View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

on delivery
30 A.M., E.S.T.
ril 24, 1985

Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Subcommittee on Financial Institutions, Supervision, and Regulation
of the
Committee on Banking, Finance and Urban Affairs




House of Representatives

April 24, 1985

I appreciate the opportunity to appear before this
Subcommittee to review with you the issues involved in interstate and regional banking.

These issues are inextricably

related to the "nonbank bank" question we discussed last weekf
and to the still broader question of the appropriate direction
and structure of our banking system.
In sum, the Federal Reserve Board believes the time
has come for Congressf as part of more comprehensive banking
legislation, to authorize some interstate banking.

The

approach should take account of the desirability of transitional
arrangements over a period of years before moving to more
general interstate banking; the need to avoid undue concentration
of banking resources and to maintain a climate in which small
institutions can flourish; and the desirability of retaining a
role for states in the evolution of the banking structure within
a state.




- 2 -

The basic Federal branch banking law, the McFadden
Act of 1927, has not been amended in any substantive manner
since 1933.

The law effectively prohibits national banks from

branching interstate by limiting each national bank to branching
only within its home state, subject within that state to any
branching restrictions imposed by that state on state-chartered
banks*

The Douglas amendment to the Bank Holding Company Act

of 1956 prohibits interstate expansion by means of a bank
holding company acquiring banks in another state unless
such acquisitions are explicitly authorized by that state.
In spite of the statutory McFadden and Douglas prohibitions, de facto there has been a large and increasing
amount of interstate banking in recent years.

Some of that

has taken place through avenues specifically permitted by law.
According to a study by the Federal Reserve Bank of
Atlanta, U. S. bank holding companies in 1982 had 202 loan
production offices and 143 internationally oriented Edge Act




- 3 Corporations operating outside the parent's home state; foreign
banking organizations had another 254 banking offices outside
their home state.

There are probably more today.

More

important are the variety of finance companies, mortgage
companies, industrial banks and other offices with at least
partial banking capabilities operated interstate by bank
holding companies.

The Atlanta study counted some 5f500 such

offices operating outside the holding company's home state
and many more exist now.
Technological advances are also providing large
opportunities for banks to expand geographically without brick
and mortar offices.

By joining ATM networksf banks in some

cases have been able to reach out to existing or new customers
over state lines.

Looking ahead, banking through home computers

would be difficult to confine within a state's boundary.

But

even without exotic technology, the relative speed and simplicity
of communications and transportation today makes it much
easier, particularly on the deposit side, to conduct banking




- 4 at a distance.

Large businesses routinely "sweep" deposits

into "concentration accounts" at selected banks.

The combinations

of print and broadcast advertising, 800 number telephone lines,
deposit brokerage, and efficient clearing mechanisms mean that
the day of rather insulated local deposit markets are gone.
On the loan side, nationwide credit cards are available to
customers throughout the country.
The substantial number of "nonbank bank" applications
by bank holding companies, stretching the fabric of existing law,
is one indication of the strength and depth of some banks'
desires to operate over a wider geographic area.

The pressures

toward interstate operations arise from a number of sources.
Competition from non-depository businesses that can and do
provide financial services —
and other bank-like services —
is strong and pervasive.

including money market accounts
through interstate networks

Thrift institutions, which have no

statutory bar to interstate branching, offer interstate facilities
in a significant number of cases.




Moreover, banks in slower

- 5 -

growing areas naturally want to participate in more rapidly
expanding regions,

Florida alone, for instance, has attracted

about 20 percent of all nonbank bank applications by bank
holding companies.
A number of relatively large banks that nevertheless
rank well below the largest money center institutions in size
apparently feel, with some urgency, that a stronger competitive
position in national and international markets requires a
larger size than can reasonably be attained within the boundaries
of a single state.

Some of the largest banks, conversely,

urgently wish to attain a wider and more stable base of "retail"
deposits and to expand their consumer lending.

At the other

end of the spectrum, there are small banks concerned about
their ability to compete effectively without being able to
combine with others in a natural market area that may extend
over state boundaries.




- 6 Resistance to interstate banking for a variety of
reasons —

including a desire of many banks to continue as

independent institutions —

clearly remains strong.

But the

pressures for change are apparent in initiatives by a number
of states toward more interstate banking.

The growing number

of regional interstate banking arrangements is the most
important reflection of that change in attitude.

Today 14

states have enacted laws permitting reciprocal entry by bank
affiliates of bank holding companies headquartered in states
within a designated region; 12 more states are actively
considering such arrangements.

