State Regulators Taking Aim at the 30-Mile Rule

State banking regulators are stepping up their attack on a tactic used by national banks for expanding across state lines.

The banking commissioner of Michigan is protesting KeyCorp's use of the "30-mile rule" to move a Michigan unit to Indiana. And Oklahoma's banking chief is threatening to sue over plans by a small bank in that state to jump into Texas using the rule.

Meanwhile, a dozen state regulators have thrown their support behind Texas' banking commissioner in her fight against an expansion based on the rule.

The commissioners' protests mark the latest outburst over the 30-mile rule, which lets national banks move headquarters offices 30 miles - even across state lines. Despite sharp opposition from the states, the Office of the Comptroller of the Currency has approved a number of interstate 30-mile moves.

The banks say they are using the rule to consolidate operations and save money. State regulators, however, say the banks are gaining an unfair advantage and are jumping the gun on the federal interstate branching law enacted in 1994.

In fact, the commissioners charge that Comptroller Eugene Ludwig and his agency are deliberately trying to undermine the authority of the states.

Some state commissioners, such as those in Kansas and Wisconsin, have knuckled under over the past year. Michigan's top bank regulator said he wants to fight.

Patrick McQueen, commissioner of Michigan's Financial Institutions Bureau, was immediately suspicious last November when he learned that KeyCorp's Society Bank wanted to move its $1.1 billion-asset Ann Arbor, Mich., bank 80 miles southwest to Bronson and then hop over the state line into Indiana.

He protested the application with the OCC because he felt the bank was trying to circumvent state and federal interstate banking laws.

Specifically, Society converted to a national bank, relocated its main office in Bronson, again moved its main office to Angola, Ind., merged with Society National Bank Indiana and branched back into Michigan. Much to Mr. McQueen's dismay, the applications were approved in one fell swoop on Jan. 8.

"States' rights in my opinion are being trampled," Mr. McQueen said. "I think this is going to get appropriate reaction."

The OCC declined to comment.

KeyCorp executives defended the move by saying that what they did was no secret. The Cleveland banking company moved its Michigan subsidiary into Indiana with the intent of eventually consolidating it with the bank in Cleveland by June.

"The filings we have done are within the boundaries of the law," said spokesman John Fuller. "We believe the applications we filed and got approval on were proper."

Still, Mr. McQueen says he believes KeyCorp has an unfair advantage over the state banks he oversees. Even though Michigan was an early state to approve interstate banking under Riegle-Neal, its law demands that it will only allow branching with states that have also opted in. Neither Indiana nor Ohio have opted in.

"I was very vocal in support of interstate branching," Mr. McQueen said. "I'm also very vocal for the right of states to control branching within their boundaries."

In all, Mr. McQueen has raised four questions. First, he wonders how the OCC can use the 30-mile rule to allow a bank to move 80 miles. Even though the rule has been applied to other banks moving across state lines, he also challenges the 30-mile rule when it moves a bank headquarters into another state.

He also doesn't believe KeyCorp should be able to leave its branches in Michigan if it's moving its headquarters to Indiana. Finally, Mr. McQueen argues that the OCC approved interstate branching contrary to Michigan law.

KeyCorp and the OCC "overstepped their boundaries literally, contrary to state law and federal law," Mr. McQueen said. He is contemplating a lawsuit against Society Bank and the Comptroller's Office.

In Oklahoma, Commissioner Mick Thompson is awaiting a decision by the OCC that would allow $124 million-asset Bank of Southern Oklahoma to relocate to Texas. If the bank receives approval, Mr. Thompson said, he will sue.

Meanwhile, many eyes are on the controversy in Texas, which centers on a lawsuit filed in North Texas against a move into the state by Commercial National Bank of Texarkana, Ark. If Commissioner Catherine A. Ghiglieri wins, the decision may help opponents block further applications to the Comptroller's Office.

In the Texas case, the Comptroller's Office approved an application in August one business day before a Texas law went into effect forbidding interstate branching. Texas, with more than 1,000 banks, is so far the only state to opt out of branching.

Bank departments have rallied around Ms. Ghiglieri. Commissioners of 11 states - Arkansas, Connecticut, Delaware, Iowa, Maine, Michigan, New Hampshire, North Dakota, Oklahoma, Virginia, and West Virginia - and the District of Columbia have signed a friend- of-the-court brief. The Conference of State Bank Supervisors also signed onto the brief, which was filed by Paul Foster, general counsel for the Oklahoma State Banking Department.

Mr. Foster said his bank became concerned when it discovered Bank of Southern Oklahoma, a $124 million-asset bank in Madill, was proposing a move to Dennison, Tex. Commissioner Thompson has protested to the OCC.

But Mr. Foster said he believes the comptroller has an agenda. "Congress should establish the rules. Not the comptroller of the currency," he said.

Mr. Foster contends that if Congress had intended to give discretionary power to the Comptroller's Office, it would have clearly stated so in Riegle-Neal.

"When you look back at banking legislation over the past 10 years, every time branching was brought up, it was hotly debated and highly protested - every time clear up to Riegle-Neal."

Ms. Ghiglieri agrees with that assessment. An 18-year veteran of the OCC, she says she believes Mr. Ludwig is trying to undermine the states.

"If you listen to the comptroller's speeches, you hear he talks a lot about a federal banking system," she said.

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