number of interstate offices controlled by
holding companies is impressive, given the
prohibition on interstate banking.
Holding companies may use a number of
avenues to serve both interstate retail and
wholesale customers. The only area in which
they cannot effectively compete for consumer
accounts is in the convenience area—providing
MAY 1983, E C O N O M I C R E V I E W '

T a b l e 8. Summary of Interstate Activity
GRANDFATHERED

Holding-

Banks

FOREIGN BANKS

FOREIGN*

DOMESTIC
Branches

Holding-

Banks

Agency

Edge

Branch

•

Alabama
Alaska
Arizona
Arkansas
California

161

188

2
1

2
3

107
4

Montana
Nebraska

3
1

25
5

Nevada
New Hampshire
New Jersey
New Mexico

1
1

5
2

35
27

North D a k o t a

110

Ohio
Oklahoma
Oregon

169

3
2

12
2

80
27

Washington

1
1

63
85

West Virginia
Wisconsin
Wyoming

3
2

6
4

22
4

141

1,397

Colorado
Connecticut
Delaware
District of C o l u m b i a
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa

StatesWith
Reciprocal
Agreement

10
2

PreferredStock
Deals
Filed
With
Board
1

He) 8
Subs
107

Loan
Production
Oftices

521
158

787

372
253
39

621
276
57
156
212
100
105

182

Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri

N e w York
North Carolina

39
66

•

Pennsylvania
R h o d e Island
S o u t h Carolina
S o u t h Dakota
Tennessee
Texas
Utah
Vermont
Virginia

TOTALS

331
370

168

322
79
270
335
229

108

159
289

227
114

116

Notes.
O • These slates allow entry of limited-purpose banks
O - These states allow expansion of interstate grandfathered banks
* These columns are not included In total number of oftices
A Su ot the foreign bank holding companies own only one bank but the bank is located outside
the home stale ot the loreign banking organization

156
367
23
310
76
83
320

103

202
334

297
219

brick-and-mortar offices t o attract small and
medium sized consumer accounts.
On the wholesale side, holding companies are
providing a wide array of interstate financial
services, some of which require a physical
presence but many of which do not. Many of
these corporate services may be provided
through nonbank subsidiaries, which are free to
establish interstate offices. In addition, large
banking organizations are providing large corporate customers with banking services not
requiring physical interstate offices. These banking
organizations appear to be competitively handicapped only in providing certain wholesale
banking services to medium and especially small
business customers. These customers still depend
to a large extent on locally controlled banks. 18
It appears, however, that as time goes by more
and more of the financial services required by
medium and small businesses will be targets for
large banking organizations supplying these
services through 4(c)8 provisions. It simply is not
necessary for a banking organization to maintain
a facility that both accepts deposits and makes
loans to be competitive across state lines. The
larger holding companies have already established
their nonbank interstate presence.
Some of the smaller banking organizations
having a regional scope are moving quickly to
establish formal and informal agreements to
form interstate networks if the interstate prohibitions are removed. Their rationale seems to be a
perceived need to become large enough to
compete with the money center banks on an
equal footing. Although the smaller banking
organizations make the assumption, the question
is whether larger banking organizations are
under any strong pressure to establish a nationwide
interstate banking network involving brick-andmortar offices. The answer must be a modified
no.
First, the removal of Regulation Q means that
banks will be required to pay money market
rates for a larger proportion of their small and
medium size deposits. The day of bank deposit
customers subsidizing banks through low interest
is over. Take this subsidy away and add in the

David Whitehead, "Sixth District Survey of Small Business Credit"
Economic Review Federal Reserve Bank of Atlanta (April 1982), pp. 42-48.

expense of operating distant offices and one
conclusion is clear: large banks have no great
incentive t o use brick and mortar facilities to
collect deposits except possibly in the most
attractive high growth markets.
From the consumers standpoint the idea of
interstate networks is also questionable. As
banks are required to pay money market rates
for more of their funds, they necessarily will have
to pass the costs along to consumers through
direct pricing on services. Since an interstate
banking network will be expensive to maintain,
will customers be willing to pay for the marginal
benefits associated with " u n l i m i t e d " geographic
access to their accounts? The answer is probably
"no," given the number of less costly alternatives
available that do not require an interstate
network. For these reasons it does not appear
that the consumer will lead the way to interstate
banking. Supply in this case will definitely follow
demand—and little demand exists for this type
of service.
Too many avenues allow banking organizations
to provide interstate financial services on a less
costly basis to believe that nationwide interstate
brick-and-mortar expansion is inevitable.
Interstate bank expansion will occur in the
absence of the interstate prohibition, but,
because of the prodigious amount of interstate activity already in place, it will evolve
slowly and will be geographically limited to the
more attractive markets. There is some danger
that small and medium sized banking organizations might be panicked into building interstate
banking systems large enough to fend off money
center banks. In the short run this may create
some inefficient organizations. Taking a longer
view, however, market forces will correct these
inefficiencies. The larger money center banks,
on the other hand, quite obviously will become
active in the more attractive markets—but are
unlikely to establish comprehensive nationwide
interstate networks because they have already
established themselves through nonbank subsidiaries.
— D a v i d D. W h i t e h e a d

Pam Frisbee contributed valuable research assistance in the preparation ot
this article. The author also wishes to thank the other District Federal
Reserve Banks for their vital contributions.
A longer, more detailed
version of this study is available from the Information Center, Federal
Reserve Bank of Atlanta.

M A Y 1983, E C O N O M I C R E V I E W '

The Financial Conglomerates
An important development in the financial services
industry is the formation of financial conglomerates offering a wide range of services from one
source. While the potential impact of these
conglomerates is huge, little evidence exists
about whether synergy on such a large scale can
really work in the financial services business. Can
the diverse parts of these financial service conglomerates mesh and complement each other,
leading to increased sales and reduced costs
related to consolidation?
Some evidence suggests that it will be difficult
to achieve these synergies, at least in the short
run. Previous attempts to create synergy in the
financial services industry have been somewhat
disappointing. For the most part, life insurance
sales by stock brokerage firms and mutual savings
banks have not been a roaring success. Continental Insurance made little progress toward the
synergy that was supposed to accrue from its
Diners Club credit card operation or its consumer
finance subsidiary (both units have been sold),
while INA was never able to sell insurance
through its Blyth Eastman Dillion subsidiary.
Of course, significant cross-selling opportunities
can accrue to financial conglomerates as well as
increased opportunities for mass marketing of
additional services. There are also opportunities
to eventually consolidate operations and utilize
available computer capacity. However, it may
take years to effectively achieve these synergies.
Nevertheless, the trend toward financial conglomeration is real and likely to continue in the
future as witnessed by the large number of nonbank companies that have become significant
factors in the financial services business.1
'Alan Gart "The Future of the Financial Services Industry," National Association
of Business Economists, Jacksonville, Florida, October 19, I979.

The potential impact of "near-banks," such as
Sears, American Express and Merrill Lynch, on
the financial markets is enormous. Banks and
savings and loan associations are constrained by
networks of Depression-era regulations that
prevent them from branching across state lines,
shut the door on domestic investment banking,
and sharply limit subsidiary activity. Near-banks,
on the other hand, are scarcely touched by such
rules because they do not accept deposits. They
are less restricted as to the business functions
they can perform and the business locations they
can choose.
Let's look at some examples of financial conglomerates and examine their strengths, weaknesses, and likely evolution.

Merrill Lynch
Although Merrill Lynch is best known as a retail
stock brokerage firm, it performs a complete
array of investment banking services. Its Capital
Market Croup is actively engaged in merchant
banking, institutional sales, trading, arbitrage,
block positioning, and underwriting.
The greatest growth at Merrill Lynch has come
in its retail or consumer activities. Its money
market funds and Cash Management Account
(CMA) have attracted a plethora of new customers that offer the potential to become retail
brokerage customers. The CMA combines a
securities account, a money market fund, a VISA
debit card, and access to liquidity through a
credit card, or checking account arrangement
via Banc One of Columbus, Ohio. The company
also offers credit cards to its retail customers.
Merrill Lynch has also begun to sell insurance
through its brokers in close to 500 domestic
offices.

Nonbank financial conglomerates, relatively unhindered by regulations, are
expanding in size and scope. If deregulation continues, financial conglomerates
that offer all financial services could emerge

FEDERAL RESERVE BANK O F ATLANTA

The company has become active in selling tax
shelters, commodity services and CDs (for Banc
One of Columbus and Home Federal Savings
and Loan of San Diego from w h o m they receive a
commission).
The company also has an active real estate
subsidiary that offers to buy and sell homes and
commercial properties. All these services appear
to be part of a corporate plan for Merrill t o
become a complete financial supermarket for
investors.

The New Sears
Sears Roebuck, in one sense, is even more of a
financial supermarket than Merrill Lynch. Through
Allstate, its property, casualty, and life insurance
subsidiary; Dean Witter; Coldwell Banker; its
ownership of the eleventh largest savings and
loan association in California w i t h $3 billion in
assets and a small commercial bank in Chicago;
its nearly 4000 outlets in department stores and
catalog offices; a new check processing service
to be offered in conjunction with credit unions;
and its base of 25 million active credit card
holders, Sears may well be a model of future
banking concerns.
The Chicago-based Sears has a huge in-house
data base on consumer credit which will become
the nucleus for the carefully targeted selling of
loans, money market funds, stocks, and other
instruments. A recent Roper organization poll
found Sears to be " v i e w e d most favorably" by
consumers who rated it against other corporations.
This acceptance should offer Sears an edge over
competitive financial institutions. Sears seems
ready to launch an array of additional services
that may include:
•
•
•

•
•

•

The formation of a world trading company.
The provision of retirement account opportunities for its customers.
A debit card that could be used t o endow the
new money market fund accounts with savings
and checking account privileges.
A universal financial card capable of handling
practically all household financial transactions.
A move into secured and unsecured personal
lending including homeowners' loans that should
rival finance companies, banks, and thrifts.
A pioneering system in two-way communications with the home through computers
and telephone for financial and consumer
product transactions.

•

A national hookup of automated teller machines (ATMs) in Sears retail stores that could
hook up to bank-like Sears merchandise credit
accounts, allowing customers t o draw cash,
take small personal loans through prearranged
lines of credit, deposit money, or make merchandise, mortgage, insurance premium, or
stock purchase payments. Through agreements
that Sears could make with certain banks,
customers of those banks could use ATMs at
Sears stores to tap their savings or checking
accounts or even to pay bills.
Although the potential for cross-selling and the
introduction of these new products seem quite
promising, there are some potential pitfalls. 2 As
the company pushes more direct selling of mer- .
chandise and financial services, notably through
interactive television and home computer systems,
it may steal sales from its own stores.

|
American Express
The next financial services giant, American Express Company, faces a huge challenge in successfully integrating the securities firm of Shearson
Loeb Rhoades, Inc., (acquired in a $1 billion
stock swap) into its financial empire. This financial
conglomerate with a holding company at the top
is best known for its travel service and credit card
business. Among its major assets are a giant-sized
international bank, Warner Amex Cable Communications, Fireman's Fund Insurance, and Mitchell Beazly Ltd. (a publishing company). It has
also purchased a 10 percent interest in McLeon
Young Weir Ltd., a major Canadian securities
firm. Shearson has also purchased Foster & Marshall, one of the largest regional brokerage firms
in the Northwest, and Robinson-Humphrey, a
major regional brokerage house in Atlanta.
American Express is moving beyond travel and
leisure dollars to vie for a central role in the
money that Americans save and invest The
company is counting on t w o salient aspects of its
business: its reach into the affluent sector of the
economy through its 13 million cardholders
w h o m it views as nearly recession-proof and
through its data processing ability and information
systems. The company wishes to become an
omnipresent intermediary for affluent Americans,
tapping into the estimated $8 trillion of personal
assets in the United States.

b u s i n e s s Week, November 16, 1981.

M A Y 1983, E C O N O M I C R E V I E W '

]

In addition to its credit card base of customers,
American Express can also reach affluent Americans through more than 4,000 brokers in its
Shearson system.
The company is presently gearing up for the
first offspring of the Shearson American Express
marriage, a computerized cash management
service called the Financial Management Account (FMA) which permits credit card and
checking withdrawals from an investment account.
Another kicker is the potential tie-in with
Warner Amex Cable Communications, which
would put American Express in the forefront of
electronic consumer financial transactions on
their television screens. The company is exploring
other sophisticated interactive home services
such as electronic banking and shopping and
commercial services for business.

Conclusion
The examples of Sears, Merrill Lynch, and American Express suggest what might lie ahead for the
financial services industry. 3 W i t h a loosening of
regulation, financial conglomerates that offer all
financial services nationwide could emerge. The
current regulations separating insurance companies, banks and consumer finance and investment brokerages are fading, laying the foundation
for the future. The real questions that must be
answered are whether American consumers will
really be attracted by one-stop shopping for all
their financial needs and whether the environment is truly different today so that hybrid
financial products and cross-selling across subsidiaries can really work in the 1980s. Recently,
the advertising of financial services seems to
encourage consumers to be selective, to pick
and choose the best investment or vendor of
services to fit a particular need. Also, the popularity

of financial supermarkets is being tested in the
marketplace. A lot of careful planning will be
necessary in order for the sum of the parts to add
to more than the sum of separate entities.
Banks in this country have been handicapped
by both product and geographic regulatory constraints. Although the bank holding company
umbrella permits some flexibility, banks (for the
most part) cannot branch across state lines,
underwrite corporate securities and some forms
of municipal revenue bonds, or sell non-credit
related insurance. On the other hand, most
European banks and American financial conglomerates do not have these product or geographical
limitations.
With the recent networking of nationwide
ATMs and the acquisition by New York based
Citicorp of a troubled California thrift institution,
it is highly likely that some of the restrictive
regulatory barriers may fall within the next few
years. Some states and regions, such as N e w
England, are already considering reciprocal branch
banking facilities. Restrictive geographic banking
regulations seem rather arbitrary and inconvenientto consumers in a modern c o m p u t e r a n d
communications era where people commute
from N e w Jersey and Connecticut to N e w York
or from Virginia and Maryland to Washington, D.C.
in order to go to work.
If some form of regional banking is permitted in
the next couple of years, unlimited interstate
banking would probably follow by the end of the
decade. Removal of the geographic constraint
would place banks in a better position in competing with financial conglomerates for the retail
financial services of consumers.
—Alan Gart
Florida International University

This article is excerpted trom Alan Cart The Insider's Guide to the Financial Services
Revolution to be published by McCraw-Hill in summer 7983.

For a more complete inventory of nonbanking institutions' financial services,
see C. Westbrook Murphy and Thomas W. Brunner, "Will Anyone Try to Block
Amexco?" American Banker April 23, 1981, and Harvey Rosenblum and
Diane Siegel, "Competition in Financial Services: The Impact of Nonbank
Entry," Federal Reserve Bank of Chicago, 1982.

FEDERAL RESERVE BANK O F ATLANTA

uni

Regional
Forces for
Interstate
Banking

Market forces are changing the structure of
banking and the financial service industry. 1 Financial innovations such as the spread of N O W
accounts and similar interest bearing transaction
accounts and the growth of money market funds
served as catalysts. Together with the thrift industry crisis, they helped bring on the Monetary
Control Act of 1980 and the Garn-St Germain
Depository Institutions Act of 1982. Among other
things, this legislation finally provided for the
phaseout of Regulation Q. 2
Similar innovations and market pressures are
forcing bankers, legislators and regulators to
reassess the desirability of maintaining geographical restrictions on intrastate and interstate banking.
This article dissects these market developments
and explains why it may not be possible, or
desirable, t o maintain for long the existing limitations on branching and bank holding company
expansion. It also will look at some of the public
policy issues that will arise as these restrictions
are re-examined.

How Banking Organizations
Erode Interstate Restrictions

With nonbank financial
conglomerates spreading their
presence nationwide,
interstate
restrictions on banks may be
harming the very institutions they
were designed to protect.

Not withstanding the 1927 McFadden Act
prohibitions on interstate branching, banking
organizations were very successful during the
late 1960s and early 1970s in innovating methods
to establish physical presences across state lines.3
Banks have employed loan production offices,
Edge Act Corporations, corporate calling officers,
and EFT facilities. 4 Larger banks have adopted

'See for example Kane (1982) or Eisenbeis (1981b).
For a description of these Acts see McNeill and Rechter (1980).
See for example Eisenbeis (1980), Whitehead (1983), Department of the 1 /
Treasury (1981), Peter Merrill Associates (1981) and Golembe Associates
(1979).
"There are now over 100 shared and proprietary EFT systems that allow a
customer to obtain cash by drawing down funds in an account across
state lines.
2
3

MAY 1983, E C O N O M I C REVIEW '

the bank holding company form to facilitate the
operation of nonbanking subsidiaries, such as
consumer finance companies, industrial banks,
mortgage banking firms and trust companies
throughout the country. 5
Similarly, many key classes of customers—and
especially large corporate customers—have found
it profitable to incur the search and transactions
costs t o deal with nonlocally based suppliers of
financial services. Large business loans have long
been negotiated in national and international
markets, and the establishment of such a corporate
relationship
has usually resulted in deposit
balances flowing into the nonlocal market as
well.
To a large extent then, the prohibitions on intra
and interstate banking have become progressively
eroded. But it is also significant to note that,
except for the largest customers, most of these
innovations have effected the lending activities
of banking organizations. The principal area that
has remained less affected by these banking
innovations has been retail deposit taking. Thus,
the main consequence of existing intra and
interstate banking restrictions has been to insulate
retail deposit markets from nonlocal competition.

i
f

(

Interstate Expansion by
Unregulated Competitors

In the late 1970s and early 1980s the combination of extremely high interest rates and
binding Regulation Q ceilings stimulated the
entry of unregulated nondepository institutions
into the financial service industry. These firms
have innovated ways both to take retail deposits
across local markets and on an interstate basis at
near market rates and to offer a wide range of
financial, investment and insurance services not
available from commercial banks. Both of these
activities are perceived as actual and potential
threats t o banking organizations.

The principal innovation that has evolved to
collect consumer deposits on an interstate and
national basis has been the money market mutual
fund. At the time of the Garn-St Germain Depository Institutions Act of 1982, noninstitutional
deposits in these funds approached $183 billion
or about 15% of bank and thrift institutions' small
time and savings deposits. The real importance
of money market mutual funds is that they have
broken down the dependence of previously
locally limited customers on local depository
institutions for financial services. The rapid growth
of these funds during the late 70s and early 80s
indicated that, when the opportunity costs t o
consumers resulting from regulatory constraints
are sufficiently high (1) t o overcome the inconvenience and search costs associated with seeking
higher rate alternatives, (2) to breakdown their
resistance to dealing with nonlocal institutions,
and (3) to compensate for holding a greater
portion of their financial assets in the form of
uninsured liabilities, consumers will shift their
funds into alternative investment instruments. 6
As distinct from the market supply oriented
methods banks have developed to avoid restrictions on interstate banking, the growth of
money market mutual funds has affected the
structure of both the market demand and
supply for deposit funds. Clearly, the funds
increased the number of alternative suppliers
of deposit-type services offering near money
market rates. In addition, it has already been
suggested that their growth and customer acceptance signals a fundamental change in the
nature of the demand for deposit and other
financial services. Once customers are no longer
dependent on local sources of supply for deposit services, the geographic market ceases to
be local; and in this case it has become an
interstate market. Under these circumstances,
any benefits that might have accrued previously
to in-state banks from prohibitions on intra or

Even the subsequent authorization of the $ 2 5 0 0 minimum deposit
Super NOW accounts and the MMDA December 14th account both free
of interest rate ceilings, did not reduce the importance of money market
funds. To be sure the phenomenal growth of these two new accounts to
over $ 2 9 0 billion (as of February 16, 1983) in a very short period
suggests that ceteris paribus, consumers prefer insured to uninsured
accounts. However, only $ 1 0 billion of these funds probably came from
money market funds, which still stand at $204.6 billion.
6
Not discussed in this section are the implications of the 24 interstate
supervisory mergers of S&L's. During 1982 and 1983, 24 interstate

FEDERAL RESERVE BANK O F ATLANTA

consolidations were approved (involving many more than 24 S&L
because of multiple acquisitions in a single application). This includes
the acquisition by Citicorp of a failing S&L in California These acquisitions
have created a number of interstate S&L's, but the competitive significance
will depend upon whether the industry weathers its financial crisis. Also
not discussed is the potential expansion of single S&L holding companies
which are not subject to as stringent limitations on permissably nonbanking
activities as are multiple S&L holding companies and bank holding
companies. (For a further discussion see Federal Reserve (1981).

interstate banking —by protecting local deposit
markets from actual entry or the threat of entry
by out-of-state banks—are completed dissipated.
Three other recent interrelated financial innovations should serve further to bring the
efficacy of existing interstate banking restrictions
into question. Two of these innovations evolved
in direct response to binding Regulation Q
ceilings (and to a lesser extent, reserve requirements) on banks and thrifts; they attempt to
capitalize further on the breakdown in consumer
dependence on local depository institutions. 7
The first is the evolution of symbiotic finance,
and the second is the emergence of the new
broker-bankers. The third innovation relates to
the potential exploitation of the nonbankbank device by both brokerage firms and nonfinancial firms to avoid the nonbanking (and
interstate) activity restrictions in the Bank Holding
Company A c t

Symbiotic Finance
Symbiotic finance is simply the joining together
of independent firms to provide services that
the participants could not legally or economically provide i n d i v i d u a l l y (See Eisenbeis
1981a). The classic example is the Merrill
Lynch Cash Management Account, which combines a margin account at a brokerage firm, a
captive money market mutual fund, a Visa debt
card, and a servicing arrangement through
BancOne of Ohio. Variants and refinements of
this service are being offered by numerous
other brokerage firms. In addition, Visa has also
authorized a money market fund directly to
use its debit card issuance through a Boston
bank thereby eliminating the need for a margin
account from a brokerage firm. 8
These nonbank symbiotic finance arrangements have enabled nonbanking firms to offer
often superior substitutes for traditional banking
services and thus pose a significant potential
competitive threat to banking organizations. 9
Not only do they capitalize on the fact that

consumers have learned they can obtain financial
services from nonlocal and nontraditional firms,
but also some of these firms have an extensive
interstate presence which could serve as additional consumer service centers.

The Growth of the Broken Bankers
In fact, the incentives for certain firms to
diversify into the banking business have been
so strong that a wave of vertical combinations
was precipitated in 1982 in the brokerage business. The result has been the second of the
three financial innovations mentioned previously—the creation of the broker-bankers.
Recent combinations of American Express- ,
Shearson, Bache-Prudential and Sears-Dean
Witter-Coldwell Banker, just to name a few,
have resulted in a whole new class of financial
service firms. 9> 10 These firms are internalizing
certain symbiotic financial arrangments to take J
advantage of potential synergistic or scope
economies. To this extent, they represent an f
intensification of symbiotic relationships. For
example, Shearson-American Express is employing an American Express Credit Card in connection with a Shearson Cash Management

i
"These ... arrangements
have enabled
nonbanking
firms to offer often
superior
substitutes
for traditional banking
services."
J

Account. The chief difference from the Merrill
Lynch-Visa type cash management account,
which requires an immediate debit to the
margin account, is that under the American
Express arrangement balances to the credit card
account can be paid out of the margin account
at the end of the monthly billing cycle.
However, the broker-bankers are also positioning themselves to offer a wide range of

}

I
'Unlike the Merrill Lynch Account, which has a $20,000 minimum initial
deposit, this account would have only a $5,000 minimum initial balance.
8
Recently, Merrill Lynch has announced a link with a Japanese broker and
a Swiss merchant bank to offer a mutual fund to its retail customers
specializing in investments on a world wide basis in scientific and

technological firms.
For a detailed listing of such combinations see Rosenblum and Siegel
(1982).
,0
Sears has most recently announced its intention to use its Sears World
Trade, Inc., subsidiary to market financial services worldwide.
9

MAY 1983, E C O N O M I C REVIEW '

}

consumer and corporate financial, brokerage
and insurance services. Thus the potential
competitive threat of these unregulated brokerbankers and other unregulated competitors
spreads far beyond their immediate activities
with money market mutual funds and cash
management accounts. These institutions presently operate offices interstate and are not
subject to bank regulation. Furthermore, some
are already positioned to expand into the
electronic transaction business. ShearsonAmerican Express, for example, has a partial
interest in Warner Communications, the nation's
largest cable TV firm. Warner has an experimental in-home interactive network that could
be adapted to provide transactions and related
financial services. Combined with its satellite
communications capabilities, American Express
has the real potential to put together a worldwide on-line payments system. What is unique
about this arrangement is that, like the merchants such as Sears, Wards and Penneys, w h o
have substantial on-line POS capabilities, collateral uses of the hardware and other aspects
of the system allow costs to be spread. Such a
network would not be dependent solely on
fees and transaction charges for payments
services to make the system profitable, as is
presently the case with bank-operated electronic payments services. To spread their costs,
banks have entered into joint venture, sharing,
and franchise arrangements with other banks.
Merchants and broker-bankers are not the
only firms creeping into the banking transaction
business. The credit card companies, which
have enjoyed a symbiotic relationship with
banks, have also begun to expand into payments area. Not only do Visa and Master Card
now have debit cards, but also both have
announced plans to establish nationwide ATM
networks to serve participating firms and their
customers
Unlike the money market mutual funds and
the credit card companies, broker-bankers have
not yet made significant inroads into the consumer financial service business. But the combination of technology, widespread geographic
presence, and cost and regulatory advantage
suggests that broker-bankers and others could
be a potential competitive force for existing
depository institutions. Moreover, their targeting
of the middle and upper income consumer 11
and their ability to offer an attractive and
flexible package of services suggest that such
FEDERAL RESERVE BANK O F ATLANTA

unregulated competition could make considerable progress in attracting away a very profitable
portion of the commercial bank consumer
customer base.

