Banking Goes National

By Stephen Koepp

Big-city moneymen reach across state lines in search of the choicest markets

National chains are the American way of marketing. Products from hamburgers and mufflers to computers and ice cream are sold in look-alike outlets from Hawaii to Maine. Until recently, one area of business was restrained from going this route: banking. While Canada has just eleven banks and Britain has about 300, the U.S. has some 15,000. Nebraska alone has 283 different banks, Oklahoma 256 and Colorado 126. Says Walter Wriston, chairman of New York's Citicorp: "When the pioneers got off the wagon train going west, they set up a general store, a saloon and a bank." The general store and the saloon may be gone, but the bank probably remains, protected by state and federal legislation from encroaching competition by the big money-market banks.

American financial institutions, however, are now going national. Despite laws like the 1927 Pepper-McFadden Act, which forbids banks to set up branch offices outside their home states, moneymen are spreading out from coast to coast. New financial supermarkets such as Sears and Shearson/American Express are offering a wide variety of banking services, and traditional firms, ranging in size from San Francisco's BankAmerica (assets: $124 billion) to General Bancshares of St. Louis ($1.8 billion), are roaming far outside their old territory. Consumers are likely to reap better services and lower prices from the resulting competition.

The leader of this movement is Citicorp ($130 billion), the largest U.S. banking company. The firm now operates 947 offices in 40 states. Boasts Wriston: "We do business with one family out of ten in the country." And Citicorp is reaching out for still more accounts. Last month it bought Chicago's ailing First Federal Savings & Loan ($4 billion) and Miami's New Biscayne Federal Savings ($1.9 billion). A year ago Citicorp purchased California's big Fidelity Savings & Loan ($2.9 billion). During the 1960s and '70s, many money-center banks began looking overseas in search of opportunities to expand. But with their books now showing bad debts from Poland, Brazil and other countries, bankers are trying to tap safer, domestic markets.

The rich Sunbelt states of Arizona and Florida hold particular appeal for banks. But until lately, big institutions in New York City and San Francisco left that prime territory to regional banks like Miami's Southeast Banking Corp. ($9 billion). Says Southeast Chairman Charles Zwick:

"We used to be criticized because we seemed more interested in lending in Orlando than in Zaire or the Philippines. We don't hear much of that any more."

American banking regulations have long been an anachronism in a country where state borders mean less and less. The laws were made at a time when bankers had persuaded legislators that each state should keep its savings at work financing projects within its borders. In addition to federal rules outlawing interstate branching, Illinois, for instance, bans the state's 323 banks from setting up branch offices any farther than two miles from their headquarters. Texas law does not allow a bank to have more than one branch office within the state. The result of those parochial rules is a financial hodgepodge. "No country has a more fragmented banking system than we do," says Harry Keefe of Wall Street's Keefe, Bruyette & Woods. "There are at least 12,000 banks too many."

Congress first began opening the door to interstate competition in 1970, when it allowed banks in one state to set up consumer-finance and business-loan offices in another. Citicorp soon established 95 consumer-finance outlets in 28 states under the name Person-to-Person. The company today conducts about 80% of its $10.5 billion mortgage business outside New York.

Meanwhile, Manhattan's Manufacturers Hanover plans to spend $1.5 billion to buy C.I.T. Financial, which will give it some 1,000 loan outlets across the U.S.

Big-city banks got another chance to cross state lines when savings and loans ran into trouble during the last recession. In 1982, Congress passed legislation that permitted healthy banks to acquire ailing institutions in other states. Major banks jumped at the chance to grab new accounts. BankAmerica, for example, last year bought Seattle's ailing Seafirst Corp. Citibank's S and L takeovers in Florida, Illinois and California were all made under the 1982 act. Wrote Analyst David Whitehead in the monthly magazine of Atlanta's Federal Reserve Bank: "The emergency provisions of the Depository Institutions Act of 1982 may in fact be unlocking the door to full interstate banking."

More than anything else, new technology may be responsible for breaking down the barriers to national banking. At a time when financial institutions can send billions of dollars around the world in a few seconds via modern telecommunications, the stateline limitations seem like a vestige of a bygone era. Says Wriston: "Technology is making the old legal barriers irrelevant." Depositors today can already use nationwide networks of automatic teller machines to transact business almost anywhere. The Plus system, organized by Denver's Colorado National Bank, gives more than 18 million customers access to automatic teller machines at 1,153 banks. Its rival, CIRRUS network, includes 5,000 machines owned by 700 banks with nearly 20 million depositors. Home banking, which allows people to carry out financial transactions from their living room or den on personal computers, is also knocking down state lines. With home banking, it is almost as easy for a citizen of Missouri to have an account with New York's Chemical Bank as it is for a Manhattan resident.