Four states allow entry from

any other state, three without and one with reciprocity.
These liberalized approaches toward interstate banking over
recent years suggest a significant change in thinking since
the MacFadden Act and the Douglas amendment were enacted.*
Substantive Issues in Interstate Banking
Against this background, the Federal Reserve Board
believes the time has come to review and clarify national

*Attach6d ar6 a Chairt showing interstate banking regions and
a table listing the status of interstate banking legislation
in the 50 states and the District of Columbia.



policy toward interstate banking, recognizing the economic
and competitive pressures driving toward liberalization of
present restrictions, while also protecting the safety and
efficiency of the banking system, preventing undue concentration
of economic resources, and assuring benefits to the users of
banking services.
One continuing objective of public policy is to assure
competition in banking, as in other industries.

Ordinarily,

we would not expect that competition would be promoted by
confining an industry to a single geographic market or a
single state.

Indeed, we rely on the ability of additional

firms to enter markets as a competitive force leading to the
best possible products at least cost.

Moreover, existing

anti-trust law appears to provide considerable protection
against local markets becoming non-competitive as the result
of entry of larger organizations.
Available empirical studies do not suggest that large
states with large banks and statewide branching are experiencing




- 8 -

increasing concentration of local markets.

The presumption

that restrictions on entry into particular markets imply some
loss of competitive vigor, unless overridden by other considerations of public policy, suggests that some liberalization of
interstate banking is appropriate.

That presumption has added

force in an environment in which other large financial service
firms are able to operate nationwide, exploiting what economies
of scale in technology or marketing may be available.

In

effect, those firms may now be in a position to skim off
profitable areas of business from banks committed to providing
a full range of banking services.
Historically, a counter-argument to interstate banking
has been a strong antipathy to concentration of economic power,
particularly in the banking system, and a desire to maintain
banking resources in significant measure under control of local
banks, knowledgeable about the needs and circumstances of smaller
businesses and individuals.




_ 9 —
Experience in states with large banks and statewide
branching suggests that these are not questions of "either-or.fl
Attachments I and II provide a brief analysis of experience in
two of our largest states, one of which has had statewide
branching for decades and the other of which has permitted
statewide operations only since 1976.

In both cases, large

numbers of relatively small independent banks remain.

In

California/ a rapidly growing statef new banks are being
formed in relatively large numbers? in New York, a state that
is growing more slowly, relatively few new banks have been
formed, but the number of small independent banks (i.e.,
under $100 million) has dropped only modestly since statewide
branching was permitted.

In both states, the competitive

environment appears healthy, with the consumer and businessman
able to choose between some of the largest banking institutions
in the world and small locally oriented banks.

Should banks

be permitted to expand interstate more freely, we would
anticipate similar patterns to prevail.




- 10 -

We are aware that a rush to expand geographically
could pose certain risks —

temptations to pay exceptionally

high prices and to leverage capital, to spread management
thin, and to enter into new types of lending or operations
where experience may be limited.

We believe these risks can

be dealt with through normal supervisory processes, particularly
in evaluating financial and managerial factors with respect
to applications.

In particular, we believe that a banking

organization planning sizable expansion programs should be
able to demonstrate its ability to maintain fully adequate
capital and liquidity positions, to avoid excessive use of good
will on its balance sheet, and to provide capable management
for acquired institutions.
connection, that the risks —

I would also emphasize, in this
actual and potential —

from

expansion into new banking markets are typically more identifiable, and often less, than those posed by entry into new




- 11 nonbanking activities where bank management may have little
or no experience.
Concentration
Viewed from a national perspective, restrictions on
interstate banking have been effective in forestalling large
concentrations of domestic banking resources, at least by the
standards of other countries.

The 10 largest banking organiza-

tions control only about 20 percent of all domestic banking
assets, and the 100 largest only a little more than half.
Presumably, concentration ratios would tend to rise
with interstate banking, quite significantly so if such
activity is unrestricted.

At the same time, the California

and New York experience I referred to earlier suggests the
process would stop very far short of the concentration of
institutions common in other countries.

We would anticipate

thousands of independent organizations remaining.
Nevertheless, we believe that a variety of safeguards
should be included in legislation liberalizing interstate banking




- 12 to encourage continuing diversification of banking resources.
Taken alone, anti-trust laws -- focused on the market shares
of competitors in particular markets —
responsive to that need.

do not appear fully

Essentially, those laws as applied

to banking make little distinction between the overall size
of organizations competing in particular markets, but rather
focus on the size of their presence in a single market alone.
Consequently, those laws might be consistent with considerably
greater concentration, measured on a national or regional
basis, than would be desirable.
Two kinds of limitations, in our judgment, might be
taken to forestall any substantial risk of excessive concentration.

The approaches are not mutually exclusive and would be

complementary.

Both would, at the margin, involve essentially

arbitrary judgments, for they would envisage a simple quantitative
measure of relative size.

