Volcker Backs Interstate Banking

Federal Reserve Board Chairman Paul A. Volcker said Wednesday that Congress should approve interstate banking but with safeguards to ensure that big banks do not take over the industry and squelch competition.

Volcker said Congress needed to act because state lines could no longer contain the industry, which is using technological advances, regional compacts and loopholes in the law to extend services over once-rigid geographic boundaries.

“Markets will continue to respond and change will take place,” Volcker said. “The only question is whether that change will take place in a constructive framework of rules established by Congress.”

“In sum, the Federal Reserve Board believes the time has come for Congress . . . to authorize some interstate banking,” Volcker told the House Banking subcommittee on financial institutions.

The federal law restricting interstate banking has remained essentially unchanged since 1933, while the industry has evolved, Volcker said. Large holding companies have moved across state lines by establishing “non-bank banks,” which operate much like banks but don’t offer all of the services found at commercial institutions, thus skirting the formal definition of “bank” found in federal law, he said.

“Technological advances are also providing large opportunities for banks to expand geographically without brick-and-mortar offices,” Volcker said, noting the impact of broad-service credit cards and the rapid spread of automatic teller machine networks.

“Looking ahead, banking through home computers would be difficult to confine within a state’s boundary,” he said.

At the same time, 14 states so far have joined in regional banking compacts to allow each other’s banks to do business within the region to the exclusion of others--a continuing process that Volcker said would “Balkanize banking” if Congress didn’t act.

Volcker said that Congress could allow interstate banking in metropolitan areas that cross state lines and permit regional compacts as a transition to a truly national banking system.

While supporting interstate banking, the Fed chairman said antitrust laws alone may not be adequate to ensure competition in the industry. Congress could limit the percentage of assets held by any one bank company and states could be encouraged to limit a single bank’s share of banking business in any one state, he said.

Volcker said states could retain substantial control over their financial institutions if the laws were drafted carefully, requiring bank companies to have separate affiliates in each state.

The chairman of the House Banking Committee, Rep. Fernand St Germain (D-R.I.), said Congress should move toward interstate banking with care.

“Geographic expansion must be accompanied by ironclad assurances that communities and bank customers will be served and that they will not become afterthoughts for banking complexes with far-distant interests,” he said.