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The Interstate Banking Revolution: Benefits, Risks and Tradeoffs for Bankers and Consumers.

The interstate Banking Revolution: Benefits, Risks and Tradeoffs for Bankers and Consumers By Peter S. Rose, westport, CT: Quorum Books (an imprint of Greenwood Publishing Group), 1989, Pp. 244, $45.00.

PETER S. ROSE, holder of the Jeanne and John Blocker Chair of Business Administration at Texas A & M University, focuses in this volume on a relatively new and ongoing movement in banking - the rapid spread of banks and bank holding companies across state lines. While many analysts believe that full-service interstate banking will bring badly needed capital to struggling local economies and help stem the rising tide of savings and loan failures, concern is growing in the regulatory community and among some bankers and consumer groups that this trend will only exacerbate current problems of excessive risk exposure in the banking sector.

Rose explores in detail the potential benefits and costs of interstate banking and assesses this movement in light of an increasingly global marketplace and a volatile international economy. Before interstate banking can fulfill the promise of its supporters, Rose concludes, new federal and state policies that both protect the public interest and bring greater stability to the banking industry are necessary.

Rose's book, published in 1989, is indeed timely. American banking today is passing through a revolution brought about by widespread deregulation of financial services in the 1980s, beginning with the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Garn-St. Germain Act of 1982. In addition, significant changes in organizational structure, unprecedented in at least a half a century, have brought about tremendous challenges. Not since the Great Depression of the 1930s have U.S. banks been so severely battered by the combined forces of economic turbulence, competition from within and without the industry, rapid technological innovation, and a constantly changing set of federal and state government rules. Small banks and bank holding companies, numerically dominant in the industry for generations, are disappearing in many local markets. They are being absorbed by large, diversified financial-service firms. Diversification extends to both geography and products.

Among the many issues discussed by Rose are the causes of the interstate banking movement, the benefits and costs of interstate banking, public policy issues raised by banking across state lines, methods for analyzing and selecting banks for interstate acquisitions, overcoming the key management problems of interstate banking, interstate goals and outcomes, and guideposts for public policy and the management of interstate banking firms.

Rose, a prolific writer in the field of financial institutions, contends that American banking is moving along a path toward a financial sector dominated by a relatively small number of large banks, a system similar in many respects to that operated in other industrialized nations of the Western world for centuries. For example, while we have a decentralized and fragmented system of about 14,000 banks in this country, Japan has only 158 banks. In Canada, five banks hold 90 percent of the assets; in England, six clearing banks control 70 percent of assets. By contrast, the 100 largest U.S. banks control about 50 percent of assets.

The most visible aspect of this movement is the spread of interstate banking across the nation's diverse landscape. Almost all states now permit banking organizations from other states to enter their domain with a full menu of services and compete against local banks for financial services customers in hundreds of local communities. The number of full-service interstate bank holding companies quadrupled between 1983 and 1988 and by 1989 accounted for over half of all interstate offices operated by U.S. banking organizations.

Rose notes the interstate revolution in American banking has multiple causes, not the least of which is pressure from foreign banks. The latter - especially the Japanese - have recently captured a growing share of U. S. domestic customers; the market for corporate banking services has come under severe pressure from foreign institutions. Many knowledgeable commentators have argued for years that relaxation of interstate banking laws, along with repeal of the Glass-Stegall Act of 1933, is imperative if American institutions are to be competitive with those of other nations.

In the final chapter, Rose poses perhaps the most relevant question in the book. Can the deregulated private market for financial services work effectively and efficiently under interstate banking? There are no readily apparent answers. Based on the research evidence amassed thus far - and the opinion of bankers themselves - the answer appears to be in the affirmative. Rose, however, sounds a cautionary note. There must be adequate resources allocated to supervisory authorities in order to ensure that the laws and regulations designed to protect customers' deposits and maintain public confidence are enforced.

Toward this end, bank examinations must be more frequent and more thorough than has been generally the case in recent years. This, of course, is happening today throughout the country. Moreover, Rose notes the United States must move forward toward a banking system in which the capital pledged by banks to help protect their depositors and the fees banks pay for federal deposit insurance reflect the amount of risk their boards of directors and managers have chosen to undertake. The former is already in place with the new risk-based capital guidelines; the latter appears to be only a matter of time.

The issue of interstate banking has far-reaching impacts on our society. Peter Rose has addressed a timely and relevant topic, one that is going to be with us for some time, perhaps throughout the decade of the 1990s. The book would certainly be a worthwhile addition to the collections of those business economists who are actively involved in various types of banking and financial organizations. In fact, it is good reading for anyone who has an interest in the rapidly changing field of financial services.

Wayne C. Curtis Troy State University
COPYRIGHT 1991 The National Association for Business Economists
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Curtis, Wayne C.
Publication:Business Economics
Article Type:Book Review
Date:Apr 1, 1991
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