High Court Clears Way for States to Establish Regional Bank Zones

The Supreme Court cleared the way Monday for what could become a broad reshaping of the nation’s banking system, ruling that states may create regional banking zones to protect their own institutions from big, expansion-minded banks with headquarters outside the area.

The court, in an 8-0 decision, upheld regional banking laws in Connecticut and Massachusetts that had been at the forefront of a recent trend toward regional multistate systems.

Similar statutes have been enacted in 13 other states, principally in the Southeast, as a means of protecting local and regional institutions from growing competition of banking giants in the money centers of California, New York, Texas and Illinois. At least seven other states are considering regional banking laws.

In California, by contrast, legislation is pending that would allow banks from any other state to establish operations.

The justices concluded that regional banking laws did not conflict with federal statutes, the free flow of interstate commerce or the constitutional guarantee of equal protection of the law.

Balkanization Feared

“Our country traditionally has favored widely dispersed control of banking,” Justice William H. Rehnquist wrote for the court. “While many other Western nations are dominated by a handful of centralized banks, we have some 15,000 commercial banks attached to a greater or lesser degree to the communities in which they are located.”

The case had drawn widespread attention in the banking world. The Federal Reserve Board, which had approved the New England plan, conceded in briefs to the court that it would probably lead to a “significant restructuring of the banking industry” as other states follow suit.

Citicorp of New York and other big banks contended that the case would open the door for the “regional Balkanization” of the industry, partitioning the nation into exclusionary banking regions. But regional banks and state officials pointed to the nation’s long tradition of allowing states to exercise primary control over banking activities and urged the court to uphold the plan.

The longstanding general bar to interstate banking was overcome in the early 1950s as bank holding companies found ways to acquire subsidiaries in other states. But in 1956, Congress closed the loophole by passing the Bank Holding Company Act, subjecting bank holding companies to federal regulations and prohibiting them from acquiring subsidiaries. However, under one provision, states were permitted to authorize out-of-state bank holding companies to acquire or establish banks within their borders.

Alternative Course

More recently, big bank holding companies have moved across state lines, offering “non-bank” services such as credit cards. Faced with growing competition from such operations, some states began following an alternative course, allowing the merger and expansion of local and regional banks without permitting unimpeded interstate banking from all over the country.

The court, in its decision Monday (Northeast Bancorp vs. Federal Reserve, 84-363), concluded that Congress intended to give the states the flexibility to “partially lift” the ban on interstate banking without opening themselves to full-fledged interstate banking. The Massachusetts and Connecticut laws were consistent with the “broader purposes” of the federal legislation “to retain local, community-based control over banking,” Rehnquist wrote.

Justice Lewis F. Powell Jr. did not participate in the case.

Philip Corwin, legislative counsel for the Independent Bankers Assn. of America, a trade group representing small and medium-sized banks, said the decision “lifts a cloud from regional interstate banking laws and probably derails any congressional action for nationwide interstate banking.”

New York’s Citibank said, however, that it is deeply disappointed by the court’s ruling. “The Supreme Court’s decision highlights the need for revision of the decades-old laws that govern banking in the United States today,” it said in a statement. “These laws penalize banks’ customers by perpetuating protective turfs for their banks.”

The statement concluded: “Even the proponents of Balkanized banking admit they are basically only interested in protecting themselves from competition.”

SEC Sought Bar

In another decision, the court, restricting the government’s authority to regulate investment advisers, ruled 8 to 0 that the Securities and Exchange Commission could not prevent publication of a general investment-advice newsletter on the grounds that the publisher had been previously convicted of fraud.

The court sidestepped what had promised to be an important constitutional test of free-speech rights against federal securities laws. Instead, it held that federal regulatory statutes were aimed at individual investment advice--not the kind of general and non-personal comment found in a widely circulated newsletter.

The case involved an action brought by the SEC against Christopher L. Lowe, president of Lowe Management Corp. During the time the corporation was registered as an investment adviser, Lowe was convicted in New York of misappropriating funds of an investment client and other offenses. The SEC, citing the violations, later sought to bar Lowe from publishing a newsletter that he was sending to as many as 19,000 subscribers.

There was no evidence the newsletter was false or misleading. Lowe, supported by some civil liberties and press groups, challenged the action as a “prior restraint” on the press barred by the First Amendment.

The court, in an opinion by Justice John Paul Stevens (Lowe vs. SEC, 83-1911), said there was no need to reach the constitutional issue. The regulatory statute under which the SEC moved against Lowe was not intended for use against publishers of “bona fide newspaper, news magazine or business or financial publications,” Stevens said.

In a concurring opinion, Justice Byron R. White, joined by Chief Justice Warren E. Burger and Rehnquist, said that the statute was intended to cover publishers like Lowe but that the SEC’s action against him was prohibited by the First Amendment.

STATE BANKING LAWS: TWO APPROACHES

NATIONAL: Allows REGIONAL: Allows banks banks from any only from specific other state to operate. states to operate Alaska Connecticut Kentucky Arizona Florida Oregon Maine Georgia Rhode Island New York Idaho South Carolina South Dakota Indiana Tennessee Washington Maryland Utah Massachusetts Virginia North Carolina