The Conference of State Bank Supervisors is trying to get through Congress a bill that's important to all banks. The supervisors' bill will help ensure that state bank charters are as attractive as national charters in the context of interstate branch banking.
Most of the relief from excessive government regulation that banks have achieved has resulted from actions by state legislatures or various regulators. Congress has generally been so tied up in knots by special interest groups that it's been virtually incapable of leading the way on modernization efforts.
Elimination of the restrictions on branch banking is a good example. They were anti-competitive and limited banks' ability to diversify their risks.
Congress was finally able to dismantle the restraints because they'd already been gutted by actions at the state level. Various states had enacted statewide branching laws, followed by interstate banking compacts.
The states have been important laboratories for innovations in banking. Checking accounts, NOW accounts, adjustable-rate mortgages, and automated teller machines are among the many initiatives at the state level that were later adopted nationwide.
The Office of the Comptroller of the Currency is at the forefront of innovations in banking today. A short time ago, though, major banks were abandoning their national charters because the Comptroller's Office was regarded as an oppressive regulator.
The ability to shift between a national and state charter or to expand through either a holding company or bank subsidiary is critical to a healthy banking industry. The right to choose between a state and national charter is valuable only if both are attractive.
Right now many bankers are focused on the national charter. Indeed, some are in the process of forming an association to defend the national charter against political attacks. No less energy ought to be expended on behalf of state-chartered banks.
Nationwide branch banking presents unique challenges for state-chartered banks. If a national bank branches nationwide, it has one primary regulator. It's examined by the OCC, which determines the activities in which it can engage wherever it operates.
Things aren't as easy or clear for a state-chartered bank. If a state bank is chartered in Ohio, who examines the bank's branches in Florida? What law governs the permissible activities in Florida of an Ohio-chartered bank?
The Conference of State Bank Supervisors worked with the state banking departments, the Federal Deposit Insurance Corp., and the Federal Reserve to resolve the examination and supervision issues. The bank's home state (Ohio, in the example) is responsible for supervision and regulation of the bank nationally.
Under the Riegle-Neal Interstate Banking law, the host state (Florida, in the example) governs both national and state banks in the areas of intrastate branching rights, community reinvestment obligations, fair- lending practices, and consumer protection laws. So far so good.
The rub comes in determining the permissible activities of a "foreign" state-chartered bank. Assume Ohio banks can sell a product that Florida banks can't. What law governs this activity when an Ohio bank operates in Florida?
The supervisors' bill makes it clear that the home state's law (Ohio's, in our example) would apply, assuming national banks are permitted to engage in the activity. This puts "foreign" state-chartered banks on precisely the same footing as national banks.
The proposal ought to be a slam-dunk, except it's opposed by the National Conference of State Legislatures. That group is concerned that in- state banks will be disadvantaged vis-a-vis out-of-state banks. Since the override in the supervisors' proposal would apply only to activities permitted to national banks, the legislatures' opposition is fatuous.
Bankers who care about their industry's future need to get involved in this issue. A healthy dual banking system is vitally important to a strong, vibrant banking industry. u