Nonbank Banks
The third recent financial innovation that
heightens the interstate competitive threat to
commercial banks has been the recent wave of
acquisitions of nonbank banks by money market
mutual fund organizations, such as Dreyfus; by
conglomerates, such as Culf and Western,
Wilshire Oil and Parker Pen Company; by
merchants, such as McMahan Valley Stores;
and by finance companies, such as Teachers
Service Organization, Avco Financial Services,
Beneficial Corporation and Household Finance
Corporation. The acquired nonbank banks are
chartered commercial banks which do not
both make commercial loans and accept demand deposits. Such banks do not meet the
statutory definition of a bank for purposes of
the Bank Holding Company Act, and hence
their acquisition by a nonbanking firm does not
cause that firm to become a bank holding
company. 12 Since the acquisiton of nonbank
banks is not governed by the Bank Holding Act,
they may be acquired by any financial or
nonfinancial company. Furthermore, nonbank
banks can be acquired in any of several states
to form an interstate organization without regard
to the Douglas Amendment restrictions on
interstate banking operations. 13 Because of
this potential for linking brokerage, commercial
and industrial activities with interstate deposit
taking, the expansion of nonbank bank acquisitions should be perceived as a real competitive
concern to banks under the present regulatory
system.
Should the nonbank bank activity prove to
be a successful way to avoid bank holding
company regulation, then it seems only a matter
of time before major banking organizations
would subdivide their existing banks into sets

" S e e Gross (1981) and Murphy and Brunner(1981).
''Acquisition of more than 10% of such a bank's stock must still be
approved by the appropriate federal bank regulator under the Change in
Bank Control Act. To date such approvals have been given by both the
FDIC and the Comptroller of the Currency.
,3
Of course, such banks would still be prohibited by the McFadden Act
from branching interstate.

of nonbank banks and thereby cease to be bank
holding companies.

Implications of Innovations to Avoid
Interstate Banking Prohibitions
Several important observations emerge from
the recent surge of financial innovations to
avoid branching constraints. First, as David
Whitehead (1983) demonstrates, significant
interstate banking already exists. Both banks
and nondepository institutions have evolved
numerous ways to supply bank-type services
across state boundaries to nearly all significant
classes of customers, except with respect to
retail deposit-taking.
Second, the unexploited potential of the
broker bankers and the nonbank banks suggests
that further expansion of nontraditional suppliers into the banking business is extremely
likely. Third, the growth of money market
mutual funds—and t o a lesser extent cash
management type accounts—indicates that even
significant groups of consumers no longer are
limited to local markets for many financial
services. This change in the geographic scope
of consumer demand, together with the nonlocal nature of many business financial markets
and devices that have evolved to avoid interstate
banking restrictions, suggests that those limitations are becoming increasingly anachronistic.
Fourth, the main parties adversely affected by
restrictions on geographic expansion are commercial banks', forced to compete with institutions not subject to the same restraints. Existing limitations no longer are protecting banks
from outside competition. Instead, they are
preventing banks from following their customers or attracting new customers over the same
geographic range as competitors. Finally, for
banks preferring consolidation to independent
status, limitations on interstate banking restrict
the number of outside bidders and thus reduce
the price shareholders can realize by selling

'"Often, Iowa and Florida are cited as permitting out-of-state holding
companies to acquire instate banks. But in both instances, the applicable
statutes merely grandfathered existing out-of-state operations. Only
one bank holding company in Iowa and a couple in Florida are affected. In
both instances, however, the grandfathered companies have expanded
through additional acquisitions. From 1981 through March 18, 1983,
Utah allowed reciprocal acquisitions by any bank holding company
resident in a state with such reciprocal provisions. In April, Washington

out. W e may conclude that interstate restrictions are harming the very institutions they
were designed to protect.

Changing Attitudes
Responding to the changing environment, a
few states, including IJIinois, Florida, Nebraska
and Arkansas, have recently liberalized their
policies toward intrastate expansion. More importantly, six states have also enacted legislation
allowing out-of-state banking organizations to
enter. 14 - 15
These six states may be divided roughly into
two categories based on the type of outside
entry they permit (see Table 1). South Dakota

"Broker-bankers...could
be a
competitive
force for existing
institutions."

potential
depository

and Delaware allow out-of-state bank holding
companies to acquire only single-office, limitedpurpose banks. 16 Both states specify minimum
initial capital requirements of $10 million. These
limited-purpose banks must employ at least
100 employees. Additional restrictions prevent
these institutions from conducting general purpose banking that might pose a competitive
threat t o indigenous banks. These two states
are attractive to outside bank holding companies because of favorable usury ceilings and
liberal tax laws. Those advantages encouraged
banking organizations from N e w York and
Pennsylvania t o relocate their credit card operations and certain other activities.
The other four states, Alaska, Maine, Massachusetts, and New York, place no special limitations on the kinds of banking business that
may be done. But these states restrict either
the type of entry or the locations of firms
seeking entry. For example, Alaska prohibits

passed legislation to facilitate Bank of America's acquisition of Sea First.
The Douglas Amendment to the Bank Holding Company Act of 1956
prohibits interstate acquisitions of banks unless the acquired bank's
state has explicitly enacted legislation permitting such acquisitions
16
South Dakota recently passed legislation permitting banks to engage in
insurance activities that they would be prohibited from engaging in
through subsidiaries of bank holding companies This will kindle additional
interest in outside entry by banking organizations into South Dakota
15

M A Y 1983, E C O N O M I C REVIEW '

Table 1. States Permitting Outside Entry by Banking Organizations*
Alaska -

Delaware -

Maine -

Permits acquisition of existing banks by out-of-state bank holding companies.
The acquired banks must have been in existence for at least three years;
thus, de novo entry is not feasible.
Allows acquisition of a single office, limited purpose, d e novo bank with an
initial capitalization of $10 million. At least 100 employees must be hired.
Competition with indigenous banks must be minimal.
Allows acquisitions by out-of-state bank holding companies on a reciprocal
basis.

New York -

Similar to Maine.

South Dakota -

Similar to Delaware

Massachusetts

Allows reciprocal bank holding company acquisitions and branching in New
England only.

•Iowa and Illinois allow expansion by companies with bank or trust company subsidiaries grandfathered by the 1956 Bank Holding Company Act.
Florida law providesan exception to the general prohibition for any out-of-state holding company which on Dec. 2 0 , 1 9 7 2 owned all the assets of, or
had control over, a Florida bank or trust company.
Source: Bank Expansion Reporter, January 3, I983.

the acquisition of de novo banks and requires
that outsiders gain entry by acquiring banks
that have been in existence at least three years.
Maine and New York permit acquisitions by
bank holding companies from states with reciprocal legislation permitting entry by Maine or
New York holding companies, respectively,
and Connecticut has similar legislation pending.
Massachusetts, the most recent to permit outside entry, has a similar reciprocal clause but
only for bank holding companies headquartered
in other New England states. This limitation of
entry to institutions from particular geographic
areas may be symptomatic of a growing trend
toward cooperative regional approaches to
relaxing interstate restrictions.
Reports in the financial press (see Forde,
1983) of a February meeting among New
England bankers, regulators and legislators indicate a growing consensus that, because of
the integrated nature of those states' economies,
some form of regional interstate banking experiment may have merit Participants expressed a
desire to coordinate the effort since "all the
New England legislatures were expected to
consider, or reconsider," interstate banking
issues this year. These same reports, however,
also imply that many participants want to avoid
changes that would affect local banks adversely
or would divert funds out of the area.
FEDERAL RESERVE BANK O F ATLANTA

Most recently Senator Tsongas and Representative Frank, both from Massachusetts, have
introduced federal legislation that effectively
would acknowledge the experiment in interstate banking in New England. Our analysis
suggests that reciprocal approaches to interstate
banking reflect the overly optimistic views of
bankers that interstate branching laws can still
afford some degree of protection from interstate
competitors. 17
In the Southeast, the Southern Growth Policies
Board, as part of a broader program t o foster
economic development in member states, formed the Southern Regional Banking Committee.
The committee was charged with recommending to the 12 member states possible changes
in the banking structure to improve performance
and enhance the ability of southern banks to
compete for funds. Committee members proposed the elimination of state usury ceilings,
the liberalization of intrastate branching restrictions, and a phased relaxation of limitations on
bank holding company expansion. While the
committee did suggest a regional, reciprocal

" I n New England, many still want to exclude the large New York banks
from the region. While New York banks can presently expand into Maine,
the new Massachusetts law explicitly excludes New York banks from
using subsidiaries in Maine to expand into Massachusetts

approach to holding company expansion, it
argued that such agreements should be in
place for only a limited time before nationwide
agreements could be pursued. 18 To date, however, these recommendations have received
little consideration among the Southern Growth
Policy states.

Policy Issues Pertaining to Proposals
for Regional Interstate Banking
The Carter administration's report on interstate
banking focused on several policy issues raised
by modified interstate banking restrictions. 19
These include implications of any proposed
changes regarding:
1. The level and quality of services to
local communities,
2. The viability of smaller banks,
3. The safety and stability of the system,
4. The division of supervisory and regulatory responsibilities among state
and federal authorities,
5. Competition and concentration of
resources.
The consequences for the first three areas
would be largely unaffected by the various
alternative methods proposed for liberalizing
branching and interstate bank expansion. For
example, research evidence suggests that the
quality and quantities of services are generally
enhanced whenever multi-office banking is
permitted. The availability of credit to locally
limited consumers and businesses generally is
increased, and no evidence suggests that bank
holding companies or branch banks redirect
funds from less developed to more developed
markets. Notwithstanding the fears of smaller
banking organizations, branching or holding
company expansion appears to pose no threat
to the viability of small banks. Neither is there
evidence that large banks can enjoy cost or
scale advantages over smaller banks; even in

"To provide for a greater accumulation of capital, to enhance economic
development and to facilitate more effective allocation of financial
services t o individuals and businesses of all sizes, the SGPB states
should enact legislation to permit entry of out-of-state bank holding
companies on a reciprocal basis To allow regional bank holding companies
an opportunity to position franchises to compete in national markets,
reciprocal banking agreements should be limited to the states of the
SGPB region for a specified period of time with provisions for nationwide
agreements beyond the limiting interval (See Skinner (1982)."

the most competitive markets, small banks
tend to outperform larger competitors. 20,21
Finally, safety and soundness considerations
suggest that risk may be slightly greater where
multi-office banking is permitted, with bank
holding company subsidiaries exhibiting slightly
greater risk than independent branch banks.
The evidence for this is rather tenuous, however, and must be balanced by the advantages
that multi-office banking offers in facilitating
the takeover of weak or failing institutions.
Proposals to liberalize interstate banking
laws can have important effects on regulatory
policies and structure and on the division of
authority among state and federal agencies. In
general, the wider the branching powers of
banking organizations, the more difficult it will
be for individual states to impose differential
regulations on firms operating within their
borders or on their own state-chartered banks.
Similarly, state banking departments might be
hard pressed to examine all their own institutions
plus those operating within their boundaries.
Most likely, wide geographical expansion would
force uniformity of state policies and, because
of regulatory burdens, tend to favor national as
opposed to state-chartered banks.22 These problems would be greatly reduced, however, if
expansion t o o k place t h r o u g h separately
chartered bank holding companies in each
state. In that case, the individual states would
need t o be concerned primarily only with
subsidiaries operating within their boundaries.
Perhaps the most controversial area, however,
is the effect of liberalized banking on competition and on the concentration of resources.
Restrictions on geographic expansion have, in
the past, insulated many local markets from
competition. On the other hand, concentration
in SMSAs tends to be slighter higher in states
with more liberal branching laws. Thus, there is
the legitimate concern that wide geographic
expansion will be accompanied by increased
consolidation of the banking system. And this

See Department of the Treasury (1981).
For a review of the scale economies literature see Benston, Humphrey
and Hanweck (1982).
2,
Savage and Rhoades (1981) examined the performance of small banks
in major metropolitan markets
" I n the extreme, a state chartered bank operating in 50 states might be
examined by state banking departments whereas a national bank would
only be examined by the comptroller of the currency.
J0

MAY 1983, E C O N O M I C REVIEW '

consolidation is likely to take place—as it
already has begun in Pennsylvania—by first
combining the largest competitors rather than
assuring that a large number of more equal
sized competitors are formed and then allowed
to compete head to head.
The Carter administration expressed fear
that antitrust laws and policies may be inadequate to guide the transition from a regional
and local banking system to one that permits
wide geographic expansion. This concern deserves careful consideration. Regional approaches to liberalizing interstate banking would assure
that several larger organizations would compete
at the national level. A resulting cost of this
approach, however, may be increased concentration of resources and economic power within
those regions. 23 This issue suggests that any

" I t was precisely this tear that led one member of the Southern Regional
Banking Committee to dissent from the proposals of the SGPB (See
Skinner (1982).

interstate banking proposals be given careful
consideration.

Conclusion
Pressures to relax restrictions on interstate
banking further are likely to increase rather
than abate. Furthermore, many bankers are
coming to realize that existing prohibitions are
now hurting banks more than they are protecting
them from outside competition, and efforts are
already afoot in several regions to promote
regional relaxation of interstate banking limitations.
Finally, a number of public policy issues arise
in proposing changes in the Douglas Amendment
and McFadden A c t Those relating to competition and concentration of resources may prove
the most critical. Providing a smooth transition
to a more geographically diversified banking
system while ensuring an adequate level of
competition at the local market level constitutes
one of the most difficult problems policy makers
will face.
— Robert A. Eisenbeis

REFERENCES

Benston, George J., Gerald A H a n w e c k a n d David B. Humphrey. "Operating
Costs in Commercial Banking," Economic Review, Federal Reserve Bankof
Atlanta November 1982.
Department of the Treasury. Geographical Restrictions on Commercial
Banking in the United States, The Report of the President, Department of
the Treasury, 1981.
Eisenbeis, Robert A "Financial Innovation and the Role of Regulation:
Implications for Banking Organization, Structure and Regulations," Board of
Governors of the Federal Reserve System, February 1980.
"Interstate Banking: Federal Perspectives and Prospects,"
Proceedings of a Conference on Bank Structure and Competition, Federal
Reserve Bank of Chicago, May 1981.
"Regulation and Financial Innovation: Implications for Financial
Structure and Competition Among Depository and Non-Depository Institutions,"
Issues in Bank Regulation, Vol. 4, No. 3, Winter, 1981.
Federal Reserve, "Bank Holding Company Acquisition of Thrift Institutions," a
study by the Staff of the Board of Governors of the Federal Reserve System,
September 1981.
Forde, John P. "Drive for Regional Banking Gains in New England States,"
American Banker, Tuesday, February 8, I983.
Golembe Associates. "A Study of Interstate Banking by Bank Holding
Companies," prepared for the Association of Bank Holding Companies, May
25, 1979.

FEDERAL RESERVE BANK O F ATLANTA

Kane, E J. "Accelerating Inflation, Technological Innovation, and the Decreasing
Effectiveness of Bank Regulation," Journal of Finance May 1981.
McNeil, Charles R. and Denise M. Rechter. "The Depository Institutions
Deregulation and Monetary Control Act of 1980," Federal Reserve Bulletin
June 1980.
Murphy, C. Westbrook and Thomas W. Brunner "Will Anyone Try to Block
Amexco?" American Banker, April 23, 1981.
Peter Merrill Associates. "The Environment for Non-Local Competition in U.S.
Banking Markets," prepared for the American Bankers Association, January
1981.
Rosenblum, Harvey and Diane Siegel. "Competition in Financial Services:
The Impact of Nonbank Entry," Federal Reserve Bank of Chicago, 1982.
Savage, Donald T. and Stephen A Rhoades. "Can Small Banks Compete,"
Bankers Magazine, January-February 1981.
Skinner, Alton. "Report of the Southern Regional Banking Committee t o the
Executive Committee of the Southern Growth Policies Board," Southern
Growth Policies Board, November 14, 1982.
Whitehead, David D. "Interstate Banking: Taking Inventory," Economic
Review, Federal Reserve Bank of Atlanta, May 1983.

Alternative Avenues to Interstate Banking
Even if legal barriers to interstate activity are removed, other factors will tend to limit
interstate holding company activity. The effects on financial institutions
and
consumers, however, will depend on the exact route interstate banking
takes.
Observers of the U. S. financial scene generally
agree that broadened interstate banking activity
is coming. W e will focus on the differences in the
impact of interstate banking depending on the
way it comes a b o u t The effect on financial
institutions and on their customers will differ
depending on whether interstate banking comes
through liberalization of McFadden (branching),
elimination of the Douglas Amendment (bank
holding company acquisition), or through greater
exploitation of other devices.
While there is a presumption that interstate
banking eventually will be allowed nationwide, a
number of proposals have advocated limited
interstate banking, either permanently or as a
means of phasing in the eventual nationwide
system. These proposals include regional interstate banking, limits on the number of interstate
acquisitions, or limitations on the method of
entry into interstate markets—de novo (starting a
new bank) or through acquisition of existing
institutions. 1
'Various approaches t o interstate banking are also discussed by Alan S.
McCall and Donald T. Savage in Branching Policy: The Options," Journal
of Bank Research, Summer 1980, pp. 122-126.

Different Avenues have Different Effects
In analyzing the impact of different methods
of interstate banking, it is useful t o consider the
effect on four types of bank customers—large
corporations, middle-market firms, small businesses, and consumers.
The easiest to deal with are the large national
firms. Competition for their business is already
national in scope. The largest banks in the
country are seeking the business of Fortune 500
or 1,000 firms, regardless of location of either the
bank or the corporation. This competition does
not require a local branch or subsidiary bank.
Thus, money center banks can compete for
Lockheed's business without maintaining a branch
in Atlanta. If physical presence is desirable, a loan
production office, legal under existing law, is
usually adequate.
Small businesses are now served exclusively
by local lenders. The small firm in Orlando
obtains banking services from Orlando banks.
The small businessman from Orlando w h o seeks
credit at a Miami bank will be greeted with
courtesy, no doubt, but also with suspicion as to
why he is unable to meet his needs in his own

)
*

*
)
}
(

>
5

E
32

i
M A Y 1983, E C O N O M I C R E V I E W

locality. For that small Orlando firm, seeking
financing in Atlanta is out of the question.
The devices that currently allow interstate
activity, such as loan production offices or Edge
Act corporations, are not an efficient means of
serving the small business borrower. Loan production offices are staffed with lending officers
experienced in seeking business from large corporations. The offices are not set up to make
smaller loans and, in any case, they are not
allowed to take deposits. Part of the consideration
involved in a bank lending transaction is the
opportunity to obtain a borrower's deposit account If the nonlocal bank cannot compete for
the deposit account, it is at a disadvantage in
competing with local institutions. Some subsidiaries of out-of-state bank holding companies,
such as finance companies or leasing subsidiaries,
can extend credit t o a small business; but they
too lack the opportunity to handle its deposit
account. The effect on the local small business of
a change to allow interstate banking will depend
heavily on the specific form of the change.
De novo entry (establishment of a new bank)
by an out-of-state bank generally will benefit
small business customers more than entry through
acquisition. De novo entry adds to the small
firm's sources of service while entry by acquisition
merely substitutes one bank for another. This
substitution is not without effect, however, and
the effect of a de novo establishment of an outof-state bank's branch differs from a de novo
bank holding company subsidiary.
An important distinction between a branch
andabanksubsidiaryofabankholdingcompany
is that the branch's lending limit is based on the
capital of the entire bank, while the subsidiary is
limited by its o w n capital. Thus, the branch of a
money center bank established in Atlanta or
Birmingham can make a multi-million dollar loan
to large local firms. An important implication is
that an out-of-state branch can emphasize service
to larger businesses in an area, while the bank
subsidiary of a bank holding company must be
oriented toward small business customers and
consumers.
It follows, therefore, that small businesses may
be benefitted more by establishment of a bank
holding company's subsidiary than by its branches.
Analogously, the competitive position of small
local banks may be more affected by entry of
subsidiary banks than by branches. This is an
interesting consideration because it is frequently
asserted—as in the Carter administration report
FEDERAL RESERVE BANK OF ATLANTA

on the McFadden Act—that interstate bank holding company expansion is less disruptive to the
existing competitive banking structure than interstate branching.
Acquisitions have a somewhat different impact
W h e n a sizable local institution is taken over by
an out-of-state institution (whether to be operated
as subsidiary or as a branch), it may become less
locally oriented in its lending policy. If so, change
would not benefit local small businesses but,
conversely, it would represent less of a competitive
threat to local small banks.
The effect of interstate activity on smaller
banks also varies depending on location. Small
banks in major cities already face stiff competition
from large banks. Small banks in Atlanta, Tampa
or Miami compete with the largest institutions in
their state. Evidence suggests that small firms
prefer to deal with smaller banks, and small
banks have long operated profitably in this
competitive environment Thus, de novo interstate branching or bank holding company expansion is unlikely to represent a significant
change in the competitive structure of those
cities. And if a large local competitor is acquired
by an out-of-state institution, the small local
bank's competitive position is probably improved.
The bank in a smaller city or town may be
affected significantly by entry of a large out-ofstate bank, but such banks are unlikely to enter
de novo into smaller cities. There are limits to the
pace at which even the most aggressive bank can
expand following a change in the law—limits that
we will discuss later. The small-city bank is most
likely to find itself in direct competition with an
out-of-state institution if that institution acquires
an existing competing bank or its parent. Thus,
an independent bank in Macon may find itself
competing with a subsidiary of a money center
bank holding company if a New York or Chicago
bank acquires a local competitor or the parent of
a local competitor. But the local bank's ability to
compete with the money center bank for small
business customers is at least as good as its ability
to handle existing competition.
The banks most likely to be affected by interstate competition appear to be larger institutions
doing business with locally based middle-market
firms. Those firms, the best customers of the
larger in-state banks, will be the principal targets
of out-of-state entrants into the market In many
states, these firms already have access to many of
the larger banks in the state, and they may not
have much t o gain from new competition. On
33

the other hand, in some smaller states or those
with a concentrated banking structure, these
middle-market firms may see a significant improvement in their access to bank services.
Potential interstate entrants much prefer branch
expansion over holding company acquisitions
because it allows them to tailor expansion to the
particular market being entered. It is feasible to
establish a wholesale oriented branch at lower
cost—requiring less capital, modest office space
and few employees. Such an operation may be
little more than a deposit-taking loan production
office. If interstate banking comes about through
change in the Douglas Amendment, allowing
only de novo bank holding company subsidiaries,
the cost and difficulty of raising sufficient capital
will hold down the number of interstate ventures.

