BANK GEOGRAPHIC STRUCTURE

In banking, the term geography refers to the area in which banking activities are allowed to take place, such as interstate banking, and intrastate and interstate branching. While even banking experts often confuse the terms, they have distinctly different meanings.

Intrastate Branching

Intrastate branching means that a bank can have more than one office within its home state. Fifty years ago, few banks had more than one office. Today, most banks can open offices (branches) across their states. Bank branching originated at the state level, and the states have directed the expansion of banks' geographic boundaries. Forty states, the District of Columbia and Puerto Rico allow statewide branching, and ten states allow limited branching.

Today there are almost 50,000 bank branches open across the country, constituting approximately 80% of the nation's banking offlces. More than 60% of banks today operate branches, commonly over broad areas within their home states. The proliferation of branches has reduced the number of banks in the United States, but perhaps not as much as you might expect while the U.S. had 147399 banks in 1940, the country has 10,715 banks today, a 25% decline over more than fifty years.

The 1927 McFadden Act sought to give national banks competitive equality with state-chartered banks by letting national banks branch to the extent permitted by state law. The McFadden Act specifically prohibited interstate branching by allowing national banks to branch only within the state in which it is situated. Although the Riegle-Neal Interstate Banking and Branching Efficiency Act repealed this provision of the McFadden Act, it specified that state law continues to control intrastate branching, or branching within a state's borders, for both state and national banks.

Interstate Banking

Interstate banking refers to the ability of a bank holding company to own and operate banks in more than one state. Under the Douglas Amendment to the Bank Holding Company Act of 1956, states controlled whether, and under what circumstances, out-of-state bank holding companies could own and operate banks within their borders. This right was upheld in the 1985 Northeast Bancorp v. Board of Governors decision, which detersnined that states could establish and enforce regional interstate banking compacts.

The need for the Douglas Amendment grew from the concern that bank holding companies were evading the McFadden Act and state branching laws by acquiring numerous subsidiary banks in various states, and then operating these banks as if they were branches. The development of these interstate bank networks was a significant factor leading to Congress' passage of the Banking Holding Company Act of 1956. Senator Douglas emphasized that a primary purpose of his amendment was "to prevent an undue concentration of banking and financial power, and instead keep the private control of credit diffused as much as possible."

Regional compacts were reciprocal legislative agreements between states in a specific geographic area. For example, six New England states adopted legislation in the mid-1980s allowing interstate acquisitions by banks in the New England region. Banks in other regions, in the southeastern United States and the Midwest, soon followed with regional banking arrangements.

Thirty-five states currently allow bank holding companies from anywhere in the country to establish or acquire a bank within their borders, referred to as "full nationwide banking." Fourteen states and the District of Columbia allow only regional interstate banking, and only one state, Hawaii, has no interstate banking statute.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed the Douglas Amendment. As of September 29, 1995, federal law allows full nationwide banking across the country, regardless of state law. Another provision of the Riegle-Neal Act allows affiliate banks within bank holding companies to effectively act as branches for each other, accepting deposits, collecting payments, and providing other customer services.

Interstate Branching

Interstate branching means that a single bank may operate branches in more than one state without requiring separate capital and corporate structures for each state. The state of New York approved the first interstate branching statute in June, 1992. This law set several requirements and conditions on New York branches of out-of-state banks. It also required reciprocity, that is, that New York banks be allowed to branch into the home states of banks that branch into New York. North Carolina, Oregon, and Alaska passed similar laws in 1992 and 1993.

The Riegle-Neal Interstate Banking and Branching Efficiency Act allows national banks to operate branches across state lines after June 1, 1997. The federal law allows branching through acquisition only, which means that a bank holding company must acquire a bank and merge it into another bank in order to operate it as a branch.

The Riegle-Neal Act allows states to "opt out" of interstate branching by passing a law to prohibit it before June 1, 1997. A state that "opts out" of interstate branching prevents both state and national banks from branching into or out of its borders. If a state opts out, it may opt back in at any time by repealing its prohibition on interstate branching.

States may also "opt in" before the nationwide trigger date by passing a law to allow interstate branching for both state and national banks. States that do not wish to "opt out" must enact some form of legislation to allow state-chartered banks to operate branches across state lines, because the Riegle-Neal Act addresses branching rights for national banks only. States also have the power to authorize de novo branching across state lines, which means that a bank could simply open a branch in another state instead of having to acquire an entire bank.

Interstate branching will require many changes in the current system of bank supervision. Generally, state and federal regulators examine only a bank's headquarters, not its branches. While this will probably continue to be the case in a system of interstate branching, state and federal regulators are working now on ways to collect and share the information they need about banks' operations in multiple states and federal supervisory districts.