House Panel Backs Bush Proposal for Interstate Banking

Congress took a major step toward approving full interstate branch banking Wednesday, which could significantly alter the structure of the American banking industry.

The vote by the House Banking, Finance and Urban Affairs subcommittee on financial institutions represented one of the first major victories for the Bush Administration in its campaign to push a sweeping banking reform plan through Congress.

But it also marked a defeat for small banks, which opposed the measure out of fear that their big-city rivals, which are often given broader protection by federal regulators, would come in and dominate their rural markets.

Interstate banking was approved after the subcommittee defeated, 24 to 12, an attempt by supporters of small banks to add an amendment that would have effectively killed interstate banking to Administration-sponsored legislation on the issue. The Administration strongly opposed the amendment and won all but one Republican vote on the committee, while the Democratic majority split its vote on the issue.

“This is the one the Bush Administration really wanted,” said Ken Guenther, executive vice president of the Independent Bankers Assn., a trade group that represents small banks. Interstate banking, he added, is “the No. 1 priority for the Bush Administration in bank reform.”

Rep. Bruce Vento (D-Minn.), who sided with the small banks and sponsored the amendment to kill interstate branches, argued that interstate branch banking will effectively kill the ability of individual states to regulate banks, leaving the industry completely reliant on federal regulation. The subcommittee “ran roughshod over the states . . . in the name of big banks,” Vento complained after his amendment was defeated. He plans to bring the issue up again when the legislation reaches the full banking committee, he said.

Today, 48 states already allow some form of interstate banking, but in many states interstate operations are still severely restricted. To cross state lines now, banks must set up new corporations in each state before they can accept deposits, and many states allow only banks from neighboring states to enter their markets. California is one of the most open states; it allows banks from any states that also allow California banks to enter their markets.

Robert Dugger, chief economist of the American Bankers Assn., predicted Wednesday that if Congress does approve the Bush proposal, the big winners will be the large regional banks that avoided many of the international lending mistakes of the New York-based money center banks. The regional institutions, including Banc One of Ohio, First Wachovia of North Carolina and the National Bank of Detroit in Michigan, are among the healthiest in the industry and are poised to move quickly into new territories once full interstate branching is approved.

Separately, the House panel also approved a measure by Rep. Joseph P. Kennedy II (D-Mass.) that would restrict the ability of banks to seek new lending and investment options if they do not have adequate records of service to poor people and small businesses.

The measure would place community investment standards on banks as they seek to expand under the Bush Administration’s proposed banking package. The Kennedy amendment passed by an 18-17 vote, despite Administration opposition.

Regulators would be required to review a bank’s record on local investment and lending practices before approving its moves into new areas, such as stock trading or insurance underwriting.