Patterns in West suggest branching won't result in a few megabanks.

WASHINGTON -- To banks and bank holding companies in the West, lifting federal restrictions on interstate banking would just be a formality. The western states have already opened their borders to branches from other states.

The patterns that have developed in that region suggest nationwide interstate branching would not lead to a concentration of assets among a few large institutions, according to a new study by the Federal Reserve Bank of San Francisco.

"The pattern in the West suggests that there are regional factors that likely will keep banking from evolving into a system consisting of just a few nationwide megabanks," wrote Fred Furlong, a San Francisco. Fed vice president and author of the study.

"You're talking about retailtype banking activities," said Mr. Furlong in an interview. "That requires some understanding of local markets."

Bill Expected to Pass

An interstate branching bill moving through Congress would eliminate all barriers to interstate banking, permitting banking companies to own and operate separately chartered banks in other states.

In addition, the bill would eliminate restrictions on branching, except in those states that choose to opt out of the system. Branching would permit a bank holding company to convert out-of-state banks it owns into branches.

Although progress on the bill has slowed considerably in the past two weeks, most observers believe the legislation will pass this year.

One common concern about interstate banking is that out-of-state banks will raid local deposit markets as a source of money to lend in their home states, Mr. Furlong said.

Economic Logic

"But that is not the case," he said. "Rather, banks have an incentive to allocate credit to the highest-valued uses, taking into account risk."

Interstate banking would certainly have some effect on lending with this incentive, Mr. Furlong wrote, but "it could go either way."

"If interstate banking organizations are better than single state banks at moving funds around, and if returns on the marginal lending in a given state are low, interstate banking might mean less lending in that state," he wrote.

"However, if returns on lending tend to be high in a state, interstate banking could mean more lending in that state."

Where the Profits Are

His comments reflect the belief that money migrates, by one means or another, to areas where it is most profitably and efficiently used. And interstate banking, as such, has little effect on this phenomenon.

Over 90% of Nevada's banking assets are held by out-ofstate banks, and Arizona and Washington both weigh in at a around 80%, the study shows.

Most of the interstate banking activity within the 12th District has been initiated by only a few banks, a large percentage of which are located within the district. About $105 billion of the 12th District's $353 billion in bank holding company assets are controlled by out-of-state companies that are based in the district.

California-based holding companies hold about half of the interstate banking assets within the district, in part because of the presence of BankAmerica, the biggest institution on the West Coast and the second-largest in the United States.

Mr. de Senerpont Domis writes for the Medill News Service.

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