TESTIMONY OF
RICKI HELFER, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
INTERSTATE BANKING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
1:00 P.M.
TUESDAY, OCTOBER 17, 1995
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
Madam Chairwoman and members of the Subcommittee, I appreciate the opportunity to testify on the
status of interstate banking and trends in bank consolidation. For over a decade, the growth of interstate
banking has been a fundamental element of the rapidly changing structure of the nation's banking
industry. Last year, Congress, recognizing the economic and competitive advantages produced by
removing the long-standing geographical restraints on banking organizations, added impetus to the
interstate trend by enacting the Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Riegle-
Neal Act"). This year, and especially over the last few months, a number of mergers and acquisitions
between large banking organizations have been announced. Attachment 1 lists the largest merger
announcements of 1995. Thus, the banking industry is in a period of change and transition. The
challenges for the Federal Deposit Insurance Corporation and the other banking regulators as the
industry passes through this time of restructuring are many.
The first section of this testimony contains a description of the banking industry's ongoing restructuring, a
process in which the growth of interstate banking organizations has played a central role. The description
includes historical background on the restructuring and places the recent activity in mergers and
acquisitions between banking organizations in the context of longer term developments. This section
draws from a study on interstate banking in progress by the FDIC's Division of Research and Statistics.
The study examines trends in FDIC-insured institutions over the past decade. The second section of the
testimony focuses on the impact of the banking industry's restructuring on customers of banks, and the
third section examines the future of the community bank. The final section reviews the FDIC's statutory
authority, and the agency's plans and initiatives, with respect to matters affected by the restructuring of
the industry.
AN INDUSTRY IN TRANSITION
For much of the nation's history, state boundaries controlled and curtailed the growth of individual banking
organizations. In most instances, a U.S. banking organization could not establish domestic deposit-taking
offices outside of the state where its home office was located. Moreover, its ability to expand within its
home state was often limited. Attachment 2 categorizes states according to their branching laws. One
result of this situation was a banking industry with numerous participants and protected geographic
markets. The industry was also constrained by state and federal laws that added product limitations to the
geographic limitations. Under the product limitations, banking organizations were restricted to offering a
limited number of financial products and services. Moreover, the limitations were often interpreted in a
narrow fashion that hindered the ability of banks to adjust their products to changes in technology and the
marketplace. These geographic and product limitations had a number of long-term negative impacts.
Businesses and consumers did not enjoy the benefits of full competition among depository institutions
and between depository institutions and other providers of financial products and services. Benefits from
greater competition can be in the form of lower prices, better products, and better availability of products.
The less-than-optimal level of competition among depository institutions hindered the movement of
banking resources. This allowed less efficient banks to command excess resources, and prevented more
RICKI HELFER, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
INTERSTATE BANKING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
1:00 P.M.
TUESDAY, OCTOBER 17, 1995
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
Madam Chairwoman and members of the Subcommittee, I appreciate the opportunity to testify on the
status of interstate banking and trends in bank consolidation. For over a decade, the growth of interstate
banking has been a fundamental element of the rapidly changing structure of the nation's banking
industry. Last year, Congress, recognizing the economic and competitive advantages produced by
removing the long-standing geographical restraints on banking organizations, added impetus to the
interstate trend by enacting the Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Riegle-
Neal Act"). This year, and especially over the last few months, a number of mergers and acquisitions
between large banking organizations have been announced. Attachment 1 lists the largest merger
announcements of 1995. Thus, the banking industry is in a period of change and transition. The
challenges for the Federal Deposit Insurance Corporation and the other banking regulators as the
industry passes through this time of restructuring are many.
The first section of this testimony contains a description of the banking industry's ongoing restructuring, a
process in which the growth of interstate banking organizations has played a central role. The description
includes historical background on the restructuring and places the recent activity in mergers and
acquisitions between banking organizations in the context of longer term developments. This section
draws from a study on interstate banking in progress by the FDIC's Division of Research and Statistics.
The study examines trends in FDIC-insured institutions over the past decade. The second section of the
testimony focuses on the impact of the banking industry's restructuring on customers of banks, and the
third section examines the future of the community bank. The final section reviews the FDIC's statutory
authority, and the agency's plans and initiatives, with respect to matters affected by the restructuring of
the industry.
