A Call for Interstate Banking

Moving into the financial future, but a fight lies ahead

Big U.S. banks looking for ways to expand their business have long been restricted by some archaic federal laws. Unlike almost any other enterprise, they have been prohibited from doing retail business outside their home state. Such rules would be similar to decreeing that General Motors could only sell cars in Michigan or that Pillsbury could only market cake mixes in Minnesota. This week, however, banks will get some overdue good news: the Carter Administration will recommend to Congress that commercial banks be allowed to open branches outside their home state. Though no one expects longstanding laws to be rewritten quickly, the new proposal, contained in a report prepared by the White House staff, adds momentum to the movement for a nationwide banking system.

The U.S. banking industry currently is as disjointed as the hamburger stand business was before the advent of McDonald's. A hodgepodge of state and federal regulations has been erected to protect small banks around the country by keeping out their big-city brothers. The origin of the geographic restrictions goes back to the 1830s, when Andrew Jackson was fighting Nicholas Biddle over the charter of the Bank of the United States. Populist politicians have always fought nationwide banking on the grounds that small-town financial decisions should be made locally. Smaller banks also claim they would be run out of business if large banks from New York, Chicago or San Francisco were permitted to compete with them. As a result of one-state-only banking laws, there are close to 15,000 banks in the U.S., more than in all the rest of the world.

A move toward national banking would be a major step in the revolution that is now occurring in the American financial community. The Depository Institutions Deregulation and Monetary Control Act, which was passed by Congress last March, has ordered the phaseout of the ceilings that exist on the amount of interest that financial institutions can pay on passbook accounts. Banks can now give no higher than 5.25% interest, while Savings and Loans can pay a maximum of 5.5%. By 1986 there will be no Government-fixed interest limits. The new law also permits banks and savings institutions to pay up to 5.25% interest on money held in checking-like deposits known as NOW (for negotiable order of withdrawal) accounts. Previously the NOW accounts were available only in New England, New York and New Jersey. The changes are designed to help traditional savings institutions compete with popular new money-market funds that currently pay about 16% interest on checking-like accounts.

Even without the changes recommended by the Carter Administration, the U.S. is already moving toward a national financial market. Merrill Lynch, the brokerage firm, allows customers from nearly any state to write checks against their money-market accounts through an agreement with Bank One of Columbus. Holders of American Express Gold Cards will soon be able to insert the cards into automatic teller machines around the U.S. and withdraw cash from their home bank accounts. New York's Citibank plans to move its 5.8 million-customer credit card operation to South Dakota to take advantage of higher interest rates permitted there. San Francisco's Bank of America has opened branches in Seattle, Dallas, Minneapolis and Cleveland to finance export business for corporations in those cities. These branches could easily increase their services if interstate banking is permitted. Bank of America's outgoing president, A.W. Clausen, praised the White House proposal, saying that "interstate banking will foster a competitive market benefiting consumers."

The Carter Administration recommendation, though, still faces substantial opposition in Congress. Small banks are expected to fight vigorously against any change in existing laws. Said one key congressional banking aide last week: "The chances of these proposals passing are remote. The small bank vs. big bank issue is still controversial." Nonetheless, modern financial and credit needs in the 1980s appear to be an irresistible force for changing banking's old ways. Citibank's blue, compass-like trademark may yet become as familiar a symbol around the U.S. as McDonald's golden arches. qed

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