Effects on Consumers
W h e n interstate expansion's objective is consumer business, analyzing the alternative types
of interstate expansion becomes more complex.
First of all, a major objective of interstate consumer banking has been attracting low-cost core
deposits. Consumers traditionally have maintained
sizable demand deposits (on which no interest is

"Regardless of any change in federal law,
consumer banking appears likely to become
less locally
limited."

paid), N O W accounts and saving deposits (with
interest at 51/» percent), and other fixed-maturity
time deposits with below-market interest rates.
The phase-out of interest rate ceilings and the
recent creation of money market accounts and
super-NOW accounts at competitive market
rates, may make consumer business less profitable
to commercial banks in the future. Thus, some of
the motive for interstate expansion in this market
may have lessened or disappeared.
Second, it is unclear whether any change in the
law is necessary to conduct consumer business
on an interstate basis. O n the lending side,
finance company subsidiaries of bank holding
companies have the necessary powers and already
can operate interstate Savings and loan associations
have gained full consumer banking powers, both
in lending and deposit-taking (including checking
34

accounts). If bank holding companies were allowed
t o own S&Ls on an interstate basis, change in the
McFadden Act or the Douglas Amendment would
not be needed to bring about full interstate
competition in consumer banking. Loan limits
are not a problem in consumer lending, so a
branch is not a more attractive vehicle for interstate entry than a holding company subsidiary.
The Federal Reserve already has authorized
bank holding company acquisition of an S&L in a
few exceptional cases, the most dramatic being 5
Citicorp's acquisition of Fidelity Savings and
Loan in California. 2 A Federal Reserve staff study
recommended that the savings and loan business
be considered an appropriate activity under .
Section 4(c)(8) of the Bank Holding Company
'
Act, but the Board has sought congressional
„
guidance before makinga general decision in this
controversial area.3 The 1982 Cam-St Germain
Act authorized interstate and inter-industry acquisitions of failing thrift institutions. The legislation
clearly treats such acquisitions as exceptional, )
which can be interpreted as a congressional
intent that such acquisitions should not be allowed -»
under "normal" (non-failure) circumstances.
Even without the S&L vehicle, existing mechanisms may be sufficient for carrying out consumer
banking business interstate. Banks can and do
solicit credit card business nationwide. Banks
can also solicit deposits by mail on an interstate t
basis, and a number of large banks have begun t o
do so in connection with the new money market
accounts. Money market mutual funds familiarized
consumers with the idea of handling liquid asset
portfolio transactions by mail with distant institutions, and the large commercial banks now are
taking advantage of that familiarity. Customers of )
out-of-state banks can be given local access to
their funds through automated teller machines, f
Shared interstate A T M networks are being expanded. Consumers will still probably prefer to
keep their checking account local, however.
Regardless of any change (or lack of change) in )
federal law, then, consumer banking appears
likely to become less locally limited. If local ,
market conditions are not competitive, or if local
banks are inefficient or unable to provide modern

'See "Citicorp's Acquisition of Fidelity Federal Saving and Loan Association of
San Francisco," Federal Reserve Bulletin, October 1982, pp. 656-660,
and Interstate Financial Corporation's Acquisition of Scioto Saving Association, Columbus, Ohio," Federal Reserve Bulletin, May 1982, pp. 316318
3
"Bank holding company acquistions of thrift institutions"—staff study
prepared for the Federal Reserve Board September 1981.

M A Y 1983, E C O N O M I C R E V I E W '

>
*

services, out-of-state banks will be able t o solicit
business successfully. Local offices may be less
necessary in the future than they have been in
the past. Interest rate ceilings have prevented
banks from competing on rates, so convenience
has represented the most important dimension
of competition. But that is no longer the case.
It is difficult to predict just how consumer
financial services will be delivered in the future.
Rather than seeking a local presence, large,
consumer-oriented banks may franchise or sell
sophisticated services t o local banks. The nonlocal vendor may be able t o extract much of the
potential profit from consumer business through
service fees paid by the local bank. In any case,
competition for consumer business is becoming
more intense. The consumer, except in relatively
isolated communities, may not need further
change in the law.

Implications for Intrastate Branching
These consumer banking considerations have
implications for the desirability of intrastate as
well as interstate branching. O n e of the most
controversial aspects of interstate banking has
been its effect on state control over banking
structure, particularly the extent of branching
within a state. W e have noted that the McFadden
Act defers t o state law with respect t o geographical limits on branching by national banks. But this
may be less important in the future, as extensive
branching becomes less profitable.
Consumer banking traditionally has involved
collecting funds from depositors at low interest
cost on the basis of convenience. Where state
law has allowed, convenience has been provided
through extensive (and expensive) branch facilities.
If banks have to pay market rates for these funds,
they no longer will be able to afford the cost of
such facilities—estimated at perhaps 2 percent
of funds collected. Direct deposit, automated
clearing houses, and automated teller machine
networks may provide consumer convenience in
the future, and the longstanding debate over
branch banking may fade away.
If branching continues t o be a matter of controversy, however, changing the Douglas Amendment would do much less violence t o traditional
state control over intrastate branching than would
liberalization of the McFadden Act. This consideration apparently was given heavy weight in
the Carter administration McFadden Act Report,
FEDERAL RESERVE BANK OF ATLANTA

which recommended the Douglas rather than
the McFadden route to interstate banking.

Restraints on Interstate Expansion
There seems to be a widespread belief that
removal of the McFadden Act or Douglas Amendment immediately w o u l d spark a tremendous
expansion of interstate branching or holding
company activity. This rests on the assumption
that the sole barrier to interstate activity is the
legal one, and hence if that barrier were removed
interstate activity could proceed unencumbered.
However, other factors will tend to limit interstate
holding company activity even after legal barriers
are removed.
Three types of constraint that will persist include considerations relating to the profitability
of the target area, constraints based on the
capacity of the expanding bank, and legal/regulatory constraints. A bank holding company
does not expand interstate in the abstract; it
must have a particular market in mind. However,
there are only a limited number of attractive
banking markets—markets in which the expanding bank can expect to operate profitably. Atlanta,
for example, may appear t o be an attractive
location for a money center holding company to
organize a new bank or acquire an existing bank.
But it is less attractive considering the possibility
that five or ten or more other holding companies
may try t o do the same thing. This problem exists
with either a de novo banks or an acquisition. A
rash of de novo banks w o u l d increase competition and reduce profitability. The acquisition
route would not directly add t o the number of
competing institutions in the market. But if a
number of potential acquirers pursue a limited
number of attractive acquirees, the price of their
stocks will be bid up. Earning a profit on an
acquisition requiring a substantial premium would
prove difficult.
Even if there are attractive opportunities available to aggressive bank holding companies, the
holding companies remain subject t o their o w n
internal limitations. The most important are likely
t o be capital and management shortages. Few
money center banks have more capital than
supervisory agencies view as marginally adequate.
Expansion through de novo holding company
subsidiaries requires additional capital. While
acquisition of an existing bank through an exchange of stock does not necessarily require new
capital, its feasibility turns on the capital market's
35

valuation of the stock involved. The key issue in
all cases is the holding company's ability to tap
the capital markets. While capital considerations
do not necessarily constrain interstate expansion,
the current state of both equity and debt markets
will make it difficult for most large banks t o
generate the additional capital needed to finance a
substantial expansion. 4 Capital will be a more
serious constraint on holding company expansion
than on branching.
For many banks considering nonlocal expansion,
the pace of such expansion will be limited by
management talent. This has, in fact, already
limited the pace of expansion by some banks,
which see the opportunity for profitably establishing additional loan production offices but
lack the qualified lending officers to staff them.

"Even if there are attractive
opportunities
available, holding companies remain
subject
to their own internal
limitations."

That problem becomes more severe when an
entire bank must be staffed. Of course, the
problem is less if an existing bank with competent
management is acquired. Yet, unless the acquiring
bank is able to devote some managerial expertise
to the acquisition, it is likely t o represent merely
a financial investment, not a true merging of the
acquired institution providing real operating economies or advantages.
Even with change in the Douglas A m e n d m e n t
or McFadden Act, other delays and constraints
are inherent in the regulated nature of the
banking business. Organization of a de novo
subsidiary bank or branch or an acquisition
requires at least one regulatory approval, and
usually more. The pace of much regulatory agency
decision making can be slow, particularly when
applications involve controversial issues. That
certainly will be the case with applications for
interstate charters or acquisitions. There are
"During the heyday of conglomerate merger expansion, the market's
tendency to put high price-earnings ratios on stock of aggressive conglomerates enabled them to acquire firms with lower price-earning ratios
at prices attractive to shareholders of the acquired firm yet which
increased earnings of the acquirer. The situation in the banking industry
today is just the opposite. Many banks in attractive growth markets are
selling at higher prices relative to earnings than the money center banks.
Such acquistions would involve a significant degree of dilution to shareholders of the money center banks.

really t w o separate problems involved: first is
simply the supervisory agencies' ability to handle
the flow of paper if 100 or 200 applications for
interstate operations are added t o a volume that
already strains the agencies' resources; second is
the difficulty the agencies will face in making
necessary policy decisions on the applications. 5
Since sizable acquisitions are likely, we must
also consider the role of the Justice Department
and the courts under antitrust laws. Some applications of antitrust concepts t o banking have
been rather clearly resolved. A series of bank
merger cases decided by the Supreme Court in
the 1960s (in particular, Philadelphia, Lexington,
and Phillipsburg), combined with the 1966 amendments to the Bank Merger Act, set clear limits on
horizontal bank mergers—mergers involving banks
in direct competition in the same market. These
standards have been applied consistently by the
banking agencies, and have been understood by
banks and their counsel, so mergers that would
be prohibited by these guidelines are rarely even
proposed.
The courts have spoken less clearly in the case
of "market extension" mergers—those involving
the issue of "potential competition." In these
cases, the two parties t o the merger are not in
direct competition in the same market. The
acquiring bank is alleged t o have the capacity
and the interest in entering the market of the
acquired bank on a de novo basis, or through a
merger with a smaller bank now in the market (a
" t o e h o l d " acquisition), thus encouraging competition. It is also often argued that the acquiring
bank is already affecting the market because
banks in the area, aware of the competitor
"waiting in the wings," refrain from pricing strategies
that would encourage entry. The Justice Department has brought suit in several cases on the
grounds of "potential competition" and "probable
future competition," but has lost every time.
Debate over the applicability of potential competition has been intense, both in banking and

Several methods of reducing this problem warrant attention by the
Congress Congress can put a deferred effective date on legislation
authorizing interstate banking. During this period, perhaps a year or
longer, the agencies can determine policy and establish procedures t o be
used when the applications are received. Congress could provide some
guidance as to policies to be followed by the agencies. Congress could
also impose a firm deadline for decision making, as it has done with bank
holding company acquisitions handled by the Federal Reserve. The
agencies could accept applications during the interim period, and decide
them all as of the effective date of the legislative change. A similar
approach was used when Florida first authorized branching, avoiding the
inequity that results when Bank A has its application approved and gains
a head start on Bank B, whose equally meritorious application happens to
fall later in the queue of cases.

MAY 1983, E C O N O M I C R E V I E W '

other contexts. Courts generally have acknowledged applicability of the argument in principle,
but have never found the facts sufficient to rule
for the Justice Department. The result is a great
deal of uncertainty as to what is allowable and
t what is not.
Bank acquisition cases involving potential competition have been a relatively minor factor in
L changing bank structure. But this issue will come
to the fore if barriers to interstate banking are
eliminated. Virtually all acquisitions in such a
framework would be market extension acquisitions
that would raise potential competition issues.
Most of the banks that would seek interstate
acquisitions are large and probably would prefer
I to acquire banks that have a significant market
share. There is nowhere a bank can turn to obtain
accurate guidance as to which possible acquisitions
I will meet the test of the antitrust laws and which
will be barred. 6
Uncertainty does inhibit mergers. Many mergers
make economic sense if they can be handled
1
smoothly, but are not worthwhile if they require
huge legal costs to complete. Thus, inhibited
mergers are not simply those that agencies or the
courts would rule unacceptable, but also many
that would, if carried t o a final Supreme Court
decision, be found to be legal. While some
advocates of a strong anti-merger policy view this
inhibiting effect as desirable, uncertainty of the
law scarcely promotes economic efficiency.
These considerations suggestthat even if there
is a change in the law to allow unlimited interstate
banking, the pace of such expansion will remain
subject to important constraints.

The Role of Foreign Banks
While these considerations will limit the pace
of interstate expansion by U. S. banks, foreign
banks should be considered separately. Before
the International Banking Act of 1978 (IBA),
foreign banks were allowed to operate fullservice banking offices in more than one state.
Several operated in both New York and California
Such activity was frozen by the IBA, but many
foreign banks retain an interest in interstate
expansion if the law should allow it. A number
have already taken advantage of liberalized restrictions on Edge Act Corporations t o establish

For a further discussion of antitrust issues in interstate banking, see
Steve A Halbrook and Donald T. Savage, "Interstate Commercial Banking
The Antitrust Issues," Banking Law Journal, September 1981, pp. 747767.

FEDERAL RESERVE BANK O F ATLANTA

such operations in several cities, with Miami and
Houston the preferred locations.
Some foreign banks are interested in consumer
business, a traditional strength of the British
banks. Several Japanese banks have been successful in consumer banking in California. Yet
most foreign banks are interested in middlemarket firms that may have links to their home
country or that may have use for a foreign bank's
particular expertise. For example, many middlesized Texas firms are suppliers to oil operations
in the North Sea, the M i d d l e East or Latin
America, and banks from these areas may seek
an office in Houston or Dallas. With the exception
of foreign banks interested in consumer banking,
the type of business contemplated can be more
efficiently handled with a branch rather than a
holding company subsidiary.
This aspect of interstate banking is significant
because there are probably more foreign banks
interested in interstate expansion in the United
States than there are domestic banks capable of
such activities. Of the 500 largest banks in the
world, 403 are non-U. S. banks, and 142 of these
are already operating in the United States.7
While the IBA attempted to put foreign and
domestic banks on an equal competitive basis
(removing the foreign banks' freedom from reserve requirements, for example), foreign banks
may still enjoy some advantages in interstate
expansion. Most important is in the regulation of
capital. Many foreign banks are allowed to operate
with lower capital ratios than U. S. banks (substantially less than the regional U. S. banks they
will compete against). If a foreign bank establishes a
branch in the United States, it may be feasible for
U. S. authorities to police the capital adequacy of
that office, but more difficult to regulate the
capital of the entire organization. It is easier to
regulate the capital of a bank holding company
subsidiary (it is a domestic bank), but it is not
clear whether the Federal Reserve can or should
attempt to regulate the capital adequacy of a
consolidated foreign bank holding company as it
does with domestic bank holding companies.
If interstate banking is authorized, the share
controlled by foreign banks will increase substantially, particularly if branching rather than
holding company expansion is authorized. While
several studies have failed to find any detrimental

' A m e r i c a n B a n k e r , July 28, 1982, p 41.

effects associated with an increased foreign bank
role in the U. S. banking system, this is likely t o
become at least a political issue.

Proposals for Limited
Interstate Banking
Despite evidence that much interstate banking
already exists, many consider too drastic any
change in U.S. law to allow full service nationwide banking. Some argue that limited interstate
banking can provide the advantages cited for
nationwide banking with fewer disruptive effects,
while others argue for a limited approach temporarily t o cushion the impact of a change to
nationwide banking
The most restrictive approach would be to
allow branching (or holding company acquisitions)
only within standard metropolitan statistical areas,
or SMSAs. The Hunt Commission urged that
states be progressive in changing their laws in
recognition of the fact that several banking
markets are divided by state lines. 8 The New
York City SMSA includes portions of New Jersey
and Connecticut, while the Washington SMSA
includes several counties of Virginia and Maryland.
Other SMSAs include portions of a second state.
Because current banking economics make extensive branching within an SMSA less attractive,
this proposal has less t o recommend it now than
in the past. ATMs can accomplish nearly all the
benefits previously a t t r i b u t e d t o intra-SMSA
branching.
There are many proponents of regional interstate banking, particularly among the large regional
banks. At one level it is easy to dismiss such
suggestions as self-serving. The regional banks
naturally want the opportunity to move into
attractive banking markets in nearby states, while
keeping the money center banks out of their
territory. But basic economic similarities among
groups of states could provide economic efficiencies from limited interstate banking. The
bank serving textile manufacturers in Georgia,
for instance, can bring experience and expertise
to similar customers in the Carolinas that a
Minneapolis bank cannot Lending t o wheat
growers in Kansas is similar to lending t o wheat
growers in South Dakota; oil drilling in W y o m i n g
is similar t o drilling in Colorado.

"See The Report of the President's Commission on Financial Structure
and Regulation, December 1971, p. 62.

In particular, smaller firms may benefit from
increased competition that can result from regional
interstate banking. The small furniture manufacturer in Virginia may not be a customer sought
by a money center bank moving into that state,
but may be desirable t o the North Carolina bank
already familiar w i t h the business. On the other
hand, banks from nearby states may already be a
competitive force in the market.
The basic problem with proposals for regional
banking is that no one has been able to define
regions on a logical and consistent basis. In an
attempt to overcome the essentially arbitrary
nature of regional classification, many have seized
on the concept of contiguity. Neighboring states
are usually similar in economies. But this basis is

"Some argue that limited interstate
banking
can provide the advantages of
nationwide
banking with fewer disruptive
effects."

also arbitrary and clearly inequitable in its treatment of banks in different states. Contiguous
state branching would give Florida banks access
only to Georgia and Alabama, while Nevada
banks would have access to California, Oregon,
Utah, Idaho and Arizona. In fact, such a limitation
w o u l d encourage the artificial shifting of headquarters. A Florida bank could enter Georgia and
make Georgia its headquarters, thus enabling it
to enter states not open to it from Florida. This
artificial movement has taken place in Pennsylvania under that state's contiguous county
branching law. Again, this approach bases treatment of banks on their location rather than the
their efficiency or ability to operate on an
interstate basis. While such a limited approach
to interstate banking might be justified as a step
toward eventual nationwide banking, it is not a
reasonable permanent solution.
A final approach involves limiting the number
or the method of interstate operations, rather
than the location. Our current banking structure
grew out of a traditional American fear of concentrated financial power. No other country has
so many commercial banks. Those w h o see this
as an attribute of the U.S. financial structure fear
that nationwide banking could lead t o a wave of

M A Y 1983, E C O N O M I C R E V I E W '

mergers creating a concentrated banking system
such as that of England or Canada.
One means of preventing this, while gaining
the benefit of broader interstate banking, would
be to allow interstate expansion on a de novo
basis only. Entry under such a rule necessarily
would increase competition rather than concentration. The ultimate effect of such an approach
is not clear, however. Many banking markets are
already competitive. Additional new entry could
require the exit of existing firms. If banks were
precluded from selling out to out-of-state institutions, we would see an increase in intrastate
mergers. The ultimate net effect on concentration
might be the opposite of what is intended.
Further, interstate mergers offer an efficient means
of resolving problems of failing institutions. Barring
such mergers would sacrifice a major potential
advantage of interstate banking.
For directly opposite reasons, some favor
interstate banking through merger only. Proponents of this approach argue that the U. S.
banking system is too fragmented, with many
banks too small to achieve economies of scale.
Interstate acquisitions could reduce the number
of banks without necessitating mergers between directly competing institutions. (Some
believe the approach taken in the Garn-St
Germain Act is ideal in that it allows such
mergers only when necessary to prevent a
failure.)
This proposal has a political advantage. Many
bankers oppose interstate banking because
they fear increased competition from giant outof-state institutions. Interstate banking limited to mergers may remove their fear of a
money center bank opening an office next
door and may offer investors a greater number
of potential buyers when it comes time to sell
their bank.
Fear of the disruptive impact of liberalized
interstate banking on the competitive structure

FEDERAL RESERVE BANK O F ATLANTA

clearly is the principal reason such activity has
been restricted. Proposals for limited interstate
banking attempt to deal with this problem. An
alternative means of cushioning the immediate
impact of a change is to limit the number of
interstate ventures that each bank can undertake.
Banks could be restricted to a few acquisitions
of de novo entries per year. Over time banks
would be allowed t o operate nationwide, but
restrictions in the early years would enable the
regional banks to strengthen their operations
while facing only limited direct competition
from money center banks.
Economic and regulatory constraints are probably sufficient to obviate such legal restrictions.
It is unlikely that even the largest banks in the
country could plan, negotiate, and finance
several major interstate ventures in the first
year such activity is legalized. Nevertheless, a
legal constraint may provide comfort for some
who otherwise might oppose interstate banking.

Conclusion
Because interstate banking has long been a
matter of intense controversy, it is important
that advantages and disadvantages be discussed
thoroughly. But much of that discussion necessarily takes place in the abstract in terms of interstate banking generally rather than focusing
on the effects of specific approaches to interstate
banking. Our purpose has been to suggest that
those effects differ depending on the route
chosen toward interstate banking Any discussion
of the merits of changing the McFadden Act or
the Douglas Amendment must recognize that
many means of engaging in interstate banking
already exist and that such activity will increase
even without change in fundamental restrictions
on interstate activity.
— Paul M. Horvitz

Interstate Expansion
and Bank Costs

The evolution of interstate banking will be influenced importantly by the relationships
between banks' unit costs and their size—measured in assets, number of offices and
geographic extent Expansion of banks beyond their headquarters states implies
increases in all three dimensions. The potential expansion will be limited to the
extent that unit costs (operating costs per loan booked and deposit account
serviced) rise as banking organizations grow through interstate expansion. If unit
costs rise sharply, expansion would cut into profits and would be strictly limited. If
unit costs remain constant or nearly so, more expansion would take place, and if unit
costs decline with size, rapid expansion w o u l d be likely.
As previous articles in this Review have indicated, there are several methods of
interstate expansion; these may affect bank costs differently. Whitehead's work (17)
indicates that extensive interstate banking already occurs through a variety of
methods. Because methods vary greatly from bank t o bank and because rapid
interstate expansion is relatively recent, there has been little systematic accumulation
of data on or analysis of overall costs of these interstate operations or of the impact of
expansion on costs.
W e are better prepared to look at the potential impact of interstate branching if the
McFadden Act is repealed and the impact of interstate bank holding company
operation of banks if the Douglas Amendment is repealed. Costs of branching and
bank holding company operations on an intrastate basis have been studied
extensively. This article summarizes the results of these studies, discusses their
limitations and draws implications from them.
Since banking structure appears t o influence banks' pricing of their services, w e
would like to know how much consolidation of the system to expect. Since the

Evidence suggests that bank costs increase as size increases While
interstate banking may bring more services to local markets, cost
advantages of large banks do not seem great enough to trigger rapid
consolidation within the industry.

1
MAY 1983, E C O N O M I C REVIEW

V
I

1
j

financial system's health is related closely t o
bank profits, we would like t o know how
expansion and consolidation would affect costs
and, hence, profits. Since the public's outlays
for financial services are influenced by the cost
of such services, we would like t o know how
interstate banking would impact costs.
In order to judge how bank costs react to
interstate expansion, we would like to see studies
of bank costs based on interstate experience.
These do not exist, at least not in published
form, but there are cost studies that deal with
banks of all types, including those with extensive
intrastate office networks. These studies and
other observations provide extensive, though
incomplete, evidence on which to base some
tentative conclusions about the reaction of
costs to interstate expansion. (Two recent and
more detailed discussions of these studies are
found in papers by Benston, Hanweck and
Humphrey (4 and 5) and McCall (13).)

Branching and Unit Costs
As banks expand through branching, unit
costs may rise, remain stable or fall. Will interstate
banking expand quickly or slowly, or not at all?
Will it result in extensive consolidation and will
such branching significantly impact bank customers' costs? It all depends importantly on
the reaction of costs to the size of branch banks
and the costs of their unit bank competitors.

»
}

Studies of this relationship have appeared
with some frequency over the past 30 years.1
These studies generally have relied on formal
production functions and individual bank cost
data generated in the Federal Reserve Banks'
functional cost analysis (FCA) program. They
have built upon one another using increasingly
elaborate methods of measurement and statistical analysis to estimate banks' unit operating
costs in relation to the volume of specific
financial services that they produce. A few
have attempted to consider the impact of
overall bank size on unit costs by adding
together cost functions for individual products. 2
The two most recent studies in this line provide
several advances over previous studies and
analyses of recent banking cost data. 3 They will
receive most of our attention.

(
;

I
>
'

'See Benston, Hanweck and Humphrey (4, pp. 17-20) for a detailed
summary of these studies.
'These include studies by Bell and Murphy (2), Murphy (15) and Benston,
Hanweck and Humphrey (4 and 5).
3
These are the studies by Benston, Hanweck and Humphrey (4 and 5) and
Gilligan, Smirlock and Marshall (7).

