Ruling Expected to Slow Move to National Banking

National banking will be slowed but not stopped by Monday’s U.S. Supreme Court ruling that allows states to form regional alliances barring outside banks, according to bankers and bank analysts.

The high court decision will force New York and California mega-banks like Citibank and Bank of America to pursue treaties with individual states where they wish to expand rather than conquering the nation in one neat move with the aid of Congress.

The ruling also gives strong regional banks protection from the giants while they grow by acquiring smaller institutions in their own and neighboring states.

More Competition Expected

“It slows down the momentum for Citibank in terms of the number of places they can make acquisitions,” said Michael Connor of Keefe, Bruyette and Woods, a Wall Street brokerage house specializing in banks. “The momentum shifts to large regional institutions that can begin to acquire the mass and muscle of the money center banks. The result will be more competition instead of reinforcing the competitive imbalance that currently exists.”

But Connor stressed that, while Monday’s ruling is a temporary setback for New York-based Citibank, the nation’s second-largest bank, it by no means spells the end of the bank’s interstate ambitions.

“Citibank is forever. They’re going to be around,” he said.

In California, the effect likely will be felt in the state Assembly, where a bill currently is pending to open the state to banks nationwide.

Limit Acquisitions

The bill, sponsored by Assemblyman Charles Calderon (D-Montebello), is backed by big New York banks and has drawn criticism from a number of smaller California institutions.

With uncertainty about the legality of regional compacts lifted by the high court, a compromise probably will be crafted to limit interstate acquisitions to a group of Western states, observers said.

“Now that California can say which states it wants to have reciprocity with, the Legislature might be more inclined to do so,” said Michael Roster of the banking law firm of McKenna, Conner & Cuneo in Los Angeles. He said the Western region probably would include the states west of Colorado.

Cross-border combinations could see large banks swallowing up small banks or a large number of smaller institutions combining to ward off the big banks, he said.

“I expect there will be consolidations, as has occurred in other states,” Roster said. “That isn’t to say the small banks would disappear, but (they) would either be merged into larger organizations or form compacts to work together. They’d have a chance to go steady with one another before deciding to get married.”

Irwin Gubman, senior vice president and director of government relations at Bank of America, the nation’s largest bank, said the ruling will have only limited impact on the bank’s plans and the movement toward national banking.

“It will affect the pace of change, but it is not significant enough to overturn the momentum and the thrust of interstate banking, which is clearly here to stay. It may arrive a year or two later than we’d otherwise desire, but it is clearly coming.”

He said that, despite cheering by some smaller banks that the Supreme Court had stepped in to protect them from predatory giants, the barriers to interstate acquisitions began falling seven years ago when Maine passed legislation allowing any bank from any state to buy a local institution.

Most analysts agreed that national banking in one form or another is inevitable, whether through acquisitions, branches, credit cards or electronic transactions. The Supreme Court merely said the Constitution and federal law do not prohibit states from temporarily shielding local banks from outside competitors.

But analyst Connor said a major shakeout in the banking industry is coming, regardless of any action by Congress or the courts.

“This is the last great industry in the U.S. to consolidate. We don’t know today the names of the 10 most powerful banks of 1995 because they’re still in the formative stage. There’ll be at least five newcomers in the group. The ones that stand to lose the most will be the five big banks of today that get muscled out.”