AN INDUSTRY IN TRANSITION
For much of the nation's history, state boundaries controlled and curtailed the growth of individual banking
organizations. In most instances, a U.S. banking organization could not establish domestic deposit-taking
offices outside of the state where its home office was located. Moreover, its ability to expand within its
home state was often limited. Attachment 2 categorizes states according to their branching laws. One
result of this situation was a banking industry with numerous participants and protected geographic
markets. The industry was also constrained by state and federal laws that added product limitations to the
geographic limitations. Under the product limitations, banking organizations were restricted to offering a
limited number of financial products and services. Moreover, the limitations were often interpreted in a
narrow fashion that hindered the ability of banks to adjust their products to changes in technology and the
marketplace. These geographic and product limitations had a number of long-term negative impacts.
Businesses and consumers did not enjoy the benefits of full competition among depository institutions
and between depository institutions and other providers of financial products and services. Benefits from
greater competition can be in the form of lower prices, better products, and better availability of products.
The less-than-optimal level of competition among depository institutions hindered the movement of
banking resources. This allowed less efficient banks to command excess resources, and prevented more
efficient banks from bringing their capital and expertise to markets that could have benefitted from their
presence. Finally, banking organizations were constrained in their ability to meet the competition from
other segments of the financial services industry. The competitive disadvantage banking organizations
operated under is evidenced by their declining share of the assets of the financial services industry. For
example, in 1952, banks and thrifts held 63 percent of those assets. That proportion declined steadily
over the years and at midyear 1995 was 32 percent. The marketplace distortions arising from the
geographic and product limitations on depository institutions led to a variety of pressures for change. At
the institution level, creative management explored ways under existing laws to offer the products and
services that businesses and consumers demanded. At the industry level, changes were sought in the
state and federal laws that created the competitive inequities.
Indeed, over the brief period of little more than a decade, the U.S. banking industry has undergone a
geographic structural change of considerable proportions. Attachment 3 enumerates mergers, failures
and new charters of FDIC insured institutions over the past ten years. State banking barriers have
dropped significantly. At midyear 1984, 33 percent of the nation's banking assets were controlled by bank
and thrift organizations with operations in two or more states. At midyear 1994, the proportion was 64
percent, almost two-thirds of the nation's banking assets (See Attachment 4). A major consequence of the
rise of interstate banking has been consolidation in the industry. The number of banking organizations
has declined, and the proportions of banking assets and deposits controlled by larger banking
organizations have risen. This is reflected in a corresponding decline in the number of commercial banks
and savings institutions, as well as an increase in the number and assets of larger institutions (see
Attachment 5).
Concerning consolidation -- defined as the reduction in the number of institutions due to mergers and
acquisitions of healthy institutions and to failures of troubled institutions offset by the addition of new
institutions -- a representative statistic is the decline in the combined number of bank holding companies
and independent banks and thrifts. This decline was 32 percent, from 14,887 to 9,804, between year-end
1984 and midyear 1995 (see Attachment 6). In contrast, the decline does not mean that new institutions
are not being established. In fact, between 1984 and mid-year 1995, 2,476 new commercial banks and
savings institutions were chartered. At the national level, the share of industry deposits held by the largest
institutions has increased. At year-end 1984, the 42 largest banking organizations held 25 percent of the
nation's domestic deposits. By midyear 1995, 25 percent of domestic deposits was held by the largest 16
banking organizations (see Attachment 8). It should be noted that increased consolidation in the banking
industry at the national level has not resulted in more concentrated local banking markets. Among the
reasons are that much of the consolidation has involved mergers between organizations in different
markets and new institutions have entered markets.
The states have played a major role in the growth of interstate banking and the accompanying industry
consolidation. Beginning in the late 1970s and early 1980s, a number of states acknowledged the
changing economics of banking by allowing the creation and development of interstate bank holding
companies -- companies that own banks in two or more states (see Attachment 9). The state laws varied
considerably. Some states acted individually, while others entered into compacts with neighboring states.
Some states required reciprocity -- an out-of-state bank holding company could acquire an in-state bank
only if the out-of-state holding company's home state granted similar acquisition privileges to holding
companies in the target state. Other state laws, particularly those enacted pursuant to regional compacts,
limited permissible out-of-state entrants to those from the neighboring geographic region.
