Claiming that the U.S. banking industry is overly fragmented and losing ground to international competitors, a powerful coalition of federal regulators, legislators, influential consultants and some large banks is renewing the call to allow U.S. banks to branch nationwide.
The drive favoring larger U.S. banks with extensive branch networks is being engineered by top Federal Reserve Board officials and key members of Congress, among others.Their moves pose the latest challenge to states that want to preserve their historical right under the McFadden Act to control banking activities within their borders.
The latest strike for nationwide banking is legislation to be introduced this week by Sen. Christopher Dodd, D-Conn., and Rep. Charles Schumer, D-N.Y.
At a hearing last Thursday, Federal Reserve Board Chairman Alan Greenspan asked Dodd if this legislation would mean an end to the McFadden Act. Told that it would, Greenspan responded, "No question, it would be highly desirable."
The McFadden law, enacted in 1927, allows national banks to open branches in a given state only to the extent allowed state-chartered banks.
It thus gives state governments the final word on branch authority for all banks regardless of charter and broadly prohibits banks from opening deposit-taking offices across state borders.
By way of reciprocal interstate banking laws that many states enacted during the 1980s, bank holding companies can buy or establish a separate institution in each state they enter. In most cases, entry into each new state requires the expense and bureaucracy of an independent management and a new board of directors.
A majority of states permit some form of interstate banking. About 30 allow statewide branching, another 13 have restricted branching laws and a handful still operate as unit banking states with very limited or no branching.
Federal Reserve Board Governor John LaWare thinks the McFadden Act has contributed to competitive disadvantages for U.S. banks in the international markets, where other banks have lower capital and funding costs and greater diversification of risk.
In a recent interview, he said, "As long as the McFadden Act is on the books, interstate banking becomes a cumbersome and expensive operation that could be improved tremendously, from an efficiency point of view, if you consolidate as branches."
LaWare and others say Congress should address the need to liberalize laws on bank branches next year when key industry reforms such as deposit insurance are expected to be considered.
William Isaac, former chairman of the Federal Deposit Insurance Corp., says more people are agitating to break down interstate branching barriers in markets such as metropolitan Washington or New York.
Analysts are saying that when Europe becomes one market in 1992, it will call for a re-examination of U.S. policies. "Some people say if Europe will allow branching by banks across national boundaries, why can't the U.S. permit branching across state lines?" Isaac said. "Europeans are saying, `You U.S. banks want to branch in Europe, but you won't let us branch in the U.S. We want reciprocal treatment.' "