Under a rule adopted Tuesday by the Federal Deposit Insurance Corp., a bank's out-of-state branches must meet lending minimums or risk being shut down by regulators.
Out-of-state branches will be required to maintain loan-to-deposit ratios equal to half the average of all banks in the state.
If a branch does not meet this requirement, examiners would determine whether it is making a reasonable effort to meet the credit needs of its community. If it fails this second test, the branch could be closed and the bank banned from opening new branches in that state.
The rule, designed to prevent siphoning of local deposits, will take effect in late September, 30 days after it is published in the Federal Register. The Federal Reserve Board approved a similar rule Monday, and the Office of the Comptroller of the Currency is expected to finalize its rule by Sept. 5.
Banking industry representatives criticized the rule, saying the Community Reinvestment Act already requires banks to meet the credit needs of neighborhoods where they take deposits.
"This is excess," said Steven I. Zeisel, senior counsel of the Community Bankers Association. "CRA takes care of this issue more than adequately."
Also Tuesday, the FDIC proposed streamlining the approval process for any state-chartered bank seeking to engage in new activities such as real estate investment or insurance underwriting.
The proposal, which does not grant new powers, would standardize what has been a case-by-case practice since 1991, when Congress required state banks to get approval from the FDIC before offering any product or service not permitted national banks.
If a healthy institution's home state permits the activity, its subsidiary would be able to underwrite securities and engage in real estate investment simply by filing a notice with the FDIC. Under the proposal, which will be out for comment for three months, the activity would be approved if the agency does not object within 30 days.
Current rules require state banks to file an application and wait for FDIC board approval, a process that can take as long as a year, agency officials said.
The proposal "will make it considerably easier for state banks to take advantage of state-authorized expanded powers," said Neil Milner, president of the Conference of State Bank Supervisors.
Mr. Milner criticized the new branching rule, however, saying it unfairly exempts national bank branches established under the 30-mile rule. This loophole allows national banks to move their headquarters anywhere within a 30-mile radius, even across state borders.
But OCC Chief Counsel Julie L. Williams said most of the 40 national banks that used the loophole to enter a particular state also used the 1994 interstate banking law. In these cases, every branch in an institution's statewide network must lend at least half as much as the average home-state bank, Ms. Williams said.
Banks will not have to produce or report additional data under the rule, the FDIC said. Contrary to most industry sources, Steven A. Bennett, general counsel of Banc One Corp., Columbus, Ohio, said compliance will not be difficult.
"This rule simply ensures that deposits generated locally find their way back into the community," he said. "Those of us that operate banks that identify closely with local markets are not going to be too upset about this."