Montana Bankers Association chief Steve Turkiewicz is no fan of the Obama admin- istration's plan to lift restrictions on interstate branching. While the state is massive, it has less than one million residents, and Montana bankers simply don't believe that there's enough business to go around to support banks that might want to branch in from neighboring states. They worry that Montana communities will suffer if out-of-state banks move in, then pull up stakes when the branch fails to meet expectations.

"We think the laws that we put into place consider the long-term commitment to Montana communities, as opposed to a marketing decision that is good at the moment," Turkiewicz says. "And if we look at what's happened over...the last 18 months, those decisions can be changed very quickly; and what do we do with the community that's left sitting there?"

The other side of the argument, of course, is that banks based in slow-growing Montana could more easily open branches in faster-growing states if interstate branching laws are relaxed. As Obama officials pointed out in a white paper outlining their plan for regulatory reform, geographic diversification can protect banks from "local economic shocks."

Under current law, the only way for an out-of-state commercial bank to enter a new state, unrestricted, is to buy an institution there. Thrifts have no such restrictions in place and can move freely from state to state. But as part of its plan to eliminate the federal thrift charter, the Obama administration has proposed doing away with restrictions on de novo branching by out-of-state institutions, regardless of charter; as well as ending the minimum age in-state banks must reach before they can be acquired. Out-of-state banks would still be forced to adhere to deposit concentration caps, which would become the de facto last line of defense for states.

So far, little consensus has emerged on the proposal - partly because the industry is focused on higher-profile provisions in the regulatory reform plan, and partly because it is so divided on interstate branching to begin with. Twenty-one states already have reciprocal agreements in place under which they will allow other states' banks to open branches in their states if the other states will return the favor.

John Ryan, executive vice president in the legislative department for the Conference of State Bank Supervisors, says that while he's heard many favorable arguments for allowing unfettered state-to-state branching, his group was still waiting for its members to reach a consensus on the issue before taking a position. "There are definitely two sides to this," he says.

It's not just state commissioners who are split. Industry observers say that banks close to state lines will generally favor the plan so they can better serve customers that tend to cross state lines often. Banks in the middle of states, meanwhile, might not be so eager to expand into new states, or be receptive to more competition.

The Riegle-Neal Interstate Banking and Branching Efficiency Act was passed in 1994 largely to protect community banks' turf. Ryan of CSBS says one argument for lifting branching restrictions now is that they have failed at this mission. Bank of America, for example, circumvented deposit-cap rules when it acquired Countrywide Financial, since Countrywide was a thrift. Other institutions, too, have moved into states via the thrift charter loophole.

Of course, the first step in repealing Riegle-Neal is eliminating the thrift charter, and that won't be easy. The banking industry is putting much of its lobbying muscle behind preserving the thrift charter, and if it succeeds, the interstate branching debate could become moot.

Still, the Independent Community Bankers of America's official position is that it opposes the Obama administration's branching proposal, reasoning that states should be allowed to make their own laws regarding competition. States "like to have banks that are headquartered in their state and have a very local interest in the economy and the success of activity in that state," says Karen Thomas, the ICBA's executive vice president of government relations.

Ted Dreyer, senior attorney for financial services at Wolters Kluwer, said he doubts that letting banks branch more freely will have much impact on competition. He points to a 2007 white paper produced by the Federal Reserve Bank of Chicago that concludes that deposit caps - not branching restrictions or age requirements on acquisitions - have the greatest impact on whether or not banks move into other states. The Obama plan would still permit states to set deposit caps.

Ultimately, Dreyer says he doesn't expect bankers to dig their heels in too deeply on interstate branching - one way or the other - because, when it comes to regulatory reform, they have much bigger policy battles to fight.

"The biggest battles are going to be in other areas and it's conceivable that smaller issues like [interstate branching] can get horse-traded, depending how the other issues go," Dreyer says.

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