WASHINGTON -- Interstate branching is opposed by some public advocates, but it would be a big boon for consumers, according to a Federal Reserve economist.
Not only would the broadened power force banks to offer more convenient, less costly services to their customers, but it would also spur industry competition and perhaps even increase the flow of funds into smaller communities, according to Paul S. Calem, writing in the Philadelphia Fed's May-June issue of Business Review.
"Anyone who frequently crosses a state line for work, for shopping, for business or pleasure stands to benefit from interstate branching," he said.
Benefits Seen to ATM Users
Mr. Calem said consumer groups oppose interstate branching partly because its benefits have not been thoroughly articulated. Sixty-six million people live in metropolitan areas that straddle state borders.
With interstate branching, these residents would have more convenient access to banking services, at lower cost, he said.
For example, these consumers would be able to use their own banks' automatic teller machines more often, avoiding extra fees for using other banks' facilities.
And while many consumer groups argue that interstate branching would choke competition and reduce the size and variety of banks from which customers can choose, Mr. Calem disagreed.
National banks would move into new areas, setting up new banks, thereby increasing competition, he said.
This would be especially true in areas that are dominated by a few institutions.
"As a result, consumers in these markets would likely be offered more favorable rates and fees," he said.
More Branches Predicted
Mr. Calem said his research on state branching laws supports the argument that restrictive laws lead to fewer branches.
On average, he has found, states with highly restrictive branching laws have one fewer branch in rural counties and 13 fewer branches in urban counties than states with looser rules.
Other research has found that states with legal restrictions on branching have fewer branches per square mile, he said.
The Fed economist also rejects advocates' arguments that interstate branching would put smaller banks -- especially those committed to serving their communities -- out of business.
"To the extent that these banks are particularly responsive to the needs of small businesses and local communities, there will be enduring demand for their services, and they will continue to occupy profitable niches," he said.
As examples, he cited the experiences of California and Florida, which have longstanding statewide branching laws. Although several large banks have taken root there, he said, they continue to face stiff competition from hundreds of community banks.
Boon to Communties?
And while many argue that loosening branching laws would make the banking industry less responsive to the needs of individual communities, Mr. Calem said that the change could lead to even greater community investment on the part of banks.
"In particular, a multistate bank may be in a better position to import funds into a community to finance a major local project," he said.
