On Sunday, interstate branching will be legal in nearly every state thanks to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
The June 1 effective date is not expected to alter the industry overnight, but the law's long-term impact will be profound.
Going forward, bankers, especially those at large institutions, increasingly will question the value of holding a state charter and operating a bank holding company. The law also is expected to fuel the current wave of large bank mergers and ignite consolidation among small banks.
For some big institutions, the certainty offered by a national charter is irresistible. Cleveland-based KeyCorp will consolidate its 12 state- chartered institutions into one national bank by August.
Though Key could have retained its state charter, the option of answering to only one regulator made the most sense, said spokesman William Murschel.
"Key is using this as the impetus to become one nationwide bank," he said. "We have a coast-to-coast franchise, so we ought to organize and market ourselves like McDonald's or American Express, not a collection of companies defined by rivers or state lines."
Birmingham-based Amsouth Bancorp plans to combine its state-chartered institutions in Alabama, Florida, Georgia, and Tennessee this summer, but has no plans to convert to a national bank. But bank spokesman Jim Underwood acknowledged: "Over time we could find ourselves subject to duplicative regulation in the various states where we operate."
As a result, state regulators are under pressure to make their banking charters more attractive. "We've been we been quite concerned" about banks dropping their state charters, said Elizabeth McCaul, acting banking superintendent in New York where four of the five largest institutions are state-chartered.
"It's easier for banks that operate in multiple states to choose a national charter," she said. "For state banks it's less clear which laws apply when operating in several states."
Ms. McCaul and other state regulators are pushing Congress to pass legislation that would make it easier for their banks to take advantage of interstate branching. Ms. McCaul also is pressing New York lawmakers to pass a "wild card" statute that would allow her to keep the powers of state banks on par with national banks.
Jerry W. Spencer, executive vice president of the Alabama Bankers Association, noted that state banks still enjoy important advantages such as lower examination fees and wider affiliation powers than national banks. "I don't see a rush to change as long as state charters remain competitive," he said.
The Riegle-Neal law allowed holding companies to own banks in every state beginning in September 1995, but delayed nationwide interstate branching by individual banks until this year. States, however, were given the opportunity to permit interstate branching earlier or to "opt out" altogether.
Only Texas and Montana chose to delay interstate branching; Texas until September 1999 and Montana until October 2001.
Legislatures in 29 states, the District of Columbia, and Puerto Rico permitted branching before June 1, while 18 waited until this weekend.
In three other states-Wisconsin, Missouri, and Kansas-lawmakers made no decision, but their banking regulators used "wild card" statutes to permit interstate branching on June 1.
With interstate branching now legal, many bankers also must decide whether they want to keep their holding companies. Experts predict that most big institutions will shed their Federal Reserve-regulated parents and fold their operations into one nationally chartered bank bank. That's due in part to the Comptroller of the Currency's decision to let national banks offer securities underwriting and other activities through an operating subsidiary.
"The holding company is starting to look very cumbersome," said Mark W. Olson, a partner in the Washington office of Ernst & Young. "Its principal purpose was to allow interstate ownership. Now, at the very least, the value of having a holding company will fade."
Michael P. Smith, executive vice president of the New York Bankers Association, agreed that holding companies may become a rarity, provided regulators allow a wide range of uses for operating subsidiaries. "A lot of activities handled by holding companies would be easier to do from the bank," he said.
But L. Thomas Block, lobbyist for Chase Manhattan Bank, predicted that many banks will keep the holding company structure to meet special needs.
Chase Manhattan Corp. owns Texas Commerce Bank in Houston, which can't be folded into the New York bank because Texas is one of two states that "opted out" of Riegle-Neal's interstate branching provisions.
Also, as a state-chartered bank, Chase Manhattan needs a holding company to operate its "Section 20" securities affiliate.
Interstate branching will drive more mergers, Mr. Olson noted.
That's because 32 states prohibit banks from starting banks from scratch; they must buy their way into the state.
The bulk of cross-border mergers will be done by small banks that want to serve rural markets near state lines. "The big bank mergers are going to get headlines, but the greatest number of acquisitions will take place at the community bank level," said Neil Milner, president of the Conference of State Bank Supervisors.
He predicted that state charters will remain the favored choice among community bankers. "State supervisors know the local markets better," he said.
But Mr. Milner predicted interstate branching will put small banks under more pressure to cut costs.
"Large banks are going to operate on a very efficient basis," he said. "Community banks must learn to compete on thin margins in businesses now enjoying large spreads, such as credit cards and mortgages."