Tucked into the Obama administration's regulatory reform proposal is a plan to lift restrictions on interstate branching, an issue that could end up dividing community bankers.
Though the industry has focused on higher-profile provisions in the reform plan, observers say banks close to state lines will generally favor the plan so that they can better serve customers who 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.
Steve Turkiewicz, the chief of the Montana Bankers Association, is no fan of the proposal. Though his state is massive, it has fewer than 1 million residents, and Turkiewicz said Montana bankers do not believe there is enough business to support banks that might want to branch in from neighboring states. The Montana bankers worry that their communities will suffer if out-of-state banks move in, then pull up stakes if a branch fails to meet expectations, he said.
"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 said. "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 is that banks based in slow-growing Montana could more easily open branches in faster-growing states if interstate branching laws were 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."
As part of its plan to eliminate the federal thrift charter, the administration has proposed doing away with restrictions on out-of-state institutions' building of branches, 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.
Under current law the only way for an out-of-state commercial bank to enter a new state, unrestricted, would be to buy an institution there.
Thrifts have no such restrictions and can move freely from state to state.
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," said Karen Thomas, the trade group's executive vice president of government relations.
Twenty-one states have reciprocal agreements under which they allow other states' banks to open branches within their boundaries if the other states return the favor.
John Ryan, executive vice president in the legislative department of the Conference of State Bank Supervisors, said in late June that, though he has heard many arguments for allowing unfettered interstate branching, his group was waiting for its members to reach a consensus on the issue before taking a position.
The Riegle-Neal Interstate Banking and Branching Efficiency Act was passed in 1994 largely to protect community banks' turf. Ryan said one argument for lifting branching restrictions is that they have been ineffective. Bank of America Corp., for example, circumvented deposit-cap rules when it acquired Countrywide Financial Corp., a thrift's parent. Other institutions, too, have moved into states via the thrift charter loophole.
The state bank supervisor group later came out in favor of the admistration's proposal.
Of course, the first step toward repealing Riegle-Neal is eliminating the thrift charter, and that will not 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.
Ted Dreyer, senior attorney for financial services at Wolters Kluwer, said he doubts that letting banks branch more freely would have much effect on competition.
He pointed to a 2007 white paper produced by the Federal Reserve Bank of Chicago which concluded 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 said, he does not expect bankers to dig in their heels too deeply on interstate branching, one way or the other, because they have much bigger policy battles to fight when it comes to regulatory reform.
Interstate branching, he said, "can get horse-traded, depending how the other issues go."