But, by responding directly and

logically to the concerns about concentration, I believe they
would provide a mere coherent approach than the present "system"




- 13 -

of implicitly relying on an almost total prohibition on
interstate acquisition as an indirect means of controlling
concentration levels.
The first approach would envisage limitations on the
largest banking institutions acquiring other banks.

For

instance, the very largest holding companies in terms of
domestic banking assets (or depository institution assets)
say the top twenty-five —
with each other.

—

might be prohibited from merging

In addition, banks could be prohibited from

obtaining through acquisition more than some fixed share of
the nationwide total of such assets, although de novo or
relatively small acquisitions in other states could be permitted.
The second approach would permit, or even encourage,
states to set limitations on the proportion of banking assets
(or depository institution assets) within their own borders that
could be acquired through acquisitions or mergers of institutions
of significant size.




Specifically, such acquisitions could be

- 14 denied if the resultant institution would hold more than, for
example, 15 or 20 percent of a state's banking assets.

Any

such rule should be nondiscriminatory between in-state and
out-of-state banking organizations.
Of coursef rules implementing these approaches
would have to be carefully drawn to avoid anomalous results.
The important point is that the national and state-wide
concentration limits be fully observed.
We would strongly suggest exceptions to these limitations be permitted for failing institutions.

Indeed, in

light of the remaining strains evident in some sectors of
the thrift and banking industries, we would propose that the
emergency arrangements for failing institutions in the GarnSt Germain Act be extended.
ways:




They should be liberalized in two

by not requiring that an institution actually be "closed1

- 15 -

to qualify for emergency treatmentf and by reducing or eliminating the $500 million size cut-off in the Act.

The Dual Banking System
Interstate banking, by its nature, has implications
for the dual banking system*

Indeed, it is difficult to

conceive of a system of interstate branching that would enable
state law and supervision to govern the operations of banks in
sister states.

Consequently9 interstate branching could well

lead to a massive expansion of the national banking system.
If interstate banking operations are instead generally
confined to separately incorporated and chartered components
of a holding companyr particular states could maintain authority
over the in-state operations of the holding company.

Moreover,

there would be opportunity for a greater degree of local control,
For those reasons, a requirement that interstate acquisitions
generally take the form of a holding company affiliate appears
to fit more naturally our banking traditions, at least over




- 16 -

a long transitional period to a fully developed interstate
banking environment.
A Possible Policy Approach
Various approaches toward interstate banking have
been proposed over the years, ranging from modest changes in
existing arrangements to nationwide branching.

For instance,

possible transitional approaches well short of nationwide
banking include:
1)

Branching throughout metropolitan areas that
extend across state lines, of which there are
35 at present.

2)

Expansion into contiguous states.

3)

Expansion de novo or by acquisition, into any
metropolitan area above a minimum size.

4)




Encouragement of reciprocal arrangements among
states.

- 17 -

5)

Interstate banking limited to de novo operations
or small acquisitions (conversely, some have
proposed limiting or prohibiting small acquisitions
in the interest of maintaining local banks).

6)

Regional arrangements.
Each of those approaches (and any others that could

be developed) has particular strengths and weaknesses; each
could be debated.

However, much of the recent thinking in

states, and within the banking community, has focused largely
on the last of those options —

regional arrangements.

As a

consequence, we believe it useful to focus on that approach
as a point of departure.
An advantage of regional arrangements seen by many
is the opportunity for regional organizations to reach a size
necessary for an effective national or international presence,
and then to become more effective competitors of the largest
banking institutions in all phases of banking.




- 18 ~
However, the approach suffers from some clear weaknesses.

The regions may be defined in a discriminatory way f

aimed at encouraging particular combinations of banks and
excluding others, without clear and objective rationale.
Specifically, some proposals appear to be driven by a desire to
exclude New York and California banks, or simply large money
center banks.

By their nature, sizable regional arrangements

would permit combinations of banks long distances (and several
states) apart, without permitting even limited operations in
some contiguous states.

Metropolitan areas might be left, in

a banking sense, bifurcated.

Viewed as a permanent arrangement,

regional compacts would tend to Balkanize banking, with a
tendency toward regional concentrations.
Because of these potential weaknesses, we believe a
federal framework is required for regional arrangements.




