ABC's of Banking
Provided by the State of Connecticut, Department of Banking, based on information from the Conference of State Bank Supervisors (CSBS)
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 refers to branching within a particular state. Allowing banks to open more than one office or branch originated at the state level, and the states have directed the expansion of banks' geographic boundaries. Earlier in this century, few banks had more than one office. Today, most banks can open branches throughout their respective states.
A great majority of our 50 states allow statewide branching, and other states allow limited branching. Many banks have expanded their branch network to better meet the needs and convenience of their customers.
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 intrastate branching by allowing a national bank to branch only within the city in which it is situated. Although the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed this provision of the McFadden Act, it specified that state law continues to control intrastate branching, or branching within a state's borders, for both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.
Of note, there are approximately 9,500 savings and loan branches that, because of preemptive authority in the law establishing the thrift charter, are subject to neither intrastate nor interstate branching restrictions. This preemptive authority was intended to foster a national market for home mortgages.
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.
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 Bank 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."
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed the Douglas Amendment. On September 29, 1995, federal law allowed 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 banking has resulted in increased consolidation and concentration in the banking industry. While the United States had 14,399 banks in 1940, the country has fewer than 9,000 banks today. However, while consolidation among banks has certainly been the trend, the number of branches in the U.S. has steadily increased. In other words, consumers have more banking outlets than ever in our country's history.
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 1992. This law set several requirements and conditions on New York branches of out-of-state banks. It also required reciprocity; that New York banks were allowed to branch into the home states of banks that branch into New York. Other states passed similar laws.
The 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act allowed national banks to operate branches across state lines after June 1, 1997. This federal law allows branching through acquisition only, which means that a bank must acquire another bank and merge the two structures in order to operate branches across state lines.
The Riegle-Neal Act allowed states to "opt-out" of interstate branching by passing a law to prohibit it before June 1, 1997. A state that "opted-out" of interstate branching prevented both state and national banks from branching into or out of its borders. Texas and Montana were the only states to "opt-out" of interstate branching.
States also have the power to authorize "de novo" branching across state lines, which would allow a bank to simply open a new branch in another state instead of having to acquire an entire bank. Several states have decided to allow de novo branching; however, most of them have done so on a reciprocal basis.
In 1997, the Riegle-Neal Amendments Act was signed into law ratifying an agreement between the states, the FDIC and the Federal Reserve allowing "seamless" supervision for state-chartered banks that branch across state lines.