FEDERAL RESERVE BANK O F ATLANTA

The study by Benston, Hanweck and Humphrey
recently published in this Review (4) advances
on previous studies in its measurement of bank
output, the form of its cost function and its
treatment of expansion by adding branches. Its
method of measuring overall output allows the
identification of upwards of 70 percent of bank
costs with a single index of bank o u t p u t Its cost
function allows, but does not require, U-shaped
cost functions—functions that allow for declining
unit costs at low levels of output and rising unit
costs at higher levels of o u t p u t Its method of
including branches corrects previous methods,
which probably overestimated costs of adding
branches at larger banks.
This study dealt w i t h banks having deposits up
to $1 billion. Its authors found that unit banks
experienced some diseconomies of scale as
their size increased beyond $75 million in deposits, that is, their average cost increased as
their size increased. Branch banks experienced
economies of scale when they expanded output
without increasingtheir branches. However, when
branch banks increased their output by adding
branches (as they generally do and w o u l d be
forced to do if they moved into interstate banking),
they also experienced diseconomies of scale
beyond the $50 million—$75 million deposit
size.
The study's major conclusions with relevance
to interstate branching were that a) costs increase
slightly with bank size for branch and unit banks
with $50 million—$75 million in deposits or
more when branch banks expand by adding new
branches and b) when normal methods of expansion are accounted for, branch and unit
banks of similar deposit size have similar costs.
These conclusions differ from those of earlier
studies in that they find slight diseconomies of
large-scale banking while the others generally
find slight economies of large scale.5
The study by Gilligan, Smirlock and Marshall
(7) is a pilot-type study combining measures of
economies of scale and economies of scope in
producing bank products. It uses a similar production function t o that used by Benston and his
colleagues (4) and analyzes FCA data Its principal
advance is its consideration of economies of
scope.

"McNulty (14) found similar results for savings and loan associations in a
study that used similar methods- This study also reviews cost studies of
savings and loan associations—most of which have results that are
generally consistent with the studies of banks
5
Murphy (15) studied banks as large as $5.5 billion in deposits

Economies of scope occur when the combined
cost of producing t w o or more products in the
same operation is lower than the combined cost
of producing the same products separately. Banks
are multi-product firms and they produce combinations of services with the same people and
equipment. Tellers handle various types of deposits, computers keep records on all transactions
and the same physical plant may house several
functions. Thus, tests for economies of scope
seem justified. If economies of scope are significant, banks might be able t o decrease the unit
cost of each type of output by adding new types
of output as they grow.
The study by Gilligan, Smirlock and Marshall
finds no evidence of economies of large scale in
commercial banks. However, in its limited test, it
found evidence of economies of scope in overall
bank production when either of its t w o methods
of measuring overall output was used. These
results raise, rather than answer, the question of
whether economies of scope show up when
more detailed output measures are used and
whether large banks offering multiple services
might gain sufficient cost advantages to undercut
small banks' prices on basic services.
These t w o studies show no evidence of scale
economies for banks above a relatively small
overall size. In this they differfrom most previous
studies which show slight scale economies. The
two most recent studies, however, are among
the few t o use functional forms that allow Ushaped cost curves, thus allowing rising unit
costs as size increases. They also analyze the
most recent data (from the late 1970s), which
might account for their findings.
Cost studies of individual bank functions have
a history similar to estimates of overall costs.
Most of these studies made no allowance for
diseconomies of large scale through U-shaped
cost curves. They found slight economies for
most individual functions. Studies using more
recent data showed less cost decline. The study
by Benston and Hanweck (3) allowed for Ushaped cost curves and found them for the
demand deposit function; other functions showed
constant costs, except business loans, which
showed continuing economies of large scale
production. These results might have resulted
either from changes in the way banks operate or
from a method that allowed U-shaped cost
curves. That the latter is more likely to be the
reason is shown by a recent study by Dunham
(6), in which economies of scale were shown for
42

all five of the functions measured, with afunction
that w o u l d not allow U-shaped curves.
Thus, economies of scale studies seem t o
indicate that large banks have no unit cost
advantage over smaller ones—at least not over
banks as large as $50 million in deposits. Unit
and branch banks have similar cost functions
throughout the output range if branch banks
increase output by adding branches. Advantages
or disadvantages of any group of banks are slight
In a later section of this article, w e will discuss
some reasons why these results are not conclusive.

)

Bank Holding Company Expansion
Interstate banking by bank holding companies
involves an extension of the above evidence on
economies of scale in branching. Since a bank
holding company is a collection of banks, evidence
already discussed on individual banks should tell
us about the units that make up the holding
company. That evidence indicates that branch

)

"Economies of scale studies-indicate
that
large banks have no unit cost
advantage
over smaller
ones"

and unit banks achieve economies of scale only
up to a fairly small size and have slight diseconomies beyond $50 million—$75 million.
But does ownership by a bank holding company
impart anything to a collection of individual
banks that would change their cost structures? If
holding company ownership raises costs above
those that an individual branching system might
achieve, w e w o u l d expect less consolidation and
higher banking costs after removal of the Douglas
Amendment than after removal of McFadden
Act branching prohibitions. If it reduces costs, w e
would expect more consolidation and lower
costs.
Bank holding companies can centralize some
operations of their subsidiaries—investment, trust
audit data processing and accounting, for example.
This may allow them to operate each subsidiary
more efficiently and to achieve greater economies
of scale than independent banks, but not necessarily more efficiently than branch organizations

)
*

)
,
j

•
5

MAY 1983, E C O N O M I C REVIEW

1
)

of similar size. O n the other hand, greater information and coordination costs inherent in larger,
more formally structured organizations may cancel
such efficiencies.
Several studies have tested the impact of bank
holding company ownership on individual banks'
costs to determine the effect of these forces on
the unit costs of affiliated banks. Five studies
have been published over more than a decade
on the impact of holding company affiliation on
efficiency. Their results occasionally conflict and
are not, on the whole, conclusive because each
study has important problems.
The t w o earliest studies (Schweitzer, (16) and
Kalish and Gilbert, (8)) treat bank assets as their
measure of bank size. Beyond that similarity, the
studies differ in most important respects, including
their conclusions. Schweitzer analyzed annual
income and call report data for banks in the
Minneapolis Federal Reserve District in 1964.
Kalish and Gilbert analyzed national FCA data for
1968, computing cost relationships using only
the most efficient banks.
For reasons not ascertainable because of important differences in methods, the t w o studies
reached opposite conclusions about the impact
of holding company affiliation on efficiency.
Schweitzer found that small (assets less than $25
million) affiliate banks were less efficient than
small independents, while large affiliates were
more efficient. Kalish and Gilbert, dividing small
from large banks at $10 million of loans and
investments, came to the opposite conclusion.
Schweitzer's conclusions generally were echoed
in a study of demand deposit costs of 1968 FCA
banks by Longbrake and Haslem (12). Their
study measured three components of demand
deposit output: average account size, average
number of accounts per office and number of
offices. Their results indicated that affiliates with
less than average account size and less than
average accounts per office (generally smaller
banks) had higher average costs than similar
independents, whether branch or unit banks,
while affiliates with greater than average account
size and accounts per office had lower average
costs. This study did not estimate cost functions
for other bank functions or for the bank as a
whole; consequently, it is not directly useful for
drawing implications of expanded bank holding
company activity for overall bank costs.
Benston and Hanweck (3) studied costs of
several important banking functions using 19681974 FCA banks in an analysis of the overall
FEDERAL RESERVE BANK O F ATLANTA

effects of affiliation on bank costs. For only one of
these functions did affiliates' efficiency differ
from that of independents. In the demand deposit function, affiliates had lower average costs
than independents, and affiliates' advantages
grew with holding company size (rising from 4
percent for a small company to 17 percent for a
large company). In the other functions s t u d i e d time deposits, business and agricultural loans,
real estate loans, installment loans, administration,
occupancy, business d e v e l o p m e n t and promotion—holding company affiliation did not
influence bank costs.
These results are consistent with those of
Longbrake and Haslem t o the extent that they
indicate large holding companies have higher
than average account size and accounts per
office. The results indicate little other affiliate
advantage. The study did not cover all bank
functions, however, and the cost functions were
not aggregated. Thus, overall effects were not
strictly discernible from the Benston-Hanweck
study.
To a great extent this criticism was obviated by
a more recent bank cost study by Benston,
Hanweck and Humphrey. This work, the most
recent available, aggregates at least a large proportion of bank costs. It is probably our best
guide in assessing the impact of affiliation on
bank costs. Using a newly developed index of
combined output of most functions that generate
bank costs, these researchers studied 19741978 FCA banks. Accounting for both the fact of
affiliation and the size of the bank holding
company, they found no significant effects of
affiliation on the bank costs they reviewed.
Holding company size was not found to be an
influence.

Limitations of the Evidence
The cost studies reviewed here leave unanswered some questions that are important in the
appraisal of interstate banking costs. Three of the
most glaring questions involve very large banks.
The studies we have reviewed do not cover the
largest banks—those with deposits greater than
$1 billion —yet these are the ones most likely t o
act in the event the McFadden Act or Douglas
Amendment is repealed. The studies also generally
fail to deal with economies of scope—adding
additional products to the output of an expanding
firm. The one study that does test for economies
of scope finds them, but its tests are not general.
43

In addition, they do not cover the influence on
costs of widespread bank holding company and
branching systems, since the banks studied operated statewide systems at the most.
Large banks and economies of scope are
closely related. Gilligan and his colleagues (7)
question recent evidence that most bank products suffer diseconomies of scale and that
banks overall appear to suffer diseconomies
when these individual cost functions are added
up. They find such evidence inconsistent with
the existence of large banks. Economies of scope
that involve the interaction of bank product
costs may explain the inconsistency. If additional
products reduce costs of existing products, banks
may be able to add new products as they grow
and t o reduce the costs of other products, thus
overcoming diseconomies of large scale. Very
large banks may thrive in such situations, though
smaller institutions show no economies of scale
in traditional products.
Direct evidence on these questions is limited
t o the two-product test of economies of scope in
the Gilligan paper. However, indirect evidence
that even very large banking organizations have
had limited success when they enter new markets
indicates that large banks' advantages are not
extensive. This evidence is summarized in King
(9 and 10); see also Keunreuter (11).
The cost impact of geographic extensions of
bank branches or bank holding companies' subsidiaries beyond their headquarters states is not
known. Certainly communication is complicated
somewhat by greater geographic spread. Some
large statewide banks reportedly have had difficulty collecting data rapidly enough to meet
regulatory reporting deadlines. Decisions on participations and large loans also cause some
delays in present branching and holding company systems. Available evidence does not tell
us whether a nationwide system would increase
communications and administration costs significantly for the bank operating i t O n the other
hand, modern electronic communications media
may help t o avoid extra communications costs.
Indeed the continuing operation of interstate
nonbank office networks by several bank holding
companies (see Whitehead, 17) leads t o the
presumption that such costs are not significant.
Also missing from bank cost studies is recent
and consistent product-by-product evidence on
bank costs. Recent evidence on individual product costs would help us to analyze the implications of interstate banking for specialized bank
44

activities. For example, continuously decreasing
costs of demand deposits as reported by Longbrake and Haslem (12) or for business loans as
reported by Benston and Hanweck (3), would
imply that large institutions specializing in demand
deposits and business loans might exist alongside
smaller local institutions specializing in time

"Extensive consolidation
banking system seems

of the
commercial
unlikely."

deposits and consumer loans. This type of specialization could save money for the public, though
it might increase concentration in certain product
lines. Evidence on individual product costs is,
however, inconsistent from study t o study.
A final blind spot in evidence on bank size and
costs involves risk. Larger banks may be able to
diversify their assets t o a greater extent than
smaller ones and, consequently, t o incur lower
risk. (See Baltensberger (1)). Evidence of such
advantages for larger banks in practice has not
been developed. In their review of the bank
size—bank cost relationship, Whitehead and
Schweitzer (18) conclude that "...no systematic
evidence exists that small banks are at a competitive disadvantage in terms of risk." The lack
of evidence, they also point out, may be the
result of the woefully incomplete study of this
relationship.

Summary and Conclusions
Evidence from commercial bank and savings
and loan cost studies indicates that diseconomies
of scale exist for institutions of all sorts—branch
and unit, affiliate and nonaffiliate—above relatively low levels of overall size. Costs increase, in
other words, as size increases. This evidence
indicates that for specific products other than
business loans and demand deposits, such diseconomies may also exist above rather low
output levels. Bank holding companies do not
appear t o influence the efficiency of affiliates.
This evidence is incomplete and not entirely
conclusive because it generally fails to cover very
large banks or t o consider economies of scope,
costs of extensive geographic communication or
MAY 1983, E C O N O M I C REVIEW '

risk. W i t h one exception, its evidence on costs of
individual products may be outdated. There are
reasons to believe, however, that these omissions
do not greatly influence the broad overall conclusions based on the evidence.
The existence of some diseconomies after low
output levels implies first that large institutions
gain little in the way of lower costs to threaten
small banks, to benefit the public or to convince
investors that their expansion will reap a return
greaterthan alternative investments. Undersuch
conditions, extensive consolidation of the commercial banking system seems unlikely. The
competitive impact of interstate branching or
bank holding companies on banking structure
would be limited. Regulators could analyze the
competitive effect of mergers or acquisitions in
local markets without fear that by denying bank
combinations they could foreclose a lower output cost alternative. It would be sufficient t o
analyze criteria based on competitive effects.

The evidence also has implications for the
benefits of interstate banking in terms of costs of
banks' services to bank customers. The best
available evidence indicates that widespread
expansion by large organizations would produce
no lower costs and possibly higher costs of
banking services offered in their markets to the
public since unit costs may actually increase with
size. Interstate banking may, on the other hand,
bring more services to local markets if large
banks offering a wide variety of services expand
nationwide.
In general, interstate banking appears to be
neutral in its impact on the publicthrough banks'
production costs. Cost advantages of large banks
do not seem great enough (if they exist at all) to
trigger rapid consolidation and concentration
within the industry, inhibiting competition. Nor,
on the other hand, does expansion seem likely to
provide the public with lower on-site costs of
financial services.
—B. Frank King

BIBLIOGRAPHY
1. Baltensperger, E. "Economies of Scale, Firm Size and Concentration in
Banking," Journal of Money, Credit, and Banking, 4 (May 1972), 467488.
2. Bell, Frederick W., and Neil B. Murphy. "Costs in Commercial Banking: A
Quantitative Analysis of Bank Behavior and Its Relation to Bank Regulation,"
Federal Reserve Bank of Boston, Research Report No. 41, 1968.
3. Benston, George J., and Gerald A Hanweck. "A Summary Report on Bank
Holding Company Affiliation and Economies of Scale," Proceedings of a
Conference on Bank Structure and Competition, Federal Reserve Bank
of Chicago, 1977.
4. Benston, George J., Gerald A Hanweck, and David B. Humphrey.
"Operating Costs in Commercial Banking," Economic Review, Federal
Reserve Bank of Atlanta, 67 (November 1982), pp. 6-21.
5. Benston, George J., Gerald A Hanweck, and David B. Humphrey. "Scale
Economies in Banking: A Restructuring and Reassessment," Journal of
Money, Credit, and Banking, 13 (November 1982, Part 1).
6. Dunham, Constance. "Commercial Bank Costs and Correspondent Banking," New England Economic Review, Federal Reserve Bankof Boston,
(September/October 1981), 22-36.
7. Gilligan,Thomas W., Michael L Smirlock, and William J. Marshall, "Cost
Complementarities, Scale Economies and Natural Monopoly in Banking"
Federal Reserve Bank of Chicago, Proceedings of a Conference on
Bank Structure and Competition, 1982, 262-282.
8. Kalish, Lionel and R. Alton Gilbert. "An Analysis of Efficiency of Scale and
Organizational Form in Commercial Banking," Journal of Industrial
Economics, 21 (July 1973) 293-307.
9. King, B. Frank. "Changes in Large Banks' Market Shares," Economic
Review, Federal Reserve Bank of Atlanta 67 (November 1982), 35-39.

FEDERAL RESERVE BANK O F ATLANTA

10. King, B. Frank, "The Impact of Local Market Entry by Large Bank Holding
Companies," Economic Review, Federal Reserve Bank of Atlanta 67
(November 1982), 40-47.
11. Kunreuther, Judith Berry, "Banking Structure in New York State: Progress
and Prospects," Monthly Review, Federal Reserve Bank of New York,
(April 1976) 107-115.
12. Longbrake, William A , and John A Haslem. "Productive Efficiency in
Commercial Banking: The Effects of Size and Legal Form of Organization
on the Cost of Producing Demand-Deposits Services," Journal of
Money, Credit, and Banking, 7 (August 1975), 317-330.
13. McCall, Allen S. "Economies of Scale, Operating Efficiencies and the
Organizational Structure of Commercial Banks," Journal of Bank
Research II (Summer 1980) 95-100.
14. McNulty, James E "Economies of Scale: A Case Study of the Florida
Savings and Loan Industry," Economic Review, Federal Reserve Bank
of Atlanta 67 (November 1982), 22-31.
15. Murphy, Neil B "A Re-estimation of the Benston-Bell-Murphy Cost
Functions for a Larger Sample with Greater Size and Geographic
Dispersion," Journal of Financial and Quantitative Analysis, 7 (December 1972), 2097-2105.
16. Schweitzer, A A "Economies of Scale and Holding Company Affiliation in
Banking, Southern Economic Journal, 39 (October 1972), 258-266.
17. Whitehead, David. D, "Interstate Banking: Taking Inventory," Economic
Review, Federal Reserve Bank of Atlanta 68 (May 1983).
18. Whitehead, David D., and Robert L. Schweitzer. "Bank Size and Bank
Risk: A Note on the Evidence," Economic Review, 67 (November 1982)
32-34.

Will Bank Capital Adequacy Restrictions
Slow the Development of Interstate Banking?
Earlier in this Economic Review, Paul Horvitz
points out that the McFadden Act and the
Douglas Amendment aren't the only
barriers to interstate banking. He cites
three additional significant constraints to interstate expansion:
the need for a bank to earn a
profit in a new market, internal
constraints to a bank's ability to
grow (for example, its need for
qualified personnel), and capital adequacy constraints imposed by bank regulators.
As this article suggests, the regulatory capital adequacy constraint
may slow the growth of interstate
banking organizations. While some academics have expressed doubts about the
value of capital adequacy constraints the federal
bank regulatory agencies consider bank capital
adequacy before approving bank holding company acquisitions, bank mergers and c/e novo
bank branches. 1 Regulatory approval can be
denied if a proposed new consolidated entity
lacks sufficient capital. Therefore whether or
not capital adequacy constraints are justified,
they may affect the expansion rate of interstate
banking. If interstate banking is legalized, then
' See for example, Sam Peltzman, "Capital Investment in Commercial Banking
and Its Relationship to Portfolio Regulation," Journal of Political Economy,
7 8 (January-February 1970), pp. 1-26 or Lucille S. M a y n e "Impact of
Federal Bank Supervision on Bank Capital," T h e Bulletin (New York
University Graduate School of Business Administration, Institute of Finance),
1972, Nos. 85-86 a n d for counterpoint see John J. Mingo, "Regulatory
Influence on Bank Capital Investment" Journal of Finance, 3 0 (September
1976) pp. 1111-1121.

banks must have sufficient excess capital to )
support this growth, or they will have to raise
additional capital if they wish to engage
in interstate banking.

Regulatory Capital Guidelines
Until December 1981, regulatory agencies attempted to regulate the capital position of
bank holding companies on the
basis of informal capital standards. At that time formal guidelines were announced for three
groups: one set of guidelines for
FDIC-regulated banks, another
guideline for banks regulated by
the Office of the Comptroller of the
Currency and the Federal Reserve System and the guideline for bank holding
companies. While all three agencies use the
organization's capital (variously defined)-to-asset
ratio as the primary measure of its capital
adequacy, the agencies also will take other
considerations into account when analyzing a
capital position.
All three sets of capital guidelines group the
regulated institutions into three zones:
1) those presumed to have acceptable capital,
2) those that may be undercapitalized
3) those strongly presumed t o be
undercapitalized.
The FDIC measures a bank's capital adequacy
by its equity capital-to-asset ratio and imposes

Many community and smaller regional bank holding companies enjoy
stronger capital positions than some larger regional and multinational
companies If regulatory guidelines on bank capital remain in place, they
will affect the pace and extent of interstate expansion.

M A Y 1983, E C O N O M I C REVIEW

(

the one guideline on all of the banks it regulates.
It has established a threshold level of equity
capital at 6 percent. Banks below this threshold
will be required to submit an acceptable comprehensive capital plan. The FDIC also established a
minimum acceptable level of equity capital at 5
percent The FDIC will insist that banks below
this level submit a plan to raise their capital
promptly.
Guidelines of the Comptroller of the Currency
and the Federal Reserve are more complicated.
Those agencies use t w o measures of a bank's
capital: primary capital, which consists of the
bank's permanent equity capital, and total
capital, which consists of its primary capital along
with limited life preferred stock and subordinated
debentures. Banks also are divided into three
groups for the purposes of these capital guidelines:
multinational banks (the 17 largest banks),
regional banks (all other banks with more than
$1 billion in assets), and community banks
(banks with less than $1 billion in assets). The
minimum primary capital-to-asset ratio is 6
percent for community banks and 5 percent for
regional banks. Community and regional banks
are "expected to operate above the minimum
primary capital levels." Community banks whose
total capital-to-asset ratio exceeds 7 percent are
assigned to Zone 1, as are regional banks whose
total capital ratio exceeds 6.5 percent Community
banks with total capital-to-assets between 6
percent and 7 percent and regional banks with
ratios between 5.5 and 6.5 percent are assigned
to Zone 2. Banks not assigned to Zones 1 or 2 are
assigned to Zone 3.
Explicit capital standards have not been
imposed on multinational banks. The lack of an
explicit standard for multinationals does not
mean, however, that the Comptroller and the
Federal Reserve are unconcerned about the
capital position of multinational organizations.
Indeed one of the four objectives cited by the
agencies for the new capital guidelines is " t o
address the long-term decline in capital ratios,
particularly those of the multinational group."
The guidelines imposed on bank holding
companies are similar to those imposed on
banks by the OCC and the Federal Reserve. The
guidelines are applied to the primary and total
capital positions of the consolidated BHC w i t h
the BHC's primary and total capital defined in
almost the exact same way as banks' primary and
total capital are defined. The one significant
difference is that BHC total capital includes bank
FEDERAL RESERVE BANK O F ATLANTA

subordinated debt but excludes subordinated
debt issued by the BHC parent and its nonbank
subsidiaries.
These guidelines can be used by banking
regulators to limit a banking organzation's
growth by rejecting banking organizations' merger
and branching requests and by cease and desist
orders. Under existing law the federal bank
regulators can use their power to deny BHC and
bank acquisitions' requests to prevent undercapitalized banking organizations from acquiring
an existing or de novo bank. The law currently
requires that the Federal Reserve approve all
BHC merger applications and the federal agency
regulating the surviving bank approve all bank
mergers. The law requires that before such
approval is given, the relevant agency must
consider"the financial and managerial resources
and the future prospects" of the banking organizations concerned. This gives the agencies the
ability to reject the applications of banking
organizations that are, in their opinion, undercapitalized.
Prior to the issuance of formal capital standards,
all three agencies scrutinized the capital position
of the proposed corporation when considering
bank merger applications, and the Federal
Reserve rejected some acquisition requests due
to inadequate capital in the holding company or
one of its affiliate banks. Since the new standards
took effect, the Board of Governors of the
Federal Reserve has rejected two applications by
a holding company to acquire a bank due to the
holding company's capital inadequacy. Last year
the Board rejected a request that would have
dropped a regional holding company's consolidated
equity capital from 7.2 percent of assets to 5.8
percent of assets.2 Furthermore, the Board noted
that the company would have goodwill equal to
approximately 25 percent of its equity capital. 3
The Board also rejected an application that
would have reduced a bank holding company's
primary capital ratio from 7.5 percent of assets to
less than 6 percent. 4
The Board also expressed concern about a
regional holding company proposal which resulted
'"The Central Bancorporation, Inc, "Federal Reserve Bulletin, (December
1982), pp. 789-792.
The pace of interstate bank acquisitions could be affected if the Board does
discount BHCs' capital by some fraction of its goodwill. This will be a
problem because in most banking mergers the acquired organization
received some premium over its book value. If the Federal Reserve does
discount capital based on goodwill, then capital requirements for interstate
expansion will be effectively increased.
""Manufacturers Bancorp, Inc.," Federal Reserve Bulletin, (January 1983),
pp. 46-48.
3

in the holding company taking on substantial
new debt, although its capital remained above
the guidelines. The Board's comment on a
southeastern regional BHC acquisition request
was that "...although the proposal would entail
significant acquisition debt, the amount of debt
involved would not preclude the applicant from
serving as a source of strength to its subsidiary
banks. 5 The bank's total capital ratio d r o p p e d
frdfri 7.09 percent at the end of 1981 to a pro
forma amount of 6.57 percent after the acquisition
was consummated.
The Board has approved a bank acquisition
request by a large multinational holding company.
The Board said that, even though it has been
concerned about "a long-term trend" toward
lower capital ratios for multinationals, it "...has
noted the improvements that Citicorp has made
in its capital position...". 6 At the beginning of
1981, the holding company had a 3.6 percent
primary capital ratio. The Board also expressed
its expectation that the holding company will
"continue its efforts to improve its capital
position and will take such efforts into consideration in acting on applications for further
expansion."