Regional banks are challenging the aggressive ventures of the financial-center institutions with a variety of tactics. Many financiers are pushing for new state laws designed to block the entrance of big-city banks into their territory. Powerful regional institutions like NCNB Corp. ($19 billion) of Charlotte, N.C., are urging legislatures to create cooperative multistate banking as an alternative to national banking. Says Hugh McColl, chairman of NCNB:

"We will emerge as the dominant regional bank in this area. Over the next decade, we should get into Virginia, Georgia, South Carolina and then maybe into Alabama."

Lewis Holding, chairman of First Citizens Bank in Raleigh, N.C., sums up the fighting mood now prevalent among local bankers by saying, "For a hundred years we've been trying to build our own capital base in the South. We're not going to let some Yankee money-center banks come in and swoop it all up." Massachusetts, Connecticut and Rhode Island last spring created the first U.S. regional banking zone. This allows institutions in one of the states to acquire banks or savings and loans in the other two. The Bank of Boston ($20 billion) promptly took advantage of the new law by announcing plans to merge with two other banks in the area.

Citicorp, however, sued in federal court in Boston to block the zone as an unconstitutional restraint on trade. Said Roderick MacDougall, chairman of the Bank of New England:

"Citicorp is already a dominant presence in our state. I do not think the people of New England will take kindly to this." In the Midwest, interstate banking legislation has progressed more slowly. Some politicians are opposed to any easing of the old rules because they believe that even regional banks could become too powerful.

Says E. Peter Gillette Jr., vice chairman of Minneapolis' Norwest Corp.: "Perhaps the philosophy is an agrarian holdover--the populists against the pinstripers." Small banks in the West have discovered one innovative way to survive: by renting the name and services of Los Angeles-based First Interstate ($41 billion). The owner of 21 banks in eleven Western states, First Interstate is on its way to becoming the McDonald's of banking. In return for paying a franchising fee, local banks are given the right to use the First Interstate name and are provided with a series of big-bank services, including a network of 750 automatic tellers. Says First Interstate Chairman Joseph Pinola: "Our customers enjoy all the advantages of home-town service wherever they travel in our territory." Some small banks are trying to compete in the new era of national banking by concentrating on their specialties. The First National Bank of Amarillo, Texas ($1 billion), has plenty of savvy when it comes to making cattle loans. Says Chairman Gene Edwards:

"Some of the ranchers in our area have been doing business with us for three generations. You don't lend money on cattle like you do on real estate. Cattle can be hauled off in the middle of the night, and there goes your collateral." Many small bankers believe they can stay more friendly and flexible than large institutions.

"Size doesn't scare me," says Dean Treptow, president of Brown Deer Bank ($55 million) in Brown Deer, Wis. "We should be able to adapt more quickly to changes than the big boys can." Some regional banks are trying to fight off possible takeovers by large institutions by merging with other banks. The goal is to become so large that firms like Citicorp cannot easily swallow them up. Mergers also reduce overhead costs by combining such expensive operations as data processing and advertising.

Last week Cleveland's National City ($6.6 billion) announced plans to merge with Columbus' BancOhio ($6 billion). Indus try Analyst James Wooden of Merrill Lynch estimates that by 1995 the U.S. will have only 25 to 35 national banking organizations. Citicorp, BankAmerica and the other leading financial-center banks remain relentless in their determination to knock down the remaining roadblocks to expansion across state lines. The financial giants sometimes lose a round or two, but they always fight back.

Last year the Federal Reserve refused to approve plans by Citicorp, BankAmerica and First Interstate to buy banks in South Dakota, from which they intended to sell insurance across state borders. Unbowed, the banks have now started pressuring Congress for a legislative change to let their strategy go ahead. Citicorp Vice Chairman Hans Angermueller bluntly says that his company's tactic is "to batter at every barrier at all times." With that kind of zeal behind it, full national banking is probably not far away.

-- By Stephen Koepp.

Reported by Frederick Ungeheuer/ New York

With reporting by Frederick Ungeheuer