Interstate Banking

Many states have lifted restrictions on interstate expansion of bank holding companies, sparking an increase in interstate banking. Removal of federal interstate banking and branching restrictions could further spur the growth of larger, more geographically widespread banking companies. The growth in interstate banking is concentrating assets at the national level as bank companies continue to buy out or merge with banks in other states. Concentration of assets at the state level, however, is limited to mergers and acquisitions among banks in the same state or local market. Banks with assets of less than $1 billion have been able to maintain their national market share despite the growth of the largest banking companies. Although the removal of interstate banking and branching restrictions could benefit the safety and soundness of the industry, the regulatory process, and many bank customers, such a move is not without risk. Problems can arise if banks are poorly managed and regulated, asset concentration levels rise significantly, or credit is tightened for bank customers who find it hard to obtain loans elsewhere. The risks to safety and soundness can be minimized by restricting interstate expansion to well-run and well-capitalized institutions and by properly implementing the early closure and safety and soundness provisions of the FDIC Improvement Act of 1991. In addition, vigilant enforcement of antitrust laws and of the laws and regulations governing credit availability is essential. Additional regulatory authority could be needed to respond to unforeseen consequences of increased interstate banking.

GAO found that: (1) the relaxation of restrictive state banking laws has contributed to a substantial increase in interstate banking in the United States; (2) removing federal interstate banking and branching restrictions would further encourage the growth of larger, more geographically diversified banking companies; (3) increased interstate banking has led to substantial consolidation of the U.S. banking industry and increased concentration of assets at the national level; (4) there is no direct relationship between increased interstate banking and the concentration of assets at the national level; (5) increased interstate banking does not necessarily reduce the role of smaller banks; (6) the benefits of removing interstate banking restrictions will depend largely on how well the banks are managed; (7) the risks of remaining interstate banking restrictions can be minimized by restricting interstate expansion to well-managed and well-capitalized banks; (8) the best way to minimize the risks to the quality and availability of banking services is to ensure that markets remain competitive through vigilant antitrust enforcement and laws and regulations governing credit availability are adequately enforced; and (9) additional regulatory authority may be needed to address any unanticipated consequences resulting from increased interstate banking.