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STATEMENT ON REGIONAL AND NATIONAL INTERSTATE BANKING PRESENTED TO THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS BY WILLIAM R. WATSON ASSOCIATE DIRECTOR OF RESEARCH AND STRATEGIC PLANNING FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 10:00 a.m. Thursday, April 25, 1985 Rayburn House Office Building, Room 2128 Mr. Chairman: I am pleased to have the opportunity to testify on behalf of the FDIC before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance on various issues relating to interstate banking. We are all for some time. aware that limited d£ facto interstate banking has existed Entry to this market basically has been limited to the larger banks and bank holding companies, and has been accomplished in large measure by establishing offices or subsidiaries that do not in their name or possess federal deposit insurance. ties normally do not perform the full have the word "bank" These interstate facili range of banking activities, but do provide a means for out-of-state banking organizations to compete in segments of local banking markets. They are known by such names as loan production offices, mortgage companies, consumer finance companies and Edge Act Corpora tions. nies, Additionally, many industrial banks are owned by bank holding compa and many of these are insured by the FDIC. To provide a measure of the magnitude of this activity, a 1983 study conducted by the Federal Reserve Bank of Atlanta organizations. tocompete for correspondent identified approximately 7,600 interstate offices of banking Moreover, a physical market presence is not always necessary banking services; credit card banking services currently and are other loans the and best examples, various although advances in technology may significantly increase the importance of consumer electronic banking. More have recently, emerged. two First, other the vehicles willingness for of entry the FSLIC into interstate to arrange markets interstate - 2- acquisitions of troubled savings and loan associations by bank holding compa nies provides an opportunity for banking organizations to acquire interstate subsidiaries that have very liberal deposit and investment authority. However, the activity that has received the most attention and raised the most contro versy is the nonbank bank. tages over the to interstate more Although the nonbank bank option does have advan limited banking service facilities, their is grossly overemphasized. importance relative Their importance probably relates more to the ability of nonbank firms to own entities that are called banks and are do not think is a more eligible for nonbanking significant federal ownership departure deposit insurance. of banks should from perceived While I personally present any problem, tradition than the it use of nonbank banks as a vehicle for interstate expansion. All full of the service existing banking that would not exist interstate facilities, if full options and are undoubtedly imperfect result interstate banking existed. substitutes in for inefficiencies The economics of this situation argue for unlimited interstate banking, and the signals provided by the market indicate its inevitability. The only substantive questions relate to when and how. Interstate banking, whether on a regional or national basis, has a variety of potential benefits that undoubtedly are familiar to this Subcommittee. Removal of barriers to entry generally serve to increase competition, reduce prices and improve the quality of products available to users of bank services; -3this should tend to be beneficial to local banking markets. nity to reduce to consumers and others who are limited Moreover, geographic expansion affords an opportu risk through diversification of deposit sources and lending opportunities. Rather than dwell on the virtues of interstate banking opportu nities, direct the remainder of my comments to the purpose of this I will testimony, first focusing on the general area of geographic expansion and then on the regional pact concept. As the deposit insurer, one of our major concerns relates to the effects of interstate the banking system as on the a whole. As safety and indicated soundness of individual earlier, geographic banks and expansion should afford the opportunity to diversify and to reduce risks. Although the benefits of disregarded, geographic the most lending significant a more stable, number of retail banks diversification risk reduction for not for many deposit base. compete should be banks derives from perhaps building While this may mean that an increased a relatively fixed amount of retail deposits in local markets, it could result in a reduction in the extreme funding vulner ability of a few institutions. There is always the danger that banks or bank holding companies may be willing to pay unjustifiable premiums to gain an early entry into selected markets. While mistakes acquisitions a significant gained in and the accounting deterrent evaluating undoubtedly will the to treatment unwise potential be made, of decisions. of the premiums need paid Moreover, out-of-state as markets, to capitalize should experience the to pay a price above the economic value of a franchise should diminish. provide is tendency -4Perhaps the greatest risk to the insurance fund of interstate banking emanates from the probable increased number of "large" banks and the potential for a significantly increased size of the largest banks. more importantly, the practical that larger failed or failing The statutory and, restraints placed on the FDIC normally mean bank situations are more difficult to handle than small to moderate sized banks, and can result in a proportionately larger exposure to loss. However, if it is accompanied be a larger which number may more than in a world of interstate banking, by strong antitrust enforcement, of eligible potential counterbalance the acquirors negative particularly there probably would in any effects of size category, increased bank size. There also are other important public policy issues raised by interstate banking. One fear that frequently is raised banks in such an environment. banks, The evidence we have seen suggests that small at least those that are well-managed, out-of-state competitors. relates to the fate of small Available will evidence not be hurt by entry of suggests that economies of scale above a reasonably small asset size are not significant, and that smaller institutions banks. utes, generally have better returns than regional and money center Moreover, in states that have long-standing statewide branching stat small independent banks continue to exist and usually earn returns above those reported by their larger competitors. Perhaps the most important issue related to interstate banking concerns the concentration of economic power. In our judgment, current bank antitrust -5laws and guidelines are sufficient to control banking are markets. ill-equipped national level. we However, believe combined existing to deal with law practice in the banking area undue concentrations of economic power on a Although there are a variety of ways to deal with the problem, that legislation validating with and undue concentrations in local a prohibition industry, would make to enter a market, "potential of a combination sense. but the It seems of the desirable to competition" concept, largest firms encourage in the large banks undesirable to allow that entry to occur by means of the acquisition of one of the dominant firms within that market if a "toe hold" acquisition or de novo entry are viable alternatives. Likewise it does not seem desirable to allow a combination of two or more of the largest firms, and even though they do means of not their share of the aggregate market is relatively small compete implementation in any common need markets. to be worked-out, Although we the numbers and believe that this is a sensible way to approach the problem. If laws the is factor constitutionality upheld in by the determining Supreme the before authorizing full the Court, future there are definite advantages step of Massachusetts-Connecticut regional structure to regional interstate of pacts the be an important banking interstate banking, will reciprocal system. While banking as an interim there are disadvantages in allowing this to happen without some Congressional guidance. Although we have no problem with the regional pact concept -- indeed, they are probably desirable as an interim step in that they will allow regional - banks to strengthen their position — there are potential concerns. of the being case currently 6- in anticipation of nationwide One problem area comprises considered by the Supreme banking the substance Court; these pacts do discriminate against banks and holding companies headquartered in states excluded from the pact. that the banking. existence of A second area of concern relates to the possibility regional pacts may delay or prevent full interstate Banks participating in a pact will have the opportunity to consoli date their positions within the region, and some may not find it economically advantageous to expand beyond the regional level. There would be an incentive for those banks not wishing to expand further to resist any move that would expose them to competition from out-of-region banks. In sum, we believe that interstate banking is both desirable and inevita ble, and ultimately will work to the benefit of users of banking services. Moreover, there appears to be no safety and soundness problems that are not outweighed by the potential public benefits to be derived from the opportuni ties for increased competition and risk reduction. Our major concern relates to control of excessive concentrations of power within an interstate banking environment; we would not favor interstate banking that was not accompanied by the stronger regional provided antitrust enforcement than pact concept as a means that consolidations within currently to phase exists. in full We interstate support banking, these pacts are governed by rules that ultimately result in a more competitive nationwide banking system. also
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