Q & A : Bill Eliminates Boundaries on Banks : Legislation: President signs law that paves the way for interstate banking.
A landmark bill permitting U.S. banks to operate branches across state lines, which President Clinton signed into law on Thursday, could have numerous implications for consumers.
Experts do not expect dramatic changes because interstate banking, in which bank holding companies own banks in other states, is already a fact of life in many states. But the law will expand interstate banking to the few states that currently do not allow it. And if states go along, the new rules on interstate branching will let banks create seamless branch networks.
That raises some questions for customers. Among them:
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Q: Are there any advantages for me?
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A: Consumers who live in a metropolitan area that straddles several states will find that interstate branching makes banking easier, experts say. For example, a person who lives in New Jersey and works in New York City will be able to open an account at a bank near home and conduct all bank business at a branch in the city. Right now customers away from home in another state are limited to using ATM machines. Be aware, however, that the federal law allows states to opt out of interstate branching.
Travelers also will find added convenience. If interstate branching is permitted, they will be able go to a branch of their bank in another part of the country and conduct bank business with a teller, such as depositing a check or getting a money order.
And the health of banks will be less dependent on any one region if they can spread their risks across more states. That will produce a stronger, healthier industry that will ultimately benefit consumers and banks alike, some industry experts say.
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Q: Will the law affect the fees my bank charges, or rates on my loans and deposits?
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A: The American Bankers Assn. says that interstate branching will result in lower overhead expenses, which banks could pass along to consumer in lower rates and fees.
Not everyone is so optimistic. “There may be some efficiencies, but I’m not sure they will be enough to show up in consumers’ pocketbooks,” says Michelle Meier, counsel for government affairs at Consumers Union. “And what efficiencies there are could end up going to shareholders. If interstate banking results in less competition, banks will have little incentive to pass their savings on to consumers.”
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Q: In other words, less competition means less pressure to give me a low rate on a loan or a higher rate on a CD?
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A: Not necessarily. Industry experts point out that banks will continue to have many non-bank competitors, such as finance companies and mutual funds, and so it’s not in their interest to suddenly start raising loan rates or lowering deposit rates.
In addition, James Barth, finance professor at Auburn University and a former economist at the Federal Home Loan Bank Board, says major changes in rates and fees are not likely because interstate banking is already so prevalent. Multi-state, multibank holding companies now control 70% of the industry’s assets, compared with just 5% in 1980, he says.
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Q: Will this mean my small, local bank is gobbled up by one of the industry’s giants?
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A: It’s unclear whether this will mark the end of small community banks. It’s true that the industry is in the midst of a wave of mergers that is likely to accelerate under the new law. But community banks are far from extinct. The American Bankers Assn. points out that although 49 states already permit some form of interstate banking, there are still about 8,000 community banks with assets of less than $100 million.
To help safeguard competition, the new law sets some limits on how much money any one bank can hold--no more than 10% of deposits nationwide, or no more than 30% in one state. But one bank could still dominate a particular region, Meier says. “A lot of concentration is very local,” she says. “This won’t stop a bank from having a huge presence in Cleveland without much competition.”
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Q: Is there a danger that the far-flung national bank networks will ignore the needs of local communities?
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A: There is concern that the creation of huge national bank networks will lead to standardization of services that hurts communities with particular needs, such as inner-city neighborhoods. “There may be much more lending by the numbers, and credit decisions that are made pretty far from a local community,” says Allen Fishbein, general counsel for the Center for Community Change, a nonprofit group based in Washington, D.C. “We may see more cherry-picking, in which a bank goes into a new state and buys banks in affluent areas and stays away from parts of a state viewed as low-income or slow growth.”
Meier is especially worried about the impact of the law on small-business lending, which she says “takes a lot of local decision-making to tailor the loan product to meet local needs and the local economy.”
The American Bankers Assn., however, notes that banks still must comply with the Community Reinvestment Act, which requires them to meet the credit needs of all the communities in which they do business. And banks are in business to make loans, and they will continue to do so.
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Q: When does the law take effect?
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A: There are two phases: One year after Clinton signed the bill, interstate banking takes effect. As of July 1, 1997, banks will be able to begin merging their branch operations around the country, except in states that have opted out of interstate branching.
In addition, states can take the initiative to authorize branch mergers within their own borders at any time after the bill is signed.
