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President's Message: A Welcome to Interstate Banking and Branching


Thomas C. Melzer
Saturday, October 1, 1994

The United States has a long tradition of restricting interstate and branch banking that, with the signing in late September of new banking legislation, will finally come to an end.

The new legislation has two major parts. The interstate banking section is straightforward: It allows bank holding companies, one year from now, to make acquisitions in other states—even where state law currently bars out-of-state institutions. The interstate branching portion of the law is a bit more complicated: It allows organizations, beginning in June 1997, to consolidate their multi-state holdings into a single branch network. It also grants states the right to opt out of interstate branching, if they choose, by passing a law forbidding such action before the new rules take effect. A number of states—including a few in the Eighth Federal Reserve District—are reportedly considering such opt-out provisions.

How might this legislation alter the banking landscape? We are likely to see some of the following:

  • fewer independent banks
  • more branch offices
  • greater convenience for bank customers
  • greater geographic diversification of banking risk.

As usual, it is difficult to predict with any certainty what the effects of new legislation will be on the number and size of banking organizations. But there is good reason to believe the changes will be less than startling: States have been moving in this direction for years. By forming regional interstate banking compacts and relaxing branching restrictions within their own borders, the states have, in effect, made the passage of this new law into an evolutionary, rather than revolutionary, step toward full nationwide banking and branching.

We expect that many relatively small community banks will continue to thrive in the new environment. As the last issue of The Regional Economist reported, community banks are holding their own in California and North Carolina, where statewide branching has been permitted for more than a decade.

A period of uncertainty, of course, will follow this legislation. Will it turn out to be worth it? The answer depends on what you think of the new law's primary goal: to remove the artificial barriers that have prevented financial institutions from competing on a level playing field, both with their peers and with financial institutions across the globe.

Removing such barriers is a move toward greater competition. And competition in most any industry is a boon for that industry's users. Overall, then, despite the uncertainty it engenders, the new banking legislation should be welcomed with open arms.

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