BIT by bit, commercial banks in the United States are battering down the wall against interstate banking. Now Congress is debating whether to formalize and accelerate this shift by specifically permitting nationally chartered banks to branch across state lines.
The latest bank to push into new territory is Fleet/Norstar Financial Group Inc., which earlier this week won the bidding to purchase Boston's failed Bank of New England from the Federal Deposit Insurance Corporation (FDIC).
The Providence, R.I., bank takes on 160 branches in Massachusetts, where before it had only a one-office bank.
Now Fleet, aided by the buyout firm Kohlberg Kravis Roberts & Co., leapfrogs Bank of Boston Corporation to become the region's largest bank. It already had a strong presence in Connecticut, Maine, New York, New Hampshire, and Rhode Island.
Fleet's rapid growth over the last decade has come in spite of the McFadden Act, which since 1933 has prohibited banks from opening deposit-taking branches in other states.
Other companies have followed similar paths in recent years to grow into ``superregional'' institutions - with a holding company owning banks in several states.
Regional banks in the South, such as SunTrust of Atlanta and NCNB Corporation of Charlotte, N.C., have begun to edge nearer the size of New York's money center banks. BankAmerica Corporation, based in San Francisco, owns banks in eight Western states, including the biggest banks in California and Washington.
Some companies have even moved beyond their immediate regions to approach national status. Banc One of Columbus, Ohio, has operations in Texas; Midlantic Corporation of Edison, N.J., is active in Florida. BankAmerica attempted to become a bicoastal giant by bidding for the Bank of New England.
Despite this trend, the Bush administration says true nationwide branching is needed to give the nation a sound financial services industry. In February Treasury Secretary Nicholas Brady proposed broad reforms for the industry.
Currently, the nation has more than 12,000 banks, two-thirds of which are state-chartered. Many analysts say the nation is ``overbanked,'' especially with the rise of nonbank companies that compete with banks in loans, credit cards, and money-market accounts.
Consolidation is taking place already through the acquisition of distressed banks and savings and loan associations, notes Andrew Brimmer, a bank consultant in Washington, D.C. But he says it is inefficient for bank-holding companies to operate separate entities in different states.
``If the Treasury proposals become law, then the pace of consolidation will be hastened,'' Mr. Brimmer says. ``We might very well see'' the industry shrink to 8,000 or 9,000 institutions during this decade.
Brimmer says nationwide branching has a better chance of passage by Congress than some elements of the administration's plan. The plan also seeks to allow banks to enter the insurance and securities businesses, and to be owned by industrial firms.
Mr. Brady is urging Congress to pass comprehensive reforms, rather than focus only on recapitalizing the FDIC's Bank Insurance Fund, which has been depleted rapidly by financial troubles in the banking industry. The Bank of New England failure alone is expected to cost $2.5 billion.
With national branching, banks would no longer need to have separate boards of directors in each state in which they operate, and there could be greater consolidation of administrative and data operations.
However, the proposal faces opposition from the Independent Banker's Association (IBA), which represents small banks, and the Conference of State Bank Supervisors. John Alderman, the IBA's regulatory counsel, says states should retain the right to regulate banks within their borders, and that the availability of credit in small communities would suffer as large banks came in from outside, stealing depositors by offering higher interest rates and then making fewer loans.
Brimmer says small banks will remain significant players in the US banking system, and that credit would not be tighter under a simplified system.
``Why would a big bank go into the area if it didn't want to serve that area?'' he asks. Brimmer expects about a dozen truly nationwide banks would emerge.
Currently, banks operate under a patchwork of state laws. Thirty-three states allow some form of national banking, in which banks from anywhere in the nation may acquire banks within their borders. Some states require a reciprocal arrangement: The acquiring bank's home state must allow entry by banks from the acquiree's state. Fifteen states in the South and Midwest allow interstate banking only on a regional basis. Montana and Hawaii do not allow interstate banking. States have been moving on their own to remove geographic constraints on banks, but only a repeal of McFadden could allow nationwide branching.
If branching were allowed, observers say the initial impact would be the conversion of subsidiaries into branches by bank-holding companies. If the nation's 160 interstate bank-holding companies, which operate 465 bank subsidiaries, all did this, the number of US banks would fall by 305, according to David Mengle, an economist with the Federal Reserve Bank of Richmond, Va. This could save $2 billion annually in overhead costs, according to a study by McKinsey & Co., New York consultants.
Lowell Bryan, the author of the study, predicts savings would reach $10 billion a year, assuming that repeal of McFadden triggers further consolidation among large banks.
The change might also help large banks become national, rather than primarily regional. This would reduce banks' exposure to local economic problems, such as the real estate downturn that ravaged Northeast banks such as the Bank of New England.