Branch Plan: From Dark Horse to Juggernaut

WASHINGTON -- The Bush administration's interstate banking proposal is sailing through Congress, leading many money-center and regional bankers to believe that they may soon be able to exercise long-sought branching powers.

Even though the legislative process has barely begun, most observers expect the branching provisions to pass with any reform bill -- a development that could accelerate the consolidation of the banking industry.

Some advocates point to California and North Carolina, which have long permitted statewide branching, as prototypes for how the industry may evolve. If those states' bank-to-population ratios prevail nationally, the number of commercial bank charters could eventually shrink by 70% to 75%.

The administration position, which would lift the McFadden Act's restrictions on branching across state lines, was supported by the House financial institutions subcommittee in a decisive 24-14 vote. The vote humbled such formidable opponents as state governors and banking commissioners, consumer advocates, community bankers, and farmers.

"I know when I'm losing," said Peggy Miller, banking lobbyist for the Consumer Federation of America, which adamantly opposes the administration's interstate initiative. "We're pretty much resigned to some form of interstate branching."

Instead, the Consumer Federation plans to concentrate on damage control. The organization hopes to persuade lawmakers to add provisions limiting fees that banks can charge consumers and imposing community reinvestment requirements on banks that branch across state boundaries.

Permissible in 48 States

Interstate banking became common in the 1980s through acquisitions by bank holding companies. Hawaii and Montana alone among the 50 states bar out-of-state banks from entering.

The demise of the 64-year-old McFadden law promises radical change for the industry because it would allow holding companies to consolidate their current bank charters -- and hence administrative units and lending limits, among other things.

A holding company could convert its interstate acquisitions to branches of its lead bank. And any given bank could open new branches outside its home state without requiring permission from the host state.

The Treasury Department foresees huge cost savings for banks.

Expensive Redundancies

Under the current system, each bank in a multistate holding company has its own board of directors, auditing and regulatory reporting requirements, and accounting and computer systems. All those redundancies could be eliminated, the anti-McFadden forces say.

McKinsey & Co. consultant Lowell L. Bryan estimates eventual savings through consolidation could run as high as $10 billion a year -- for an industry that had pretax earnings of $24 billion in 1990.

Mr. Bryan does not predict how many commercial banks would survive any given consolidation scenario. But, a Treasury study predicts, if the proportion of banks to population nationwide equaled that of California -- where 433 institutions serve 29 million residents -- only about 3,700 of today's 12,500 banks would survive.

Some independent-banking advocates point to North Carolina and South Carolina as evidence that strong community banks can survive competition from statewide or interstate entities.

Dwindling Prospects

In North Carolina, where 68 of the 78 chartered banks have less than $500 million in assets, there is one bank for 84,600 people. That ratio, applied nationwide, would leave room for only 3,000 banks.

In South Carolina, where 78 of 84 banks have less than $500 million in assets, there is one bank for 42,000 people. That ratio extended nationally would yield 6,000 surviving institutions, about half the current total.

Mr. Bryan and other supporters of change have contended that well-managed community banks will not be conquered by out-of-state predators. Much of the economic gain that McKinsey predicts would occur through big-bank mergers and consolidations.

"Just 12 to 15 mergers built around solid-performing players, in markets where there is overcapacity, could create annual cost savings in the range of $4 billion to $6 billion," Mr. Bryan said.

Some Future for Duality

But Treasury acknowledges that some of the duplicative systems may be maintained, even if the interstate branching barriers are swept away. Localized boards of directors are a source of loan referrals, Treasury noted in a study, and might well be maintained.

Moreover, the Fed's system of tiered reserve requirements provides an incentive to retain multiple, small subsidiaries, rather than convert them into branches -- at least for the smaller banking organizations that set aside the least reserves relative to deposits.

Opponents of the Treasury plan are regrouping for another skirmish when the full House Banking Committee takes up the administration's banking bill. Rep. Bruce Vento, D-Minn., who led opposition to interstate banking when the subcommittee voted on it, is expected to try again, perhaps modifying his approach.

When the subcommittee on financial institutions met, Mr. Vento urged an amendment that would have given states a veto over branching rights within their borders. He also asked lawmakers to establish limits on asset concentration among large banks. Mergers among the top 25 banks would not have been allowed.

Open Mind About Mergers

Mr. Vento wants to limit mergers, in part out of concern that regulators will continue to bail out large institutions.

"We don't need to create any more too-big-to-fail banks," Mr. Vento said in a recent interview. But to gain votes, the Minnesota populist may either drop the concentration limits or ask that they be considered apart from his interstate measure.

As a result, interstate-banking opponent Kenneth Guenther, executive vice president of the Independent Bankers Association of America, believes that "Vento is very much alive."

Most observers, however, think the best that foes of interstate branching can hope for is to delay the measure's effective date for a few years or hobble it with nuisance provisions.

One such provision is a measure from Rep. Joseph Kennedy 2d, D-Mass., that requires banks to commit to lend specific amounts to low-income communities, small businesses, and the like, before receiving approval to branch across state lines.

Role for Compliance Rules

The Kennedy amendment also requires banks to obtain one of the two top Community Reinvestment Act compliance grades -- outstanding or satisfactory -- as a prerequisite to interstate branching. It passed the subcommittee by only one vote, but Mr. Kennedy believes he can widen the margin in his favor when the full banking committee votes later this month.

Mr. Guenther said the subcommittee vote "was a wakeup call for the nation's governors," who are now ready to fight.

Several governors are contacting lawmakers in hopes of retaining a voice in branching regulation. One example is a joint letter from Gov. Tommy Thompson of Wisconsin and Gov. George Sinner of North Dakota to Senate Banking Committee Chairman Donald W. Riegle Jr., D-Mich. They told Mr. Riegle that Congress should not touch the restrictions contained in the McFadden Act and its counterpart in the Bank Holding Company Act of 1956, known as the Douglas Amendment.

Guardianship for Revenues

"An individual state can best determine its own needs," they wrote.

Governors may also be concerned about potential revenue losses. At least 27 states levy a franchise tax on the income from federal obligations held by banks.

But federal law permits states to impose such taxes only on home-state institutions and those that receive a privilege from the state, such as permission to do business within its borders.

The bill that emerged from the House subcommittee probably would not permit states to continue imposing franchise taxes on banks, since banks would no longer need permission to cross state borders, said Sandra B. McCray, a tax-law expert who teaches at the University of Colorado.

Ms. McRay said banks might also have incentives to move their headquarters to one of the 24 jurisdictions that do not impose franchise taxes.

Chilling Forecast

Some of the groups opposed to interstate banking worry that their livelihoods are jeopardized. In a world of interstate branching, they say, credit could become less readily available for farmers, small businesses, and consumers.

"Urban branch banks with loan officers located far away from rural communities will be unwilling to provide credit services to small farmers," said Leroy Watson, a lobbyist for the National Grange, a farm organization.

Treasury officials argue that interstate branching will actually increase credit availability. If local banks are not serving a community, they say, other lenders will be free to move in.

But consumer advocates, such as the Consumer Federation's Ms. Miller, say that unless the Community Reinvestment Act is tightened, interstate branching "will lead to a massive movement of deposit dollars out of local communities."

The reinvestment act "doesn't apply to branches at all, right now," said Ms. Miller. "If a tiny town is having a problem with a local branch, instead of being able to sit down with the branch they'll have to sit down with the holding company -- and that could be in New York or in Japan." [Tabular Data Omitted]

PHOTO : Peggy Miller Consumer Federation of America

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