BRANCHIN OY FINANCIAL INSTITUTIONS
CO ITTE ON BANKING, HOUSING
UNITD STATES SENATE
U.S GVERNMNT PRINTING OFFICE WASHINGTON :1976 iiii ii #iiiiiiiiii#iii
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COMMITTEE, ON BANKING, HOUSING AND, URBAN AFFAIRS
WIrLIAM PRXMRE, Wisosn Ghekseek JOHN SPARKMrAN, Alabama JOHN TOWER, Texas HARISON A. WILLIAMS, JR., E DWARD. i, B OOMMangaila New Jerseir 'BOB PACKWOOD, Oregon,
THOMAS J. MCINTYRE, New Hampshire JEE warMS, Nort Cealia ALAN. CiRANSTON, California JAKE GAB4, Utah ADLAI E. STEVENBON, Bllinois JOSEPH R. BIDEN, Ja., Delaware ROBERT -MaRGAN, North Carolia.
liaNxams A. McLzAx, Staff Dkd' ANTHONY eqCz~arr Mierstle -Btaff Dikvt
1JBOOMMITTEFON INANCIAL INSIUTIONB
THOMAS J. McINTYRE, New Hampshire, Ohoiruses WILLIAM PROXMIRE, Wisconsin JOHN TOWER, Texa JOHN SPARKMAN, Alabama EDWARD W. BROOKE, aschst
HARRISON A. WILLIAMS, JEL, JESSE RELMS, North Crln
ADLAI E. STEVENSON, IlInois WILLIAM R.LWaa, Couse Ross MARl= FRIED Staff AaS&tt
Foreword by Senator Thomas J. McIntyre ----------------------------- V
Statement of Senator John Tower ------------------------------------- XI
Outline for study ---------------------------------------------------- XIII
Summary ---- ----------------------------------------------------- XV
"The Branch Banking Provisions of the McFadden Act As Amended: 'Their Rationale and Rationality," by Gerald C. Fischer and Carter H. Golembe ---------------------------------------------------------- 1
"The Evolution of State Policies on Multioffice Banking, From the 1930's to the Present," by Roger S. White, analyst in money and banking, Economics Division, Library of Congress, Congressional Research Service-- 43 "'Branch Banking and the Safety and Soundness of Commercial Banks," by Gary C. Gilbert, financial economist, Economic Research Unit, Federal Deposit Insurance Corporation --------------------------------- 83
"Branch Banking: A Summary of the Issues and the Evidence," by Jack M. Guttentag ------------------------------------------------------- 99
"Multiple Office Banking and Competition: A Review of the Literature," by Bernard Shull, professor, economics department, Hunter College--- 113 "The Impact of Multioffice Banking on the Availability of Credit in Smaller Conmnunities," by Gerald C. Fischer and Raymond H. Davis, Depository Institutions Study Center, Temple University ----------------------- 155
"The Agenda for the National Commission on Electronic Fund Transfers,"' by Donald 1. Baker, visiting professor of law, Cornell Law School ------ 193 "'Does Antitrust Law Preclude the Need for Geographic Constraints on Banking," by Donald 1. Baker -------------------------------------- 221
"The Dual Banking System in the United States," by William J. Brown, Department of Economics and Research, American Bankers Association -------------------------------------------------------------- 239
"Branching In the Savings and Loan Industry: Economic Analysis and Federal Policy Review," a staff study of the Federal Home Loan Bank Board ------------------------------------------------------------ 315
"A Judicial Impact Statement on the McFadden Act," by Ford Barrett, Assistant Chief Counsel, Comptroller of the Currency ---------------- 369
"The Impact of Holding Company Acquisitions on Aggregate Concentration in Banking," by Samuel H. Talley, staff, Board of Governors of the Federal Reserve System ------------ 7r ------------------------------- 77
"Chain Banking," by Jerome C. DarneH, assistant professor of business administration, University of Colorado ------------------------------ 403
"Management Interlocks Between Mutual Savings Banks and Commercial Banks," by-Jerome C. Darnell, economist, Research Department, Federal Reserve Bank of Philadelphia -------------------------------------- 428
"The Perennial Issue: Branch Banking," by Larry R. Mote, in Business Conditions, Federal Reaerve Bank of Chicago ------------------------ 437
'qhe Optimal Banking Structure: Theory and Evidence," by George J. Denston, professor of finance, University of Rochester ----------------- 455
"q* Effects of Branching by Financial Institutions on Competition, Proftetive Efficiency and Stability: An Examination of the Evidence," by Gary G. Gilbert and William A. L*ngbrake, financial economists, Federal Deposit Insurance Corporation --------------------------------- 475
"The Impact of De Novo Commercial Bank Entry," by Alan S. McCall and Manferd 0. Peterson, financial economists, Division of Research, Federal Ddposit Insurance Corporation ------------------------------ 499
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erring geographic expansion by banking organizations is needed, they have been further dispelled by recent events.
For example, in addition to my earlier comments on EFTS, the U.S. Supreme Court has now joined the growing list of critics of geographic. restrictions on banking organizations. It did so in its June 1975 decision in United State8 v. Citizen-g and Southern National Bank upholding an Atlanta national bank's mergers with five socalled "correspondent associate" banks. The Supreme Court's decision in favor of the mergers, which the Department of Justice challenged on antitrust grounds, hinged largely on a finding that the acquisition of the five, banks constituted a "Procompetitive," action designed "to defeat a restraint of trade" imposed by GeO_-rg la's restrictive branching law.
The 'Court's &cision contained anumber of references highly unfavorable to existing branching policy. For example, the Court said: "The banking business is, of course, riddled with State and Federal regulatory barriers to entry. . But, most of these barriers-that is, chartering requirements--at least arguabl serve the overriding public interest in maintaining customer conWdence in the industry as a whole by assuring adequate financial stability and responsible management for all banks. Antibranching laws, on the other hand, are now, widely rec gnized as a simple device to protect outlying unit banks from the-rigors of regional competition."
In my estimation, the Supreme Court decision clearly underscores yet again the -need for congressional review of the geographic restraints on expansion by banking organizations. I Concern over bank branchiz g' policy is not new, of course. But it has been the focal point of increasing attention in recent years in tering of the continuing evolution of bank structure and regulation.
in 1971, for example, the Department of Justice specifically urged t1W Council of State Governments to encourafe State legislatures to liberalize State branching lawg as -a means o encouraging competitiom in banking. Simply stated, the Department's position, which remains the same today, is that permission to branch creates procompetitive alternatives to banks seeking to protecttheir markets.
Also in 1,9715 the Hunt Commission urged, in a series of recommendations designed to revitalize the Nation's financial institutions, that "the power of C'om-mercial banks to branch, both de novo and by merger, be extended to a statewide basis, and that all statutory restrictions; on branch or -home office locations based on geographic 6r population- facturs, or on Proximity to other banks or ikhe-r branches thereof be eliminated."
Even though the concern over branching restrictions is generally rAlsed in the context of State laws, I believe that the Congress has an overriding responsibility to address and formulate a national policy on.: the underlying issue; namely, the geographic expansion of banking ""ices in: the. future.
:..For example, the Congress is presently engaged in the shaping of a 4ew national policy on the structure of the Nation's financial institutions which will have ramifications for decades to come. Financial yestructurm'g.proposals of the type passed by the Senate last 'December WiS. 1267, the Financial Institutions Act will have top Priority in the Rot CQRgM&
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Statement of Senator John Tower
As the ranking minority member of the Financial Institutions Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs, I too wish to express my appreciation for the efforts of those :vVho icontributed to this compendium. I also wish to stress that I approach the upcoming review of Federal policy on branching by financial institutions with an open mind. Considerable, research is needed on the issue of branching policy', and this compendium should be viewed only as a first, albeit important, step. Finally I wish-to make, a few observations which I trust will be kept in mind by the subcommittee, membors and other interested parties as we proceed with our review of branching policy.
First, I want to point out that branching polic has not been static tbroughout, our history. The First Ba-nk of the United States which was chartered in 1791 by the Federal Government was given authority tb branch aicross State lines and eventually established eight branches in: eight different States. Whereas the First Bank was given authority lo branch interstate, the Second Bank of the United States was required by its 1816 charter to establish a branch in any State irr which 2,000 of thi ban k's shares were subscribed or held if the legislature of the State applied for it. The Second Bank established 27 branches, giving it representation in every State on the Atlantic seaboard except New Jersey and Delaware, and every district in the interior except Illinois and Indiana. Today, of course, neither a national bank nor a State bank can branch across State lines; each State imposes its own branching restrictions on the banks it charters; and a national bank in a given State is subject to all branching restrictions imposed by that Sta-te on the commercial banks it charters.
A second point I wish to underline is that, while the inability to branch across State lines largely prevents U.S. banks from soliciting retail (small) deposit accounts from a geographic area larger than a State, still U.S. banks do possess a substantial capability to provide financial services on a multistate basis. Through the formation of bank holding companies, U.S. banks can operate a wide range of multistate affiliates: loan production offices consumer and business finance comanies mo financial consulting services, et center. U.S.
p rtLyaLye banks,
banks also ha"vec formed Edge Act and agreement corporations through which they have established multistate office networks to conduct international activities incidental to whatever international banking business they do anywhere in the country.
A third point I wish to make is that the economic efficiency aspects-and, therefore, public welfare aspects--of branching can change with changes in technology. I have already noted that two of this countr ys earliest banks branched extensively. 11-owever, travel and communications problems made the operation of widespread branch systems extremely difficult. As a result, once the barriers to obtaining bank charters were lowered by the "free banking laws," branch bank(XI).
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FEDERAL BRANCHING POLICY
OUTLINE FOR STUDY
1. The history and background of the McFadden Act of 1927, as amended by
the Banking Act of 1933, in terms of branch banking.
A. What was the rationale relied upon by Congress in enacting the
branching provisions of the McFadden Act of 1927, as amended by
the Banking Act of 1933?
B. Why did Congress designate State boundaries as the ultimate limit
for geographic expansion by banks and why did it designate the States, not the Federal government, as the exclusive authority to determine whether and to what extent, if any, multi-office banking
is to exist within their borders?
C. What kind of bran ching policy has emerged, State-by-State, over
the past 40-odd years?
D. What other forms of multi-office banking (such as satellite banking,
chain banking, and multi-bank holding company systems) have
emeiged State-by-State over this same'period?
19. To what extent are the'ground rules for multi-office expansion by
thrift Institutions, particularly savings and loan associations, difJerent than those that apply to banks?
11. The relationship of branching policy tothe continued safety and soundness
of the nation's financial system.
A. Have unit banks been more susceptible to failure than banks within
B. To what extent does the existence of deposit insurance neutralize
the impact banking structure might have on bank failures?
C. If there are differences in the safety and soundness of unit banks
compared to banks with branching systems,-are the differences attributable to banking structure, to the size of the institutions involved, or to some other factor?
Ull. The relationship betw* een hank structure and banking's ability to serve the
public needs and convenience in terms of the availability and cost of fiirancial services.
A. To what extent does branch banking facilitate economies of scale
beneficial to the public interest that axe difficult, if not impossible,
for unit banks, even of the same sizeto achiev ?
B. What are the d1jOrences between branch banking and unit banking
in terms of the availability of credit, the cost of credit, the inter eatpaid on time and savings accounts, and the scope of financial
servim that are offered to the public?
Does unit banking or branch banking tend to promote higher loanto4eposit ratios?
