Big banks favor spreading their branches: but some independents are fearful of being overshadowed.

Big banks favor spreading their branches

But some independents are fearful of being overshadowed

House Subcommittee passage of a Bush administration proposal to allow banks to branch nationwide delighted local banking giants First Interstate and Security Pacific, while drawing mixed responses from local community bank executives and advocates.

First Interstate released a five-page report on the merits of interstate branching, stating among other points that the move could save banks like First Interstate 10 percent to 20 percent of their noninterest expense -- $260 million to $520 million for First Interstate in 1990 -- if adoped.

"Critics of the current system (of branching) have blamed the current system for the absence of any American banks among the largest banks in the world, for creating local monopolies and artificially high prices for banking services and for impeding capital growth in the banking industry," the First Interstate document said. "These critics are correct. . . . The cost savings to the banking industry from the gains in efficiency were (interstate banking to become possible) are enormous."

Interstate branching refers to the ability to establish branches in different states without establishing or buying local banks with separate boards of directors in each state, as is now the case.

The Bush administration proposal, which included a wide range of other administration-recommended reforms, cleared the House Financial Institutions Subcommittee by a 36-0 vote on May 23.

The subcommittee, however, also adopted an amendment by Rep. Joseph Kennedy (D-Mass.) that would prevent banks from branching across state lines or affiliating with securities or insurance firms unless they meet certain community investment standards. The amendment was later weakened to exclude banks which have already received a satisfactory community reinvestment rating from the federal government during the last two years.

The bill will now be considered by the full House Banking Committee in the middle of June, said a spokesman for the sub-committee.

Some independent banking associations which represent smaller banks, however, blasted the proposal, stating that it would increase competition from bigger banks while failing to eliminate preferential treatement for large banks and their depositors when those banks are faced with trouble or liquidated.

"In a nutshell, we have two criticisms," said Ken Guenther, chief lobbyist for the Independent Bankers Association of America. "This plan does not do away with too-big-to-fail banks -- they have 100 percent coverage (for depositors, should the bank fail). And this proposal is an inequitable proposal that will drive depositors from small banks to larger institutions" by eliminating protection for small bankers.

Guenther cited the state of New York, where he said that 10 years after interstate branching was allowed in the state in 1972, the number of independent banks declined by 45 percent.

Guenther said that the elimination of small banks would be felt particularly hard by small businesses, who often turn to community banks for loans as a lender of last resort.

State officials too voiced concerns that the bill infringes on the right of states to decide who does business within their boundaries.

"Right now it allows the state no control over who comes into California," said John Paulus, California deputy superintendent of banks. "We are currently evaluating the proposal."

Opponents of interstate branching are hopeful that amendments made by other committees which must approve the bill will grant the states some regulatory power over branching.

However, an effort by Rep. Bruce Vento (D-Mich.) to make interstate branching subject to state approval was defeated in a 24-12 vote by the Financial Institutions Subcommittee.

Several local independent banking officials said healthy Los Angeles County independent banks will not be harmed by the move because they have already been exposed to significant competitive pressures and can provide a higher level of service than large banks. By contrast, smaller banks in some states have been sheltered from competition.

"There (will) definitely be a demand for independent banks," said Aubrey Austin, president of Santa Monica Bank. "One of the major reasons is our size. We can be more flexible and we can provide better service. We've coexisted with the majors for 63 years."

Guenther agreed that California independents would fair better under interstate banking.

"If you have an expanding economy, like California, there are niches for the community banks," Guenther said. "States without such economies, like New England -- I don't see a good climate that will allow community banks there to flourish."