PHILADELPHIA - Four Middle Atlantic state banking commissioners signed a supervisory pact Wednesday that paves the way for banks they regulate to branch across state lines.
The first-of-its kind deal is intended to put state-chartered institutions on an equal footing with national banks in the new world of interstate branching.
Lately, the Office of the Comptroller of the Currency has played up the fact that national banks can go interstate and deal with only one regulator, said Maryland Banking Commissioner Margie Muller.
"We can now offer exactly the same thing," she said after joining the commissioners of Delaware, Pennsylvania, and Virginia in signing the agreement at the Federal Reserve Bank of Philadelphia, which helped negotiate the deal.
New Jersey is expected to join the compact once its legislature approves pending interstate legislation, and the four regulators said they expect to add a number of other states - including West Virginia, North Carolina, South Carolina, Kentucky, Tennessee, and Georgia - and the District of Columbia.
"We hope this will go to every state, so they don't have to start from ground zero," said Ms. Muller.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits cross-border branching as of June 1, 1997 - although some states have elected to allow branching before the deadline.
The Philadelphia Fed deal gives the home state regulator primary responsibility for its banks, including those that cross into other jurisdictions. The home state must investigate all complaints, take all the enforcement actions, and coordinate all exams.
"We regulators have given up sovereignty for the sake of the banks we serve," added Richard Rishel, Pennsylvania's secretary of banking.
However, states that play host to banks from other jurisdictions will retain several specific powers, including the authority to order the home state regulator to conduct a compliance exam at a branch. Also, host states can refer complaints and recommend enforcement actions to the home state regulator, and they can help examine branches in their state.
The deal, however, includes several provisions that allow states to get around this division of authority. One of the more striking is a provision allowing the host state, under "appropriate circumstances," to investigate a dispute on its own. Host states also can examine a branch during "emergencies" without the home state regulator being present.
Ms. Muller said these provisions make sense because they permit home state regulators to ask host state examiners to review a problem before getting involved themselves.
Still, the regulators ran into one sticking point. The parties couldn't reconcile conflicting laws dealing with applications. So they struck a compromise. The home state regulator will have to approve all applications, except in cases where the host state's laws require otherwise.
Banking industry officials generally praised the deal, saying it adequately protects institutions in the home and the host state.
"This is a big deal," said Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America. "It is important for the banks involved because they want to make sure supervision isn't too complicated, and the banks not branching interstate want to know that those banks that do branch are being adequately supervised."
Ms. Thomas, whose group opposed the interstate branching bill, said she is particularly pleased that the host state can participate in exams. "That is a good protection," she said, adding that host state examiners will be more likely to look for signs that the branch is engaging in predatory pricing or other schemes that could hurt native banks.
The pact contains one major weakness, Ms. Thomas said. Bickering among state commissioners could bring the whole deal crashing down, she said. "This whole system is going to have to rely on the good will of commissioners to operate effectively."
Mathew Street, associate general counsel at the American Bankers Association, said the deal isn't a surprise.
"It was what people expected to happen and intended to happen," he said. "It is the only path to follow."