Interstate Expansion of Community
Banking Organizations
The community banking organization, as defined
in regulatory guidelines, can be divided into
small organizations and large organizations. The
small community banking organizations, those
with less than $100 million in assets, constitute
the overwhelming majority of banking organizations in the United States. These organizations
are generally too small, however, to be a major
factor in interstate banking. Most of these small
organizations could double or triple in size and
still have less than $100 million in assets. Most
interstate banking that these organizations engage
in will be transacted through offices no more
than a few miles from their headquarters.
The larger community organizations generally
are similar to regional and multinational banking
organizations, but there is one significant difference. The larger community banking organizations have an important motivation to grow,
because a bank that grows to over $1 billion in
assets becomes a regional bank for capital

"Ellis Banking Corporation," Federal Reserve Bulletin, (July 1982).
«"Citicorp," Federal Reserve Bulletin, (October 1982).

adequacy purposes. Community banking organizations that grow into regional organizations can
meet the guidelines with .5 percentage points
less total capital and 1 percentage point less
primary capital. If the guidelines are taken
literally a holding company with assets of $950
million and the exact minimum total capital to
classify as a Zone 1 community bank could
finance the purchase of a $51 million bank with
debt and still emerge with total capital exceeding
Zone 1 guidelines as a regional holding company.
A similar but less dramatic effect would occur if
the guidelines were administered such that as a
bank grows towards its boundary, its capital
requirement would approach that of larger
banks.
In 1982, Golembe Associates studied the
December 1981 primary and total capital ratios
of a sample of Association of Bank Holding
Company members. 7 The Golembe study looked
at the association's 20 largest members, 60
percent of its members w h o have between $3
billion and $5 billion in consolidated assets and
25 percent with less than $3 billion in assets. The
results, reproduced in Table 1, show that most
large community bank holding companies can
support some asset growth on their existing
capital.
Every percentage point a community holding
company exceeds the total capital Zone 1
guidelines could support up to 14 percent asset
growth. 8 Thus, some larger community organizations may be able to move up to regional bank
status with little or no increase in their capital.

;

Large Banking Organizations' Current
Capital Position
Most interstate banking that will take place if
restrictions are dropped will involve regional and
multinational banking organizations. These organizations can support growth with their existing
capital, the earnings they retain in the future and
the new capital they raise. The asset growth to be
supported, however, will not consist solely of

)

}

'See "An Analysis of the New Capital Guidelines for Bank Holding Companies,"
Golembe Associates, Inc., November 1982.
lf a banking organization is allowed to reduce its capital ratio (primary or
total capital) to the minimum Zone 1 guideline, then it can grow by the
amount excess capital/minimum Zone 1 capital ratio. A community bank
with a 7 percent primary capital ratio could expand by a maximum of 7
percent - 6 percent/.06 =.14. This calculation of a banking organization's
growth potential is for illustrative purposes and does not necessarily apply
to any specific organization. Unique characteristics of individual banking
organizations may affect the minimum capital ratios required for Zone 1
classification.

MAY 1983, E C O N O M I C R E V I E W '

Table 1. Percentage Distribution of Capital Ratios of Sampled Community Holding Companies
December 31, 1981

Capital as a
Percent of Assets

Primary Capital

5.0 - 5.5

5.5 - 6.0

Total Capital

Zone 3

6.0 - 6.5
6.5 - 7.0
7.0 - 7.5

Zone 2

20
20

20
30

7.5 - 8.0

8.0 - 8 5

8.5 - 9.0
Zone 1

9.0 - 9.5
9 . 5 - 10.0

Federal Reserve Board primary capital ratio guidelines.
Federal Reserve Board total capital ratio zones.
Source: Golembe Associates

interstate banking but also will come from the
growth of existing business. Before we can
analyze the ability of large banking organizations'
capital to support interstate banking, we need to
look at banking organizations' historical ability to
generate capital to support their growth.
The analysis will be limited to regional and
multinational bank holding companies. Independent regional banks are not analyzed because
they constitute a small fraction of the regional
banking organizations. There are no multinational banks that are not affiliated with a
holding company. The capital position of individual banks within holding companies need not
be a constraint on interstate banking because
holding companies have the option of double
leveraging to meet the capital needs of individual
subsidiaries.9

Talley has examined the asset and equity
growth rates of the multinations banking organizations (Table 2).10 He shows that the growth
rate of equity capital at multinationals shifted up
from around 7.5 percent in 1970-1974 to around
11 percent between 1975 and 1982 but that it
has otherwise remained relatively stable. The
growth rate of bank assets has fluctuated widely
through the past decade, however, with a
maximum annual rate of 25.1 percent and a
minimum rate of 1.6 percent. The equity capital
to assets ratios declined from 5.15 percent in
1970 to 3.49 percent in 1974 and thereafter
have fluctuated between 3.6 and 4 percent.
Capital trends for d random sample of regional
banks are presented in Table 3. 11 These organizations' equity capital has been relatively constant

'Double leveraging can be loosely defined as bank holding company debt
issues that fund holding company purchase of bank equity. The new capital
standards do not stop holding company double leveraging. However, they
do prevent bank capital arising from double leveraging from being used to
offset a weak BHC capital position. Therefore BHCs that meet or exceed the
consolidated capital standards can use double leveraging t o meet the
capital needs of individual subsidiaries.

FEDERAL RESERVE BANK O F ATLANTA

See "Bank Capital Trends and Financing," by Samuel Talley, a Board of
Governor's staff study in February 1983.
" T h e original sample consisted of 30 organizations that were regional BHCs
on December 31,1981. The sample is selected at random with replacement
as suggested by Lapin. The sample size is reduced to 29 because one BHC,
a spinoff from a nonfinancial corporation in 1980, had to be dropped. Some
of the banking organizations had less than $1 billion in assets in one or
more years prior to 1981 and some organizations were not organized as a
holding company for the entire period.

over the sample period, particularly since 1977.
Regional holding companies have raised their
capital at a rate close to their growth rate in assets
over the same period. 12
The Colembe analysis of regional and multinational holding companies' primary capital is
reproduced in Table 4. Almost all the regional
holding companies sampled meet or exceed the
Federal Reserve's primary capital standards.
Smaller regional BHCs tend to exceed the
standards by a larger margin than do larger
regionals. Only half of the regional holding
companies with over $5 billion in assets exceed
the capital standards by more than 1 percentage
point, while 77 percent of the regional organizations with $3 to $5 billion in assets and 80
percent of the regionals with less than $3 billion
exceed the standards by more than 1 percentage
point. Every 1 percentage point of primary
capital above the guidelines at regional banks
could support as much as 20 percent growth if
accompanied by an appropriate increase in the
organization's debt capital and if the Federal
Reserve allows the holding company to reduce
its capital to the minimum Zone 1 guidelines.
As noted above, no guideline has been given
for multinational holding companies, but the Fed
and Comptroller of the Currency have expressed
a desire to see improved capital positions. Even
given this desire, it is highly unlikely that the
Federal Reserve can force multinationals to
maintain capital ratios higher than those required
of regional banks. Of the multinational organizations, 37 percent have primary capital equal to or
greater than that required for regional banks.
The Colembe Associates study also examined
the total capital position of their sample, and
those results are reproduced in Table 5.
A substantial minority of the regional banks
have total capital ratios in Zones 2 or 3. This
stands in sharp contrast to the finding that
virtually all regional banks have adequate primary
capital. For those holding companies with total
capital in excess of the m i n i m u m required for
Zone 1 regional organizations, every percentage
point of excess total capital could support as
much as 1 5 percent asset growth.
No total capital standards have been specified
for multinational organizations. If the categories

T h e above analysis of equity capital trends ignored historical trends in total
capital because the regulatory view of holding c o m p a n y subordinated debt
has shifted through time.

applied to regionals are also applied to multinationals, then no multinational has Zone 1 total
capital and the overwhelming majority have |
Zone 3 total capital.
This analysis of current holding company
capital positions demonstrates that smaller .
regional organizations are in a better position to
support growth than larger organizations, and )
that regional organizations are in a better
position than multinationals.
While no guidelines have been set for the
multinationals, the Federal Reserve expressed
its concern about the "long-term decline in )
capital ratios, particularly those of the multinational
group," when it issued the standards in December '
1981. Since that time banks have raised significant t
amounts of new capital. 13 I n one case in October
1982 in which specific reference is made to a
multinational's capital position, the Board noted
improvements in the holding company's capital '
position and expressed its expectation that further )
improvements would be made.
This analysis also demonstrates that community j
and regional holding companies' primary capital
positions are better relative to regulatory standards
than are their total capital positions. Some )
regional organizations may be able to support up
to 60 percent growth on existing primary capital !
if they increase their total capital by issuing <
additional subordinated debt or limited life
preferred stock.

Will Capital Standards Slow the
Growth of Interstate Banking?

Large banking organizations have been able to )|
provide capital sufficient to support some growth
while maintaining primary capital ratios at a *
relatively constant level since the mid 1970s.
Some regional banking organizations may even
be able to grow by as much as 15 to 23 percent M
on existing total capital and by as much as 60
percent on existing primary capital if they raise
additional subordinated debt or limited life .
preferred stock. If banking organizations want to
expand beyond their existing capital base, they
will have to sell more subordinated debt or J
preferred stock and take one or more of the
following measures t o increase their equity >

S e e "Outlook for Bank Capital" by J a n e F. Nelson in the December 1982
United States Banker

Table 2. Equity Capital to Asset Ratio, Asset Growth and Capital Growth Rates
for Multinational Banking Organizations

Year

Percentage Growth
in Equity
Capital During
the Year

Percentage Growth
in Total
Assets During
the Year

1970

7.9

10.9

5.15

1971

6.8

12.0

4.91

1972

8.0

19.7

4.43

1973

7.7

25.1

3.82

1974

7.9

18.2

3.49

Equity Capital
to Total Assets
Ratio at
Year-end

1.6

3.94 2

10.2

8.5

4.00

1977

10.5

14.6

3.86

1978

11.4

14.2

3.76

1979

11.2

15.9

3.61

1980

13.0

10.5

3.69

1981

11.1

7.3

3.83

2.7 3

3.98 4

1975

14.8

1976

1982 (6 mos.)
1
2
3

11.1

Based on consolidated bank holding d a t a
The growth of equity capital a n d the equity capital to total assets ratio were increased in 1 9 7 5 d u e to an accounting change.
Annualized growth rate. The growth rate for total assets b e t w e e n December 31, 1981 a n d J u n e 30, 1982, probably was r e d u c e d to
s o m e d e g r e e by year-end "window-dressing" that increases total assets. The growth rate of total assets from J u n e 1981 to J u n e 1 9 8 2
was 3.9 percent.
Ratio is for June, 1982.

Source: Talley

Table 3. Equity Capital to Asset Ratio, Asset Growth and Capital Growth Rates
of Sampled Regional BHCs

Year

Percentage Growth
in Equity
Capital During
the Year

1975

3.7

3.8

6.2

1976

7.9

5.9

6.3

1977

6.1

11.5

6.0

1978

10.5

12.8

5.9

1979

9.5

8.7

5.9

1980

9.4

7.3

6.0

1981

11.0

11.4

6.0

Source: FDIC, Moody's

Percentage Growth
in Total
Assets During
the Year

Equity Capital
to Total Assets
Ratio at
Year-end

Table 4. Percentage Distribution of Primary Capital Ratios of Sampled Companies
by Class and Size of Company
Primary
Capital
as a
Percent
of Assets
3.0 - 3.5%

Regionals:
Assets
Between
$1 b-3b

Regionals:
Assets
Between
$3b-5b

Regionals:
Assets
Above
$5b

Multinationals

—

3.5 - 4.0

—

4.0 - 4.5

—

4.5 - 5.0

—

5.0 - 5.5

5.5 - 6.0

6.0 - 6.5

6.5 - 7.0

—

7.0 - 7.5

—

7.5 - 8.0

—

8.0 - 8.5

—

6
—

—

Federal Reserve Board primary capital ratio guidelines for "regional" holding companies.
Notes: No guidelines have been established for the multinationals.
Source: Golembe Associates

capital: raise new equity capital in the financial
markets, use stock swaps t o acquire other banks,
increase their profitability, or cut their dividend
payout ratio.
Bank organizations should face no special
problems raising new debt capital. They may,
however, have problems increasing their equity
capital.
Assuming that banks cannot significantly increase
their profitability, they will have to acquire banks
through stock swaps, sell new equity or cut
dividend payouts t o raise new equity. Stock
swaps will generally provide sufficient new
equity to support the banking organization's
growth. Nelson looked at banks' ability to sell
new equity issues, but she did not consider
dividend cuts. She notes that most bank stocks
are selling below book value and that bank
52

capital problems may affect the pace of banking
organizations' growth. 14
Common market folklore has it that corporations
whose stocks are selling below book value
should not issue new stock because it will dilute
existing earnings. Nelson expressed this view in a
recent issue of United States Banker. "Selling
new shares below book is damaging to the
issuing institution because per share earnings
can be severely diluted without a dramatic
improvement in profits." 15
The arguments that companies should not
dilute earnings and should not sell stock below
book value are suspect. W h e n a company

'"Nelson, IbidHorvitz also discusses the potentialfor bank mergers to result in the dilution
of the acquiring firm's earnings.

MAY 1983, E C O N O M I C REVIEW '

Table 5. Percentage Distribution of Total Capital Ratios of Sampled Companies
by Class and Size of Company
Primary
Capital
as a
Percent
of Assets

Regionals:
Assets
Between
$1 b-3b

Regionals:
Assets
Between
$3b-5b

Regionals:
Assets
Above
$5b

3.5 - 4.0%

Multinationals
13

4.0 - 4.5

25
Zone 3

4.5 - 5.0

5.0 - 5.5

Í2~

6.0 - 6.5

6.5 - 7.0

5.5 - 6.0
Zone 2

7.0 - 7.5
7.5 - 8.0

Zone 1

8.0 - 8.5

8.5 - 9.0

Notes: There are no zone designations for multinationals.
Source: Golembe Associates

purchases an asset, such as another bank or a de
novo branch, it is buying a stream of future
earnings. The asset is worth purchasing if the
value of the future earnings discounted at the
bank's cost of capital exceeds the cost of the
acquisition or in other words the asset has a
positive net present value. 16 If the cost of the
acquisition is greater than the discounted value
of the earnings, then the project has a negative
net present value and is disadvantageous to
existing shareholders. Short-term dilution of
earnings is not harmful to shareholders if the
acquisition promises sufficient earnings in the
future. The relationship of book value to market

'^Banks' cost of capital is a weighted average of the rate paid on new debt and
the market's required rate of return on a new stock issue with the weights
depending on the firm's debt-to-equity ratio.

FEDERAL RESERVE BANK O F ATLANTA

value is irrelevant to the calculation of an
acquisition's net present value. Banking organizations selling below book value are doing so
because they made investment and management
decisions that were mistakes viewed with the
20-20 perspective of hindsight. 17 Banks cannot
erase the effects of bad decisions by refusing to
raise new equity to support desirable interstate
growth. Indeed, bank management only compounds the cost to shareholders of prior mistakes
if it refuses to fund growth that has a positive net
present value.

" T h i s analysis of bank stocks that sell below book value applies to firms
whose stock sells on organized exchanges Because of liquidity problems,
the stock price of banking organizations whose stocks have only a limited
local market may not reflect the firm's true value. Thus a small bank's stock
may sell below book value not because of bad management decisions but
because too few investors know enough about the bank to buy its s t o c k

The other way to increase a bank's capital
given constant return on assets is to cut the
dividend payout ratio. Dividend payout ratios
can be reduced by: cutting dividends or by
maintaining constant dividends while income is
increasing with the bank's size. The reluctance of
bank analysts to suggest that banks could solve
their capital problems by reducing dividends is
not very surprising. Most corporations are very
reluctant to cut their dividends, and those that
do, such as Consolidated Edison, sometimes find
that their stock price drops sharply after the cut.
Often times, however, a company cuts its
dividend while it is experiencing financial difficulty.
A dividend cut by a firm in this setting is taken by
the financial markets as a signal that the company's
management thinks it has serious problems.
Thus, it is not the dividend reduction per se that
causes a firm's stock price to drop, but rather the
indication it provides about future prospects.
Banking managers who reduce dividends to
fund profitable interstate growth are not sending
the market a negative signal. O n the contrary,
such reductions should indicate that management
views a firm's prospects as very favorable. If the
financial markets agree with management, then
a dividend reduction will increase the value of an
organization's stock.
Banking managers w h o believe dividend cuts
will hurt their stock price can consider the less
drastic measure of holding dividends constant
while income increases. This is a slow way for a
firm to increase capital, but it is better than
foregoing profitable investments because of capital limitations.
Banking organizations, then, can increase
equity capital to support profitable interstate
growth and still increase the value of their
outstanding shares. There are, however, several
reasons why capital adequacy guidelines may
slow the growth of profitable interstate banking.
One possibility is that banking organizations
will follow conventional wisdom by refusing to
cut dividends, pay out ratios or sell stock at
prices below book value to support desirable
interstate growth. If this happens and holding
company stock prices do not increase, then
capital adequacy standards will slow the development of interstate banking significantly.
A related reason why interstate growth may be
slowed is that the financial markets may not
agree with bank managers on which interstate
expansions have a positive net present value. No
matter how desirable a banking organization's
management believes interstate
growth is,
54

unless the financial markets agree with management's assessment the firm's stock price will
drop. Therefore, some interstate expansions
may be killed because the markets do not agree
with management's assessments of their desirability.
Another problem that may slow the expansion
of smaller banking organizations is that they may
find the transaction costs of selling new equity so
high that otherwise desirable mergers will become
too expensive. Nelson quotes Harry Keefe, Jr.,
chairman of Keefe, Bruyette and Woods, as
saying, " A b o u t 63 percent of all stocks are
purchased by pension funds, and a company
that can't reach that market is disadvantaged." 18
Keefe went on to point out that few banking
organizations have sufficient trading volume to
justify institutional interest. This disadvantage for
smaller holding companies relative to larger
organizations will be offset partially be their
stronger capital position.
The fourth reason why capital guidelines may
slow interstate banking growth is that they
increase discount rate applied cash flows from
growth. Banks, like all corporations, should
discount their future cash flows by their cost of
funds. Government regulation of capital/asset
ratios increases banks' cost of funds if that
regulation forces banks to hold more capital than
they otherwise would and if equity capital is
more expensive than debt.

Conclusion
Regulatory capital adequacy guidelines can
affect the rate of growth in interstate banking.
Banking organizations that wish to grow must
have sufficient existing capital or they will need
to raise additional capital. While many community
and smaller regional bank holding companies
appear t o have excess capital, the capital
position of larger regional holding companies
and the multinationals seems to be weaker. Low
bank stock prices may inhibit some banking
organizations from selling additional equity to
support growth. Banking organizations' stockholders should be willing to raise sufficient
capital to support interstate growth that has a
positive net present value. Regulatory capital
guidelines may prevent some questionable
interstate expansion, but they should not prevent
expansion of profitable interstate banking.
—Larry D. Wall
'»Nelson, op. cit., p. 47.

MAY 1983, E C O N O M I C R E V I E W '

Technology
and
Interstate
Banking
Interstate electronic banking is
already emerging. In fact, in the near
future virtually all financial institutions
may gain access to networks that
enable them to
deliver services anywhere in the
country.

FEDERAL RESERVE BANK OF ATLANTA

Delivering financial services to customers is
the business of banking. Historically banks have
delivered their services from their main offices
and branches. A customer could gain access to
his account indirectly, using the postal system or
couriers; but transactions could not be processed
and completed until a physical item (check,
deposit, loan application or payment) arrived at
an office of the customers bank. Thus convenient
locations and efficient transportation have been
keys to banks' ability to attract and serve
customers. And legislative restrictions on branching have limited the geographic markets in which
banks could compete.
Today technology is changing the constraints
on the delivery of financial services. Specialpurpose computer terminal devices such as
automated teller machines (ATMs) and point-ofsale (POS) terminals give customers direct
access to their bank accounts from grocery
stores, shopping malls and other nonbranch
locations. Personal computers give customers
access to their accounts from office or home.
Transactions can be processed and completed
through electronic signals that travel along
telephone lines or two-way cables. Today a
customer's bank may be as convenient as his
television set. And banking's need foran efficient
transportation system is being replaced by the
need for efficient data communications.
Technology is reducing the need for branch
offices and is introducing interstate banking for
retail and commercial customers. O n the commercial side, interstate banking is supported by
loan production offices and calling officers. The
support for interstate banking is not clear on the
retail side. Nevertheless, a review of emerging
retail electronic banking services reveals that the
elements of interstate banking for consumers are
being put in place.
In the case of A T M systems, the interstate
connections are already being made. Technological feasibility and economic necessity support
the addition of other services to the communication links already established for ATM systems,
55

reinforcing the trend toward interstate retail
banking. A deterring question is how long the
courts will continue to equate electronic banking
terminals with branch banks. Nevertheless, de
facto interstate retail electronic banking is
already emerging, and it seems likely that
legislation and regulation eventually will confirm
what is already a fact.

Elements of Retail Electronic Banking
Retail electronic banking services today are
somewhat disjointed. The three services that
most financial institutions consider as retail
electronic services are ATMs, POS, and home
banking. 1 Home banking's precursor, telephone
bill paying, is a hybrid that may enable customers
to access their accounts by interfacing directly
with the bank's computer via push-button
telephones, or it may require a bank employee
to act as the interface between the telephone
customer and the bank's computer. ATMs, POS
and home banking services are at different
phases of development. They are not linked
together internally at most banks yet, and the
number of banks that have joined in shared
systems remains small. However, it appears
likely that these three services eventually will be
linked into an electronic delivery system banks
can use to deliver financial services anywhere in
the United States.
ATMs. Automated teller machines primarily
provide exchange services. A T M deposit, withdrawal and transfer capabilities enable customers
to exchange one form of asset for another. For
example, they can exchange deposits in a bank
account for cash. Some A T M systems also enable
customers to make payments to credit card
accounts or loans, and some permit credit card
cash advances. However, ATMs' payment and
credit functions are seldom used. They account
for less than 2 percent of the transactions
conducted on these machines. As of 1982, cash
withdrawals were the most popular type of ATM
transaction (76 percent of transaction volume),
followed by balance inquiries, an information
service delivered via ATMs. 2

POS. Point-of-sale services are not widely
available and the product itself is not clearly
defined. One or more of four services generally
are associated with POS: (1) check authorization/
guarantee, (2) credit authorization, (3) point of
banking, and (4) direct debit.
Check authorization/guarantee and credit
authorization services are self-explanatory. Point
,of banking is the term the banking industry
applies to delivering deposit, withdrawal, transfer,
payment or information services to bank customers
via terminals in retail locations. Usually the
terminal transmits data to the customer's financial institution and receives authorization for the
transaction from that bank. A clerk at the retail
location completes the transaction by accepting
deposits and payments and dispensing cash.
Direct debit represents the POS concept in its
purest form. In a POS system featuring direct
debit, a customer can pay for purchases electronically, using a terminal to authorize his bank to
debit his account and credit the merchant's
account for the purchase price.
The few direct debit POS services available
have w o n little acceptance from consumers.
Most of the service's benefits seem t o flow to
merchants and banks, who favor the concept
because it can reduce operating costs. The
principal benefit to consumers is convenience
and ease of use. (For example, the Iowa Transfer
System's POS pilot service has found that direct
debit transactions are handled even faster than
cash.) Also, consumer record-keeping might be
made easier because of documentation in
periodic statements and terminal receipts. Nevertheless, debit cards must compete with checks
and, in some instances, with credit cards; and
consumers find these traditional payment mechanisms relatively easy and inexpensive to use. It
seems likely that banks and merchants will have
to add incentives such as merchant discounts
before consumers will be converted to this new
payment mode. It is also likely that rising costs of
checking and credit card services will encourage
consumers to try direct debit services if they are
priced lower than the alternatives.
Home Banking. The retail financial service of
the future is home banking, but it is not an

'Direct deposit ot social security and payroll checks and preauthorized
payments made through an automated clearinghouse (ACH) are also
quasi-electronic ways of processing retail account transactions. However,
the company or the government generally initiate these transactions
based on a written authorization from the retail account holder. Since
these are consumer initiated retail electronic banking transactions are not
discussed further in this paper.