For

- 19 -

example, such weaknesses can be substantially ameliorated if
states entering into such regional arrangements were also
required after relatively few years —

say three —

to permit

reciprocal entry by banks in any state that has enacted a
regional arrangement or otherwise provides for entry of banks
of any other states.*
In this approach, any state, if it so chose, could
continue entirely to "opt out" of full interstate banking.
But, if it chose to enter into a regional arrangement, it
would also have to be prepared to consider those arrangements
as a transitional approach toward a broader arrangement
encompassing all states willing to provide reciprocal privileges.
As suggested above, all interstate acquisitions would be
subject to Federal limitations designed to protect against

*Regional arrangements are the subject of a constitutional
challenge that is now before the Supreme Court. A federal
framework, such as suggested above, could be put in place
if the Supreme Court sustains regional arrangements or
even if the Court were to find them unconstitutional on
grounds of violation of commerce or compact clause
requirements. However, if the Court were to find that
such arrangements violate the equal protection clause,
they could not be permitted even if sanctioned by Federal
law. See Attchment III.



- 20 -

undue concentration, and states would be able to limit the
proportion of their banking assets acquired by a single banking
organization.

We would also suggest that it would be appropriatef

in the first stages at least, for these interstate operations to
be undertaken by means of separately incorporated units of a
holding company rather than by direct branches.
The number of states that ultimately might wish to
enter into regional (or nationwide) arrangements within this
broad framework must, for the time being, remain unknown.
Consequently, the possibility would exist that little progress
would be made toward interstate banking, even for limited
operations within metropolitan areas.

Yet, the status quo is

hardly satisfactory, and the legitimate pressures toward
interstate operations that have impelled "nonbank banks" would
continue to seek "unnatural" channels.

Consequently, we would

suggest that, with due notice, the Congress authorize interstate




- 21 -

branching within metropolitan areas and for neighboring areas
of contiguous states.
Conclusion
I have on a number of occasions in the past stressed
the urgency of Congressional action to guide the orderly
evolution of the banking system and to reaffirm certain basic
principles that have guided the banking and financial systems,
adapting them to present circumstances.
to respond and change will take place.

Markets will continue
The only question is

whether that change will take place in a constructive framework of rules established by the Congress after a careful
weighing and balancing of the vital public interests that are
now before you for review.

In my judgment, —

and taking

account of both market forces and recent state inititatives
—

a comprehensive approach now requires a resolution of the

issues involved in interstate expansion,




* * * * * * * * * *

-22-

Principal Interstate Banking Regions Being Considered by the States
s of A p r i l

19HS)

1 984 Year End Commercial Bank Deposits in Billions of Dollars

Passed National Legislation
Passed National Reciprocal Legislation
Passed Regional Reciprocal Legislation

Proposed National
I S S\ Proposed Regional Reciprocal

Note: This map includes proposed banking regions announced through April 1985. Banking groups and state
legislators proposed these regions but they are not definitive. In addition, the iaws and proposed laws
are not homogeneous. This map does not indicate states with limited purpose, grandfathered or
troubled institution laws.
Rhode Island's law provides for reciprocity in New England on July 1, 1984 and reciprocity in the nation to
go into effect on July 1, 1986.
Sn the Southeast Region Florida, Georgia.. North Carolina and South Carolina have ail passed regional reciprocal
laws though the regions differ to some degree.
Kentucky has a multi-bank holding company law which allows interstate acquisitions with its contiquous
states with reciprocal agreements. On July 15, 1986 Kentucky will have a national reciprocal law.
Indiana also has a reciprocal law with contiguous states though both states have been proposed as
part of the Mid Atlantic region.
* Maryland, Tennessee, Virginia and Washington, D.C. have been proposed for inclusion in both the Southeast
and Mid Atlantic Regions.
^Indiana and Illinois have been proposed for inclusion in both tin? Central and Mid Atlantic regions.
The laws in Indiana, Maryland and Arizona have been passed by the legislatures but not signed by the gov
ernors of those states as of April 18, 1985.



- 23 INTERSTATE BANKING LEGISLATION BY STATE

STATE

STATUS OF
LEGISLATION

Alabama

None

Alaska

Effective

Open Entry

All States

Arizona

Effective
October 1, 1986

Open Entry

All States

Arkansas

Defeated

RegionalReciprocal

SOUTHEAST (14 States & DC)
AL, FL, GA, LA, MD, MS, MO,
NC, OK, SC, TN, TX, VA, W , DC

California

Proposed

NationalReciprocal

Colorado

None

Connecticut

Effective

Delaware

None

District of
Columbia

TYPE

REGION (if any)

RegionalReciprocal

NEW ENGLAND (5 States)
ME, m, NH, RI, VT

Proposed

RegionalReciprocal

SOUTHEAST (11 States)
AL, FL, GA, LA, MD, MS,
NC, SC, TN, VA, WV

Florida

Effective
July 1, 1985

RegionalReciprocal

SOUTHEAST (11 States & DC)
AL, AR, GA, LA, MD, MS, NC
SC, TN, VA, W , DC

Georgia

Effective

RegionalReciprocal

SOUTHEAST (10 States)
AL, FL, GA, KY, LA, MS, NC
SC, TN, VA

Hawaii

None

Idaho

Effective
July 1, 1985

RegionalReciprocal

WEST (6 States)
m , OR, MT, NV, UT, W




- 24 -

STATUS OP
LEGISLATION

TYPE

REGION (if any)