Any uncertainties regarding state initiatives to remove barriers to bank holding company expansion
across state lines were eliminated in 1985. In the decision of Northeast Bancorp v. Board of Governors of
the Federal Reserve System, 472 U.S. 159, the U.S. Supreme Court upheld the ability of the states to
reduce selectively, under the Douglas Amendment to the Bank Holding Company Act, restrictions on
entry by out-of-state holding companies.
In 1994, Congress in the Riegle-Neal Act added a federal element to the states' initiatives on interstate
banking. Under the Act, most remaining state barriers to bank holding company expansion were removed
on September 29, 1995. Holding company growth, however, will be restrained by explicit, statutory
presence. Finally, banking organizations were constrained in their ability to meet the competition from
other segments of the financial services industry. The competitive disadvantage banking organizations
operated under is evidenced by their declining share of the assets of the financial services industry. For
example, in 1952, banks and thrifts held 63 percent of those assets. That proportion declined steadily
over the years and at midyear 1995 was 32 percent. The marketplace distortions arising from the
geographic and product limitations on depository institutions led to a variety of pressures for change. At
the institution level, creative management explored ways under existing laws to offer the products and
services that businesses and consumers demanded. At the industry level, changes were sought in the
state and federal laws that created the competitive inequities.
Indeed, over the brief period of little more than a decade, the U.S. banking industry has undergone a
geographic structural change of considerable proportions. Attachment 3 enumerates mergers, failures
and new charters of FDIC insured institutions over the past ten years. State banking barriers have
dropped significantly. At midyear 1984, 33 percent of the nation's banking assets were controlled by bank
and thrift organizations with operations in two or more states. At midyear 1994, the proportion was 64
percent, almost two-thirds of the nation's banking assets (See Attachment 4). A major consequence of the
rise of interstate banking has been consolidation in the industry. The number of banking organizations
has declined, and the proportions of banking assets and deposits controlled by larger banking
organizations have risen. This is reflected in a corresponding decline in the number of commercial banks
and savings institutions, as well as an increase in the number and assets of larger institutions (see
Attachment 5).
Concerning consolidation -- defined as the reduction in the number of institutions due to mergers and
acquisitions of healthy institutions and to failures of troubled institutions offset by the addition of new
institutions -- a representative statistic is the decline in the combined number of bank holding companies
and independent banks and thrifts. This decline was 32 percent, from 14,887 to 9,804, between year-end
1984 and midyear 1995 (see Attachment 6). In contrast, the decline does not mean that new institutions
are not being established. In fact, between 1984 and mid-year 1995, 2,476 new commercial banks and
savings institutions were chartered. At the national level, the share of industry deposits held by the largest
institutions has increased. At year-end 1984, the 42 largest banking organizations held 25 percent of the
nation's domestic deposits. By midyear 1995, 25 percent of domestic deposits was held by the largest 16
banking organizations (see Attachment 8). It should be noted that increased consolidation in the banking
industry at the national level has not resulted in more concentrated local banking markets. Among the
reasons are that much of the consolidation has involved mergers between organizations in different
markets and new institutions have entered markets.
The states have played a major role in the growth of interstate banking and the accompanying industry
consolidation. Beginning in the late 1970s and early 1980s, a number of states acknowledged the
changing economics of banking by allowing the creation and development of interstate bank holding
companies -- companies that own banks in two or more states (see Attachment 9). The state laws varied
considerably. Some states acted individually, while others entered into compacts with neighboring states.
Some states required reciprocity -- an out-of-state bank holding company could acquire an in-state bank
only if the out-of-state holding company's home state granted similar acquisition privileges to holding
companies in the target state. Other state laws, particularly those enacted pursuant to regional compacts,
limited permissible out-of-state entrants to those from the neighboring geographic region.
Any uncertainties regarding state initiatives to remove barriers to bank holding company expansion
across state lines were eliminated in 1985. In the decision of Northeast Bancorp v. Board of Governors of
the Federal Reserve System, 472 U.S. 159, the U.S. Supreme Court upheld the ability of the states to
reduce selectively, under the Douglas Amendment to the Bank Holding Company Act, restrictions on
entry by out-of-state holding companies.
In 1994, Congress in the Riegle-Neal Act added a federal element to the states' initiatives on interstate
banking. Under the Act, most remaining state barriers to bank holding company expansion were removed
on September 29, 1995. Holding company growth, however, will be restrained by explicit, statutory