has not enacted legislation allowing out-of-state bank holding companies to acquire local institutions. Chart A summarizes current state laws on interstate banking and Chart B summarizes current state laws on intrastate branching.

CHART A INTERSTATE BANKING

Senate Banking Committe

As of March 9, 1904

Nationwide Interstate Banking
Regional Interstate Banking

No Interstate Banking

Statewide Branching

Limited Intrastate Branching

Congress considered a number of bills that provided for interstate acquisitions in 1985. The bills contained measures designed to protect local interests. The need for such legislation became less pressing after the Supreme Court, in a 1985 decision, upheld the validity of the regional agreements discussed above. Northeast Bancorp, Inc. v. Board of Governors, 472 US 159 (1985). Individual states, thus, were able to craft legislation compatible with their varying local and regional interests under the Douglas Amendment framework, which allowed broad state authority to permit interstate acquisitions conditionally, or not at all. Many states imposed conditions restricting de novo entry and specifying the minimum age of banks eligible for acquisition by out-of-state banking holding companies. A substantial number of states also limited the share of statewide deposits that could be controlled by an out-of-state banking organization. Some states have permitted interstate banking subject to conditions requiring the acquiror to make a contribution to economic activity in the state.

INTERSTATE BANKING AND BRANCHING WILL PROMOTE COMPETITION

Interstate banking

AND STABILITY

One of the critical elements of the bill is to eliminate remaining, disharmonious local law restrictions on interstate bank holding company acquisitions of banks in different states. Secretary of the Treasury Bentsen, in an October 25, 1993, speech outlining the Administration's banking agenda, stated, "We currently have a de facto system of interstate banking. But it's a patchwork system, and it's clumsy."

The Federal Reserve has repeatedly called for removal of the remaining restrictions on interstate banking. As Federal Reserve Governor John LaWare testified at the Committee's October 5, 1993, hearing:

In short, the states have made it clear that they accept-and perhaps prefer-interstate banking, and their legislatures have made interstate banking a substantial reality today, but actions at the state level have resulted in a hodgepodge of laws and regulations that permit interstate banking, but in an inefficient and high cost manner. In brief, the Committee believes that phasing out the Douglas Amendment will bring rationality to a system that is already well on the way to nationwide banking. The Committee also anticipates that reducing the barriers to interstate banking will have several benefits.

First, such a reform will promote diversification of asset and liability portfolios that will strengthen the banking system. Geographic restrictions make it difficult for banks to diversify their de posit bases and loan portfolios, leaving them vulnerable to downturns in the local economies where they do business. While banks currently have some ability to diversify their risks, such as by purchasing loan participations from banks in other regions, they are hampered by the lack of a physical presence in those regions. Without such a presence, banks may have only a partial under

E

standing of the local economy and the assets they are purchasing. Geographic diversification will help alleviate this problem.

Second, interstate banking allows banks the ability to access additional markets, where funds may be less expensive, where lending demand is higher, or where risk and diversification factors are favorable. This would have helped the banking industry, and the taxpayers who stand behind the federal deposit insurance guarantee, in the past. For example, according to the October 5, 1993, testimony of acting FDIC Chairman Hove:

The insurance funds have absorbed major losses in recent years in rescuing large banking organizations with assets concentrated in a few industries or a limited geographical area. During the 1980s, for example, slightly more than 80 percent of failed-bank assets were in just four states: Texas, Illinois, New York, and Oklahoma. Perhaps if they had been more geographically diversified, banks in these states might have been better able to weather the financial storms that beset local and regional energy, agricultural, and real estate markets.

Governor LaWare of the Federal Reserve Board testified at that same hearing:

* * * the elimination of geographic restraints would provide an important tool in diversifying individual bank risk, providing for stability of the banking system, and improving the flow of credit to local economies under duress.

Thus, reducing these restrictions will bolster the safety and soundness of the banking industry and thereby lessen the vulnerability of the Bank Insurance Fund and the risk to the American taxpayer.

Third, removing the remaining restrictions on interstate banking will promote efficiency in the banking system. Branch consolidation, following repeal of the Douglas Amendment and amendment of the McFadden Act, will also increase the banking industry's profitability. A study by McKinsey & Company estimates that the cost savings to the banking industry from mergers, that would be encouraged by repeal of interstate banking and branching restrictions, could total $10 billion to $15 billion in annual pretax earnings (American Banker, June 10, 1991). These savings could be used to replenish bank capital, increasing the ability of the banking industry to absorb losses. Greater efficiency in the banking industry will reduce the strain on the deposit insurance fund and protect taxpayers.

Nonetheless, the Committee does not believe that increasing the opportunities for interstate banking will reduce the important role of regional and community banks. These institutions, with special knowledge of their communities, contribute to the vigor of local economies throughout the country. Ballard Cassady, the former Banking Commissioner of Kentucky pointed this out at the Committee's November 3, 1993, hearing at which he stated:

** successful banks have traditionally been those that best meet the needs of the market they serve. Large banks have adapted somewhat but small community banks