E. Are there any differences in banking tructure that tend to result
in discrimination agOnst certain classes of borrowers such as fArmerssMall businessmen, the poor, ana State and local governmem ?
IV. The relgtlObihiP of banking structure to maximum competition in the publie interest
A.' How do State-wide banliing asset concentration ratios differ from
15tate to StAfe depending on whether the banking structure involves unit'banking, branch banking or some other form of multioffice banking?
B. To what e-Vtent have changes in State-wide concentration ratios in
,#-remnt YeArs been -attributable to changes in State laws on multioffice banking, mergers and acquisitions, or de novo expansion?
C. Are concentration ratios based on State-wide data ? if
not, do concentration ratios differ according to banking structure in markets less than State-wide In scope where actual competition exists? In other words, if there have -been changes in the degree of concentration iq relevant markets over recent years, to what extent Is that attributable to changes in banking structure through such means as liberalization of State bi anching laws or the spread
of holding company banking?
D. How is entry into competitive markets different under braneh banking than it is under unit banking and to what extent is this significant in terms of assessing the competitive advantages of the
two kinds of systems?
E. Have geographic restraints on bank expansion been successful in
preventing one or two institutions from dominating competitive
F. Are geography restraints necessary, given theapplicability of the
Federal antitrust laws to bank expansion?
G. What are the merits of alternative means of guarding against undue
concentration of banking resources such as a UmIt on the percent-age of assets that.may be controlled by a single banking organization?
H. To what extent do so-called home-office protection laws in some
branching States restrict competition and w hat are the public interest benefits, if any, that offset the disadvantages of the anticompetitive nature of such statutes?
V. The impact of multi-office banking, particularly branching, on the availability of credit in smaller communities.
A. What are the facts 'about -the availability of funds in small communities based on whetherunit banking or branch banking exists?
B. How does local lending compare to total resources under unit banking and under branch banking?
C. Are there significant differences between branchin systems and
holding company systems in terms of their ability to serve local needs, particularly with respect to the transfer of 6nds from one
locality to another?
D. Do unit banks tend to be more responsible to the financial needs of
small communities than banks with "" systems or multibank holding companies?
E. What would the impact on small local banks be if laws on multioffice banking were liberalized to allow entry Into their markets by
F. Are liberal branching laws conducive to newly organized banks
being able to grow and thrive?
VI. The relationship of branching laws to off-premises electronic bankW facillties.
A. Should the definitions of branches In the McFadden Act of 1927
and the Banking Act of 1933 have any bearing on the establishment of off-premises electronic banking faf4lities?
B. What are -the fundamental differences between off-premises EFT
facilities and traditional branches?
C. To what extent can thrift Institutions and nonfinancial businesses
such as retail chains be expected to offer. financial services by electronic means in direct competition with banks? ,
D. What are the practical limits, in terms O'distance, that offpremises EFTS facilities can.be operated profitably away from
main offices or traditional branches?
E. Should there be any geographic restrictions on JWIPT facilities and,
If so, should they be different thauthose thai might pvpve warranted for traditional branches?
VIL The relation of Federal branching policy and the dual banking system.
A. Is continuation -of the branching policy articulated In the McFadden Act of 1927 and the Banking Act of IM. essential to the maintenance of the dual banking system?
B. What kinds of changes In. Federal branching policy.would be consistent with maintenance. of the dual bankin syst6m?
Branching of financial
.x:.K institutions is, as Larry Mote has characterized.it, a "perennial issue." Actually, it is not one issue, but many, and this compendium of articles attempts to touch on many o the most important aspects of those issues. The articles are arranged: to follow the preceding outline for study, and this summary is directed to those
artiqles which were especially prepared for this compendium.
The first two articles cover the history of branching legislation.
The Branch Banking Provisions of the McFadden Act as amended:
Their Rationale and Rationality," by Gerald C. Fischer and Carter H.
Golembe covers the Federal level while Roger S. White's "The Evolution of State Policies on Multi-Office Banking from the 1930's to M the Present" covers State legislation and also touches on branching
by thiift institutions.
J: As pointed out by Fischer and Golembe, branching was not even
considered in the National Currency Act of 1863, which provided for the chartering of national banks. However, subsequent. interpretations of, that act and of its successor, the National Bank Act of 1864, forb4de national banks from operating any branches other than ones they A had operated prior to receiving a Federal charter. This produced ine'u.ities because many States al fowed State-chartered banks some form J.. 011 mu'Idoffice operation either through branches, chain or group banks,
or holding companies. Trying to remedy that inequity produced a 5-year legislative struggle culminating in the passage of the McFadden, Act of 1927 which gave national banks the right to ppen branches within their home office cities, subject tocertain limitations, if State AD b4n s: were permitted to do so. That act also. defined A branch to include any branch office, braneb agency, additional office, or any
broneh place of business at which deposits are received, or checks
P .*d, or money lent."
The McFadden Act stimulated several States to pass antibranching
statutes continuing a -pattern begun a decade earlier. However, the 'need to Drotec t communities and depositors from the effects of bank 'Lilures led to a reversal in' the antibranching sentiment after 1930.
To resolve 'the branching controversy, the Banking Act of 1933 pro11 Vided not only for Federal deposit insurance, but also addressed itself
4 006inpetitivee equalitybetween State. and nation4. banks.
Despite some areument notablY by Senator Glass, that proximity A e border ii4ght make it part of the "ordinary and usual busin of the bank" to extend. into an adjacent State, the authority of IqlaTipAR.1 banks to open branches, according to the act, was to be govellied by State law. There was no single line of reasoning leading to t t d cision- but 'rather it arose f rom a desire not to infringe upon the"soverei, nl of the States and out of. the fear of possibly establishink a new form of competitive inequality between State and national
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In~~~ "rnhBnig: A Summr of the Isse and the Evidence,"
town. Banc baks also provide an economical way of transferring
Thecrdi aloaton fucion of bacigis hotly debated, but a
recet sudyshos tht lcaly lmite buinesesbenefit from statewid banhig.Brachngbaksdo not seem to have as their primiy
intres th hoe ofic ctyas s s ofen ssrted, but rather outlying
brachofics sull hvea hger lonratio than unit banks in the sae re. r.Guteta asoreports that entry of a bakitoa new markt i eaier n Sate whch allow branching than in unit States,
wit eaierenty ecouagig cmpeition. Oefinal point he makes is hat"Ingenraluni baks eemto be ale to compete successfully wit brnc ofics o lagesysem, although they may need a
modium f potetio prvidd b th reulaoryscreening of branch
Berar Shll i hi atile Mutile Ofic Banking and Competitio: Rviw o te itraure fnd tatextreme cocrn over
100comeria bakig ogaiztion in thelUnited States hold less tha 5 prcntoftott epsis ndtt ratio declined over the
lat 5 eas esit icrassin multofc branching. Finlly, he reitrats te iea hateliinaionof multiple office banking restriction wold avethe mmeiat ef ectof oweingbarriers to entry in
manylocl mrkes. Te mre hret of suhentry as well as actual
entr miht hve mporantprocmpeitye effects on the behavior of
In "he mpat o Muti-Ofic Bakin ontheAvailability of
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Gerad C FisherandCarter H. oeb NO4
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THE BRANCH BANKING PROVISIONS OF TtE McFADD9W ACT AS AMENDED: THEIR RATIONALE AND RATIONALITY
The branch banking provisions of the McFadden Act [44 Stat. 1224 (1927)) as amended by the Banking Actof 1933 [48 Stat. 162 (1933)) control the domestic branching activities of national banks in 1976 much as they did nearly a half century ago. But, while the Federal branching law remains essentially the same, the economic, demographic, and social environment in the United States has changed significantly during this period. In addition, the structure of the commercial banking system in terms of both balance sheet composition and bank organization bears little resemblance to the structure of the late 1920s and early 1930s. Alsothe competitive conditions faced by the commercial bank today are vastly different from those of forty or fifty years ago.
initially, one may find it hard to believe that there has been so
little revision in Federal branch banking law when the financial system and
the economy has undergone such massive change. Nevertheless, since branching by national banks is tied to state law, one might logically conclude that probably no major amendments were required since any needed flexibility would be provided by state legislation. In this regard, certainly one cannot dispute the fact that state branching law produces variety. For example, in five adjoining states one finds: unit banking in Illinois, county branching in Indiana and Ohio, contiguous county branching in Pennsylvania, and statewide branching in New York. Variety, however, should not be confused with flexibility as anyone who has ever studied branch
banking law will be quick to point out. And it can be stated unequivocally that the dearth of Federal branching legislation certainly cannot be traced
to the malleability of state branching law.
In reality, the factors which determine the status of branch banking
at the national level as well as at the state level are highly complex, and
they are especially difficult to interpret because of the strong emotions
on both sides in branch banking debates. Unfortunately for the economic historian, much of what is actually said and done by the protagonists is
not recorded, and much of what is recorded is purely for "the record". The
subject of this paper, the Federal branch banking statutes enacted in the
late twenties and early thirties, is no exception to this rule. Therefore, R it was necessary to review carefully a broad range of banking and legal
publications to obtain some insight into the rationale behind this legislation. This, in turn, is reflected in the format of the study.
The paper considers not only factors directly relating to the passage
and-content of the McFadden Act and the Banking Act of 1933 (Sections 2 and
3 of the paper, respectively) but the historical background of these laws
(Section 1) and more recent developments which are likely to have an impact
on American banking structure (Section 4). It should be pointed out that
despite the massive banking literature in this general area, in writing
Sections 2 and 3 in particular, it was found that the material directed to
the specific questions at hand was minuscule. As a result, some of the
observations in this study represent what the author believes is the
consensus of the views of contemporary observers and/or scholars on a given
issue. For the reader who would prefer to mold his or her own opinions, a
bibliography containing some of the better source material has been included.
There was no shortage of critics of banking in nineteenth century
America. From the time the first bank was formed in this country, people warned of the dangers of "money power" and the potential political
influence of these institutions, and one investigator found that by the mid-1800s opposition to banks was so strong in some areas that banking
was illegal in nine states. But, while the foes of banking were ni rous in this period and their efforts produced many restrictive provisions in state banking law, their attacks were directed toward banking in general and activities associated with the currency issue functions of some banks
in particular, not toward branch banking per se. National Bank Branching Powers
Branch banking as we know it today was really not an issue at that
time. This fact is quite apparent from the lack of concern with branching one finds in the wording of the 1863 National Currency Act [12 Stat. 665 (1863)) and the 1864 National Bank Act [13 Stat. 99 (1864)] which superseded it. Neither of these laws, which laid the foundation for the national banking system, specifically mentioned branch banking. Moreover, numerous scholars have searched the existing banking literature in vain for some substantive discussion of this topic in the debates which preceded the passage of these
lMiller, Banking Theories in U.S., p. 21.
2Federal Reserve Board, Committee Reports, "Branch Banking," p. 38.
laws. Their efforts do not . reveal that the question of branch
banking was raised, and there seem to have been no positive purpose of
ending branch:banking in the United States."
