FRBSF Economic Letter
Although the federal trigger date for allowing interstate branching
is June 1, 1997, about half the states, including eight of the nine
in the Twelfth District, already have gotten a jump on interstate branching.
These states took advantage of a provision in the federal law that allows
states to opt in early, so that banking organizations can operate interstate
through branches of a single bank, and not just through separately chartered
banks. With the two largest California banks taking the branching option,
almost half of the banking offices operated by interstate organizations
in the West already have been converted to branches. This Economic
Letter looks at interstate branching along with interstate banking
more generally in the West.
A little legislative
background
The push for interstate banking came from the states beginning in
the 1980s. Through that decade and into the 1990s, state after state
passed legislation allowing entry by out-of-state bank holding companies
(BHCs). In general, the state laws were restrictive in that out-of-state
BHCs could enter not by establishing branches, but rather by operating
separately chartered commercial banks. Despite these restrictions, the
prospect of interstate banking was attractive to several of the larger
banking organizations in the West. Indeed, by the time the U.S. Congress
passed the Riegle-Neal Interstate Banking and Branching Efficiency Act
(Interstate Act) and it was signed in September 1994, out-of-state organizations
accounted for the bulk of the banking activity in most western states.
The federal legislation, however, does more than just ratify the state
initiatives. For one thing, it allows an affiliated bank of a BHC to
provide deposit and credit services to customers of other banks in the
holding company that are operating in other states, making the offices
of affiliated banks virtual interstate branches. Going even
further, the federal law opens the way for a banking organization to
operate actual branches of a single bank in more than one state.
So far, only Texas and Montana have passed legislation to opt out
of interstate branching. In this District, Alaska gets credit for being
the earliest to make the jump, adopting interstate branching in January
1994, well before the federal legislation. California, Idaho, Nevada,
Oregon, and Utah opted in during 1995, followed by Arizona and Washington
in 1996. Even Hawaii, which previously did not allow interstate banking,
has decided to opt in, but not until the June 1997 trigger date.
Interstate banking
and branching activity is strong in the West
In the West, about one-third of the approximately 8,200 commercial
banking offices in the Twelfth District are operated by out-of-state
banking organizations: roughly 1,500 are offices of separately chartered
banks controlled by out-of-state BHCs and about 1,300 are interstate
branches. When thrifts (savings banks and savings and loans) are added
in, the total number of offices in the District rises to about 11,000,
with 1,800 interstate offices of separately chartered institutions and
1,500 interstate branches.
While notable, these numbers actually understate the extent of interstate
banking in the West, as the figure illustrates.
It graphs the share of total deposits and the share of total offices
both for separately chartered banks and for branches of out-of-state
BHCs for the Twelfth District states (excluding Hawaii, since it has
only a thrift controlled by an out-of-state BHC). The total height of
the bar indicates the overall extent of interstate banking.
The figure shows that in several western states the great bulk of
banking is accounted for by out-of-state organizations. For example,
interstate banking clearly dominates in Arizona, Idaho, Nevada, and
Washington, and in each state, interstate branching also is a significant
share of overall interstate banking. The relatively small shares for
Alaska suggest that its distance from other states and the unique aspects
of its economy may make it a less attractive target for out-of-state
entrants; in addition, banks in Alaska have not made out-of-state acquisitions.
For the other states in the District, the shares do not reflect the
fact that the large banks headquartered there are important players
in the expansion across state borders. For example, among banks in Utah,
First Security and Zions operate in other western states. Even from
Hawaii, First Hawaiian and Bancorp Hawaii have ventured onto the mainland.
From its base in Oregon, U.S. Bancorp has expanded into Washington,
Idaho, Utah, Nevada, and California. (The recently announced acquisition
of US Bancorp by First Bank Systems, however, would change the picture
for Oregon and raise the state's deposit and office shares in the figure
to about 88% and 79%, respectively.)
The most striking story in the District, of course, is California.
While there has been some entry from other states, very small shares
of the deposits and offices are accounted for by out-of-state organizations.
Even adding in the thrifts operated by notable organizations like Citicorp
(New York) and Washington Mutual (Washington State), the interstate
shares in California remain below 10%.
From another perspective, however, California is the major interstate
banking force in the District. These two largest banking organizations
in the state, BankAmerica and Wells Fargo, account for around 47% of
total interstate banking deposits and a bit more than 43% of the interstate
offices in the West. The two large California banks are even more prominent
when looking at just interstate branching. Together they account for
about 90% of the deposits in interstate branches and the same share
of branch offices.
More interstate branching
to come?
In a real sense, interstate branching in the West so far
has been driven from California. However, with the conversion to branches
by the large California banks virtually completed, the next push toward
interstate branching will have to come from elsewhere. It is
possible that some of the other interstate organizations operating in
the West will stay with separately chartered banks for a while. As indicated
earlier, under the Interstate Act, offices of affiliated banks can serve
as virtual interstate branches. Given that flexibility, concerns of
some organizations over the potential loss of local identity may slow
the conversion to interstate branches. However, the prevailing view
seems to be that separate bank charters bring higher costs associated
with regulatory issues, general bookkeeping, coordinating among offices,
and maintaining separate boards of directors. Moreover, even with interstate
branch networks, banks may be able to maintain an identity with communities
through arrangements like regional advisory boards, management, and
branding. That suggests that, with interstate banking already dominating
in the West, the dominance of interstate branching is probably just
a matter of time.
Fred Furlong
Vice President
Banking, Finance, and Regional Studies
Opinions expressed in this newsletter do not necessarily reflect
the views of the management of the Federal Reserve Bank of San Francisco,
or of the Board of Governors of the Federal Reserve System. Editorial
comments may be addressed to the editor or to the author. Mail comments
to:
Research Department
Federal Reserve Bank of San Francisco
P.O. Box 7702
San Francisco, CA 94120
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