Interstate Banking

Interstate banking refers to the expansion of banking across state lines. Interstate banking became widespread in the mid-1980s when state legislatures passed bills allowing bank holding companies to acquire out-of-state banks on a reciprocal basis with other states. Interstate banking has led to the rise of both regional and national banking chains.

The National Bank Act of 1863 forbade interstate banking by nationally chartered banks. The McFadden Act of 1927 further prohibited the formation of interstate banks. However, the restriction on interstate banking limited banks to regional expansion and left them vulnerable to local economic crises. Furthermore, as Americans became more mobile, the restriction on interstate banking meant that those who relocated or traveled for business or pleasure might find it difficult to get access to banking services outside the local region in which they lived.

Prior to the 1990s, the Douglas Amendment to the Bank Holding Company Act of 1956 allowed states to legislate whether out-of-state bank holding companies would be permitted to establish, operate and own banks within their borders. The 1985 court case Northeast Bancorp v. Board of Governors upheld this right. The Douglas Amendment evolved out of a fear that bank holding companies were getting around the prohibitions of the McFadden Act by acquiring subsidiary banks in other states, but operating these subsidiaries in the same manner as they would normal branches.

Interstate banking has grown in three separate phases, starting in the 1980s with regional banks. These companies are limited to a specific region, such as the Northeast or Southeast, and were formed when smaller, independent banks merged to create larger banks. In the 1980s, six states in New England passed legislation allowing for the formation of regional banks; banks in the Southeast and Midwest soon followed. Thirty-five states eventually passed legislation allowing banks from any other state to establish or acquire a bank inside their borders. Fourteen states and Washington, D.C., chose to allow only regional banking. Only one state, Hawaii, failed to pass neither regional nor national interstate banking legislation.

In the early 1990s, federal legislation was passed that allowed for the establishment of nationwide banks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allowed banks that met capitalization requirements to acquire other banks in any other state after Oct. 1, 1995. The Riegle-Neal Act permitted truly nationwide interstate banking for the first time. It allowed well-managed, well-capitalized banks to acquire banks in other states, regional or not, after Sept. 29, 1995. It further allowed banks in different states to merge into nationwide branch networks after June 1, 1997. However, under the Riegle-Neal Act, no bank holding company can control more than 10 percent of the total assets on deposit in the United States, or more than 30 percent of any single state’s total deposited assets, unless a specific state had established a deposit cap of its own.

Individual states were allowed to opt out of the branching provisions of the Riegle-Neal Act. Initially, Texas and Montana chose to opt out, but eventually, they did choose to permit interstate branching. The Riegle-Neal Act repealed both the Douglas Amendment and the McFadden Act.