Nevertheless, two provisions were included in the National Bank Act
which led to early interpretations preventing national banks from
establishing branches. The first stated that persons forming a national
bank had to specify:
"The place where its operations of discount and J. deposit are to be carried on. while the second provision and
the one which received the greatest ernphasis read in part:
usual business shall be transacted at an office or banking house located
in the place specified in its organization certificate." Economic
historians who have studied the origins of these provisions have concluded
that they had nothing to do with branching
either pro or con but
were largely copied from the state free banking acts from which the
National Bank Act was drawn), and they were intended to serve as a
protection against "wildcat" banking and so called "shaving shops."2
On this issue, the opinions of the Federal Reserve Board's economists
in the early 1930s mirror the findings of the historians. The Fed reported: Further research may discover something that will throw a different light on this point, but the present state of the evidence indicates that the provisions which effectively prevented branch banking from developing under the national bank legislation, till amended in 1927, had no connection with branch banking. They originated as measures to control note issue, and were intended, according to the explanation made at the timw, to prevent the practice under free banking of establishing banks in obscure places, in remote parts
'Chapman and Westerfield, Branch Banking, p. 59
2 Shaving shops were city offices where a bank's own notes were redeemed V at a discount- the bank itself being located in some remote area of a state.
of the state where little or no business was done, with a
view of obtaining a circulation merely, and doing no other
Nothing in the research conducted in the forty years since the Federal Reserve studies would lead one to question this conclusion. Introduction of the BranchBankiM Question
The Congress did not seem to oppose the principle of branching,
for as early as 1865 the National Bank Act was amended to permit state banks with more than one office to convert to national banks and retain their branches. [13 Stat. 469 (1865) Section 71 But there was a general lack of interest in branching at the time as noted in a major study which stated: "It seems as if the existence of the [conversion] section had been practically forgotten," since it was inoperative from its passage in 1865 to 1907 when a national charter was issued to
a converted state bank with a branch. This lack of interest in branching is no doubt the primary reason the so-called "branch banking question" was moot for several decades following the passage of the National Bank Act.
As late as 1895 and 1896, high public officials such as Comptroller of the Currency Eckels could still take a positive stand for branch banking without facing severe criticism. Then, proposals of this type caused no special furor, and indeed such recommendations were often made at American Bankders Association conventions with no debate or
lFederal Reserve Board, Committee Reports, "Branch Banking," pp. 65-66.
21bid-., p. 118.
negative reaction. The reason for this, if one may judge from comments in the press and other publication in the 1890s, was the real and growing concern with providing safe and adequate banking facilities for small towns. But, ultimately, legislation was enacted in 1900 (31 Stat. 45 (1900)] which significantly reduced the capital requirements for new national banks located in communities of 3,000 inhabitants or less making it easier to establish new banks. Thus, the argument that branching was required to meet the need for banking service in rural areas was significantly weakened,.-and some of the impetus behind the effort on-,behalf of national bankbranching was lost.
By the time the above legislation had passed (1900),.however, the
philosophic lines had begun to harden between the advocates of branching and the.proponents of unit banking. In fact, the first major attack on branch banks (apart from criticisms relating to currency issue) one academic researcher has been able to uncover related directly to the question of how*small community banking needs were to be met. Nonetheless, the controversy was short lived, and the issue was not deemed of sufficient importance even to be considered in the National Monetary Commission's recommendations of 1911. one reason was the liberal bank chartering policies of b6th the Comptroller and the states, which eventually were to bringthe number of banks in the United States to its all-time high of nearly 30,500 in 1921.
The question of national bank branching powers was not viewed so casually by the Comptroller's office, however. For example, in 1911 the Comptroller of the Currency requested the views of the Attorney
General regarding the branching powers of national banks, and was told that the power was not implied in t:he National Bank Act. In 1918 national banks were enabled to acquire branches under the consolidation act of that year, which provided that a national bank which had acquired branches at a time when it wa:s under state charter could, if it consolidated with another national bank, retain those branches.
And, finally, the question of national bank branching came strongly to the fore under the Comptrollership of Daniel R. Crissinger, appointed by President Harding. Mr. Crissinger not only urged Congress to amend the National Bank Act to permit some branching, but also followed a policy of permitting national banks to open additional intracity limited facilities for the purpose of receiving deposits or checks in areas where state banks were permitted to branch. In his Annual Report for 1922, Comptroller Crissinger strongly backed a bill then before the Congress which would have given to national banks the same branch privileges in each state as were enjoyed by state banks -- the concept which was to be adopted over a decade later.
This bill reportedly was introduced by Representative McFadden.
It signaled the beginning of a legislative struggle which would grow in scope and intensity during the next five years (1922-1427), and it would eventually lead to the Act which bears his name and which remains
one of the cornerstones of present-day national bank branching law.
Chapman and Westerfield, Branch Banking, p. 102
2 Ibid., pp. 102-103.
The McFadden Act Branching Provisions
In 1890, approximately one-third of the nation's 63 million
population lived in communities classified in Census reports as urban. By the time the 1930 Census was taken, just three years after the McFadden Act was passed, well over one-half of the then nearly 123 million people in this country lived in urban areas. But there was not only a shift from rural to urban life in this period, there was an enormous growth in larger urban communities. Places of 50,000 and over accounted for more than 50 percent of the total population growth between 1890 and 1930.
With the expansion of the urban population, combined with changing income and consumption patterns, and numerous other developments which are too well known to be repeated here, there was a substantial change in the commercial banking business between the 1890s and mid-1920s. Nevertheless, there is one other factor whose impact on banking (as well as-the economy as a whole) merits special mention the automobile. By 1927, automobile registrations in the United States had climbed to over 20 million and there were frequent references to the auto in discussions of the reasons for expanded branching.
144 Stat. 1224 (1927) This is also called the McFadden-Pepper A t since Senator Pepper's name was added by the Senate.
An example of this may be noted in a description of Chicago in
the twenties--a city which saw chain syst develop since branching
The growth of population with increasing congestion in traffic has made for the rapid development of banking in residential districts since the [First) World War. The needs of the outlying communities for more convenient banking facilities has led to the rapid growth of banks in outlying districts. The downtown banks could hardly look without envy at the lucrative savings bank business that thus developed. In the absence of branch banking the
only means of participating in this business was to buy into established banks in the new territory or
establish new ones. I
The Comptroller of the Currency in his 62nd Annual Report (1924)
In certain larger cities of the United States topographical conditions and changes in city structure, lack of parking facilities, etc., have made it difficult for outlying customers of a bank to reach the banking house. 2
And, finally, Professor Robertson in his history of the Comptroller's
During the first quarter of the 20th century, the economic forces compelling the growth of branch banking tended to promote intracity branching rather than intercity branching. As cities pushed outward and increasing traffic congested the streets, banks found it progressively more difficult to reach households. Yet itwas almost precisely at this time that the American middle class was becoming
I Thomas, "Concentration in Banking Controls through Interlocking Directorates as Typified by Chicago Banks," Journal of Business, University of Chicago, January, 1933, p.9.
2 Comptroller of the Currency, 62nd Annual Report, 1924, p.4.
acuts poitable. In a society of spatially
flourished only a few miles apart, unetain
of branch offices ouside the hoecity. 1
The ast oin, intra-city versus inter-city branch eansowrat
Intr-ciy an Iner-ity ranhin
in erm o th nube an lcaton f ranh ffies.Threter onl 11 bances exludnghea ofics) f ommrcil ank i
190, ad narl for-ifts wre ocaed utidethehea-ofic
mentioned earlier which permitted limited-service offices in 1922, and the second change resulted from the passage of the McFadden Act in 1927.
The McFadden Act
In June 1922, the First National Bank in St. Louis opened ar branch without formal approval by the Comptroller of the Currency, and similar action was taken or threatened by a number of the larger
national banks in other sections of the country. To counter this trend, after careful analysis of the law, Comptroller Crissinger ruled that national banks could establish and operate limitedservice offices and agencies, so-called "tellers' windows," in the same place they were authorized to do business. As one might expect, this set off a series of debates regarding branching including a significant exchange of views at the 1922 American Bankers Association convention. This and other debates at the state and national level were reported widely in the press and in periodicals, and within a short period of time legislation both supporting and rejecting branch expansion by national banks was introduced in the Congress.
The St. Louis case. The interest in branching was stimulated
further by the court action initiated by the Missouri State Attorney General against the First National Bank of St. Louis which, as noted, had established a branch office in Missouri -- a unit banking state. The
lKane, Romance and Tragedy of Banking, p. 524.
had~~~~~~~~~~~~~~~~ th oe4oefrestt eilto rhiiigntoa ak
from stabishig brnchesunles th brachi3 uhrt.wS. 640 (1924)
Uofre y oges
Leisatv hisor ofteAt1vnbfreteS.Luscs from ankerFedralRsv aloffcas and bakexmnesthoghu abillwa prpal ed whilh wae nrdcdb ogesa cadn There iwere many proison intebilwic eemotatt
national banks, but also in the State member banks, which, if they were allowed to exercise the branch banking privileges the States gave them, were at an advantage over national banks; and if they were forbidden to exercise them were at a disadvantage as compared with nonmember banks. The State supervisors of banks were at the same time jealous of attempts to restrain State banks from the exercise of privileges which were legally theirs, and of attempts to give national banks greater powers than State banks had. 1
Meanwhile, Congress faced the legislation with mixed emotions.
Many legislators were-hostile to branching; yet, they were forced to
choose between overriding the right of state banks to branch or giving
national banks at least some original branching powers. The latter
course wag the only practical one to take, but this was done grudgingly.
As a matter of fact, 'the McFadden bill had both positive and negative
branch banking elements, and some lawmakers attempted to expand on
its negative attributes through the so-called Hull amendments.
Amendments to the bill introduced or drafted by Representative
Hull of"Illinois were the-most disputed of any provisions that
became part of the bill:.' Among other things, the Hull amendments
provided that members of the Federal Reserve System, state and national,
should never be perM3. to establish and operate branches in those states 4hich did not at the time of the passage of the McFadden Act
allow state banks to operate branches. The bill including the Hull
ndments passed the House in 1925 but the amendments were dropped
ltederal Reserve Board, Committee Reports, "'Branch Banking,"p.140.
For a discussion of developments in this period see: Ibid.,pp.139-54;
Chapman and Westerfield, Bradich Banking, pp. 102-107; and Comptroller of the
Currency, 62nd Annual Report, 1924, pp. 2 & 3, and 65th Annual Re ort,
1927, pp. 1-2. Especially good i's Collins, The Branch Banking Questiop
76-294 0 76 3
before the Senate approved the bill. The Senate would not compromise
on this point, and the Session of Congress.euqed without further action
on the bill. This scenario was replayed in 1926 until the A.B.A. acted.
A major blow to the supporters of the Hull amendments was struck
by the American Bankers Association in its.Los Angeles convention in
the fall of 1926 when it reversed its position on d4ese provisions.
After a stormy session lasting many hours, the A.B.A. approved the
McFadden bill but without the Hull amendments. This weakened the
position of those who promoted them in the House by removing their
chief public support outside Congress. Just a-few months later, in
January 1927, the House accepted the bill without the Kull amqndments.
After a conference to settle minor differences with the Senate the'.,
Act passed and was approved by t4e President, February 25, 1927.
Branch Provisions 'of the McFadden Act
SEC. 7. That section 5155 of the Revised Statutes of the United States be a nded to read as follows:.
"Sec. 5155. The conditions upon which a national banking association may retain and operate a branc or branches are the following: "(a) A national banking association may,.retain and operate such branch or branches as it may have in lawful operation atthe date of the, approval of.,, this Act, and a I ny national banking association which has continuously maintained and operated not more than one branch for a period of more thiLn twentyfive years immediately precedingthe appr(?val of this Act may continue to maintain and operate such branch.
