After decades of frustration and acrimony, nationwide branch banking is about to become a reality. The prevailing view among most commentators seems to be that not much will change as a result.
Their reasoning is that since most states already allow interstate acquisitions by holding companies, the new law is merely a ratification by the federal government of what has already occurred at the state level. I disagree.
The recent legislation affords banks a range of strategic options that could change the face of banking and bank regulation in ways many people are just beginning to understand.
If a bank is able to operate through a single charter with branches in all states of importance to it, a logical question is, why would it need a bank holding company structure?
The holding company device was conceived as a means to bypass restrictions on branch banking.
It is difficult to identify any activity currently permissible to bank holding company subsidiaries that could not be engaged in directly by a bank or a bank operating subsidiary.
For example, a holding company's mortgage banking, finance company, and leasing activities could be conducted through bank subsidiaries.
Indeed, operating through a bank subsidiary could expand the range of permissible activities. One notable example is that a state nonmember bank, unlike a national or Fed member bank, is not precluded by the Glass-Steagall Act from affiliating with an investment banking firm.
A typical large holding company today operates multiple banks, some national and some state, plus a number of nonbank subsidiaries.
It is regulated by the Securities and Exchange Commission, the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corp., and various state banking departments.
Suppose it were to convert all of its banks into a single state nonmember bank, transform its nonbank subsidiaries into subsidiaries of the bank, and jettison its holding company.
It would be regulated by the FDIC and probably one state banking department, assuming the various states enter into reciprocal supervisory compacts, which they are likely to do.
This structure would broaden the range of permissible activities, make funding easier and less expensive to arrange, and lower operating expenses. It would also result in a substantial reduction in regulatory burdens and costs.
While bankers would have every reason to be ecstatic over this happy state of affairs, one suspects that at least some folks in Washington would be less than delighted. The Comptroller of the Currency, the Federal Reserve, and the SEC come immediately to mind. The likely result will be a mad scramble by the federal agencies to preserve their turf through agency consolidation and other proposed measures.
If the banking industry is ever to break the regulatory chokehold dragging it down in the marketplace, it will need to prepare to wage a very intense battle in Washington to preserve its strategic options.