Illinois

Proposed

RegionalReciprocal

MIDWEST/MIDCEOTRAL (6 States)
IN, IA, KY, MI, MO, WI

Indiana

Awaiting Governor's
signature. Effective
date January 1, 1986

RegionalReciprocal

MIDCENTRAL (4 States)
IL, KY, MI, OH

Iowa

None

Kansas

None

Kentucky

Effective

RegionalReciprocal
(National
trigger after
2 years
(1987))

MIDGENTRAL (7 States);
MO, IL, IN, OH, TN, VA, WV

Louisiana

None

Maine

Effective

Open Entry

All States

Maryland

Awaiting Governor's
signature* Effective
date July 1, 1985

RegionalReciprocal

SOUTHEAST/MIDCENTRAL
(contiguous only until 1987;
14 states & DC thereafter)
AL, AR, DE, FL, GA, KY, LA,
MS, NC, PA, SC, TN, VA, WV, I

Massachusetts

Effective

RegionalReciprocal

NEW ENGLAND (5 States)
CT, ME, NH, RI, VT

Michigan

Proposed

RegionalReciprocal

MIDWEST (5 States)
IL, IN, MN, OH, WI

Minnesota

Proposed

RegionalReciprocal

MIDWEST (4 States)
IA, ND, SD, WI

Mississippi

None

Missouri

Proposed

RegionalReciprocal

MIDWEST-SOUTH
(8 States)
AR, IL, IA, KS,
KY, NE, GK, TN




- 25 -

STATE

STATUS OF
LEGISLATION

Montana

None

Nebraska

None

Nevada

Proposed

New Hampshire

None

New Jersey

TYPE

REGION (if any)

RegionalReciprocal
(National
trigger
1/1/89)

WEST (11 States)
AK, AZ, GO, HI, ID, MT, NM
OR, UT, WA, WY

Proposed

RegionalReciprocal

MIDCENTRAL (5 States & DC)
DE, MD, OH, PA, VA, DC

New Mexico

Defeated

RegionalReciprocal

SOUTHWEST (5 States)
AZ, 00, OK, TX, UT

New York

Effective

NationalReciprocal

All States

North Carolina

Effective
July 1, 1985

RegionalReciprocal

SOUTHEAST (12 States & DC)
AL, AR, FL, GA, KY, LA, MD
MS, SC, IN, VA, WV, DC

North Dakota

None

Ohio

Proposed

RegionalReciprocal
(National
trigger after
4 years)

MIDCENTRAL/MIDWEST
(13 States & DC
contiguous States only
for 2 years)
DE, IL, IN, KY, MD, MI,
MO, NJ, PA, TN, VA, WV,
WI, DC

Oklahoma

None

Oregon

Effective
July 1, 1986

RegionalReciprocal

WEST (8 States)
AK, AZ, CA, HI, ID, NV, OT, WA

Pennsylvania

None

Rhode Island

Effective

RegionalReciprocal
(National
trigger
6/30/86)

NEW ENGLAND (5 States)
CT, ME, MA, NH, VT




- 26 -

STATUS OF
LEGISLATION

TYPE

South Carolina

Effective
July 1, 1986

RegionalReciprocal

SOUTHEAST (12 States 6 DC)
c
AL, AR, EL, GA, KY, LA, MD,
MS, NC, TN, VA, WV, DC

South Dakota

Effective

Open Entry!/

All States

Tennessee

Proposed

RegionalReciprocal

SOUTHEAST (12 States)
NC, GA, AL, MS, LA, AR,
KY, VA, IN, FL, WV

Texas

Proposed

RegionalReciprocal

SOUTHWEST (10 States)
AZ, AR, CO, KS, LA,
MS, MO, NM, OK, WY

Utah

Effective

RegionalReciprocal

WEST (11 States)
AK, WA, OR, ID, WY, MT
CO, NM, AZ, NV, HI

Vermont

None

Virginia

Effective July 1,
1985

RegionalReciprocal

SOUTHEAST (12 States & DC)
AL, AR, FL, GA, KY, LA,
MD, MS, NC, SC, TN, WV, DC

Washington

Proposed

NationalReciprocal

All States

West Virginia

None

Wisconsin

Proposed

RegionalReciprocal

MIDWEST (7 States)
IL, IN, IA, MI, MN, MO, OH

Wyoming

None

STATE

REGION (if any)

1/ A South Dakota bank that is acquired by an out-of-state bank holding
company may not thereafter open additional branches by merger, consolidation
or otherwise, and the out-of-state holding company may not acquire any
additional existing banks in South Dakota.




