By authorizing regional banking in the Northeast, Southeast, and West, national banking authorities in the United States took a step toward integrating the nationwide banking system through interstate branch banking.
The appearance of what were known as regional compacts among banks in the 1980’s marked a point of evolution in the American banking system toward national branch, or interstate, banking. Establishing the exact time that interstate banking became more of a reality than a goal is difficult, as the change occurred in incremental steps over the course of two hundred years, and against considerable opposition. Most authorities agree that major shifts occurred in the 1980’s thanks to the deregulatory mood that came to Washington with the presidential administration of Ronald Reagan.
Since the creation of the First Bank of the United States in 1791, which permitted branch offices in several states, many financial thinkers have argued that branching constitutes the most efficient and flexible form of bank structure. Branches are offices that have full banking powers. They can take deposits, make loans, and deal in a variety of exchanges, but their assets and liabilities ultimately are consolidated with those of the parent bank and all other members of the bank’s branch system. Rather than appearing as those of a single bank, the assets of the branch reflect those of the parent and all other branch offices.
Over time, states developed their own branching laws, often by default. In California and Arizona, for example, no legislative rulings dealt with branching until it was well developed in those areas. Older southern states, which tended to have more branching than northern states, wrote permission for branch banking into the banks’ charters. Elsewhere, as in Nebraska, Oklahoma, New York, and other states, branching at times was expressly prohibited.
Independent “unit” banks dominated much of the northern tier of the United States and the midwestern states. Unit banks
During the Civil War, the federal government passed laws chartering national banks through the office of the comptroller of the currency. Those laws prohibited the newly chartered national banks from branching, constituting yet another victory for the unit bankers. Between 1870 and 1900, however, the national bank system consistently lost members to the more lenient state systems. Because state charters often allowed branches, the national banking system operated at a serious disadvantage in many states.
The most important state in which the national system had to compete with state branching advantages was California, where Amadeo P. Giannini had built a small bank, the Bank of Italy,
The McFadden Act, named for the chairman of the House Banking and Currency Committee, Louis Thomas McFadden
Giannini had bigger ideas. He wanted to take his bank to a national scale with true interstate branch banking. His anticipated amendment to the McFadden Act, which would have permitted such branch banking, never materialized. Branch banking remained solely a state issue until the 1970’s.
Meanwhile, the industry changed dramatically in favor of branching. In 1945, for example, unit banks had 72 percent of all offices. By 1988, banks with at least one branch operated 76 percent of the sixty thousand offices in the nation. The total number of branches had soared, from four thousand in 1945 to more than forty-six thousand by 1988.
With the advent of computers, people found that they could transfer money rapidly to any bank in the nation. To remain competitive, banks had to offer flexibility. At the same time, large banks such as Citicorp,
In 1975, Maine offered out-of-state holding companies the opportunity to purchase Maine banks if the home state of the holding company reciprocated by allowing Maine-based companies to acquire businesses in that home state. By 1984, Maine had dropped the reciprocity requirement, but it provided the basis for the first regional compact, by which a group of New England states permitted their banks to invest in one another. That allowed banks in the region to merge with each other but prohibited mergers by the big outsiders, such as Chase Manhattan Bank and Citicorp. It also allowed banks to establish branches in any state in which a bank had merged.
A similarly successful regional compact occurred in North Carolina and Georgia, where North Carolina National Bank and Citizens and Southern greatly expanded their operations. Other states simply permitted large out-of-state banks to purchase in-state institutions. In 1980, Joseph Pinola led California’s Western Bancorporation
At that point, the momentum toward interstate banking stalled. The large New York banks all had established footholds in other states and even had started to unload some banks in the bank recessions of the 1980’s. Well-run local banks proved difficult for outsiders to manage, and many of them lost money. By 1993, for example, Chase Manhattan Bank, which had bought the highly profitable Continental Bank in Arizona, was looking to unload its purchase after consistently failing to keep the bank at the levels of profitability it had reached under local management. At the same time, the popularity of reciprocity agreements faded.
The regional compacts and the reciprocity agreements indicated a realization on the part of local banks that their markets no longer would be protected from out-of-state competitors, even when those competitors specifically could not charter full-service banks in their states. Some states permitted one-function banking activities by banks or other institutions, under which a company could accept deposits but not make loans, or could make loans but not accept deposits. That gave Wall Street giants such as Merrill Lynch and Prudential windows through which they could attract some banking business into money-market accounts that paid higher interest rates than did local banks and allowed companies such as Sears to make loans. In any case, local bankers acted out of self-preservation instincts to stymie further encroachment on their territory.