"(b) If a State bank is hereafter converted into or consolidated with a national banking association, or iftwo or more national banking association
lFederal Reserve Board, Committee Reports, *Branch Banking,* p. 148. During its October 1924 Convention; the A.B.h. had approved the Hull amendments.
are consolidated, such converted or consolidated association may, with respect to any of such banks, retain and operate any of their branches which may have been in lawful operation by any bank at the date of the approval of the Act.
"(c) A national banking association may, after the date of the approval of this Act, establish and operate new branches within the limits of the city, town, or village in which said association is situated if such establishment and operation are at the time permitted to State banks by the law of the State in question.
"(d) No branch shall be established after the date of the approval of this Act within the limits of any city, town, or village of which the population by the last decennial census was less than twenty-five thousand. No more than one such branch may be thus established where the population so determined, or such municipal unit does not exceed fifty thousand; and not more than two such branches where the population does not exceedone hundred thousand the determination of the number of branches shall be within the discretion of the Comptroller of the Currency.
"(e) No branch of any national banking association shall be established or moved from one location to another without first obtaining the consent and approval of the Comptroller of the Currency.
"(f) The term 'branch' as used in this section shall be held to include any branch office, branch agency, additional office, or any branch place of ,business located in any State or Territory of the United States or in the District of Columbia at which depostis are received, or checks paid, or money lent.
"(g) -This sectiorrshall not be construed to
nd or repeal section 25 of the Federal Reserve Act, as amended, authorizing the establishment by national banking associations of branches in 'foreign countries, or dependencies, or insular possessions of the United States.
"(h) 'The words 'State bank,' 'State banks,'
'bank,' or 'banks' as used in this section, shall be held to include trust companies, savings: banks, or other such corporations or institutions carrying on the banking business under the authority of State laws."
SBC. 9. That the first Pargigg4ph of section 9 of the Federal Reserve Act as ame9ded, be amended so as to read as follows [in part]: "Any such State bank which, at the date of the approval of this Act, has established and is operating a branch or branches in conformity with the State law, may retain arid operate the same while remaining or vVon becoming a storJ&older of such Federal reserve bank; but no such State bank may retain or acquire stock in a Federal reserve bank except upon relinquish nt of any branch or branches established after the date of the approval of this Act beyond the limits of the city,, town, or village in which the parent bank is situated." Rationale for the Branching Provisions
With the Hull amendments deleted, the McFadden-Act branch provisions were much the same as they were when the bill was introduced three years before. The Act has been described as a "mildly pro-branching" measure, but it really is a compromise bill. It reflects both proand anti- branch banking sentiments, which makes it extremely difficult to deternane the reasoning behind every branch provision.
Nevertheless, utilizing the background material provided in Section I and the first pa-rt of this Section, three basic elements emerge which provide a good indication of the over all rationale underlying the branching requirements. First, the equality of state and national bank branching powers; second, and related to the first, the actual and potential decline of the national banking system; and third, the removal of uncertainty about the legal status of 'tellers' windows.'
OF4 *lity.w Congressman McFadden in commenting on his bill on
June 7, 1924 stated: The main purpose of this bill is to restore
asnerl a pssbl teeuiibumbewen tae ndnaioalbak
withn te Feera ResrveSystm.",An, o arc 3,12,afe h
Act ecae la, Rpresntai~e c~aden emaked
As areslt f th pasag of hisact thenatona
bank~~~~~~~~~j act ha ens meddta atoaak are bleto met he nedsof mder indstr an
comecead omeitveeuait hsben sabise
Animal -- all banks are equal [under the, ftyadden Act] but
are more equal than otheral To cite a few examples-. $tate. mexuber banks had grandfather rights on branches putside their bcw-.office city or, for that matter, in a few cases outside their state. (National banks had few branches outside their head-Qffice cities..) Minim population figures in the law and limits on the number of new branches which a bank could establish in a city were applicable to branches of national banks but not to branches of state or banks. And the actions of state banks which were not members of the Federal Reserve System and did not plan to join the System were not restricted
by the branching provisions in the 1927 Act.
The McFadden Act was never int ended to establish c2Mlete
branching equality between state and national banks. It was also not aimed at giving the states control over Federal branching policy. The latter point is crucial for actions taken because of the basic desire of the lawmakers at the time to restrict branching are often
interpreted as indicating they sought state control over Federal.,-...-., branching policy. Rather, it was Federal branching.policy which would prevent state member banks (that wanted to remain Federal Reserve System members) from acquiring additional branches outside their head-office
1 U.S. Congress, House, Hearings before the Committee on Banking
and Currency, "Branch, Chain, and Group Banking," 71st Cong., 2nd Sess.. 1930, p. 436. Governor Young of the Federal Reserve Board in his statement before this Committee pointed out: "There are many inequalities in the branch banking provisions of the McFadden Act as they affect National banks and State member banks, respectively, and to a ceirtain extent that act fails to place these two classes of banks on an equality with respect to the establishment of branches." Ibid., p. 437.
brachs stalihe ousie ts om cty fe Ferur 25 v i1927 cola eamte oFdrlRsremebrhpecp pnrlnusmn
of sch ranhes.Theobjct as nt t liit ust atinalb at
branhingbut o lmit rancing
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i ,i !,iii0 0,
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oewemb reybacigsaebnsisefc i ent
hodntoa. ak osaeiiain.
Dene of the ationalBank in Sysem 1;-- c.1 r fo d e....q u "" al iyl-iim, i ....
in brnhn betee stt and"i i national ....'ma bell''iili tracd...th
decin whc wa aigpaeintentoa akigsse.r i
Annual Reor for 194CmtoleDws
, , ......id befor Co gr s co v nc n ev de c of the, ,i,, .... ~ ~ uren need for the brodein of .... charter ,, .... ..
powers of th ainlbns a rvddb h
The Congressman went on to note:
"These national banks entered the
state banking systems in order to place themselves upon an equal
competitive basis with state banks in their respective localities."
And "the outstanding feature of banking operations on the part of
state banks, which is making the greatest inroads into the national
system, is that of branch banking."
Congressman McFadden also made reference to Congress' intention
to permit competition and promote public service through his bill.
This idea was echoed by a colleague in the House who explained his
vote in favor of the bill as follows:
I am persuaded to vote for this measure for the
reason that crowded conditions traf f ic regulations, lack of parking facilities in our cities necessitate some change in banking facilities to suit the convenience of the complex and crowded business world. Banks, bankers, and customers in large
cities are in a situation similar to telephone, electric light and gas companies, or the post office, all of which have branches for the customers' convenience. Economy in time, energy, and many other factors demand that the old order give away
to a modern and sensible plan. Party traditions and prejudices should not fetter or bind us to the detriment of our country or the service of our constituents. 3
The reasons national banks found themselves at such a competitive
disadvantage in the 1920s. and not much earlier was discussed at some
length earlier in this paper: There was little concern with branching
at the time the National Banking Act was passed and branching authority
2,bid., p. 2621.
3Comptroller of the Currency, "Interpretive Rulings," Federal
Register, Vol. 39, N. 248 (December 24, 1974), p. 44419.
was not even discussed; the inability of national banks to branch did
not severely impede their operations until after 1900; the environment changed significantly during the first two decades of this century; and branching, particularly intra-city branching, expahded. rapidly. (See Tables 1 and 2.) As a result, many national banks felt severely handicapped in serving the needs of their customers and potential customers. Some national banks converted to state charters slowly depleting the national banking systen, while others were aided in securing at least token broader geographic representation through the authorization of the establishment of "tellers' windows' by Comptroller Crissihger.
A peripheral issue but one which provided some incentive for the introduction of-the McFadden Act was the questionable legal status of the more than 200 "tellers' windows" which had been opened by national banks. These so-called ntellers' windows" some branching critics described as "palaces" and "full-scale branches headed by a vice president."
In commenting on his bill in 1924, Congressman McFadden stated: Under a ruling issued by ex-Couptrollej; of the Currency Crissinger, and supported by an opinion from the then Attorney General, national banks in cities where State banks were engaged in branch banking were permitted to establish what has been called "additional offices" or "tellers* windows" for the receipt of deposits and cashing checks. The theory of this ruling was based upon the doctrine that a national bank possessed the incidental power to perform this character of service because competition from State banks had created a condition which made
it~~~~~~~~~~~ neesr.Almtdnme fteeadtoa ofieaaebe salshd u hi ttsi
no eal etani iwo teipiain
in~~ ~ ~ th eiino h upeeCuti h t
laws. Within a few mnh fe h e eea c a dpefu states eatdlgsainpoiiigbacig n w te bgna decade earlier, adbten11 n 99 hrensae had eatdlawsprhbtnbrnhbnig Hecy190 branching was prhiie in 22 saepritdi 9sae n
othrsha n seciicprviio coerngbrnc baks "n om o
thestte threwee afe bancetneitne ttetm h pohibiktios weeonacebti otsae hr a ihrn
beanch bankin at 4lo24.a na eysal cl.' Ti e
only partial parity with state banks in states which permitted
branching. Thusin 1928 Comptroller of the Currency Pole indicted unit
banking because of the vast number of failures of small banks and
recommended branch banking on a trade-area basis as a remedy. The
increasing number of bank failures together with the growth of group and chain banking also prompted President Hoover to ask Congress to
consider authorizing national banks to branch within limited areas.
Even the American Bankers Association, which had adopted vehement
anti-branching resolutions at its 1916 and 1922 annual conventions and
had supported the McFadden Act in 1926, adopted a resolution in 1930
which stated in part:
this association, while reaffirming its belief in the unit bank, recognizes that a modification of its former resolutions condemning branch banking in any form is advisable. The association believes in the economic desirability of community-wide branch banking in metropolitan areas and county-wide branch banking in rural districts where economically justifiable. 3 However, the A.B.A. also went on to add to its resolution another
statement which has since served as the foundation of its branching
policy, namely that: "No class of banks in the several States should
enjoy greater rights in respect to the establishment of branches than
banks chartered under the State laws."
The banking collapse of the early 1930s marked an end of state
attempts to limit branching. Indeed, there was a dramatic reversal in A. lChapman and Westerfield, Branch Banking, p. 112.
Fischer, American Banking Structure, pp. 48-49.
Quoted in Chaphian and Westerfield, Branch Banking, p. 115.
state attitudes. During the five years ending with 1935., 15 states' revised their branch laws or enacted such legislation for the first time. Twelve of these states shifted from prohibiting branches to permitting either statewide or limited branching, one went from limited to statewide branching, and two states which had had no previous branch
legislation also permitted statewide branching. In'addition to the hope that such laws would bring banking facilities back to smaller communities, it was also hoped that distressed banks could be converted to branches of stronger banks before actual failure took place.
The attitude in the U. S. Congress also underwent a change. The House Banking and Currency Committee held hearings on "Branch, Group and Chain Banking" in 1930, and in 1931 the Senate Banking and Currency committee looked-into branching in connection'with broader hearings on the Nation's banking system. It was at the House hearings, for example, that Comptroller of the Currency Pole gave an unqualified endorsement to trade area branching, regatidless; of state lines. In April 1932, the Senate Banking and Currency Committee reported a bill which would have permitted national banks to branch interstate so, long as a branch was not more than fifty miles from the head office, and to do so whether or not the states involved had any laws concerning
This particular measure was fathered by Senator Glass and was
eventually defeated. But the anti-branch forces clearly faced a much
lFischer, American Banking Structure, pp. 59-64.