Attachment I
SMALL BANKS IN THE CALIFORNIA BRANCH BANKING ENVIRONMENT

Proposals to reduce barriers to bank geographic expansion, whether
on a statewide basis or an interstate basis, raise questions relative to the
future of smaller banking institutions.
with the statewide firms?

Specifically, can small banks compete

Will there be incentives for the formation of new

banks in markets characterized by a large percentage of total assets being
held by a few statewide firms?
The data suggest th&t, while the large banks in a statewide
baaking state control a large percentage of state banking assets, this
does not mean that smaller banks cannot compete in the state's major banking
markets*

The California experience, developed over several decades of

statewide brauch banking, illustrates the possibilities for small banks.
Table 1 presents the size distribution of California banks at year-end 1984.
As the table indicates, 332 of 435 banks have assets of less than $100 million,
and only six institutions have over $5 billion of assets.

Table 1
Number and Asset Size Distribution of California Banks
Asset Size

Less than $10 million
$10 million to $25 million
$25 million to $50 million
$50 million to $100 million
$100 million to $250 million
$250 million to $500 million
$500 million to $1 billion
$1 billion to $5 billion
Over $5 billion




Number of
Banks

17
100
121
94
58
21
7
11
6

Percentage of Total State
Banking Assets Held by Firms
in Each Size Class
0.05
0.78
1.93
3.00
3.90
3.35
2.44
10.59
73.96
100.00

1-2
In spite of the dominant asset position of the largest banks,
there appears to have been adequate incentives for the formation of new
banks in California. Table 2 presents the rate of bank formation in
California over the years 1970 through 1983. In these years, 355 new
banks were chartered in California. In 1983f California accounted for
16.9 percent of all new banks in the United States. Thus, the existance
of statewide branch banking does not appear to have deterred investors in
new banks.

Table 2
Bank Chartering in California, 1970 - 1933
Year

Number of New Banks

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983

6
7
17
24
18
17
i3
14
13
24
46
42
53
61

New Bank Charters in
California as a Percentage
of All New U.S. Bank Charters
3.4
3.6
7*3
7.2
5.0
6.9
8.1
9.1
8.8
11.8
22.4
21.1
16.8
16.9

These data suggest, that, at least in California, the existence of
large statewide banks has not led to the demise of small banks. In addition,
the incentives for new bank formation have been maintained.




Attachment II
SMALL BANKS IN THE NEW YORK BRANCH BANKING ENVIRONMENT
The State of New York has had a shorter history of statewide
banking than California, and the comparison may be of interest in
evaluating the existence of small banks in a state containing many of the
nationfs largest banking organizations.

New York adopted statewide banking

in 1976, and therefore has had less than a decade of experience, as compared
to the long history of statewide banking in California.
Table 1 presents the asset size distribution for banks in New York
as of the end of 1984*

As in California, the largest banks hold the over-

whelming percentage of total statewide banking assets.

Yet, as in California,

there are a significant number of smaller institutions; 85 of the 149 banks 5
or 57 percent of all banks, have assets of less than $100 million,

Table 1
Number and Asset Size Distribution of New York Banks
Number of
Banks

Asset Size

Less than $10 million
$10 million to $25 million
$25 million to $50 million
$50 million to $100 million
$100 million to $250 million
$250 million to $500 million
$500 million to $1 billion
$1 billion to $5 billion
Over $5 billion

11
17
28
29
23
9
7
12

_J2
149

Percentage of Total State
Banking Assets Held by Firms
in Each Size Class
0.02
0.09
0.29
0.60
1.09
0.95
1.28
6.20
89.46
100.00

Table 2 presents the record of new bank charters in New York for the
period 1970 - 1983.

Although the bank formation rate in New York was substantially

lower than in California, the difference can probably be explained by the




II - 2
differences In growth rates between the two states.

Like the California

Table 2
Bank Chartering in New York, 1970 - 1983
Year

Number of New Banks

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983

2
4
4
3
6
4
1
5
2
1
2
2
1
3

New Bank Charters in
New York as a Percentage
of All New U.S. Bank Charters
1.1
2.1
1.7
0.9
1.7
1.6
0.6
3.3
1.4
0.5
1.0
1.0
0.3
0.8

experience, however, the New York data do suggest that small banks survive
the expansion of branch banking and that new banks will be formed regardless
of the degree of statewide dominance of the largest organizations.