U n d a Fenner Zimmer, "ATMs: Time to Fine Tuneand to Plan," Magazine of
Bank Administration, May 1982, p. 21.

MAY 1983, E C O N O M I C R E V I E W '

entirely new idea. The first example of a home
banking service was Seattle First National Bank's
" I n Touch" service, which permitted customers
with push-button telephones t o access the
bank's computer for a variety of services such as
budgeting, an electronic calendar, a calculator
and bill paying. In Touch was a case of too-muchtoo-soon, and the Touch Tone telephone proved
inadequate for delivering the multiple services in
a way that consumers related to well.
The remarkable acceptance of personal computers and the capabilities of videotex technology
have shifted home banking's emphasis away
from the telephone. Delivering banking services
to customers' personal computers or home
terminals offers a wider variety of services, a
greater sense of control, and a simple extension
of the financial management applications already
familiar to personal computer users.
Banks taking leadership positions in the home
banking movement tend to operate as financial
gateways between the home information/transaction systems, in which they may or may not
have an ownership interest, and other financial
institutions. The gateway links a consumer with
his bank. To conduct banking transactions, a
consumer accesses his home information/transaction service from his home terminal and enters
a code indicating he wants to access his bank.
This code links the customer up with the
financial gateway that services his bank, and the
gateway links the consumer with his financial
institution (Figure 1).
Home banking services have tremendous
potential to foster interstate retail electronic
banking. Home information/transaction services
operate nationwide, but they permit customers
to gain access to the systems via a local
telephone call. For example, both Compuserve
and The Source have local access telephone
numbers in hundreds of cities.A consumer
wanting to deal with a bank associated with one
of these services could dial a local n u m b e r t o link
up with his bank's computer regardless of his
location.

The Emergence of Nationwide Shared
ATM Networks.
Automated teller machines are the first of the
retail electronic banking services to achieve
market success. The dismal history of POS
systems suggests they were an idea born too
soon, and home banking is still predominantly in
FEDERAL RESERVE BANK O F ATLANTA

an experiment phase. It took ATMs more than a
decade to catch on with consumers, but now
those machines seem to be leading the way into
an interstate retail electronic banking system.
At the outset, few ATM networks were shared.
Financial institutions sought competitive advantages through their A T M systems, believing
ATMs were capable of shifting market share. As
all major competitors in a marketplace came to
have ATMs, each sought to differentiate its ATM
service and to maintain a unique association
with its particular ATM access card.
Larger financial institutions were usually the
first to offer ATM services, and they put smaller
banks at a competitive disadvantage. Small
banks in some market areas began to develop
shared A T M systems, in which customers of one
bank could use another participating bank's
machines. Most shared ATMs were located in
the main offices and branches of participating
banks, but many state legislatures came t o the
aid of small institutions by implementing mandatory
sharing laws in the name of competitive equality.
As ATMs became more popular among bank
customers, the bankcard associations, VISA and
MasterCard, made their moves. Each association
enabled its members' cardholders to access the
ATMs of all banks participating in their respective
A T M networks.
This prompted a flurry of response in the
banking industry. 3 Large banks feared they
would lose the competitive advantage of proprietary ATM programs if their VISA and MasterCard
customers could go to a competitor's ATMs for
cash withdrawals. Value would be added to the
bank credit cards, but few customers associate
their VISA and MasterCards with a particular
bank.

The ATM Network Debate
The appropriate A T M network structure is an
issue of considerable debate. The organizations
planning to offer national network switches
disagree as to what the banker wants from a
network. Some say exclusivity is primary to a
banker's choice of network. The network operators seem to be trying to find a middle ground
between proprietary and shared ATMs. Cirrus
and Plus, for example, grant exclusive marketing

See "ATM Networks: the Nation & the Southeast," Economic Review,
Federal Reserve Bank of Atlanta January 1983.

Figure 1
Home Banking Transaction Flow

territories to their members. This lets members
limit availability of the shared services by
marketing participation in them to only those
institutions with which they wish to share.
Other bankers and network operators reject
the exclusivity hypothesis. They feel that ATMs
are fast becoming a "generic" service that does
not lend itself to successful exclusive sharing.
The "generic" viewpoint contends that nationwide
servicing soon will be an industry-wide phenomenon, not a major selling item for any single
institution. According to this view, product
differentiation will remain important to consumer
banking but should be carried out in ways other
than exclusive nationwide sharing.
Citibank epitomizes a third point of view.
Citibank has outlined tentative plans for a
proprietary national ATM network, but does not
expect to proceed until banking laws are amended
to allow interstate deposit-taking. Officials at
Citibank see nothing to be gained by participating
in networks today.

The Integration of ATM and POS Systems
Shared ATM networks seem to be contributing
to the resurgence of interest in POS services. On
the surface, this renaissance seems unfounded.
POS systems have a history of failure. Those still
operating cannot be considered resounding
successes. And consumer survey data suggest
that people are at best disinterested and at worst
opposed to direct debit services at the point of
sale. However, when POS is considered from the
perspective of technological feasibility the recent
58

wave of new POS experiments begins to make
sense.
The heart of a POS system is the switch. The
switch is the device that transfers messages
arriving from POS terminals to the appropriate
financial institution or data processor for handling,
and transmits the response back to the terminal
from which the message originated. The heart of
a shared ATM network is also a switch, and it
serves the same function as a POS switch.
Furthermore, a switch can be configured to
receive messages from a wide variety of terminal
devices. Thus a single switch can serve ATMs as
well as POS terminals.
A key attraction of POS services is the number
of transactions they could contribute to a
switching system if the services are successful.
Most transactions an ATM switching system
could expect to handle would be the functional
equivalent of checks written for cash. In 1979
only 8.15 percent of the checks written by
consumers were for cash. In contrast, 32.22
percent of consumers' check were written to pay
for purchasers at the point of sale.4 Clearly, then,
POS services have the potential to generate
considerably more volume than ATM services.
Some shared ATM systems may even require the
additional volume that a successful POS service
could provide to achieve the economies of scale
that will make retail electronic banking cost
effective. In sum, the integration of shared ATM

"Consumer Checking Accounts: Debits, Credits, and Balances, p. 8.

M A Y 1983, E C O N O M I C R E V I E W '

networks and POS systems seems almost inevitable, and nationwide ATM networks presage
nationwide POS.

The Legal Environment for
Retail Electronic Banking

Interstate

While technology makes interstate retail electronic banking feasible, the legal environment is
less favorable. The legal question is whether
ATM and POS terminals are branch banks.
The American Bankers Association has drafted
proposed legislation, d u b b e d the EFT Systems
Act, which may help smooth over the ambiguities
of EFT law. This legislation would follow the
recommendations of the National Commission
on Electronic Fund Transfers (NCEFT) and make
a clear distinction between brick-and-mortar
branches and ATM terminals. It would permit
deposit-taking across state lines in "natural
market areas," defined as either SMSAs or "that
area where a financial institution services current
deposit customers across contiguous state lines."
State laws covering EFT terminal deployment
would be preempted, although states would
have the option to exempt themselves from the
law within three years.
To date, however, the ABA has not been
successful in soliciting congressional interest in
the bill, and the industry is proceeding cautiously
toward interstate retail electronic banking.
In sum, the legal status of A T M and POS
terminals remains hazy. This ambiguity is hindering,
but not halting, the trend toward interstate retail
electronic banking. Financial institutions are
participating in shared ATM networks based on
the Comptrollers distinction between establishing an ATM and using ATMs established by another financial institution. Nevertheless, the ATM
networks are being used for cash-dispensing
purposes only. They are not taking deposits
across state lines. O n e might expect, then, that
interstate POS systems, when established, would
be used for direct debit but not point of banking,
since deposit-taking is part of the point-ofbanking concept.

Conclusion
The elements of an interstate retail electronic
banking system are being put in place. Technological feasibility and economic imperatives are
encouraging efforts to integrate the elements
into a more comprehensive whole. And the hazy
FEDERAL RESERVE BANK OF ATLANTA

legal status of a shared nationwide system is
playing a restraining role. It is general wisdom,
however, that the law moves slowly and tends to
confirm changes that have already occurred.
A change in financial institutions' behavior
regarding retail electronic banking systems suggests that an interstate system will evolve. The
change can be seen in the parallels between
shared ATM network developments and developments in the home banking arena. In both
instances large financial institutions are showing
a willingness to cooperate in establishing systems
they once would have viewed as proprietary
competitive tools.
It also has become apparent that the key
technological element in ATM, POS and home
banking systems is the switch. Eventually all
three services may operate through the same
switch. Even though ATM and POS terminals are
not based on the videotex technology that
underlies today's home banking experiments, a
single switch could be designed to support both
technologies.
It appears that the financial services industry is
coming to see the three elements of retail
electronic banking as a set of similar delivery
mechanisms for services rather than as a set of
services in and of themselves. As the perception
of EFT as a delivery mechanism becomes clearer,
systems will begin to integrate and interconnect.
Nevertheless, it seems unlikely that all of these
networks, pilots and systems will be successful.
It is reasonable to believe that consolidation will
occur among A T M and POS networks and
among home information/transaction systems as
well. Less successful networks and systems
probably will merge with their more successful
counterparts.
What seems likely to emerge over the long run
is a small number of competing ATM, POS and
home banking networks with the capacity to
serve all banks that wish to provide retail
electronic banking services to their customers,
wherever they may be. As all financial institutions
gain access to networks that enable them to
deliver services anywhere in the country, the
branch/terminal issue and the definition of
competitive equality on a state-by-state basis
will become meaningless. De facto interstate
retail electronic banking may then, finally, be
confirmed by law.
—Veronica M. Bennett
and Charles R. Haywood
59

The Canadian Experience
with Nationwide Banking
Throughout Canada's history as a nation Canadian
banks have been permitted, indeed encouraged,
to compete on a nationwide basis. Several massive
multinational banking organizations dominate
the Canadian landscape. Their huge branch networks provide large, stable Canadian banking
operations to which have now been appended
extensive international financial operations. 1
Does the Canadian experience with "interstate"
(or nationwide) banking contain any lessons
which might be useful t o the debate underway in
the United States? The purpose of this paper is to
search out answers to this question. It is important to note that any appreciation of insights,
implications or analogies that might be drawn
must be tempered with an awareness of the
forces that have shaped the Canadian system
and a realization that, as the United States
liberalizes its interstate banking restrictions, it
starts from a very different legal and economic
footing than did Canada

'On December 3, 1981, total Canadian bank assets amounted to $ 3 5 0
billion. Assets of the largest bank. The Royal Bank of Canada at $88 billion
amounted to 25 percent of the total. The six largest banks held, together,
$ 3 3 0 billion or 94 percent of the total. About 40 percent of total banking
system assets were foreign currency assets and the remainder or about
$ 2 0 0 billion were booked in Canadian dollars The dominant relative
position of the large Canadian banks has recently changed dramatically in
terms of numbers of banks if not in asset size. In November 1980 there were

Legal Environment
As might be expected, the evolution of Canada's
banking system has been profoundly influenced
by Canadian banking legislation. In Canada this
means federal legislation. Section 91 of Canada's
Constitution Act of 1867 conferred on the federal
government exclusive power to make laws about
banks and banking. 2 This authority has been
exercised, where privately owned banks are
concerned, by means of the Bank Act. The Bank
Act requires any business wishing to call itself a
bank or describe its business as banking to
incorporate as a bank chartered under the A c t
(Hence the commonly used term "chartered
banks.")
The first Bank Act, passed in 1871, and all
subsequent versions of the Act,3 have empowered
Canadian banks to open branches without restriction on their number or geographical location

eleven Canadian banks operating. By December 1982 the number had
risen to sixty-eight banks of which fifty-seven were foreign banks subsidiaries
This article confines its attention to Canadian owned (or Schedule A) banks
(see Box).
2
Canada, Statutes, Constitution Act 1967. Part VI, Section 91.
3
Unless extended by the Canadian parliament the Bank Act must be revised
or amended every ten years. Bank Act, Part I, Section 6.

Under nationwide banking, Canadian consumers have enjoyed
high quality and a wide variety of bank services while sacrificing
some degree of local specialization. The Canadian system offers
an interesting example of some advantages—and some potential
dangers—of nationwide
banking.

M A Y 1983, E C O N O M I C REVIEW '

(See Box). The rationale for this provision is
unclear. It is consistent with the attempt of the
federal government at the time of Confederation,
in 1867, to pursue policies designed to bind the
far flung regions of Canada together. Branch
banks may have been viewed as facilitating the
economic development of frontier areas as well
as providing a national presence in the form of a
nationally chartered bank. A more cynical approach
might interpret the Bank Act as an example of
successful, self-serving lobbying by branch banks
which existed at that time. 4

Box
Branching: S c h e d u l e A vs. Schedule B Banks
The absence of restrictions on bank branching activities
of Canadian banks was unqualified prior to 1980. In
November 1 9 8 0 a new Bank Act was passed which
created a new class of banks. Previously the names of
all banks incorporated under the Bank Act had been
listed along with pertinent corporate details in Schedule A
of the Bank Act. The 1980 Bank Act permitted the
incorporation of a new type of bank which would be
listed not in Schedule A but rather in another schedule,
Schedule B, of the Act. It is now conventional to
distinguish between "Schedule A" and "Schedule B"
banks.
Whether a new bank incorporated after November
1980 is classed as a Schedule A or B bank depends on
how widely held are its voting shares. If any shareholder
and associates hold or acquire more than ten percent of a
bank's outstanding voting shares it is classed as a
Schedule B b a n k The distinction is crucial since Schedule B banks are restricted in size—to assets not more
than twenty times authorized capital and are limited t o
two offices in Canada, a head office and one branch,
unless additional branches are approved by the Minister
of Finance. De novo banking subsidiaries of foreign
banks are thus Schedule B banks and are subject to
these asset and bank requirements along with other
restrictions which do not apply to Canadian owned
Schedule B banks. Foreign bank subsidiaries incorporated by the conversion of "nonbank" financial businesses operating branches prior to November 1 9 8 0 are
permitted to continue to operate those b r a n c h e s New
branches must, however, be approved.

Evolution of Large Scale Banks
Regardless, the effect was t o permit banks to
exploit banking opportunities by marketingtheir
services on an unrestricted intra- and interprovincial basis. The observed consequence was
the rapid development of a highly concentrated
branch banking system. Table 1 shows how the
number of banks and branches in Canada have
changed since 1870.
Not all federally incorporated banks operate
national branch banking systems. Of the eleven
banks that existed in 1980, the five smaller
institutions are specialized in the geographical
market or product lines they offer, thereby carving
o u t t h e i r o w n " n i c h e " relative to the larger banks.
Three of the five concentrate their activities in
western Canada and one in Q u e b e c All have
been incorporated since the 1950s.
The six largest existing banks all have corporate
histories which go back to the 1870s or before.
They have evolved through a continuing process
of progressively extending their size and geographic reach by expanding their network of
branches through acquisition of competing banks
with competing branches or by setting up new
branches as the geographic frontiers of the national
market expanded. For instance, between 1913
and 1930 twelve bank mergers took place while
the number of branches skyrocketed.
The high degree of concentration in Canadian
banking may also be attributable in part to
provisions in the several Bank Acts other than
those permitting mergers and unfettered branching.
Orr, and Dean and Schwindt, in separate studies

*R. Craig Mclvor (1961), Chapter IV. Mclvor's analysis of various versions of
the Bank Act suggests the government was very responsive to suggestions
by banks for amendments to the A c t More recently, Stewart has argued the

FEDERAL RESERVE BANK O F ATLANTA

In contrast, Schedule A banks, which include all
banks operating as of November 1 9 8 0 and new banks
with widely held shares, are subjected by the Bank Act
to no restrictions on asset size or branching activities.
The government's policy with respect to approval of
applications for new branches by Schedule B banks is
not known at this time.

of competition and concentration in the Canadian
banking system came to the conclusion that the
low rate of entry may be related as well to
cumbersome incorporation procedures and requirements. 5
Whatever the barriers to entry are, if they exist
and impinge on incentives t o establish new
banks, existing banks will try to pick up any
unsatisfied demand for banking services by substituting a branch in the appropriate location. In
fact, branches in Canada were often set up in
locations which might not offer sufficient incentive to induce a new bank to enter the market-

Canadian banks were effectively the designers of the early Bank Acts.
Stewart (1982). See especially pp. 48-51.
Orr, 1974, p. 97; Dean and Schwindt, 1976, p. 29.

Table 1 . End of Year Data

1870
1890
1910
1930
1950
1970
1980

Number of
Operating
Banks

Number of
Branches

Thousands of
People per
Branch

34
41
28
11
10
9
11

123
426
2,367
4,083
3,679
6,199
7,414

28.9
11.3
3.0
2.5
3.7
3.5
3.3

Sources: Neufeld, EP., T h e Financial System of Canada, Macmillan
1972. Tables 4:1 and 4:7; C.B.A, Bank Directory of Canada,
1981; Statistics Canada Canadian Statistical Review, January
1983, Table 1.

place. Many branches were not immediately
profitable.
Generally speaking, a new branch is expected
to start earning a profit within three to five years
and will not be opened unless there are good
reasons to believe that this will be accomplished.
If a branch shows persistent losses in spite of
skillful management and vigorous efforts at business development, it will be closed. 6
The enthusiasm of Canadian banks for branches
as a method of competition (and, presumably,
Canadian residents for bank services at convenient
locations) has resulted in a very high ratio of
branches to population. The United States, with
roughly ten times Canada's population and five
times the number of bank branches, has a branch
density per capita of about one half Canada's.7
An interesting possible consequence of being
so "heavily branched" has been the slow injection
of ATMs into the banking system. In 1982, the
density of ATMs per capita in Canada was about
one third that of the United States.8 This is
evidently interpreted by Canadian banking people
as evidence that Canadians are being well served
by traditional branch bankingsystemsand hence
there is less incentive to speed ease of access to
bank services by way of automated systems.9 An
alternative rationale could be that banks are
reluctant to speed the obsolescence of their
huge investment in branches and associated

Canadian Bankers' Association, 1963, p.83.
'Branching may be carried to excess. See, for example, Lawrence White,
"Price Regulation and Quality Rivalry in a Profit Maximizing Model,"
Journal of Money, Credit, and Banking February 1976, p. 97.

systems of delivering banking services, at least
until it is clear the public can be educated to
accept lower branch densities in the future.
•

Nonbank Deposit Institutions—The
Competition

The banks are not without major domestic
sources of competition in Canada As we previously
noted, institutions other than banks are not
permitted to referto themselves as banks ortheir »»
business as banking. But the Bank Act fails to
define what constitutes a bank or banking from a
functional point of view. Thus, in Canada many
businesses do provide banking services. They
simply refrain from calling themselves banks or ,
advertising their activities as involving banking.
This state of affairs has encouraged many
organizations, especially trust companies and
credit unions, to offer banking-type financial
services to the general public. These include
personal and mortgage loans, checkable and
non-checkable savings deposits, credit card devices and so forth, offered in direct competition
with the banks. The relative importance of these
nonbank deposit institutions is suggested by
their considerable aggregate size. At the end of
1981 the total assets of trust and mortgage loan
companies amounted to $65 billion, and those %
of credit unions—$33 billion or close to $100
billion together. 10 This was very close to one half '
of the Canadian dollar total assets of the chartered
banks of $202 billion. However none of the
nonbank deposit institutions are nearly as large J
as the major banks.
Just as the banks branch within and among the
provinces, so do these competing institutions. >
Table 2 shows the provincial distribution of
branches of banks, trust companies, and local 3
credit unions.
Nonbank deposit institutions may be incor- •
porated at either the federal level or by a province ,
Though the Constitution Act gave the federal
government authority over banks, Section 92 of g
the same Act gave provincial governments the
power to incorporate businesses with "provincial ^
objects." So, depending upon whether a trust
company or a consumer or mortgage loan company,
for example, intends to operate mainly with a

"Sinclair (1982), p. 7
9
1 bid.
Bank of Canada Review, February 1983, Tables 39, 40 and 7. Canadian
banks are not permitted to offer trust services.

M A Y 1983, E C O N O M I C REVIEW '

4.
i

view to the national market, as opposed t o the
provincial market, it would incorporate under
federal rather than provincial legislation, respectively. 11
In terms of jurisdiction of incorporation these
options lead to complex patterns of competition
within a particular province. For example, in
Ontario, at the end of 1980, the several hundred
trust company branches indicated by Table 2
were operated by twenty trust companies incorporated in Ontario, fifteen trust companies incorporated in other provinces but registered for
operation in Ontario, and twenty-three federally
incorporated trust companies. Functionally speaking, the regulation of banking in Canada is a jurisdictional swamp.

Geographical Uniformity of
Price and Product

to appeal to the prairie provinces could not, for
example, imply the bank has more to offer the
population of those provinces than other regions
of Canada.
Moreover, whether the criticisms are valid or
not, Canadian banks are often perceived as
insensitive to the needs of particular types of
bank customers. A recent study observed that,
while not a problem for most small businessmen,
there is evidence that suggests Canadian bankers
are generally less well trained, and have less
experience and familiarity with the small businessman's situation than in many other countries.
This situation arises partly because of differences in bank structures in the various countries,
with Canada's commercial banking industry representing an extreme case of large, far-flung
branch banking organizations, which has certain
implications for staff development. For example,
such a structure creates a demand to recruit and
develop generalists, who are equipped to provide
a broad range of services in any type of geographic
or economic environment. 1 2
One aspect of Canadian banking stands out as
being a clear and uniform benefit to all Canadians
partly because banks operate nationwide. It is
the check clearing system. Almost a century ago,
in 1891, the Canadian Bankers' Association (C.B.A),
of which all banks were members, was given
authority to operate clearing houses to handle
payments instruments (mostly checks) moving
among the banks. Only banks were members of
the C.B.A.13 Over the years an extraordinarily
effective and convenient set of check processing
practices and standards evolved which, in recent
years, has meant for bank customers same day
credit for deposited checks along with twenty
four hour check clearing on a nationwide basis.
This is particularly remarkable in the light of the
number of checks being processed—nearly 1.6
billion in 1981. 14

Canadian households and business firms w h o
patronize the banks are faced with a geographical
standardization or uniformity in the costs, qualities
and types of banking services. Within each of the
major banks, rates of interest on deposits and
loans and service charges and fees are set by the
head office and are the same whether you are
banking at a branch in Halifax or Vancouver—
4,000 miles apart.
The high degree of uniformity is not simply
designed by the head office to reduce the cost of
delivering bank services throughout the country.
Canadians are highly mobile and normally can
be expected to continue banking at the same
bank as they move for whatever reason about
the country. Thus it is good business for a
nationwide branch bank to develop strong product loyalty among its customers. The battle for
market share has new dimensions in the absence
of geographical restrictions on delivering bank
services.
Standardization can also pose a variety of
problems for large branch banks. Where the
opportunity exists it may be costly or simply not
feasible to differentiate their product by geographic location. An advertising campaign geared

Because Canada's banking system is so uniform
and highly integrated geographically, there is no
possibility of achieving provincial or regional
differences in monetary policy using the general

" O f course the specific requirements of the legislation will be different in the
federal than in the provincial legislation and could influence the jurisdiction
under which a company chooses to incorporate. Local credit unions having
by definition local (or intra-provincial) purposes are incorporated or"certified"
under provincial legislation. The national association of provincial credit
union associations (the Canadian Cooperative Credit Society Limited) is
incorporated under federal legislation.
,2
Canadian Federation of Independent Business (1982), p. 49.
' 3 ln November 1980 the Act incorporating the Canadian Bankers' Association
was amended to remove responsibility for the clearings system from under

the wing of the Bankers' Association. Simultaneously new legislation
setting up the Canadian Payments Association was enacted. The Canadian
Payments Association will henceforth oversee the future evolution of the
payments system in Canada Under the earlier check clearing system,
payments instruments of nonbank institutions were accepted on a fee for
service basis. Under the Canadian Payments Association, which began
operating in January 1983, banks, who must belong, and nonbank deposit
institutions who choose to join, participate as full partners in the operation
and administration of the check clearing system.
'"Sinclair, ibid., p. 3.