2Chapman and Westerfield, Branch Banking, pp. 118-19.
greater challenge than they had encountered in the past. However, the opponents of branching received support -- and indeed salvation from an unanticipated quartex-, the supporters of federal deposit insurance legislation.
Deposit Insurance or BranchinqZ
Protection of communities from the devastating consequences of bank failures, as well as protection for the individual depositor against loss due to bank failures, had long been a matter of concern to governmental authorities. Between 1829 and 1917 fourteen states had enacted deposit insurance program several of which operated until 1930. Moreover, from 1886 until 1933, at least 150 bills had been introduced in the Congress calling for federal insurance of deposits. The banking collapse of the 1930s brought together, for the first time, two powerful forces determined to enact insurance legislation -- those concerned over the economic consequences of bank failures and those concerned with preserving the unit banking system by preventing the spread of branching laws. it was a political force sufficient to overcome the strong opposition of President Ptoosevelt and the Administration to deposit insurance -- an opposition that was quickly forgotten when deposit insurance proved to be quite successful.
Deposit insurance had long been opposed by Senator Glass who, as
indicated earlier, had been attempting to strengthen the banking system
lDeporit insurance developments are discussed in Golembe, "The Deposit Insurance Legislation of 1933," Political Science quarterly (June 1960), pp. 181-200.
kM m w30
thogh lerl izainof baing laws. vtefterhndlh
tatiia nll theisa bowtrhmignaSnao.M.Seg a bankin inteUie tts...ti swa hsbl sitne TheBnin Act of 1933 orl la -tearl Ac ft, wol-ltmtl
operate new branches: (1) Within the limits of the city, town, or village in which said association is situated, if such establishment and operation are at the time expressly authorized to State banks by the law of the State in question; and (2) at any point within the state in which said association is situated, if such establishment and operation are at the time authorized to State banks by the statute law of the State in question by language specifically granting such authority affirmatively and not merely by implication or recognition, and subject to the restrictions as to location imposed by the law of the State on State banks.
Finally, national banks had achieved (or came very close to) competitive
equality in the branching area.
State or Interstate Branch Lines
In his report presented to the Senate on an early version of
the Glass banking bill (S.4412) April 22, 1932, Senator Glass observed:
Provision for branch banking powers under carefully qualified conditions with a view to making a larger experiment with branch banking is deemed essential and due provision for it is made. Specifically, what is proposed is the grant of power to establish branches of National banks not merely in the towns and cities in which they are located but also outside of such limits at any point within the borders of the State in which they exist irrespective of State laws. Also, it is proposed that if by reason of the proximity of'a National bank to a State boundary line the ordinary and'usual business of the bank is found to extend int6 an adjacent State, the Federal Reserve Board may permit the establishment of a branch or branches in an adjacent State but not beyond 50 miles from the place where the parent bank is located.1
Senator Glass' analysis of the question of state sovereignty and branching
was published in the Congressional Record a few weeks later on May 10, 1932.
The Report on the bill (S.4412) is prihi&d in full in the.Commercial A and Financial Chronicle, April 30, 1932, pp. 3199-3202.
78-294 0 76 4
He is quoted as saying;
One objection is that to authorize branch banking would be an invasion of the sovereign rights of the States. I do not th ink the Interstate Commerce Commission and the Supreme Court of the United States have left the States with anj sovereign rights; but it seems to me, Mr. President, rather an untenable argument to insist that the Congress may authorize the establishment of a national banking system in all the States, but that it would be an invasion of the sovereign rights of the States to authorize such banks to establish branches and to conduct their business in various parts of the States rather than in one place.
A study of "the constitutional power of Congress to authorize the
establishment of branches by national banks irrespective of state laws,"
prepared by a prominent banking official and researcher, C. W. Collins,
concluded "there appears to be no doubt of this authority." The
Economic Policy Commission of the American Bankers Association, however,
voiced its opposition to the branching provisions (and other elements)
of S.4412. the A.B.A. representative concluded:
On the subject of branch banking our Association has gone officially on record at its Cleveland Convention in 1930 as favoring a limited extension. There exists some difference of opinion in our Commission as to the advisability of extending the privilegeto cover the entire State;.however, we hold unanimously to the view that the granting of permission to National banks to establish branches in adjoining States (not over 50 miles distant) would constitute a species of trade area branch banking which would give National banks an unfair advantage over their State bank competitors whose State governments could not authorize them to establish branches beyond their own jurisdictions. 2
10pinion submitted by Charles W. Collins to the Senate Committee on Banking and Currency, January 22, 1932.
Commercial and Financial Chronicle, April 2, 1932, p. 2447.
the"co~ettivF eualty"of tat an na iabnk that~interstate
stae o~reint. orove, heA.BA.s ac of support for statewide
brachig a wel wuldsugestthebaic issue was no one of maintaining
SeatK las dmtt ht he cam to branch bankig reluctanitly
becuseofhisconer abutthe failure of smller bak. Thus, when
thi prblm ws ost prviion poviin fo e pane rancini
Theconemprar ltertur woldlead oeto conclude that it was
combined with the other attacks mentioned above, led Senator Glass to modify the branch banking provisions of his bill, for he felt the
important thing was to get the bill passed. Hence, the branching requirements in the Banking Act of 1933 should be viewed only in this context. It is doubtful that they can enlighten us very much concerning: the fundamental question of desired Federal and state authority in regard to branch banking.
lCommercial and Financial Chronicle, January 12, 1933, pp. 262-63.
Th eteeto h rnhn s su.n..... i 93 uta
les tepr yedtoaiaio over,,I brnhig Th pac oflgslto
concern over the economic logic of having a state boundary serve as a measure of the extent to which a bank should be permitted to serve its particular ma ket. In 1968, for example, former Federal Reserve Board Governor Mitchell referred to state lines as "Berlin walls so far as branching is concerned," stating that "there is no economic or institutional reason for not negotiating interstate compacts to enrich the banking alternatives for citizens who live in metropolitan areas. .
Most recently, the House Banking Committee has considered procedures
which would enable banks to branch across state lines. For example, the FINE Discussion Principles, released in November of 1975, suggested that the major metropolitan areas of the country be opened to branching from out-of-state banks. 2 The proposal was not incorporated in the draft legislation formulated by the Committee, however.
Rather surprisingly to many observers, the Hunt Commission went out of its way to state in its report that it had "rejected proposals to permit interstate branching or metropolitan area banking by federal legislation Instead, it urged that "states. be progressive in changing their laws." 3 By itself, this might suc14est that the Commission wished to encourage interstate compacts or agreements with respect to metropolitan area branching, or interstate banking generally. However, this was clearly not the case from the wording of the actual recommendation by the commission, which was:
-American Banker, October Z8, 1968.
2 Financial Institutions the Nation's Economy (FINE) Discussion Principless
Committee on BankingrCurrency Housing, 94th Congress, lst Sessiong, Nov. 1975, U.S. Goverment Printing Office: 1975.
3 The rt of the President's Commission on Financial Structure and Regulation# 1971, p. 62.
By state laws, the power of commercial banks to branch, both de novo, and by merger, be extended to a statewide basis, and that all statutory restrictions on branch or home office locations based on geographic or population factors or'on proximity to other banks or branches thereof be eliminated [underscoring added].l Inflexibility of State Laws
A second problem inherent in the 1933 legislation also began to
resurface by the 1960's. This was the failure of most states to make substantial changes in their branching laws. There have been notable exceptions, particularly in states such as in New York and New Jersey.
But given the fact that more than a third of a century has passed since
the Glass-Steagall Act was adopted, as well as the fact that the economy
has changed drastically, it is surprising that the basic distribution
of states in the traditional categories of statewide branching, limited
V area branching, and severely restricted or no branching, has not changed
radicallyfram the early 19301s.
It was this portion of the 1933 compromise that the Hunt Commission
chose to do something about, by urging the states to liberalize their
-1t:*should be noted that the Commission carefully conformed to the terms of the 1933 compact, not only with respect to
reaffiraing the importance of state lines but also with respect to the
positift of the states in determining branch policy. The Commission
went out of the way to avoid making any'recommendation to the Congress,
makinef it clear that if there were to be changes in the Nation's branching
.1 they should'be at the option and discretion of the individual state
legislatures. Perhaps the Ccimmission simply thought that its advice to
1 Ibid.# p. 61.
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Bell, James F. "National Bank Branches-The Authority to Approve and to
Challenge," Banking Law gaurnal January 1965.
Candilis, Wray 0., ed. The Future of Commercial Banking. N.Y.,
Cartinhour, Gaines T. Branch, Grogg and Chain Banking. N.Y., Namillan,
Chapman, John M. Concentration of Banking. N.Y., Columbia University
Chapman, John M. and Ray B. Westerfield. IREanch Banking. N.Y., MLrper
and Brothers, 1942.
Collins, Charles W. The Branch Banking Question. N.Y., Macmillan, 1926. Collins, Charles W. Rural Banking Reform. N.Y., Macmillan, 1931. Federal Reserve Board, Committee on Branch, Chain, and Group Banking,
"Committee Reports," 1933. (Mimeographed)
Fischer, Gerald C. American Banking Structure. N.Y., Columbia University
Historical Statistics of the United States,, Colonial Times to 1957.
Department of Commerce. Washington, D.C., Government Printing Office,
Kane, Thomas P. The Romance and Tragedy of B anking. N.Y., Bankers
Publishing Company, 1922.
Kennedy, Susan E. The Batking Crisis of 1933. Lexington, University
of Kentucky Press, 1973.
Krooss, Herman E., ed. Documentary History of Banking and CurEe in the
U.S. N.Y., Chelsea House, 1969.
Miller, Harry E. BankingTheories in the United States before 1860.
Cambridge, Mass., Harvard University Press, 1927.
Money and Credit-Their Influence on Jobs, Prices, and Growth. Englewood
Cliffs, N.J., Prentice-Hall, 1961.
Report of the Committee on Financial Institutions to the President of
the United States, April 1963.
Report of the President's Commission on Financial Structure and Regulation.
Wishington, D. C., Government Printing Office, 1971.,
Robertson, Ross M. The Comptroller and Bank Supearvision. Washington,
D.C., Office of the Comptroller of the Currency, 1968.
Southworth, Shirley D. Branch Banking in the United States. N.Y.,
Teplitz, Paul V. Trends Affecting the U. S. Banking System. Ca idge,
Mass., Ballinger, 1976.
Note: These only selected items which are either referred to in the
text or which provide good background reading. In the case of Candilis and Teplitz, they offer a look at recent redevelopment
and the future outlook in banking. Marry of these volumes
contain extensive additional bibliography for the interested
THE IBRAY O CONRES Cogesoa esacAevc
Table of Contents
Introduction .......................................... I
1. The Extension of Branching Privileges ............ 5
II. State Limitations on Multi-bank Operations
of Bank Holding Companies .............. P ........ 12
III. Facilities for the Electronic Transfer of Funds .. 19 IV. Conclusion ....................................... 23
I. Status of State Branching Statutes for Commercial
Banks, 1929, 1951, 1961 and 1976 ............... 7
11. Classification of State Laws Affecting the
Corporate Acquisition of Bank Stock ............ 15
III. Analysis of Enacted EFTS State Legislation ....... 21 A-I Status of State Branching Statutes 1976 ........ 27
Differences in Branching Opportunities for Savings
and Loan Associations and Commercial Banks .......... 26
THE EVOLUTION OF STAT9 POLICIES ON MULTI-OFFICE BANKING FROM THE 1930's TO THE PRESENT
Through a variety of arrangements, many American banking
organizations have provided facilities in more than one geographic location for the transaction of banking business. In
this paper, the term "multi-office banking" applies to all such arrangements including those based on branches, remote electric facilities and individual banks within group banking organizations.