Attachment III
Litigation Involving Regional
Reciprocal Statutes

The Board has issued seven orders approving interstate
acquisitions of banks by bank holding companies pursuant to
regional

interstate banking

statutes*

Six of

the

orders

involve New England acquisitions pursuant to statutes enacted
by Connecticut, Massachusetts and Rhode Island—

and one

1/
1.

Bank of New England Corporation/CBT Corporation, 70 Fed.
Res. Bull. 374 (March 26, 1984), approving the merger of
the fourth largest Massachusetts bank holding company and
the largest bank holding company in Connecticut.

2.

Hartford National Corporation/Arltru Bancorp, 70 Fed. Res.
Bull. 35"3 (March 26, 1984), approving the acquisition by
the second largest Connecticut bank holding company of the
eighth largest bank holding company in Massachusetts.

3.

Bank of Boston Corporation/Colonial Bancorp, 70 Fed. Res.
Bull. 524 (May i&, 1$64), approving the acquisition by the
largest bank holding company in New England of the fourth
largest bank holding company in Connecticut.

4.

Bank of Boston Corporation/RIHT Financial Corporation, 70

Fed. Res^ Bull. 777 (Aug. 275, T364), approving Ban IT of
Boston's acquisition of the second largest bank holding
company in Rhode Island.
5.

Fleet Financial Group, Inc., 70 Fed. Res. Bull. 834
(October 4, 1984), approving the acquisition by the largest
bank holding company in Rhode Island of de novo banks in
Boston and Hartford.

6.

Hartford National Corporation, 71 Fed. Res. Bull. 43
(November 19, 198Tn approving the acquisition by the
second largest bank holding company in Connecticut of a ( e
3
novo bank in Providence*




Ill
order involves the southeast region, the merger of Florida and
2/
Georgia bank holding companies•—'
Each of the applications for Board approval to acquire
a bank across state lines pursuant to regional

interstate

statutes was protested before the Board—' on the basis that
the regional interstate statutes violate the Commerce, Compact
and

Equal

Protection

Constitution.

Clauses

of

the

United

States

The Board addressed each of these issues and

made detailed findings in a lengthy Appendix to its first two
4/
approval orders involving regional interstate statutes.—'
With respect to the Commerce Clause issue, the Board
determined that absent the authorization of Congress in the
Douglas Amendment of the Bank Holding Company Act, 12 U.S.C.
1842(d), the regional interstate statutes impose a burden of
the type found by the courts to violate the Commerce Clause*
The Board then considered the authorization by Congress in the
Douglas Amendment and found that the Douglas Amendment does not
appear on its face to show an intent by Congress to authorize

2/
SunTrust Banks, Inc./SunBanks, Inc,/Trust Company of
Georgia, 71 Fed. Res. Bull. 176 (January 8, 1985), approving
the merger of second largest Florida bank holding company and
the third largest bank holding company in Georgia*,
2' Citicorp, New York, New York, protested each application,
and it has sought judicial review of each of the Board's
approval orders. Northeast Bancorp, Stamford, Connecticut,
challenged the first two Board orders.
£/

See the first two cases listed in note 1.




in - r

discriminatory restrictions of the type involved in regional
interstate

arrangements

legislative history

and

offered

that

the

provision's

little guidance*

scant

Despite

its

doubts about the authorization of discriminatory state action
in the Douglas Amendment, the Board decided it should hold
state

statutes

unconstitutional

authorizing

interstate banking

arrangements

only upon clear and unequivocal evidence.

Applying this test and based upon judicial guidance contained
in Iowa Independent Bankers Association v. Board of Governors.,
511 F.2d 1288 (D.C. Cir. 1975), the Board concluded that "while
the issue is not free from doubt, there is no clear and
unequivocal basis for a determination that [the Massachusetts
and Connecticut statutes] are inconsistent with the Commerce
Clause. . . . "

Bank of New England Corporation, 70 Fed. Res.

Bull. 374, 377 (1984); Hartford National Corporation, 70 Fed.
Res. Bull. 353, 354 (1984).
The Board also found there was no basis to hold that
the regional

interstate

statutes clearly and

violate the Compact Clause.

unequivocally

The Board applied the standard

ennunciated by the Supreme Court in United States Steel Corp.
v. Multistate Tax Commission, 434 U.S. 452, 470 (1978), that an
agreement among the states does not establish a compact in
violation of the Compact Clause unless it enhances state power
at the expense of federal supremacy.

The Board

read

the

Douglas Amendment as conferring on the states authority to
regulate entry of out-of-state bank holding companies without




Ill

impinging on the federal interest in such regulation as that
concept has been articulated

in the Supreme Court's Compact

Clause cases*
Finally* the Board concluded the regional interstate
statutes do not clearly and unequivocally violate the Equal
Protection Clause.

