Interstate Banking

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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed the Douglas Amendment.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.