Current state-level policies on multi-office banking vary considerably from state to state. It is generally acknowledged that
this situation results from provisions of Federal banking laws affording state governments opportunities to build upon established
local banking traditions. The Banking Act of 1933 provides for the
determination of branching policies applicable to both federally and
state chartered banks on a state by state basis. The Bank Holding Company Act of 1956, as amended, defines bank holding companies and
provides criteria for Federal Reserve approval of applications for
the formation of new bank holding companies and for acquisitions by
bank holding companies, State governments, however, may establish
limitations on the numbers or aggregate size of banks in holding
companylgroups and the extent- of holding company ownership in banks.
The variety of constraints and privileges which state governments have inforceto influence the extent to which recognized
multi-office bnigarneet r sdsget htacs andthat racngt he evlto fteeplicies is evnor atft mult-ffice policion /Astewieyhl iwta cbacteg rgaiain o aecruvnefetrcin noefr
of muti-o liberation in eesste bolicies s lentv exisedwthi thW baniginutr.2 chraterztin ofi itreal delpmet intisaea h
important qualifications. Extensions of multi-office privileges
are seen primarily as constituting efforts to accommodate existing firms to changes in the environment in which they operate rather than as independent efforts to induce changes in banking structure and behavior. Furthermore, variations among states in the nature of policy-changes enacted in response to the same set of developments are found to be consistent with efforts to provide banking industry stability in settings which vary from state to
state because of different historical experiences with multiof f ice banking.
These conclusions are drawn from an examination of the three
major movements in the shaping of state policies which have occurred
from the 1930's to the present. In the 1930's branch banking was
considered by most states and adopted by many. Since the Bank
Holding Company Act of 1956, a number of states have enacted legislation on multi-bank operations of bank holding companies. Within the last two years, most states have enacted legislation governing
the banking industry's use of remote facilities in the electronic transfer of funds. Sources for each of these three movements are identified and reasons for differences in policy responses among
the states are examined.
Only major distinctions inmulti-office banking policies among
states and within states over time are emphasized in this paper.
For example; the branching status of individual states is described
78-294 0 76 5
in terms of the conventional classifications, unit banking, limited branching and state-wide branching. More detailed aspects of multi-office policies such as branching limitations based on capital requirements, numerical restrictions, home office protection and specific geographic boundaries applicable to limited branching are not examined. The approach adopted in this paper focuses attention on the most significant developments in state policies and narrows the policy actions under examination toward a manageable range.
1. The Extension of Branching Privileges.
Changes in state banking policies occurring in the 1930's
assume considerable importance in terms of the evolution of policies on multi-office banking. During this period, as bank holding company expansion stopped abruptly, groundwork was established for future multi-office growth through branching. Eighteen states provided for a more liberal branching status, moving to state-wide branching from a limited branching or unit branching status or changing to limited branching from a unit banking status. Most of these states had previously prohibited branching. l/ In contrast, the net effect of changes in branching status in the three and one half decades since the 1930's has been to liberalize branching status in only 7 states. The branching status of each state at selected dates, including the current status appears in Table I.
With the banking crisis of February-March 1933, the level of public concern about the organizational structure and operations of the banking industry reached a peak. Bank failures had already reduced the number of commercial banks by twenty percent from 1930 through 1932. By March 6, 1933, when President Roosevelt declared a national banking holiday, virtually every state had closed or I/ Sources used for the classification of states by branching
status during the 1930's are compilations of Federal and state
laws:on branching in the following Federal Reserve Bulletins: v. 16, April 1930: 258-266; v. 18, July 1932: 455-458; v. 22,
November 19,36: 858-876; and v. 25, October 1939: 851-870.
limited banking operations.' The Banking Aqt of June 16, 1933, the first major effort in banking reform to follow the crisis, granted to nationally chartered banks wi thin each state the sam branching privileges which were extended to state chartered banks. This provision superseded more rigid limitations imposed by the McFadden Act of 1927 and resulted in uniformity of branching opportunities for all banks within individual state jurisdictions.
In the 1930's, interest at the state level in banking organiza.tional arrangements was directed toward strengthening the financial viability of banks and at the same time assuring the availability of banking services to most population centers. To achieve these goals, the promotion of multiple office operations was actively considered in most states. With multi-office privileges, existing banks could expand into communities left bankless as a result of previous failures. Mergers of weak banks into strong could take place within large geographic areas without the loss of banking offices. The size of individual bank operations and the diversity in deposit sources and in loan portfolios could be increased with the hope of enhancing the ability of banks to withstand isolated financial setbacks of borrowers or depositors. Support for unit banking generated arguments centering on implications of increasing the concentration of banking assets under non-unit arrangements and questions about efficiency and costs under ground rules which would extend geographic areas of operations and would entail the maintenance of several physical facilities.
S Nogeogaphic branching rest irct lea.
1929 1951 1961 1976
L.Clfri S S S
10 eri L L L
12 Idh U SS
The proponents of bran biug achieved considerable success. A depression-born movement toward extending branching privileges was already discernible in the period from 1930 to 1932. Indiana and Iowa, both previously prohibiting branch banking, adopted limited branching laws. Ohio and New Jersey extended geographic areas applicable to existing limited branching statutes. Montana permitted maintenance of original geographically separated facilities of merged banks and Wisconsin provided for receiving and disbursing stations in small backless communities. As of May 1932, 9 states permitted state-wide branching and 14 provided for limited branching. Of the remaining states, 18 prohibited branching and 7 had no legislation regarding branch banking.
From 1933 to 1939, branching privileges were granted by 9 states which had previously prohibited branching and by three states which had previously failed to provide legislation regarding branching. Of the 9 unit banking states which changed branching status, six went to the extreme of providing for state-wide branching. Maine and Louisiana moved from limited to state-wide branching and Delaware, the only state moving against the trend toward liberalization, changed from state-wide to limited branching. The move from unit to branch banking represented a more dramatic change in the nature of banking operations than extensions of geographic areas accessible to banks already operating with branches.
In all, 18 states moved to a more liberal branebing status
during the 1930's. of these, 16 adopted legislation which for the
first time provided for'brahch banking on either a limited or state-u[de basis. Although it is difficult to determine with accuracy the lines of causation leading to policy changes in these states, tentative conclusions may be drawn from similarities in banking experiences among these states. The intense ty of interest in -structural reform within individual states appears to have been related to the extent to which states experienced bank failures. The national average of bank failures during the downward slide of the economy from 1930 through 1932 relative to total operating banks at the start of this period was 21.5 percent. l/ Ten of the 16 states which enacted branching privileges had bank failure rates exceeding the national average. Viewed from a different perspective, failure rates exceeding the national average in 21 states, 6 of which already allowed some form of branching. Of the remaining 15 states, 10 initiated provisions to permit branch banking. The average failure rate for states which introduced branching privileges during the 1930's was 26.6 erceftt and for states which did not adopt such legislation the average failure rate was 18.5 percent.
Lower resistance to extensions of branching privileges
appears to have existed in those states which already had multioffice banking networks in place in the form of group or chain l/ Bank failure rates for each state during this period appear in
Chandler, Lester V., America's Greatest Depression, 1929-1941.
New York, Harper Row, 1970, p. 83-84.
systems. As of December 310' 1931s 9.8-percent.of all comercial banks belonged to groups or chains. I/ This ratio was exceeded in 24 states, 8 of which had branching privileges. Provisionato.permit branch banking were introduced in 11 of the remaining 16 states during the 1930's. Reference to the relative importance of group and chain banking within individual states may also help explain the nature of branching privileges enacted. Within those states adopting state-wide branching, group and chain banks included, on average, 24.6 percent of all commercial banks. A similar calculation for states adopting limited branching yields 12.6 percent. Thus, the more extensive the existing multi-office networks, the. greater was the geographic range granted for branching operations.
It is readily apparent that the thrust of policies in those states enacting changes was to accommodate structural reorganization through branching rather than through holding companies. State governments gave less specific attention to bank holding companies during the 1930's. By the end of 1931, only three states had enacted laws directly applicable to this form of multioffice banking. In 1929, West Virginia enacted a prohibition and Oregon and Wisconsin delineated conditions under which bank hold'
I/ Numbers and the percent of cr ercial banks in chains &ad groups,
by state, for December 31, 1931 are presented in U.S. Federal Reserve Board, C7 ittee on Branch, Chain, and Group Banking, Banking Groups and Chains, [Washington, U.S. Federal Reserve
Board, 19331, P. 41-42.
companies could acquire and maintain bank stock. The Federal Reserve Committee on Branch Group and Chain Banking reporting in 1933 conceded difficulty in determining the policy position of most states regarding bank holding companies. 1/ For the remainder of the 1930's. there is little evidence of direct statelevel actions designed to affect the use of the holding company device for multi-office banking.
Over the decade of the 1930's bank holding companies as a
whole decreased in numbers and in relative size. Of the 611 banks in holding company groups'on December 31, 1931, 105 had converted to branch banks by December 31, 1936 and 17 of these were no longer within holding companies. 2/ Shifts in state branching policies constituted only one of several sources of the decline of bank holding companies. For example, public disenchantment with equity securities and with holding companies generally contributed to problems in forming and expanding bank holding companies during this period.
1/ Ibid., p. 204-208. See also Ibid., Appendix Digest of State
Laws Relating to the Purchase or Ownership of Bank Stock by
Holding Corporations, p. cii- cxxvi.
2/ Group Banking in the United States, Federal Reserve Bulletin,
v. 24, February 1938: 99-100.
II. State Limitations on Multi-bank Operationsof Bank Holding
Most states which have taken legislative measures to establish policies on multi-office banking through the use ofholding companies have done so in the years following the passage of the.Bank Holding Company Act of 1956. That act clarified Federal policies by establishing a definition for multi-bank holding companies and by providing for their-registration and for regulation of certain aspects of registered b4nkholding companies. Previously, the legislative outcome of Federal interests in bank holding companies had been uncertain. As early as 1938, President Roosevelt recommended a prohibition against bank holding companies. From 1938 through 1956, bills were introduced in most sessions of Congress to specify limitations on this form of bauking organization.
The Federal legislation of 1956 restricted the kind of activities in-which multi-bank holding companies could engage. Basic criteria regarding financial prospects, the needs and conveniences of communities served, and the preservation of competition were to be met by applicants for new multi-bank holding companies and for acquisitions of non-affiliated banks. The act did not provide limits, however, on the numbers of affiliated banks or the extent of holding company ownership in affiliated banks. The absence of such constraints appears to have served as an impetus for state governments to consider legislation to modify the accomodative
nature of Federal provisions. Ten states enacted such legislation in the period from 1956 to 1970. In 1970, an amendment to
the Bank Holding Company Act provided for an extension of its coverage to include one-bank holding companies. Through this amendment, regulatory advantages inherent to one bank holding
companies disappeared and,.'as a result, multi-bank holding companies entered a phase of rapid growth. Since 1970, five additional states have provided for restrictions on the use of the
bank holding company device for multi-office banking.
Existing state policies toward multi-bank networks of bank
holding companies fall in a range from being very permissive to providing outright prohibitions. A strong case can be made for
explaining policies adopted by individual states by reference to
the proposition that state governments attempt to accommodate changes
in the banking environment in a manner that minimizes instability for existing banking organizations. A variant of this proposition
is implicit in the frequently stated view that multi-bank holding
companies have served as an alternative to branch banking in set2z tings in which branch banking is restricted. This interpretation
of the use of the bank holding company device suggests a particular
strategy for states engaged in liberalizing multi-bank policies.