Under the traditional case law of the

Supreme Court applicable at the time of the Board's decision,
which upheld state economic legislation if it was rationally
related to a legitimate state purpose, the Board found regional
interstate statutes to be rationally related

to legitimate

state purposes in establishing a banking system responsive to
local and regional needs, including responsiveness to local
credit needs, avoiding undue concentration of banking resources
and providing an opportunity for an experiment with limited
interstate banking.
Each

of

the

Board's

approval

orders

has

been

challenged in the United States Court of Appeals for the Second
Circuit*

The Court of Appeals has stayed consummation of the

interstate acquisitions and mergers on two occasions -- to
allow the Court of Appeals to hear the case and, even after the
Court

of

Appeals

rendered

its

decision

upholding

the

Connecticut and Massachusetts statutes as constitutional, to
permit Supreme Court review.

As a consequence of these stays

by the Court of Appeals none of the interstate transactions
approved in the Board's seven orders, including the < e novo
1
acquisitions, has been consummated.




Ill - 5

The

decision

of

the

Court

of

Appeals, ^

filed

August 1, 1984, upheld the constitutionality of the Connecticut
and Massachusetts regional interstate statutes and affirmed the
Board's approval orders*

The Court found that the Douglas

Amendment constituted a renunciation of federal interest in
regulating the interstate acquisition of banks by bank holding
companies*

In deciding that the states have the authority to

lift selectively the ban on interstate acquisitions of banks
imposed by Congress in the Douglas Amendment and thereby to
create interstate banking regions, the Court noted that nothing
in the language or legislative history of the Douglas Amendment
supports the contention that an individual state must permit
acquisitions by all out-of-state bank holding companies if the
state permits acquisitions by any.
The Supreme Court was requested to review the decision
of the Court of Appeals, and in January 1985 the Supreme Court
6/
agreed to hear the case.-7 The State of New York, New York
State Bankers Association and both United States Senators and
certain members of the House of Representatives from New York
filed briefs with

the Court

statutes as unconstitutional.

opposing

regional

interstate

The State of Massachusetts

2L' Northeast Bancorp, Inc. v. Board of Governors of the
Federal Reserve System, 740 P. 2d. 203 (2d Cir. 1984).
~
Northeast Bancorp, Inc. v. Board of Governors of the
Federal Reserve System, No. 84-363 (argued April 15, 1985).




Ill - 6

joined with the bank holding companies of Massachusetts and
Connecticut that were parties to the challenged acquisitions in
filing briefs in support of the regional statutes.

The case

was argued before the Supreme Court on April 15, 1985.
The issues originally placed before the Court involved
the Commerce Clause and Compact Clause of the Constitution, and
centered, as they had before the Board and

the Court of

Appeals, on an interpretation of the Douglas Amendment and
whether

that Amendment

provided

an

"unmistakably

clear"—'

authorization by Congress to permit the states to discriminate
and burden commerce through regional interstate statutes.
The

Supreme

Court

decision,

with

four

justices

dissenting, on March 26, 1985, in the case of Metropolitan Life
Ins. Co. v. Ward, No. 83-1274, prompted the petitioning parties
to raise an argument under the Equal Protection Clause not
originally raised before the Supreme Court although, as noted
above, it was raised before

the Board.

The Metropolitan

decision held that state legislation that taxes out-of-state
insurance companies at a higher rate than in-state companies in
order

to promote

in-state

business

at

the

expense

of

out-of-state competitors was unconstitutionally

Z'
South-Central Timber Development v. Wunnicke 104
S.Ct. 2237, 2242 (1984) — requiring that federal legislation
authorizing a departure from normally applicable Commerce
Clause standards must be "unmistakably clear81 — was decided
after the Board issued its first interstate order but employing
the standard used by the Board*



Ill -

discriminatory*
advance

The Court held that this statute did not

interests

rationally

related

to

legitimate

purposes under the Equal Protection Clause.

state

This case thus

raises a question as to whether regional interstate statutes
which apply different rules to different groups of out~of-state
banks, depending on geographic location, violate the Equal
Protection Clause.
A decision by the Supreme Court that the regional
statutes are unconstitutional on Commerce Clause or Compact
Clause grounds could be remedied by an amendment to the Bank
Holding Company Act showing the intent of Congress to permit
regional

interstate

compacts, since

the Congress has

the

authority to sanction by federal statute state laws burdening
commerce or creating a compact.

Congress does not appear to

have

violations

the authority

Protection Clause

to sanction
should

the Court

decide

of

the

that

Equal

regional

statutes are unconstitutional on that basis.
The past practice of the Court

indicates that a

decision is likely to be issued in June or July, 1985.