Unless Congress makes it easier for state-chartered banks to branch across state lines, the dual banking system will not survive, two regulators warned Thursday.
State-chartered institutions that want to expand across state boundaries will increasingly choose a federal charter to escape higher costs and administrative headaches, according to Neil Levin, New York State banking superintendent, and John Bley, Washington State's lead banking regulator.
"I absolutely believe there aren't many banks that would want to take advantage of a state charter," Mr. Levin said.
Cleveland-based KeyCorp's decision last month to consolidate its 11 state-chartered banks into one national institution is a sign of the future, he said.
The two regulators were in town on behalf of the Conference of State Bank Supervisors, asking the National Conference of State Legislatures to press for federal legislation that would allow state-chartered banks to exercise all powers granted by their home state regulators, even at branches located in other states.
But Iowa Assistant Attorney General Kathleen Keest said that could trigger a "race to the bottom" as states eager to attract banks would weaken local lending and consumer protection rules.
Janice Shields, consumer research director for the U.S. Public Interest Research Group, said the proposal would strip state lawmakers of their power to protect bank customers from unfair-lending practices and high fees.
While no legislation has been introduced, the state supervisors group will try next year to amend the 1994 interstate branching law.
Since the interstate bill passed, the trade group has been trying to create "seamless" regulation for state-chartered banks. In November, the group brokered an agreement between state and federal regulators that established a bank's home state as its primary supervisor.
"If a bank has branches in 15 states and has to comply with 15 sets of laws, it won't keep a state charter," Mr. Bley said.
"Until we can restore a level playing field, there will not be many multistate banks with state charters," added Mr. Levin.
Time is running out because full interstate branching becomes federal law in June, Mr. Levin said.
Peter Kravitz, lobbyist for the Independent Bankers Association of America, said community banks will lose if too few institutions remain to keep state charters alive. "What's paramount to us is the preservation of dual banking," he said.