If legislation Yere enacted to provide for multi-bank holding companies,. t could serve as a transitional step toward a policy of
permitting branch banking or of extending geographic boundaries for
gringe s of ksastiidual ent4itis pro aotermrecmlt Inteformto ofle multi-ban oldin comanes th 3rwem 21ecl A hog casfathectn of saeitn aknognztos
No Lmittion Reuire-Re trit e rea
3/ A corporation may not acquire more than 1OZ of the capital
stock of any State bank or trust company unless 75% of the shares entitled to vote of such bank-or trust company shall
vote in favor thereof at a meeting for that purpose.
4/ Approval required for acquisition of the stock of a State bankApproval required for acquisition of control of a bank by a company; or of more than 5% of the voting shares of a bank
by a "Maine financial institution holding-company" (as defined).'
6/ Approval required for acquisition of the stock of more than
7/ A corporation may acquire the stock of any number of banks until their combined deposits total 13% of the State's banking
deposits. Thereafter, the corporation apparently may acquire
less than 25% of the stock of additional banks, in certain
8/ Reference must be made to the statute.
9/ A corporation may not acquire more than 25% of the stock of
more than one bank; apparently a corporation may acquire 100% of the stock of one bank and up to 25% of the stock of other
10/ A corporation cannot acquire 15% or more of the stock of two
or more banks; apparently a corporation may acquire'100% of
the stock of one bank and less than 152 of the stock of other
ll/ A corporation cannot acquire 25% or more of the stock of two
or more banks; apparently a corporation may acquire 1002 of
the stock of one bank and less than 25Z of the stock of other
12/ A corporation can acquire 10OX of the stock of one bank and
less than 25% of any number of other bankt,. A corporation
that owns 25% or more of two banks cannot acquire more than
25% of the stock of an additional bank if all its banks-would
hold more than 8% of the State's bank deposits.
13/ A corporation acquiring more than 50% of the stock of a bank
cannot hold stock in any other bank; apparently a corporation
may own 50% of the stock of any unlimited numberof banks.'
14/ "Chaln" and "group" ba king are prohibited without definition;
apparently a corporation may acquire 100% of the stock of one
15/ A corporation can acquire 100% of the stock of one bank and less
than 25% of the stock of any number of other banks. A corporation that owns 25% or more of the stock of two banks is limited
to 12 bank "affiliates" (as defined) and 20% of the States' bank
16/ A corporation may acquire stock in any number of banks whose
aggregate deposits do not exceed 20% of the State's bank deposits. A company that acquires at least 25% of the stock of
one bank and whose aggregate deposits, held by banks whose stock
it has acquired, exceed 20% of the State's bank deposits, may
acquire less than 10% of the stock of other banks.
17/ A corporation may not acquire additional bank stock if banks
which it controls retain 16.5% or more of in-State bank deposItsJas defined). A corporation may not acquire the stock of a I gnk that has been in operation for less than five years, except in the four metropolitan counties, and subject to other
18/ A corporation may not acquire 25% or more of the voting stock of
each of two or more banks. A "financial institution" (as defined).or certain other "financial organizations" may not acquire
25% or more of the voting shares of "any one or more banks".
Reprinted with revisions with permission of the Association of Registered Bank Roldiag, Companies.
include 14 which enacted legislation after 1956 and 4 v&ich hi*e not modified basic restrictions enacted before 1956.
The extent to which multi-bank holding companies had developed by 1956 within individual states appears to be highly significant in explaining the adoption of restrictive policies by state governments. Multi-bank holding company data on a state by state basis for a date close to the passage of the Bank Holding Company Act appears in a Federal Reserve tabulation for December 31, 1956. l/ At that date, there were 14 states in which banking offices in holding company groups exceeded 10 percent of total banking offices. Of these states, only one, Washington, currently restricts multioffice holding companies and the restriction in this case pertains only to the extent of ownership in individual banks, 25 percent of outstanding stock per bank, and not to the number or size of bank affiliates within holding company groups. Likewise, restrictions are currently in force in one of the five states in which the banking offices in holding company groups fell in a range from 5 to 10 percent at the end of 1957.
Most ;f the states with restrictive legislation are among the remaining 31 in which holding company groups were less extensively l/ Federal Reserve Bulletin, v. 44, October 1958: 1224. Data
reported in this source is for all registered bank holding
companies. At that time, registration was required only for
multi-bank holding companies, defined to include companies
owning at least 25 percent of the outstanding stock of more
than one commercial bank.
developed 0i'non-existent in 1957. Within these 31 states, policies on branching and multi-bank holding companies are closely correlated. restrictions or privileges for one form of banking organization are generally accompanied by similar policies regarding the other multi-office form. l/ The failure to pass restrictive legislation in states in which bank holding companies
had not developed extensively prior to the act of 1956 may be
regarded as a step toward liberalizing multi-office opportunities.
Of the 15 states in this category, 5 were among the 12 states
which experienced the greatest percentage point increases in banking offices controlled by'bank holding companies in a subsequent period,
from 1965 to 1973. 2/
States which have liberalized branching statutes since 1956
have usually allowed for multi-office banking through the formation of holding company groups for a number of years prior to
making branching status changes effective. This observation holds
for Wisconsin, Virginia, New Hampshire, New York, Iowa and for Florida which will allow limited branching in 1977. A similar pattern during the 1930's is noted in the previous section of
l/ Those states without restrictions on multi-bank holding companies
include 9 with state-wide branching, 4 with limited branching
and only 2 with unit banking. States which restrict multi-bank
holding companies include only 3 with state-wide branching, 7 with limited branching and 6 in which branching is prohibited.
2/ Boczar, Gregory E., The Growth of Multibank Holding Companies:
1956-73, p. 11.
11-U4 0 7$ 4
this paper. The sizeable representation of branch banking states, 18 state-wide and 7 limited, among the 32 states without statutory restrictions on multi-bank holding companies may be explained in large measure by the role of holding company groups in facilitating policy changes toward extensions of branching privileges. It is misleading, however, to move beyond the observation that holding company groups have served a transitional role to interpret state policies on holding companies and on branching in a simple cause and effect relationship.. For example, in the absence of restrictions, holding company groups have controlled a large share of banking offices forovi F 40 years in several states which have retained unit banking. l/ In addition, state governments have generally not imposed limitations on holding company expansion after adjustments to changes in branching policy would appear to have been complete.
1/ These states are Minnesota, Montana, North Dakota and Wyoming.
III. -Fac"ilities for'the Ele'ctronic Transfer of Funds.
The most recent round of state-level actions pertaining to
multi-,office banking has arisen in response to current and anticipated uses of technological advancements for the electronic transfer of funds. The specific application of electronic technology
to the transfer of funds which is addressed here relates to electronically communicated customer-bank transactions initiated or authorized by bank customers using terminals at a location other than a main office or a branch office of a bank. l/ The "additional office" classification of terminals used in such transactions has had a varied history to date. In December 1974, the
Comptroller of the Currency issued an interpretive ruling declaring
that terminals were not branches and could be used by nationally chartered banks without the imposition of numerical or geographic N limitations. 2/ Since October 1975, however, this interpretive
ruling has been suspended pending the final outcome of litigation
which may reach the Supreme Court. 3/
l/ Addiiional'facilities, known as automated clearing houses,
exist for electronic transfers among banks. In many cases,
state laws on'the electronic transfer of funds apply to both
customer oriented and interbank facilities. For futher infor
mation on this aspect of state laws see Prives, Daniel, Elec M tronic Fund Transfer Systems and State Laws, The Banking Law
Journal, v. 93, May 1976: 545-547.
2/ 12 C.F.R. 17-7491.
3/ Federal Register, v. 40, no. 204, October 21, 1975: 49077.
In state laws on the electronic transfer of funds, tgrainology and definitions are dissimilar, suggesting that very few of the laws have been written on the basis of a model produced by a'state with an acknowledged legislative lead in this area. Nevertheless, sufficient uniformity exists from state to state to permit some generalizations. Unlike other forms of multi-office banking, electronic funds transfer systems have not been explicitly prohibited by selected states. State legislation frequently establishes the applicability of existing branching provisions to electronic terminals by specifying whether or not terminals are to be considered as branches for state-level purposes. Thus a state can maintain a unit banking status in terms of traditional branch banking, and at the same time accommodate adoption of the new electronic technology. Examples of this approach appear in the laws of Florida, Kansas, Webraska, North Dakota and Oklahoma.
Stability within the banking industry of individual states is promoted to some extent in most states by prohibiting out-ofstate banks from establishing terminals. Measures providing for' the sharing of electronic facilities also tend to protect prevailing bank organizational structures by avoiding situations in which a few, presumably large, banks would dominate. in offering such terminal based customer services. Of the 19 states which have specifically addressed the sharing question in legislation, 10 require commercial banks to share manned and unmanned terminal
ANALYSIS F EN TED EFTS STATE LEGlATION
The iftingis an suplanalon oftoothan headings:
I~ ~ > -AoleToA MIs $illiipr Ift rieed anicia inglimon.
Its inipat gLaw: This destries ft) sate's IIankd branchirg law: S = statewide; L
iImi Indahing; U1 = unit iatking.
3OufSper lle Entry: The Comptroser's uties penmits interstate placment of tenanes.n
Eaih s o anjilyed to diatennine lw or not, alg if so, under whot eardilone .P wdAs owed by aoto-stalle banks wil IIIe pealled in alstale.
4. ISFMM eAssene: Thisinicames whether or not the law trash remoe faciltesai
S. eek eli Mense Pauliftp Each elasie is souteie So detenine it, aida 10What,
Mxeit disiauline we being inade between mponie (eng.. POS type tenninals) and mowanned (e.g.automatledlellsouinits. Rernot fltesa wae thoeenoate oisps
ofa bank or twncip.
() Gleogeaphl It a blli permits unnessd reot facilities. the legislation is
soreenedtoedetemine wherethe llpenmits alt Itbelocatse,i.e.. anywhoseirs thesalto (satewitle) or sremore reggicted las (1hailed). This may the ietped
pihe Ahsufdi givenopnatinonk anh usge of as brenching law.
(b hilia: Thil is an exratin sof the funagions that mway be pediirond by a
..I)Dphelta Wheer or not the foirdy mnay ana epo psits. (2ID Whether dr snat the facily may dispes cash to cinatomrs.
(3) P ortzdLeans:14Whether or notiOnes okeredit or overdraft privileges are avatiable through unmanned remote telkers.
(4) A/C Transfers: Whethier oc not account transfers, e.g.. from savings to checkIng, are permittd at facilities.
() Sharin: Whetr or not an establishing financial instition must share its unannod remot faculty with other institutions. Nt may be a mandatory sharn requirement (M); a permissive requiement (P): or SIMen (S).
(1) Uke insttons: This indicates whether Mie institutions must or may share facilities (benks and banks, S&Ls and S&Ls).
.2and thrift or vice versa.
only notice is required.
6.anand Remot Faciitis:This category examines the treatment by a kill of manned
emale terminals. The category contemplated POS terminals although other manned trminals arm included under the headng The review of the bills examrines the same uestions raised by authorization of unmanned fwaities. as well as one additional
testkm--Who mans the unit.