FEDERAL RESERVE BANK O F ATLANTA

Table 2. Provincial Distribution of Branches of Banks,
Trust Companies and Local Credit Unions
(End of 1981)
Trust
Credit
Banks Unions Companif
Province
Newfoundland
Prince Edward Island
Nova Scotia
New Brunswick
Quebec
Ontario
Manitoba
Saskatchewan
Alberta*
British Columbia
Yukon
Northwest Territories

154
33
250
181
1,455
2,849
360
394
811
862
13
16

22
13
123
133
1,843
1,157
228
343
291
296

Canada

7,378

4,449

14
7
47
22
137
599
34
49
125
122

—

1,156

•Data for Alberta do not include 113 branches of the Province of Alberta
Treasury Branches. A unique provincial government institution formed
in 1939, it is equivalent to a state bank and competes with the major
banks within Alberta with a full range of banking services.
Source: Statistics Canada Financial Institutions, Third Quarter 1982,
January 1983, p. xxx

instruments of policy. 15 This is, from time to time,
a sensitive policy issue given the considerable
differentials that have historically existed in provincial and regional economic performance and
well being.

Nationwide Utilization of Funds
Canada's national banks facilitate efficiency
in the use of financial resources within Canada 16
The overall capacity of the banking system to
support deposits and to provide credit is roughly
set by the Bank of Canada, but the distribution
of these deposits and loans across the country
depends primarily on the needs of bank customers. The whole national deposit base of
each bank is available at standardized terms
and conditions to borrowers regardless of their
geographical location. The federal government

' 6 One obvious advantage t o nationwide banking is inefficiencies in cost
management associated with the handling of interregional deposit transfers
Many transfers that might give rise to liquid asset adjustment in a
geographically restricted system can be handled as an internal bank bookkeeping entry in the Canadian system. It is not clear, however, that these
efficiencies may not be realized with a less concentrated system than that
in Canada.
'"At the same time because of the small number of banks that operated in

was correct over a century ago to view nationwide banks as a method of promoting the
economic development of a nation.
However, this approach to the role of the .
banks works best if people in the various
provinces and regions are able to perceive, for
example, some advantage to having loans evaluated on the basis of a bank's national standards
of credit worthiness rather than on terms and
conditions especially designed to encourage
loan expansion in their particular area In Canada
there has been persistent concern that what
might be in the best interest of the nation is not
necessarily in the best interest of a given
province or region.
The latest evidence of this type of concern
took place in the early 1970s. The governments
of the western provinces, especially British 4
Columbia, asserted that the activities of the
national banks were deleterious to the economic health of the region. They claimed these
banks were draining funds from their provinces
for use in central Canada. The attendant debate
showed that the assertion could not be supported by bank provincial deposit and loan
data. But more than that it was apparent that
there were (and no doubt continue to be)
misconceptions about how branch banks influence geographical flows of funds. 17 In particular, it is not sufficiently appreciated that
banks themselves initiate very little m o v e m e n t 1
in funds among their branches. Instead, individual, local, provincial and regional deposit
and loan ratios should be interpreted as representing the complex result of a multitude of
factors related to supply and demand conditions
encountered by the branches. 18

Nationwide Banking—A Good Idea
for Canada
The policy of not imposing geographical
restrictions on the domestic activities of Canadian
banks has had certain unattractive consequences.
Most striking is the potential that exists for a
g o v e r n m e n t - c o n d o n e d lack of c o m p e t i t i o n

Canada, for many years moral suasion was often used by the monetary
authorities to influence the behavior of the banks Examples include the
imposition of a secondary or liquid asset reserve requirement in 1956 and
of ceilings on certain term deposit rates in 1972.
'Benson (1978). pp 57-76.
"For a detailed discussion of the effect of banks on the interregional
movement of funds see Galbraith (1963), pp. 165-214

MAY 1983, E C O N O M I C REVIEW '

among the banks coupled with the possibility
that resource costs due to high branch densities
are unnecessarily high. One's concern cannot
help but be compounded by such considerations
as the fact that banks are not covered under
Canadian anti-combines legislation and that,
until 1967, the banks were not prohibited from
making inter-bank agreements on interest rate
levels and service charges. Nor does the literature on economies of scale make one sanguine
that the cost advantages accruing to a $60
billion bank are likely to be significantly greater
than those enjoyed by each of four $15 billion
banks. That these sorts of concerns might be
justified was the tenor of a 1976 study by the
Economic Council of Canada, in one of the
more careful recent analyses of the profitability
of Canadian banks, which concluded:
There is little doubt that present bank
legislation gives rise to costs t o Canadian
customers. While these costs are in part a
transfer from users of bank services to government and bank shareholders, the waste component of the costs may not be negligible.
The higher prices charged for financial services
will necessarily cause households and firms
to fill their needs for these services by
inferior methods. Thus there is a case for
increasing the incentives to greater efficiency
and for reducing operating costs and prices
in Canadian banking. 19

These disquieting aspects of Canadian banking
must, however, be weighed against a variety of
benefits that appear t o accrue to the major
banks. Nationwide banking permits the achievement of a degree of diversification of risk,
geographical and otherwise, and a stability of
operation that enable Canadian banks to compete successfully on a worldwide basis.
Perhaps a more important issue than the
adequacy of the present or past structure of the
banking system concerns whether it will serve
Canadians well in the future. The 1980 Bank Act
opened up the legislative door to Canadian
banking more than in the past. The trend in
Canadian banking is towards a more competitive
environment. Coupled with the already high
quality and variety of banking services available,
nationwide banking will, I think, become increasingly easy to support as time goes by.
For the United States the challenge is to
pursue those benefits that interstate banking is
likely to yield while protecting itself from undesirable levels of concentration in the banking
system. The Canadian experience suggests this
might best be achieved through legislative changes
that encourage competition within, as well as
across, state lines. Those institutions capable of
offering products or services more nicely tailored
to suit local, state or regional tastes should have
the freedom to compete on an equal basis with
those banks that choose to offer a standardized
product op a wider geographical basis.
—John N. Benson

"Economic Council (1976), p. 47. A more recent but less well executed study
came to the conclusion that bank profits in 1981 were consistent with those
of a reasonably competitive and efficient banking system. See Senate
Committee on Finance Trade and Economic Affairs, 1976.

University ot Cuelph

REFERENCES
Bank Act, 1980
Benson, J.N. Provincial Government Banks: A Case Study of Regional
Response to National Institutions. The Fraser Institute, 1978.

Ministry of Consumer and Commercial Relations, Ontario, Loan and Trust
Companies. Report of the Registrar, Business of 1980.

Canadian Bankers' Association. Submissions to the Royal Commission
on Banking and Finance. Supplement to The Canadian Banker, Spring,
1963.

Neufeld, EP. The Financial System of Canada. Macmillan, 1972.

Canadian Federation of Independent Business, Banking and Small
Business: A Comparative Study of Canada and Other Industrialized
Countries - A Summary. 1982.
Dean, J.W. and Schwindt R- "Bank Act Review in Canada: Past and
Potential Effects on Market Structure and Competitioa" Banca Nazionale
Del Lavoro, Vol. XXIV, No. 116, March, 1 9 7 6 , pp. 19-49.
Economic Council of Canada. Efficiency and Regulation: A Study of
Deposit Institutions. Supply and Services, Canada, 1976.
Galbraith, J.A Canadian Banking. The Ryerson Press, Toronto, 1970.
Mclvor, R.C. Canadian Monetary, Banking and Fiscal Development.
Macmilllan, Toronto, Canada, 1961.

FEDERAL RESERVE BANK O F ATLANTA

Orr, D. "The Economic Determinants of Entry Into Canadian Banking:
1963-7," Canadian Journal of Economics. Vol. VII, No. 1, February,
1974, pp. 82-99.
Royal Commission on Banking and Finance. Final Report. 1964.
Royal Commission on Corporate Concentration, Report. 1975.
Sinclair, H.K. "Automation in Canadian Banking—Where We Are, Where
We're Going." paper presented at Canadian Payments System Conference, October 31 to November 3, 1982, Toronto, Ontario.
Standing Committee on Finance, Trade and Economic Affairs. House of
Commons, Bank Profits. July 1982.
Stewart, W. Towers of Gold - Feet of Clay. Collins, Toronto, 1982.

v Trade Groups Choose Sides
Regulation in the banking industry focuses on
three specific goals: (1) to ensure stability in
financial markets; (2) to prevent undue concentration of market power; and (3) to guard against
sharp or unfair dealing. 1 The McFadden Act and
the Douglas A m e n d m e n t were intended at least
in part to address these aims. The prohibitions on
interstate banking were based on the belief that
restricting the geographic scope of banking
organizations would ensure sound and competitive
banking practices. McFadden and Douglas served
to erect a "fence" around each state, protecting
banks within its boundaries from the rigors of
outside competition. By locking competitors out,
Congress sought to assure a large number of
relatively small banks, thus ensuring a competitive
market environment.
Competitive conditions in financial markets
have changed considerably since McFadden
and Douglas. Although the issues involved in the
interstate banking debate are roughly the same,
the market realities of the day are not. The
relaxation of interstate restrictions on branching
and interstate banking have become controversial

'Charles F. Haywood, "Regulation, Structure and Technological Change in
the Consumer Financial Services Industry." The Costs and Benefits of
Public Regulation of Consumer Financial Services, (Cambridge: Abt
Associates, Inc., 1979).

issues with bankers. Some say that the existing
regulatory framework is outmoded. Many are
also concerned with the deregulation of product
lines to place all financial institutions on an equal
footing. Can regulations that restrict only some
of our financial institutions serve their intended
purpose in a rapidly changing financial world?
This article briefly outlines how several banking
industry groups have positioned themselves on
the interstate debate.
Some within the banking industry believe that
product deregulation alone will produce parity
with the nonbank institutions. Competing with
the money market funds, Sears Roebuck, and
other financial service companies, they believe,
depends on the array of financial products they
may offer, and not necessarily on the ability to
accept deposits across state lines. The new
product offerings made possible through deregulation would not be limited by state boundaries
and, hence, would place banks on more equal
footing with other types of financial service
suppliers.
Supervision is another critical issue in the
interstate banking scenario. If federal legislation liberalizes McFadden or Douglas, some
observers worry, state banking agencies could
see their authority preempted. A state supervisory agency tempers the scope of privilege
granted by federal law to the particular needs
of its state. Therefore, some regulators and

Banking industry interest groups will have a substantial influence on the
evolution of legislation regarding interstate banking. The major trade groups
often disagree, but their positions apparently overlap enough to point
toward
some sort of
compromise.

M A Y 1983, E C O N O M I C REVIEW '

some of the regulated are likely to oppose any
modifications to the existing legal framework
that would lessen the states' ability to regulatetheir own financial marketplace.
There is considerable concern over excessive
concentration of financial resources. Many feel
that, in the absence of the protection afforded
by McFadden and Douglas, small banks would
face unfair competition from large out-of-state
banks. Some charge that a large money center
or regional bank might not be concerned with
their community and that its development
would suffer as a result. In this view, the local
banker who is more attuned to the community's
credit needs would be more likely to make the
kinds of loans required.
Conversely, others within the banking industry
view the fence not as restraining outside competitors but as restraining the geographic scope of
their own activities. Those desiring to expand
their playing field view McFadden as a regulatory
straitjacket restraining their ability to compete.
Those who favor unrestricted branching reject
the anti-competitive argument and reason that
large interstate banks that are unresponsive to
the needs of a local community will not attract
customers and, hence, will not be a real competitive force within the market. Consequently, an
unresponsive large bank is destined to be
unsuccessful. An interstate bank that succeeds
by responding t o local needs would be creating
more competition—not less. These voices would
argue that the well managed community bank is
in no danger of suffering substantial deposit and
loan loss to large interstate banks. An efficiently
operated bank that has been serving a community
for years and is knowledgeable about its credit
needs will easily maintain an adequate customer
base.
Those in favor of relaxing geographic restrictions
assert that a certain amount of consolidation in
the industry is desirable. Banks that are operating
inefficiently will come under increased competitive pressure t o improve efficiency or leave the
industry. Competition is purported to be in the
public interest, promoting efficiency and assuring
the lowest cost of goods and services t o the
consumer.
Opinion on interstate banking is as varied as it
is abundant. The positions of interest groups
whose constituencies would be affected by a
move to interstate banking vary, predictably,
according to what constituents expect to lose or
gain. To pinpoint the key issues, this article
FEDERAL RESERVE BANK OF ATLANTA

reviews the policy stands of some of the most
influential lobbying groups in the financial
services industry.

American Bankers Association
Perhaps the most influential of the bank
lobbies is the American Bankers Association. The
ABA has about 13,600 banks and trust companies
in its membership, accounting for 91 percent of
all commercial banks in the United States. The
ABA's situation is rather sensitive when it comes
to policy because of the composition of its
membership. The association serves small and
large banks alike. Conflicts are frequent, encouraging compromise.
Although a powerful voice for the banking
industry, the ABA has not taken a firm position on
interstate banking to date. It has long supported
McFadden and Douglas and probably will
continue t o do so. The ABA came out in favor of

"An interstate bank that succeeds by
responding to local needs would be creating
more competition—not
less."

the Regulators Bill, which provided for interstate
acquisitions in emergencies. It supported measures
which first would exhaust all intrastate possibilities,
and then would explore those in contiguous
states before going nationwide in search of a
purchaser.
The ABA's general position is that deregulation
of products and services represents a first step
toward an improved banking environment.
Relaxation of geographic restrictions may then
be indicated.

Independent
America

Bankers Association

The Independent Bankers Association of
America is a bank lobby with a less general
membership than the ABA. The IBAA's membership consists of about 7,300 small and medium
sized banks. One of the I BAA's stated purposes is
to oppose concentration of banking credit
powers in chains, branch systems, or holding
67

company combines of banks. As w e might
expect, this goal has led the I BAA to oppose
interstate banking.
In 1980, the I BAA favored legislation to
prohibit the takeover of nonbank depository
institutions by banks or bank holding companies
except when a troubled institution is involved.
Failure to limit the power to acquire nonbank
institutions would, according to I BAA, result in a
potentially uncontrollable consolidation movement. The association also expressed fear that
allowing banks to acquire S&Ls would undermine
state branching laws, because banks would
capitalize on the broad branching powers granted
S&Ls and circumvent state laws.
Following the release of the Carter report,
"Geographic Restrictions on Commercial Banking
in the United States," the I BAA came out against
any of the recommended modifications of
McFadden and Douglas. Any such changes, the
I BAA argued, would lead to a "substantial"
increase in banking concentration, giving a vast
amount of economic power to fewer and fewer
banks. Centralization of decision-making over
banking would also increase, interfering with the
states' role in managing their own banking affairs.
The I BAA supports the role of state banking
authorities in supervising the financial system.
According to the I BAA, policies geared to local
needs can be produced only at the state level.
The I BAA asserts that small banks can survive
and profit in a turbulent financial marketplace
unless that marketplace is weighted against
them. The McFadden Act and the Douglas
Amendment, according to the association, represent "fundamental safeguards of the nation's
decentralized network of independent unit
banks." It is the IBAA's contention that changes
in the interstate banking laws would hurt the
nation's depository institutions and the small
communities served by them.

Association of Bank Holding Companies
The Association of Bank HoldingCompanies is
comprised of 1 79 holding companies registered
with the Federal Reserve Board under the Bank
Holding Company Act of 1956. The position of
ABHC on interstate banking is reflected rather
concisely in a draft bill referred to as the
"Regional Banking Deregulation A c t " This proposal
would amend the Douglas A m e n d m e n t to
permit a bank holding company to acquire other
bank holding companies in contiguous states.
68

Proponents claim this piece of legislation represents the best solution to the interstate banking
question for several reasons:
(1) A gradual approach to interstate banking
would allow all banks to develop their banking
skills before competing nationwide.
(2) Identifying market areas in terms of state
boundaries w o u l d provide clearly defined
markets.
(3) The contiguous state approach would
allow banks to expand within a region having
similar financial needs, permitting bankers to
do full service business in their "natural"
market areas.
Specifically, the bill calls for gradual relaxation
of restrictions on bank holding company acquisitions across state lines, subject to certain
safeguards.2 First, mergers would be allowed
only between bank holding companies, protecting
banks that do not desire holding company
affiliation from forced acquiescence. Second,
acquisitions would be permitted only into states
contiguous to the acquiring company's home
state. Moving the head office into another state
would be prohibited under the act, eliminating
the fear of "leap-frogging" into still other states.
Finally, the ABHC bill would limit the number of
acquisitions for the first five years. Holding
companies over $500 million in assets would be
allowed only one merger per state. Companies
smaller than $500 million, on the other hand,
would not be restricted in the number of holding
companies they could acquire.
The ABHC argues that this approach would
fulfill the objectives of the Carter study on
interstate banking, while at the same time
protecting the integrity of the dual banking
system and guarding against undue concentration
of banking credit power. Community bankers
would be safe under this plan. By resisting bank
holding company affiliation, they would be
protected from acquisition by an out-of-state
holding company. As far as any new competitive
threat is concerned, the community banker
would remain safe because de novo entry is
prohibited under the ABHC proposal. State bank
supervisors could also rest easy because the
"Regional Banking Deregulation Act" would
preserve the state supervisor's regulatory authority.
A bank affiliated with a holding company would

Special Report Commercial Banking Review: Geographic Expansion."
from United States Banker, March 1981.

MAY 1983, E C O N O M I C REVIEW '

.
>

•

remain a state bank after acquisition by an outof-state holding company, and would remain
subject to laws of the state in which it is
located.

Conference of State Bank Supervisors
The Conference of State Bank Supervisors
serves state officials responsible for the supervision
of state-chartered banks. The CSBS defines as its
goal the maintenance of a strong, decentralized
dual banking system and improvement in the
efficiency and effectiveness of state banking
departments. In the CSBS's view, the McFadden
Act and the Douglas Amendment are fundamental
safeguards of statefederal checks and balances.
The important issue in the interstate banking
debate, according to the CSBS, is not whether
banking services may be offered on an interstate
basis; interstate banking services are already
available. What concerns the CSBS is preemption
of a state's authority to determine w h o may
operate within its boundaries and to what
extent. Dismantling the present legal framework
would jeopardize the state banking department's
control in banking matters, the group fears, and
result in undue concentration of financial resources.
This, in turn, would restrict competition. Michael
Edwards, chairman and president of the CSBS,
has said that " i n the name of progress (the
deregulators) would turn the clock back to 1929
and in the process tell us to forget the current
structure with its tremendous versatility and
flexibility." 3

^'Interview with Lawrence Kreider, executive VP-economist and Michael
Edwards, president, of the Conference of State Bank Supervisors,"
United Sates Banker, September 1982.

The CSBS believes the states—not the federal
government—are the vehicles for orderly, effective
change. State banking departments work to
provide o p t i m u m financial services while preserving individual economic freedom, the association argues. Changes in laws protecting the
state's role in banking matters ultimately would
corrupt the financial system, it says, and result in
an excessively concentrated banking industry
operating to the detriment of many states. The
CSBS asserts that interstate services will expand
without changes in current laws and that,
therefore, such changes are unwarranted.

Conclusion
Debate over interstate banking will continue.
Whether we have full-scale nationwide branching,
regional branching, or w e simply continue under
the same guidelines will be determined in part
by the political strength of opposing interest
groups. The power and influence of these groups
will be tested. However, the n u m b e r o f opposing
viewpoints assures us that every proposal will be
thoroughly contested before emerging as a
finished piece of legislation. Indeed, the very
existence of these groups helps ensure that a
compromise acceptable to all parties is achieved.
The process of congressional debate—with
input from all of these groups—serves the best
interest of the banking industry as well as the
nation.
—Charles R. Haywood
'Since this article was written, both I B M and CSBS have adopted
positions favoring expanded bank and bank holding company powers
and development of reciprocal services arrangements, while maintaining
their commitments to state determination in banking matters (see U. S.
Banker, March 1983). Though not an endorsement of the ABHC Bill
discussed above, this development does, perhaps, indicate a trend
toward agreement on the fundamental issues

REFERENCES
Information about the positions of these groups was taken from a variety of sources. The documents consulted are listed below:
Independent Bankers Association of America
IBAA statement before the Senate Committee on Banking, Housing and
Urban Affairs concerning major banking and consumer protection laws,
May 6, 1981; Oral statement by Robert McCormick, former president,
before the House Subcommittee on Financial Institutions, Regulation,
and Insurance regarding the Gam-Regan Bill, September 22, 1982;
Remarks by Kenneth Guenther, executive director, before the Independent Bankers Division of the Tennessee Bankers Association, May 11,
1982; Statement of IBAA before the Subcommitee on Monopolies of the
House Committee on the judiciary concerning the structure of the
financial services industry, July 8, 1981.
Association of Bank Holding Companies
"Special Report Commercial Banking Review: Geographic Expansion,"
from United States Banker, March 1981; "Interstate Banking: The Contiguous State Approach," Background Paper-Association of Reserve

FEDERAL RESERVE BANK O F ATLANTA

City Bankers, July 1981; "Deregulating Interstate Banking: ABHC Cites
Strong Support from Members," American Banker, March 6, 1981.
Conference of State Bank Supervisors
"Interview with Lawrence Kreider, executive VP-economist and Michael
Edwards, president, CSBS," United States Banker, September 1981;
"Interstate Banking: Salvation or Suicide?" The Supervisor, November
1980; Press releases of CSBS, 1981-1982.
American Bankers Association
Testimony of Llewellyn Jenkins on behalf of ABA on S.1720 and S.1721
before the Senate Committee on Banking, Housing and Urban Affairs,
October 20, 1981; Testimony of Lee E. Gunderson on behalf of ABA on
S.2532 and S.2532 before the Senate Committee on Banking, Housing
and Urban Affairs, May 27, 1982.

Conclusion
A wave of market forces, including the trend
toward financial conglomerates, the success of
the money market mutual funds, and the crisis
in the thrift industry, has increased interest in
the question of interstate banking. Should we
allow interstate banking? What type of interstate
banking should be allowed? Should we change
the Douglas Amendment or the McFadden
Act? If the prohibitions are removed, how
quickly will interstate banking occur and what
form will it take? How disruptive is it likely to be
moving from a market structure mandated by
geographic prohibitions to a structure free of
these prohibitions? What are the potential
private and public benefits and costs associated
with such freedom? This special issue of the
Review addressed a number of these questions
in an attempt to further understanding of the
issues. What, then, may we conclude?
First, w e found that the largest bank holding
companies have already established a sizable
interstate presence through nonbank subsidiaries.
Many of the holding companies are headquartered in the Northeast and have established
interstate offices, mainly in high growth and
densely populated states. These same states
attractive for nonbank entry will prove to be
the most attractive areas for interstate banking
should the prohibition be lifted.
Given what these large holding companies
have already obtained, they appear to have
little incentive to establish vast nationwide
interstate systems of acquired banks seeking
to attract relatively marginal accounts. This will
become increasingly true as banks come under
competitive pressure to pay market rates for
these accounts. Given these factors, interstate
banking is likely to proceed slowly and to be
concentrated geographically if the prohibitions
are removed.
Market forces have propelled us into an
interstate financial world. Many financial services
are currently available on an interstate basis
and new financial sevices that know no geographic restrictions are being developed almost
daily. As has occurred in the past with most
major banking legislation, market forces are
necessitating legislative change.
70

Finding the right bridge to an interstate banking
system will be complex. A number of advantages
are associated with allowing interstate banking
through the branching route or through the
establishment of banks. And further, there are
advantages and disadvantages to be considered
in allowing de novo expansion or expansion
through acquisition. The specific approach to
interstate banking must also find a way to deal
with interstate financial services that have developed or will develop even without legislative
changes.