When Citibank opened a credit card processing office in South Dakota, the trend appeared clear: No local region was immune to outside operations, no matter how restricted. The combination of a chain of institutions in the West under the banner of First Interstate Bank was undertaken in anticipation of unrestricted interstate banking. That still had not occurred by 1993, leaving First Interstate essentially as a franchise operation and diminishing the interest in reciprocity agreements among large, national rivals.
Several factors help to explain the lack of progress in interstate branch banking. First, the appearance of Japanese competition in the 1980’s absorbed the attention of most large banks. Japanese banks soared into eight of the top ten places among the world’s largest banks by the mid-1980’s. New York giants such as Citicorp and Chase found themselves less interested in getting into South Carolina and more interested in establishing ties to South Korea.
Second, a financial recession struck the United States in the 1980’s, most of it related to real estate and the collapse of the savings and loan system. Large banks of any type that had extensive real estate holdings, particularly in Texas and California, found themselves in trouble. Ironically, those problems came at a time when many lenders to troubled foreign borrowers such as Mexico and Brazil had just written off millions of dollars worth of bad loans. Bank of America, for example, managed to work its way out of disaster and eliminate large blocks of foreign loans even as some critics predicted its impending doom. As the larger banks worked themselves back to health, they did not have the energy to expend also on pursuing changes in regulation and legislation that the deregulatory atmosphere of the Reagan administration had offered. As a result, they missed a chance to change the laws.
Third, the expansion of bank holding companies in some nonbranching states gave a number of banks control over large amounts of bank assets. In 1987, for example, the forty-nine hundred one-bank holding companies had 21 percent of all bank assets, but about one thousand multiple-bank holding companies controlled forty-three hundred banks and 70 percent of all bank assets. The bank holding company had become the dominant form of banking organization in the United States, somewhat diminishing the advantages of branching.
Finally, computer technology evolved so rapidly that branching became less important than it had been when money moved more slowly. Bank holding companies could move money electronically to virtually anywhere in the world in a matter of minutes, and customers in Ohio and Montana used credit cards from New York-based Citibank or California-based BankAmerica. The only strong advantage that the branches retained was in receiving local deposits, but even that function was dulled somewhat by the appearance of brokerage houses’ money-market funds, credit unions, and direct-deposit payrolls.
Regional compacts opened a window of opportunity for national interstate branch banking, but by the time many banks were in a financial position to take advantage of it, changes in technology and legislation made branching less important. Nevertheless, in 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act
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Calomiris, Charles W. “Is Deposit Insurance Necessary? A Historical Perspective.” Journal of Economic History 50 (June, 1990): 283-295. Comprehensive look at state-sponsored deposit insurance schemes examines alternative structures for maintaining bank liquidity and solvency. Concludes that states with laws allowing branch banking were far more resilient than those with any other type of structure, including deposit insurance. -
_______. U.S. Bank Deregulation in Historical Perspective. New York: Cambridge University Press, 2000. Offers historical background on U.S. banking laws to explain the changes in the banking industry in the last two decades of the twentieth century. -
England, Catherine, and Thomas F. Huertas. The Financial Services Revolution: Policy Directions for the Future. Washington, D.C.: Cato Institute, 1988. Details the developments in banking and financial services through the appearance of the regional compacts. Informative, although the authors’ bias against government regulation is clear. -
Hector, Gary. Breaking the Bank: The Decline of BankAmerica. Boston: Little, Brown, 1988. Presents a critical assessment of the Bank of America that lionizes Amadeo P. Giannini. Somewhat dated; written just prior to the bank’s miraculous comeback. -
Klebaner, Benjamin. American Commercial Banking: A History. Boston: Twayne, 1990. Thorough and concise treatment of American banking discusses the expansion of branching, bank holding companies, and regional compacts. Includes bibliography and index. -
Matasar, Ann B., and Joseph N. Heiney. The Impact of Geographic Deregulation on the American Banking Industry. Westport, Conn.: Quorum Books, 2002. Addresses the changes in American banking since the passage of the Glass-Steagall Act in 1933. Intended for readers with some background in banking and finance. Includes bibliography and index.
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