FDIC Banking Review
Interstate Banking The Past, Present And Future
by David Holland, Don Inscoe, Ross Waldrop and William Kuta
The nation's press has been rife with announcements of merger and acquisition
plans by large banking organizations since midyear 1995. This burst of
announcements is part of a long-term fundamental restructuring of the industry
that began in the early 1980s and is likely to continue for the foreseeable future.
An integral component of this restructuring is the rise of interstate or multi-state
banking, and particularly an increase in the number and economic importance of
banking organizations with banking offices in more than one state.
The restructuring of the banking industry may be decomposed into three
interrelated trends. First, interstate banking has moved from being an oddity to
being a prominent characteristic of the industry. At midyear 1995, two-thirds of the
nation's banking assets were held by multi-state banking organizations. Second,
consolidation, due mostly to mergers and acquisitions but also to bank failures
and to a paucity of new entrants, has reduced the numbers of banking and thrift
institutions substantially. For example, between year-end 1984 and March 31,
1996, the number of banking organizations bank holding companies and
independent banks and thrifts declined 36 percent, from 14,887 to 9,481. Third,
by some measures, the banking industry has become more concentrated. At
year-end 1984, the largest 42 banking organizations held 25 percent of domestic
deposits. At the end of the first quarter of 1996, the largest 13 banking
organizations held 25 percent of domestic deposits. Moreover, five percent of the
nation's banking organizations held 75 percent of domestic deposits.
In 1994, Congress, with the enactment of the Riegle-Neal Interstate Banking and
Branching Efficiency Act, added impetus to the ongoing trends. The major effect
of this law derives from its authorization of interstate branching. Given the
consolidation that has previously occurred in states where branching laws were
already liberalized, banking organizations are expected to make extensive use of
this authorization.
This study documents the changes in the geographic scope, structure and
concentration of the U.S. banking and thrift industries that have occurred over the
past decade. Prospects for the continuation of these trends are analyzed from a
variety of perspectives. Finally, the study attempts to identify the effect of
increasing consolidation in banking on the Federal Deposit Insurance
Corporation's supervisory activities.
The Past and Present
For most 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. One result of this situation was a decentralized
Interstate Banking The Past, Present And Future
by David Holland, Don Inscoe, Ross Waldrop and William Kuta
The nation's press has been rife with announcements of merger and acquisition
plans by large banking organizations since midyear 1995. This burst of
announcements is part of a long-term fundamental restructuring of the industry
that began in the early 1980s and is likely to continue for the foreseeable future.
An integral component of this restructuring is the rise of interstate or multi-state
banking, and particularly an increase in the number and economic importance of
banking organizations with banking offices in more than one state.
The restructuring of the banking industry may be decomposed into three
interrelated trends. First, interstate banking has moved from being an oddity to
being a prominent characteristic of the industry. At midyear 1995, two-thirds of the
nation's banking assets were held by multi-state banking organizations. Second,
consolidation, due mostly to mergers and acquisitions but also to bank failures
and to a paucity of new entrants, has reduced the numbers of banking and thrift
institutions substantially. For example, between year-end 1984 and March 31,
1996, the number of banking organizations bank holding companies and
independent banks and thrifts declined 36 percent, from 14,887 to 9,481. Third,
by some measures, the banking industry has become more concentrated. At
year-end 1984, the largest 42 banking organizations held 25 percent of domestic
deposits. At the end of the first quarter of 1996, the largest 13 banking
organizations held 25 percent of domestic deposits. Moreover, five percent of the
nation's banking organizations held 75 percent of domestic deposits.
In 1994, Congress, with the enactment of the Riegle-Neal Interstate Banking and
Branching Efficiency Act, added impetus to the ongoing trends. The major effect
of this law derives from its authorization of interstate branching. Given the
consolidation that has previously occurred in states where branching laws were
already liberalized, banking organizations are expected to make extensive use of
this authorization.
This study documents the changes in the geographic scope, structure and
concentration of the U.S. banking and thrift industries that have occurred over the
past decade. Prospects for the continuation of these trends are analyzed from a
variety of perspectives. Finally, the study attempts to identify the effect of
increasing consolidation in banking on the Federal Deposit Insurance
Corporation's supervisory activities.
The Past and Present
For most 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. One result of this situation was a decentralized
banking industry with numerous participants and protected geographic markets.
Over the brief period of little more than a decade, however, the U.S. banking
industry has undergone what could be called a structural change of seismic
proportions.1 State banking barriers have dropped quickly and 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. By midyear 1995,
the proportion had grown to 67 percent, representing two-thirds of the nation's
banking assets. A major consequence of the rise of interstate banking has been
consolidation and concentration 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.
The growth of interstate banking and the accompanying industry consolidation
has been propelled by marketplace forces that do not recognize political borders.2
In the decades following World War II, technological changes in communications
and data processing eroded much of the common ground that banking markets
and political boundaries may once have shared. 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. The state laws
varied considerably. Some of the states acted individually. Other 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. Still other states entered into
reciprocal compacts with neighboring states. Some state laws, particularly those
enacted pursuant to so-called "compacts," limited permissible out-of-state
entrants to those from the neighboring geographic region.
Table 1
State Elections Under the Interstate Branching Provisions
of the Riegle-Neal Act April 30, 1996
States Opting-In Prior to June 1, 1997 (24):
Alaska
Utah
Idaho Mississippi North Carolina
Arizona
Vermont
Indiana Nevada Oregon
California
Virginia
Connecticut
Washington
Delaware
Maine
Maryland
Michigan
New Jersey
New Mexico
New York
Pennsylvania
Rhode Island
South Dakota
States Opting-In on June 1, 1997 Trigger Date (11):
Alabama Illinois Oklahoma
Florida Minnesota Tennessee
Georgia
Hawaii
New Hampshire
North Dakota
West Virginia
Over the brief period of little more than a decade, however, the U.S. banking
industry has undergone what could be called a structural change of seismic
proportions.1 State banking barriers have dropped quickly and 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. By midyear 1995,
the proportion had grown to 67 percent, representing two-thirds of the nation's
banking assets. A major consequence of the rise of interstate banking has been
consolidation and concentration 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.
The growth of interstate banking and the accompanying industry consolidation
has been propelled by marketplace forces that do not recognize political borders.2
In the decades following World War II, technological changes in communications
and data processing eroded much of the common ground that banking markets
and political boundaries may once have shared. 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. The state laws
varied considerably. Some of the states acted individually. Other 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. Still other states entered into
reciprocal compacts with neighboring states. Some state laws, particularly those
enacted pursuant to so-called "compacts," limited permissible out-of-state
entrants to those from the neighboring geographic region.
Table 1
State Elections Under the Interstate Branching Provisions
of the Riegle-Neal Act April 30, 1996
States Opting-In Prior to June 1, 1997 (24):
Alaska
Utah
Idaho Mississippi North Carolina
Arizona
Vermont
Indiana Nevada Oregon
California
Virginia
Connecticut
Washington
Delaware
Maine
Maryland
Michigan
New Jersey
New Mexico
New York
Pennsylvania
Rhode Island
South Dakota
States Opting-In on June 1, 1997 Trigger Date (11):
Alabama Illinois Oklahoma
Florida Minnesota Tennessee
Georgia
Hawaii
New Hampshire
North Dakota
West Virginia