() Who mans: Balkc to a manned unit is the requirment that it be operated by a party
who is not an employee or agen of the bank. Generally,. the language of the bills
state that it ShaW be a 3rd party or a 3rd party under contract
TMa is idende to prowds an overview of bgislto and not a deankiv analysts of each bN#
ROrinted with permission of American Bankers Assac io
(Ausut 1976 Revision)
RI~ &2 11 aas
a of- la IIN
LI~3 LIZB2 1
lz a aI I
r m i
3~3~ M1 :5A f* a
facilities with other commercial banks. The mother states either require sharing of certain types of facilities or permit sharing.
Unresolved matters surrounding the development of systems
for the electronic transfer of funds include the future roles of Federal legislation and Federal regulatory agencies and the fu'll range of uses to which such systems will be applied. Undoubtedly, existing state laws will be am ended to accomodate significant changes in these areas. To date, state governments are still in the process of providing for the development of electronic fund transfer systems while minimizing disruptive repercussions on the basic structure of the banking industry.
M~lt-oficebaningopprtunitiLes have increased in most
the193'sth Bak Hldng ompnyAct of 1956, adthe advet
* ifudtrnfer systems each significantly modified posiblitesope t baksfor coptitive beaior. For reasons
states~~~ repne ocagdcnitin by enactin legislation expndig o otuntie fr -ulti-office bning. In each case,
diferecesinstae-lvelrepones anbe explind, in large meaure b th exen towhih ulti-office bnig nsm form,~~~~~~ halled eeoe ihnidvida states. Mot state polcy hanes av prteced stability of the existing struckltho'gh o atemt i mae i ths pperto discuss the merits
...of urentor ropecivemuti-ffie ankngpolicies, the anlysis
present dessuportconluion abut hefeaibility of alterpath inthe utue eoluton f poicyarrngemnts Th
process~~~~~~~~~~~~ of< shpn4ut-fiebnin oiisbuligo
uniform policies, nor does &is process seem likely to produce unifoimity in the future. The examination of major movements in state multioffice policies presented in this paper indicates reasons for a lack of uniformity which differ from rationale offered in some other sources. The formation of unique state-level approaches for promoting or constraining multi-office banking which has appeared elsewhere is that such diverse state approaches represent, in part, efforts to assure that the banking industry within individual states provides optimal service to populations and industries characterized by unique geographic distributions and financial needs. l/ The full nature of relationships between costs and quality of banking services and banking organizational structures, however, are not clear. 2/ Furthermore, the ability of alstate to tailor policies to perceived needs within its jurisdiction without creating major disruptions among financial institutions is frequently constrained by the policies it has previously used in influencing the organizational structure around which commercial banks have been developing. In fact, the strongest argument for maintaining the current arrangement in which multi-office policies for commercial banks are determined at the statelevel may be the possibility of creating a chaotic environment for financial institutions while instituting changes. For example, converting to a l/ Fischer, Gerald C., American Banking Structure, p. 66-67;
Rose, Peter S. and Donald R. Fraser, State Regulation of
Bank Holding Companies, p. 48.
2/ Mote, Larry R., The Perennial Issue: Branch Banking, Busin ess
Conditions: An Economic Review by the Federal Reserve Bank of
Chicago, February 1974: 3-23.
thoe sate inwhih ajusmens rquiedfor achievig~ conformity
tie fo bnksto ometethrug th ue of addtional offices.
Thear~lyis.prsened n hispaer uggst tht he rethes opotnt o efcig hnei oiyarneet si h
are o eectonc funs rasfe sstms.Alhogstaelgs
latie atios t dae hve ot eenuniorm th abenc ofcom
i ii ,iiiii, !liiiii ,iiiiiiiii~iiii~ ii ,iii ... iiiii7 4iiiii~i~~
.....~~~~~~ 2 6 i, ii ..." iiii~lil iiii ~iii!~i
~TH EVOLUTIO OF, ,i~i PQLICIE ON, MU T -O F C BANI NG iiii~i!~i~ii~iiii~iiiii~ii~ ii'
i~~~~~iF O TH 1930'.9il ,, TO THE ,,, PRESENT i, ii i ~ ,
A P P E N D I X. .. . .. .. i iiiiiiiiiiiiiiiiiiii i'~ ",
Difeene in Branchin Opprtuities for Sav' ing and, i ,' ii iiiiii
.. ..... ..a A s o ia i n ..... Com merc i al ,' Banks '':i, ,,if i 'ii,,", i~i~iiiiiiii~~iiii i,' i
In aIubro tts rnhn ivlgsgatdt aig
and! lon!!scit!n (S&Ls r oegnrosta hs rne
to comrca bak.... al -.Mn tt poiin o
brnhn yS&Lsaeo aryrcn rgn n15,2
stats wre wthot satuts rgulaingtheestallsmbotof &
S~~ ~ NogorpiSrncigrsrcin
Cm a S
I.Aabm L L)
2 .Al .sk S
3. Arizona o
6. Clrdo.U 7. Conciu S
8. Delawar m
State government actions on bran hing privileges for S & L's have taken place under Federal regulatory provisions which are distinctly different from those governing the determination of branching policies for commercial banks. For both sets of financial institutions there are Federal and state chartering alternatives. The Federal chartering and regulatory authority for S & L's, the Federal Home Loan Bank Board'. however, has the freedom to establish branching policies for federally chartered S & L's, a power not extended to the Comptroller of the Currency in regulating commercial banks to which it has granted national charters.
For commercial banks, the definition of a branch is established in the Banking Act of 1933. The same act delegates exclusive authority to state governments for permitting, restricting or prohibiting branch banking. This is accomplished by subjecting nationally chartered commercial banks within each state to the same branching policies which are in force for state chartered banks. The Federal chartering and regulatory authority for commercial banks, the Comptroller of the Currency, therefore, cannot engage in setting policies on branch banking.
The Home Owner's Loan Act of 1933 which created the Federal Rome Loan Bank Board is silent on the powers and duties of the Board with regard to branching. The authority of the Board to establish branching regulations for federally chartered S & L'so even in cases involving conflicts with state laws, has been upheld
in the courts. 11 The Board.* however, has operated under a basic policy of adhering to provisions of state laws in approving applications for establishing branches. 2/ Nevertheless, it has introduced significant exceptions which have resulted in extending a liberalizing influence throughout all states. For example, the Board permits branching withinthosestatas which in opinion of Broad allov4e facto branching through chains, groups or affiliate operations. It allows for the creation of branches as a means of maintaining offices which an S & L acquires in a merger accomplished for supervisory reasons. An additional Board policy which stands regardless of t1ve branching policies of the states in which Federal S & L's are locatedis toprovide for branches in low income, inner city areas.
Exercising ite.freedom to establish Federal branching policies., the Federal Home Loan Bank Board has created several classes of additional offices to apcomodate a variety of circumstances for conducting business at locations other than a main office. 3/ In December 1976, the Aoard promulgated a temporary regulation which defines remote service 4uits for the electronic transfer of funds l/ 187 F 2d 574 brd Cir. 1951) and 197 NE 2d 315 (Mass. 1952). 2/ All references to Federal Home Loan Bank Board branching policies in this paragraph are based on the Board's regulations
contained in 12 C.F.R. 556.5.
3/ Additional offices wh ich include branches, drive-in facilities,
data processing offices, mobile facilities, satellite offices
and agencies are described in 12 C.F.R. 545.14.
and rovdes or xpermenatin intheuse f scK uitsupo
sucsflaplcto ih h or.l Th lxblt ht h or nosinpoiigfra
variety~~~~~~ ~ ~ ~~ of mutiofic oprtoshsbe asrn atr
le1e inl2nc onF. comrca bakmut-ffc-peainsi
THE LIBRARY OF CONGRESS
Ab Congressional Research Service
WASHINGTON, D.C. 2D540
BIBLIOGRAPHY ON THE DEVELOPMENT OF PUBLIC POLICY ON COMMERCIAL
BANK BRANCHING FROM THE 1920's TO THE PRESENT
The scope of this bibliography is limited to materials examining the
development of public policy on branch banking. Many of the cited works
also cover various aspects of branch banking which are incidental to the
principal focus of this bibliography. These aspects include the conduct
and performance of banks under various branch banking policies and the development and economic impact of policies relating to other forms of
multi-office banking. The bibliography includes entries which examine the
development of branch bank policies in both Federal and jurisdictions.
The time span of coverage by cited items begins with the environment in
which the McFadden Act of 1927 was developed and extends to current branch policy considerations associated with the use of electronic funds transfer
American Bankers Association. State banking law ser-vice. Washington, American
tankers Association, 1974 .
Andersen, Theodore A. Century of banking in Wisconsin. Madison, State Historical Society of Wisconsin, 1954. 226p.
Berkmeyer, June. History of branch banking in Florida. [Orlando], Florida
Bankers Association, 1973. 80p.
Baker, Donald I. State branch bank barriers and future shock will the walls
come tumbling down? Banking law journal, v. 91, Feb. 1974: 119-134.
Cartinhour, Gaines T. Branch, group and chain banking. New York, Macmillan,
Chapman, John M. Concentration of banking: the changing structure and control
of banking in the United States. New York, Columbia University Press,
Chapman, John M. and Ray B. Westerfield. Branch banking, its historical and
theoretical position in American and abroad. New York, Harper, 1942. 431p.
Collins, Charles W. The branch banking question. New York, Macmillan, 1926.
78-294 0 76 7
Electronic funds transfer and branch banking the application of old law
to new technology. Maryland law review, v. 35, no. 1, 1975: 88-114.
Fischer, Gerald C. American banking structure. New York, Columbia Uuiversity Press, 1968. 429p.
Foster, Paul L. Bank expansion in Virginia, 1962-1966. Charlottesville,
University Press of Virginia, 1971. 127p.
Ileo, Michael J. and David C. Parcell. Evolution of the Virginia banking
structure 1962-1974: the effects of the Buck-Holland Bill. William
and Mary law review, v. 16, Spring 1975: 567-597.
Jacobs Donald P. and H. Prescott Beighley. The changing dimension of banking
s ructure. Journal of bank research, v. 5, Autumn 1974: 145-155.
Kent, Raymond P. Dual banking between the two world wars. In Banking and
monetary studies, ed. by Deane Carson. Homewood, Ill., Richard D. Irwin,
1963. p. 43-63.
Lamb, W. Ralph. Group banking: 'a form of banking concentration and control
in the United States. New Brunswick, N.J., Rutgers University Press,
Murphy, C. Westbrook and Ford Barrett. Legal problems of applying electronic
funds techniques to retail banking. Jurimetrics journal', v. 17, Fall,
Murray, J. Donald. Pennsylvania's forward trend in branch banking. Thesis,
Stonier Graduate School of Banking, American Bankers Association, 1961.
Prives, Donald. Electronic fund transfer'systems and state laws. Banking
law journal, v. 93, May 1976: 527-585.
Robertson, R6ss M. The Comptroller and bank supervision. Washington, Office
of the Comptroller of the Currency, 1968. 262p.
Rose, Peter S. and Donald R. Fraser. State regulation of bank holding companies. The Bankers magazine, v. 157, Winter 1974: 42-48.
Southwortb, Shirley D. Brancb battking in the United States. New York,
McGraw-Hill, 1928. 236p.
U.S. Federal Reserve Board. Committee onBranch, Chain and Group Banking.
Banking groups and chains. [Wasbington, U.S. Federal Reserve Board,
19331. 215, 126.p.