Interstate banking is pretty much a reality for most of the county already, and a new federal law will have only modest impact on the industry landscape.
Populist distrust of centralized financial power has been characteristic of American democracy from the very beginning. Early in George Washington's presidency, Treasury Secretary Alexander Hamilton and Secretary of State Thomas Jefferson fought bitterly over creation of a central bank to manage the fledging republic's money and credit: Hamilton favored the idea, Jefferson did not. When Aaron Burr--vice president in Jefferson's subsequent administration--killed Hamilton in a duel in 1804, the competing perspectives of agrarianism versus urban moneyed interests was a factor in their animus towards one another. "Burr won the duel," says Wachovia Corp. Chairman John Medlin. "The people have been waging the battle ever since."
Populist sentiment against centralized banking was dealt a partial blow in 1913, with the creation of the Federal Reserve System by Woodrow Wilson. And though it has only taken 200 years or so, the republic buried the ghosts of Hamilton and Burr once and for all with final passage of a nationwide banking bill in Congress.
Still, while the victory, is rich in historical significance, its bottom line impact will be considerably more modest. Interstate banking is already a reality for much of the country. An overarching federal law will probably accelerate the process of consolidation, but most of the remaining pockets of protectionism were disappearing on a state-by-state basis anyway. Congressional approval therefore serves to bring greater efficiency to a de facto national banking system that exists today rather than create a new one from whore cloth.
The bill was approved by the House of Representatives in early August and finally--after considerable nail-biting--by the Senate in mid-September. Under its provisions, banks with retail operations in more than one state will be able to consolidate their branches into a single network, eliminating the need for separate legal entities. Interstate branching will take effect on June 1, 1997 unless individual states opt out by passing legislation prior to that date. All states permit at least some form of branching, and most allow statewide branching. At the same time, however, most states still prohibit interstate branching.
The law also will open up the entire U.S. to cross-border mergers one year from its date of enactment. Individual states will not be permitted to escape this provision.
Last Minute Glitch
For most of the year, an interstate banking bill was deemed a lead pipe cinch to pass Congressional muster. But at the very end, Ohio Democrat Howard Metzenbaum threatened a filibuster over a provision that limits the ability of both the Federal Deposit Insurance Corp. and the Resolution Trust Corp. to sue the officers, directors and advisers of failed thrifts. Metzenbaum eventually was mollified when the Office of Thrift Supervision, which was not included in the provision, agreed to pursue such actions on those agencies' behalf.
With a crowded legislative agenda for the rest of 1994, there was growing concern that the Senate would simply run out of time to pass a bill before it recessed for the year. And that would have been a devastating setback for proponents of interstate banking. Since this has been the second session of the 103rd Congress, and measures that are still pending when a Congress officially ends automatically die, lobbyists would have started from scratch in 1995. It would have been a defeat evocative of Sisyphus, the mythical king of Corinth who spends eternity in hell rolling a large rock up a hill, only to have it tumble down when he reaches the top.
Who stands to gain the most from nationwide banking? Sellers at small institutions in attractive locations like Missouri, Alabama, Virginia and Florida--states now open to outsiders only on a limited basis--will find that expanding the list of potential acquirers should increase the value of their franchises. "It improves the buyers' list," says Christopher Flowers, a partner at Goldman, Sachs & Co.
It's also likely that some retail consumers will benefit from full-scale nationwide banking over time, particularly those who live in large urban markets that overlap two or more states, since they often are limited in the type of crossborder transactions they can perform. The Federal Reserve Bank of St. Louis estimates that some 53 million Americans either live or operate small businesses in 37 cross-state urban areas.
It's not clear that anyone will actually lose because of nationwide banking. While the Independent Bankers Association of America had mounted an 11th-hour effort to kill the bill in the Senate, few experts really believe that community banks will suddenly disappear en masse--driven out of business by the predatory giants from Charlotte and San Francisco.
"I don't think so, and I point to North Carolina in giving you an answer," says Medlin. "We've had (statewide) banking since the Civil War." When Medlin started his career 35 years ago, the state had 90 commercial banks of varying size; today it has 80, despite the enormous growth of its three largest institutions--NationsBank, First Union Corp. and Wachovia. Medlin believes the niche strategy of a typical community bank becomes even more viable as large banks grow larger still. "Banking is still a very personal business, even with the technology," he says. "I think the community bank can survive."
It's also likely that nationwide banking will bring less change than one might expect. All states but Hawaii have opened their borders to at least some degree. And while federal action will no doubt hasten the process, nationwide banking--if that term means an end to state protectionism--has already arrived for much of the U.S. "An enormous part of the country is already open to each other," says Medlin. "The increased activity made available by this is not huge--significant, but not huge."
Medlin also wonders if commercial bank acquisitions that increase the acquirers' branch networks--as virtually all of them do--are becoming untenable. Banks are being forced to restructure to compete with low-cost, nonbank institutions like Fidelity Investments. Is it then wise to buy a large branch system that ultimately must be pruned away?, Medlin asks. Otherwise, he says, "You end up with just a bigger bowl of the same stale soup." Should this thinking catch on, it could make mergers less appealing despite the arrival of full-fledged nationwide banking.
It would seem that the banks with the most to gain are those with large multi-state branch networks. NationsBank Corp., which operates throughout the Southeast and Texas, has estimated that combining them into a single network will save it about $50 million a year.
But other big banks, even those that lobbied in favor of nationwide banking, downplay the cost issue. Part of the problem is that the new law creates additional expenses, which makes it difficult to calculate any net savings. "We have not factored in the costs of an interstate banking (law)," says BankAmerica Corp. Vice Chairman Luke Helms. Forcing banks to keep detailed market share statistics for all their locations, for instance, will entail a big systems expense. Helms says he needs more time to figure it all out. "I feel a little like a general manager of a football team trying to understand the salary cap," he quips.
Too, banks have made steady progress at taking costs out of their retail networks--so there's less left to save. In recent years, BankAmeri-ca has consolidated 29 processing centers into eight, and "that came about through logic rather than an interstate banking bill," says Helms.
Helms also questions whether most consumers will gain that much--at least at first. Developments like bank cards, electronic networks and even direct payroll deposit already have given consumers more latitude than ever before. "Hopefully, it will make life a little easier," he says. Helms cites the example of a BankAmerica customer who moves from California to Arizona. "She can take her checking account with her, and we certainly hope she will," he explains. But for the consumer, Helms says, "I'm not as excited as I (once) was because I think it's basically a non-event."
Other large banks may be slow to take advantage of the law. Banc One Corp. will continue to operate its 82 chartered bank subsidiaries in the same decentralized fashion it always has, explains a spokesman. The only exception might be in "river towns" like Cincinnati and Covington, KY, where Banc One operates in each location. Merging nearby units on either side of the Ohio River might make sense, he explains.
For its part, since Wachovia is strategically committed to remaining a southeastern bank for the foreseeable future, having the ability to leave the region is of little immediate benefit. "Beyond that, we'll have to wait and see," says Medlin.
If the only significance of an interstate banking law is historical, then one is tempted to ask whether it was worth the effort. Oddly enough, many bankers still answer with an unqualified yes. Medlin points out approvingly that "You can't build an island anymore." Once the law takes effect, no one will be protected from the salutary effects of competition. Helms, likewise, believes it is a symbolic victory--and also one with important long-range benefits. "It recognizes for the first time that banks are nationwide, and that's monumental," he says. "I think a lot of positive things come out of this."
With passage, Congress has finally laid to rest two centuries of populist distrust. And if that helps the industry win other battles to broaden its business, then it truly is an important victory.