Interstate Tide Will Be Slow

Even without legislative mandates, the development of interstate banking systems most
likely will be slow. As we have seen, banks
enjoy no great cost advantages as they increase
in size. Therefore, potential cost savings will
not be a driving force behind interstate expansion. Empirical research also indicates no substantial scope economies in banking. These
t w o elements imply that smaller local banks
have relatively little to fear from larger interstate
competitors in terms of cost disadvantages.
Interstate banking will not spell the end of
such local banks. As long as these banks are
providing services consumers desire they will
remain in the marketplace. They may not be
able to offer all the services provided by an
interstate system but as the Canadian experience indicates, there is a good deal of potential
for them to remain competitive by offering
customized banking services.
On another front, it was shown that the way
we regulate bank capital will also tend to slow
the development of interstate banking systems.
While many community and smaller regional
banking organizations have excess capital under ;
current guidelines, the capital positions of '
larger regional holding companies and the
multinationals seem to be weaker. Interstate \
expansion by the largest banking organizations
may be somewhat restrained by capital considerations, but the medium and small sized '
banks are in a better position to meet the
capital guidelines. The smaller organizations, ,1
then, not only have a reason to expand interstate .
but they also have the capacity to do so.
The market's assessment of interstate bank- ,
ing's potential profitability is important because it
will affect the cost of raising new equity capital •
to support interstate expansion. As we have i

MAY 1983, E C O N O M I C REVIEW '

seen, there is little reason to believe that interstate organizations will be substantially more
profitable than noninterstate organizations. Quite
the contrary, nationwide brick-and-mortar facilities established to collect marginal accounts at
money market rates may in fact reduce profits,
limiting an organization's ability to expand.
The form and pace of interstate banking also
will be influenced by technological considerations. It was shown that the elements of an
, interstate retail electronic banking system are
already in place. However, even on this front
the hazy legal status of shared nationwide

systems and apparent consumer
will slow its development.

The Canadian experience demonstrates that
interstate branching may assist in movement of
funds and convenient access to funds and
standardized financial services for large customer
groups. Something may be lost, however, in
terms of an interstate system's ability to respond
or relate t o small localized consumers. The
Canadian example is instructive, but the interstate
system that develops in this country will not
mirror the Canadian system. W e have already
developed many relatively small institutions;
there is little compelling reason to believe they
will disappear.
Another certainty is that banking lobby groups
will ensure that all aspects of the interstate
question receive serious review by legislators.
This is as it should be. A sound and competitively
viable banking industry will be ensured only if
all aspects of the issue receive adequate review.
A wave of market pressures will force legislative
review of the interstate banking issue. These
include the phaseout of Regulation Q, introduction of mandatory reserve requirements on
all financial institutions holding transaction
balances, the ability of banks and thrifts to offer
new accounts paying money market rates,
states individually passing reciprocal agreements to allow entry by out-of-state banking
organizations, and the perceived increase in
t competitive pressures from nonbanks. Another
wave of developments favorable to interstate
banking involves troubled institutions. This
wave includes the Board of Governors' decision
to allow bank holding companies t o acquire
S&Ls across state lines, the Federal Home Loan
Bank Board's
to allow S&Ls to acquire
FEDERAL
RESERVE decision
BANK OF ATLANTA
troubled associations across state lines, and
the Garn-St Germain Act's emergency provisions

(

reluctance

allowing interstate acquisition of troubled thrifts
and banks.

Shaping A New Structure
Some form of interstate banking is inevitable; in
fact, it is occurring today as states indivdually
pass reciprocal agreements. The major issue no
longer revolves around the question of whether
or not to move to interstate banking; the major
issue is how to move to a banking structure
freed of geographic constraints.
A major concern of legislators will be the
market consequences of removing interstate
prohibitions. Will removal of the prohibitions
substantially increase the concentration of financial resources. The net effect of this increase,
however, is likely to be marginal.
As we have seen, even though current antitrust
laws would do little to prohibit market extension
mergers, the largest banking organizations will
face both regulatory and market imposed constraints on their ability to expand their interstate presence. Removing interstate prohibitions
would result in a rather slow evolution toward a
new market structure. This slow evolution will
help ensure that a number of interstate organizations will develop not only from the ranks of
the money center organizations but also from
the ranks of medium and large regionals that
have both the capacity and desire to expand
interstate.
At the same time, no compelling reason was
uncovered to suggest that small banks would
be at a competitive disadvantage in local markets.
From the standpoint of concentration of financial
resources or maintenance of competitive markets, there appears to be little to fear from
removal of the interstate prohibition.
Should we remove the McFadden or Douglas
prohibitions, or perhaps both? Our research
found no serious or substantial economic reasons
to prefer removing one over the other. Establishing an interstate system of banks, however,
would result in fewer regulatory changes both
at the state and federal level and would not
upset our dual banking system to the extent a
branching network would. Therefore, changes
in the Douglas Amendment to allow interstate
banking would seem to be the path of least
resistance.

mirosm^Äii

FINANCE
MAR
1983

FEB
1983

MAR
1982

1,240,595
291,502
72,783
304,296
603,376
53,467
4,582
43,467
138,482
34,463
9,677
33,311
64,197
5,056
370
4,304

1,232,245
291,797
69,797
277,655
622,246
52,089
4,312
42,746
136,837
34,088
9,355
30,115
66,009
4,979
363
4,248

1,107,194
286,559
54,553
148,043
647,252
43,101
2,772
37,668
119,831
34,318
7,169
14,711
67,072
4,225
289
3,621

-ommercia
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings 3c Time

14,740
3,516
875
2,816
7,986
855
71
729

14,571
3,527
836
2,583
8,032
852
69
723

Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings 3c Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts

47,790
12,490
4,116
14,943
17,189
2,285
198
1,804
19,569
6,179
1,275
4,303
8,714
959
37
862

46,681
12,127
4,012
13,438
17,924
2,247
193
1,787
19,532
6,184
1,251
4,097
8,840
934
39
836

13,511
3,420
622
1,523
8,389
734
56
625
39,637
12,362
3,164
6,352
18,681
1,925
162
1,523
16,352
5,837
1,010
1,578
8,893
778
25
720

Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts

24,190
5,843
1,294
4,477
13,077
163
13
154

24,114
5,874
1,240
4,094
13,322
162
12
153

Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts

11,144
2,327
750
2,026
6,302
N.A.
N.A.
N.A.

11,034
2,346
715
1,734
6,473
N.A.
N.A.
N.A.

$ millions
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings 3c Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings 3c Time

Snuincrs k

Timp

Sfivirws iV T i m e

Sflvino1«; .V T i m p

21,605
6,194
977
2,394
12,716
115
9
107
10,002
2,362
536
734
6,635
N.A.
N.A.
N.A.

ANN.

MAR
1983

CHG.
+ 12
+ 2
+ 33
+106
- 7
+ 24
+ 65
+ 15

Savings 3c Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments

+ 1
+ 30
+135
- 8
+ 19
+ 22
+ 18
+ 20
+ 6
+ 26
+173
- 2
+ 23
+ 48
+ 20
+
+
+
+
+
+

12
6
32
87
3
42
44

+ 44

+ 11
- 1
+ 40
+176
- 5

Savings 3c Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
Savings 3c Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
savings a Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
savings & Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
savings ac Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments

FEB
1983

MAR
1982

579,479 570,029 524,289
8,666
16,145 15,351
174,981 156,897 91,807
424,393
400,379
391,346
JAN
JAN
DEC
472,795 473,656 508,349
18,859 17,964 15,073

ANN.
%
CHG.
+
+
+
+

11
86
91
8
7
25
9
95
93
7

84,096
2,772
22,614
59,453

82,694
2,634
19,850
60,813

77,150
1,424
11,707
64,037

66,177
3.165

66,984
2,979

75,574
3,340

4,592
202
690
3,768
JAN
3,625
76

4,564
178
649
3,784
DEC
3,685
47

4,412
74
571
3,791
JAN
3,979
49

51,050
1,881
15,407
34,156
JAN
38,710
2,394

50,188
1,787
13,503
35,181
DEC
39,268
2,346

46,917
998
7,868
37,958
JAN
46,672
2,906

10,416
268
2,373
7,928
JAN
8,481
286

10,256
250
2,158
8,018
DEC
8,641
190

9,657
146
1,166
8,380

9,333
124

+ 8
+ 84
+104
- 5
- 9
+131

8,655
179
2,148
6,402

7,577
88
1,208
6,298
JAN

+ 14
+103
+ 78
+ 2

7,338
234

8,430
172
1,841
6,470
DEC
7,394
210

7,180
207

+ 2
+ 13

2,525
69
485
1,999
JAN
2,028
22

2,508
86
417
2,028
DEC
2,033
21

2,382
40
221
2,136
JAN
2,199
15

+ 6
+ 72
+119
- 6
- 8
+ 47

JAN

DEC

+
+
+
-

JAN

12
5

+ 4
+173
+ 21
- 1
- 9
+ 55
+
+
+
-

9
88
96
10
17
18

21,049 20,905 18,724 + 12
Commercial Bank Deposits
6,858
6,748
6,205 + 11
4,143 - 1
4,108
4,030
Demand
161
78 +122
173
1,367
1,301
860 + 59
NOW
1,282
673 +125
1,511
4,169
2,130 +123
4,746
Savings
5,332
5,474
- 5
5,200
11,758
10,929 11,418
- 7
Time
JAN
JAN
DEC
794
784
673 + 18
Credit Union Deposits
6,211 - 3
5,995
5,963
37 + 38
51
50
Share Drafts
153
165
39 +292
749
646 + 17
Savings 3c Time
755
Notes: All deposit data are extracted from the Federal Reserve Report of Transaction Accounts, other Deposits and Vault Cash (FR2900),
are! are reported for the average of the week ending the 1st Wednesday of the month. This data, reported by institutions with
over $15 million in deposits as of December 31, 1979, represents 95% of deposits in the six state area. The major differences betwei
this report and the "call report" are size, the treatment of interbank deposits, and the treatment of float. The data generated from
the Report of Transaction Accounts is for banks over $15 million in deposits as of December 31, 1979. The total deposit data gener*,
from the Report of Transaction Accounts eliminates interbank deposits by reporting the net of deposits "due to" and "due from" othj*
depository institutions. The Report of Transaction Accounts subtracts cash in process of collection from demand deposits, while the*

report does not Savings and loan mortgage data are from the Federal Home Loan Bank Board Selected Balance Sheet Data. The
http://fraser.stlouisfed.org/
Southeast data represent the total of the six states. Subcategories were chosen on a selective basis and do not add to totaL
72
N.A.Bank
= fewer
four institutions reporting.
Federal Reserve
of St.than
Louis
>

EMPLOYMENT

Civilian Labor force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $

FEB
1983

JAN
1983

FEB
1982

109,647
97,265
12,382
10.4
N.A.
N.A.
38.7
339

109,779
97,262
12,517
10.4
N.A.
N.A.
39.2
341

108,324
97,946
10,378
8.8
N.A.
N.A.
39.2
327

ANN.

FEB
1983

CHG.
+ 1
- 1
+19
- 1
+4

Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. Com. & Pub. Util.

Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $

Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ire., <5c Real Est.
Trans. Com. & Pub. Util.

Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., <5c Real Est.
Trans. Com. & Pub. Util.

Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insired Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $

4,783
4,285
499

Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. Com. & Pub. Util.

10.2

N.A.
N.A.
40.2
292

+ 1
+ 7
+ 2

I'iV :li an Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insured Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
Civilian Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insired Unempl. Rate - %
Mfg. Avg. Wkly. Hours
Mfg^vgMVklyjEarn. - $

Inn Labor Force - thous.
Total Employed - thous.
Total Unemployed - thous.
Unemployment Rate - % SA
Insured Unemployment - thous.
Insired Unempl. Rate - 96
Mfg. Avg. Wkly. Hours
Mfg. Avg. Wkly. Earn. - $
Notes:

1,038
925
113
9.6
N.A.
N.A.
38.8
247

+ 0

87,700
18,067
3,389
20,029
15,970
19,004
5,358
4,887

JAN
1983
87,719
18,035
3,536
20,285
15,727
18,872
5,352
4,899

FEB
1982

ANN.
%

CHG.

89,413
19,299
3,559
20,258
16,085
18,696
5,285
5,051

11,319
2,126

608
2,705
2,141
2,259
649
687

3,818
463
237
1,031
630
933
281

232

Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., <5c Real Est.
Trans. Com. & Pub. Util.
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. Com. & Pub. Util.
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Irs., & Real Est.
Trans. Com. & Pub. Util.

Nonfarrn^Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
Trans. Com. & Pub. Util.
All labor force data are from Bureau of Labor Statistics reports supplied by state agencies.
Only the unemployment rate data are seasonally adjusted.
The Southeast data represent the total of the six states.
The annual percent change calculation is based on the most recent data over prior year.

FEDERAL RESERVE B A N K O F A T L A N T A

CONSTRUCTION
ANN

JAN
1983

FEB
1982

Nonresidential Building Permits - $ MiL
44,869
Total Nonresidential
4,999
Industrial Bldgs.
Offices
11,867
Stores
5,228
Hospitals
1,580
Schools
781

45,193
4,967
11,924
5,241
1,746
785

51,662
7,042
14,929
6,163
1,674
796

13
29
21
15
6
2

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL

Nonresidential Building Permits - $ MiL
6,487
Total Nonresidential
Industrial Bldgs.
677
Offices
1,430
Stores
968
Hospitals
345
Schools
105

6,526
727
1,405
947
341
108

6,626
798
1,356
1,070
288
82

+
+
+

2
15
5
10
20
28

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL

Nonresidential Building Permits - $ MiL
Total Nonresidential
371
46
Industrial Bldgs.
Offices
72
Stores
61
Hospitals
30
Schools
5

394
62
73
64
36
5

434
75
55
55
37
6

+
+
-

15
39
31
11
19
17

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL

Nonresidential Building Permits - $ Mil.
Total Nonresidential
3,307
Industrial Bldgs.
380
Offices
708
Stores
519
Hospitals
178
Schools
21

3,296
388
687
509
176
21

3,334
367
572
617
150
20

+
+
+
+

1
4
24
16
19
5

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ Mil.

Nonresidential Building Permits - $ MiL
Total Nonresidential
980
Industrial Bldgs.
134
Offices
227
Stores
84
Hospitals
25
Schools
13

989
138
227
85
25
15

1,065
190
258
121
34
30

8
29
12
31
26
57

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL

Nonresidential Building Permits - $ MiL
Total Nonresidential
1,066
Industrial Bldgs.
63
Offices
310
Stores
165
Hospitals
62
Schools
52

1,030
83
308
155
54
51

903
91
304
128
42
19

+ 18
- 31
+ 2
+ 29
+ 48
+174

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ Mil.

Nonresidential Building Permits - $ MiL
Total Nonresidential
161
Industrial Bldgs.
13
Offices
14
Stores
39
Hospitals
5
Schools
5

163
14
15
39
5
5

175
18
44
34
6
1

- 8
- 28
- 68
+ 15
- 17
+400

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL

Nonresidential Building Permits - $ MiL
Total Nonresidential
601
Industrial Bldgs.
41
Offices
100
Stores
100
Hospitals
44
Schools
9

656
41
95
95
44
11

715
57
123
116
19
6

- 16
- 28
- 19
- 14
+132
+ 50

Residential Building Permits
Value - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
Total Building Permits
Value - $ MiL

FEB
1983

JAN
1983

FEB
1983

CHG

ANN

FEB
1982

CHG

12-month Cumulative Rate
42,812

41,118

38,554

584.3
480.3
87,681

561.1
460.8

528.5
395.7

+
+

11
21

86,312

90,216

7,529

7,282

7,700

121.6
91.1
14,016

116.6
87.8
13,809

109.6
94.2
14,326

260

248

5.5
4.3

5.2
4.2

273
4.9
5.1

631

642

707

4,350

4,223

5,293

62.6
53.0

59.8
50.8

64.7
66.9

7,658

7,518

8,628

1,500

1,440

1,025

29.0
14.9

27.8
14.4

20.2
8.5

+
+

44
75

2,480

2,429

2,089

708

686

582

12.0
9.5

11.8
9.0

9.7
7.5

+
+

24
27

1,774

1,716

1,485

193

191

146

3.8
2.2

3.7
2.2

3.1
1.7

+
+

23
29

354

353

321

517

495

381

8.6
7.2

8.2
7.2

+
+

26
60

1,118

1,151

6.8
4.5
1,096

3
-

+
-

2
11
3
2
5
12
16
11

18
3
21
11

NOTES:
Data supplied by the U. S. Bureau of the Census, Housing Units Authorized By Building Permits and Public Contracts, C- 40.
Nonresidential data excludes the cost of construction for publicly owned buildings. The southeast data represent the total of
the six states. The annual percent change calculation is based on the most recent month over prior year. Publication of F. W.
Dodge construction contracts has been discontinued.

http://fraser.stlouisfed.org/
74
Federal Reserve Bank of St. Louis

M A Y 1983, E C O N O M I C

REVIEW

GENERAL

Personal income
($bil. - SAAR)
Taxable Sales - $biL
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
($bil. - SAAR)
Taxable Sales - $ biL
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
Personal Income
($bil. - SAAR)
Taxable Sales - $ biL
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967=100
Kilowatt Hours - mils.
Personal Income
($bil. - SAAR)
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index Nov. 1977 = 100
Kilowatt Hours - mils.
Personal Income
($bil. - SAAR)
Taxable Sales - $ bil.
Plane Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index 1967 = 100
Kilowatt Hours - mils.
Personal Income
($bil. - SAAR)
Taxable Sales - $ biL
- P l a n e Pass. Arr. 000's
Petroleum Prod, (thous.)
Consumer Price Index
1967 = 100
KOowat^lours - mils.

ANN.

LATEST CURR. PREV.
DATA PERIOD PERIOD

YEAR
AGO

MAR

2,584.9
N.A.
N.A.
8,729.1

2,541.5
N.A.
N.A.
8,654.1

2,447.6
N.A.
N.A.
8,687.8

+ 0

MAR
NOV

293.4
160.5

293.2
163.4

283.1
162.1

+4
- 1

3Q
JAN
MAR

307.4
N.A.
4,354.9
1,400.0
N.A.
25.0

301.8
N.A.
3,763.6
1,397.0
N.A.
27.6

289.3
N.A.
3,901.1
1,392.9
N.A.
24.9

+ 6

33.8
23.8
93.7
56.0
N.A.
3.4

33.6
23.0
98.0
54.0
N.A.
3.6

32.8
22.4
94.3
55.4
N.A.
3.5

114.3
67.9
2,369.1
65.0
MAR
159.0
6.8

111.3
67.7
2,253.8
65.0
JAN
157.9
8.1

105.5
67.2
1,999.3
80.5
MAR
155.1
6.9

+ 8
+ 1
+18
-20

53.3
40.2
1,474.2
N.A.
FEB
295.1
3.8

52.5
39.4
1,568.9
N.A.
DEC
296.1
4.2

50.6
39.1
1,406.1
N.A.
FEB
279.8
3.7

+ 5
+ 3
+ 5

44.4
N.A.
262.6
1,191.0
N.A.
4.3

43.7
N.A.
247.7
1,190.0
N.A.
5.0

41.8
N.A.
248.5
1,163.0
N.A.
4.1

NOV
3Q
DEC
JAN
MAR
NOV
3Q
MAR
JAN
MAR
Miami
NOV
3Q
4Q
JAN
Atlanta
FEB
NOV
3Q
JAN
MAR
NOV

MAR
1983

CHG.
+ 6

+12
+ 0
+ 0
+
+
+

3
6
1
1

- 3

+ 3
- 1

+ 5
* «
3

+
+

6
2

FEB (R)
1983

MAR
1982

ANN.
%

CHG.

Agriculture
Prices Ree'd by Farmers
Index (1977=100)
133
Broiler Placements (thous.) 84,834
Calf Prices ($ per cwt.)
68.70
Broiler Prices (<t per lb.)
25.4
Soybean Prices ($ per bu.)
5.63
Broiler Feed Cost ($ npr tnn) 210

132
81,638
66.50
27.7
5.66
2f|fi

133
82,723
62.10
26.9
5.88
207

0
+ 3
+11
- 6
- 4
+ i

Agriculture
Prices Rec'd by Farmers
Index (1977=100)
119
Broiler Placements (thous.) 32,526
Calf Prices ($ per cwt.)
67.59
Broiler Prices (<t per lb.)
24.8
Soybean Prices ($ per bu.)
5.75
Broiler Feed Cost ($ per ton) 200

120
31,405
63.25
26.9
5.79
195

117
31,463
58.80
26.0
6.20
205

+ 2
+ 3
+15
- 5
- 7
- 2

Agriculture
Farm Cash Receipts - $ mil.
(Dates: JAN, JAN)
158
Broiler Placements (thous.) 10,718
Calf Prices ($ per cwt.)
66.80
Broiler Prices (« per lb.)
24.0
Soybean Prices ($ per bu.)
5.69
Broiler Feed Cost ($ per ton) 215

10,341
62.50
27.0
5.71
210

158
10,497
57.60
25.0
6.12
225

0
+2
+16
- 4
- 7
- 4

1,965
65.60
27.0
5.71
215

538
1,979
61.20
26.0
6.12
225

- 3
+ 0
+17
- 8
- 7
- 4

224
13,223
63.70
24.5
5.51
250

12,727
59.10
26.5
5.74
255

205
12,546
56.10
25.6
6.07
250

+ 9
+ 5
+14
- 4
- 9

204
N.A.
66.00
26.0
5.81
250

N.A.
63.30
28.0
5.87
255

219
N.A.
60.10
27.5
6.34
250

- 7

Agriculture
Farm Cash Receipts - $ mil.
(Dates: JAN, JAN)
Broiler Placements (thous.)
Calf Prices ($ per cwt.)
Broiler Prices (i per lb.)
Soybean Prices ($ per bu.)
Broiler Feed Cost ($ per ton)
Agriculture
Farm Cash Receipts - $ mil.
(Dates: JAN, JAN)
Broiler Placements (thous.)
Calf Prices ($ per cwt.)
Broiler Prices (t per lb.)
Soybean Prices ($ per bu.)
Broüer Feed Cost ($ per ton)
Agriculture
Farm Cash Receipts - $ mil.
(Dates: JAN, JAN)
Broiler Placements (thous.)
Calf Prices ($ per cwt.)
Broiler Prices (i per lb.)
Soybean Prices ($ per bu.)
Broiler Feed Cost ($ per ton)

524
1,983
71.30
24.0
5.69

+ 10
- 5
- 8
0

+ 5
Personal Income
Agriculture
($bil. - SAAR)
19.9
3Q
19.7
19.0
+ 5
Farm Cash Receipts - $ mil.
Taxable Sales - $ bil.
N.A.
N.A.
N.A.
(Dates: JAN, JAN)
280
216
+30
Plane Pass. Arr. 000's JAN
28.9
29.0
27.9
+4
Broiler Placements (thous.)
6,603
6,371
6,441
+3
Petroleum Prod, (thous MAR
88.0
88.0
94.0
- 7
Calf
Prices
($
per
cwt.)
68.20
64.70
61.20
+11
Consumer Price Index
Broiler Prices ($ per lb.)
26.5
27.0
28.0
- 5
1967 = 100
N.A.
N.A.
N.A.
Soybean
Prices
($
per
bu.)
5.74
5.79
6.20
- 7
Kilowatt Hours - mils. NOV
1.7
1.1
1.6
+ 6
Broiler Feed Cost ($ per ton) 169
170
195
-13
'ersonal Income
Agriculture
($bil. - SAAR)
3Q
41.7
41.0
39.6
+5
Farm Cash Receipts - $ mil.
Taxable Sales - $ bil.
JAN
29.2
28.7
27.5
+ 6
(Dates: JAN, JAN)
192
166
+16
Plane Pass. Arr. 000's JAN
126.3
128.8
124.9
+1
Broiler
Placements (thous.)
N.A.
N.A.
N.A.
Petroleum Prod, (thous.) FEB
N.A.
N.A.
N.A.
Calf
Prices
($
per
cwt.)
67.90
63.20
56.40
+20
Consumer Price Index
Broiler Prices (« per lb.)
24.0
26.5
24.5
- 2
1967 = 100
N.A.
N.A.
N.A.
Soybean Prices ($ per bu.)
5.89
5.79
6.18
- 5
Kilowatt Hours - mils. NOV
5.0
4.9
5.1
- 2
Broiler Feed Cost ($ per ton) 191
184
210
- 9
Notes:
Personal Income data supplied by U. S. Department of Commerce. Taxable Sales are reported as a 12-month cumulative totaL Plane
Wo JFT
?.
collected from 26 airports. Petroleum Production data supplied by U. S. Bureau of Mines. Consumer Price
P . <k , supplied by Bureau of Labor Statistics. Agriculture data supplied by U. S. Department of Agriculture. Farm Cash
receipts data are reported as cumulative for the calendar year through the month shown. Broiler placements are an average weekly
™t !
® f
^ p r e s e n t the total of the six states. N.A. = not available. The annual percent change calculation is based
on most recent data over prior year. R = revised.
e n

A r r l v

l s

r e

S o u

(

t h

d a t a

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