By WILLIAM R. BRYAN To branch or not to branch, an issue that finds Illinois bankers divided THE STATE legislature has again
turned aside efforts to permit banks in
Illinois to engage in multi-office banking. Thus, one more chapter in the
"Branch Banking Controversy" has
been written. But more will follow. Illinois is one of two remaining
"holdouts" in the movement toward
multi-office banking. As of this writing, Illinois and Oklahoma are the only
remaining "pure" unit-banking states.
Sixteen states, mostly in the East, permit a limited form of branching—for
example, within a county. Nineteen
states, chiefly in the West, permit unlimited statewide branching. The remaining states retain the appearance of
unit banking, but permit multi-bank
holding companies (though some states
have stopped the growth or formation
of new holding companies). In recent years, the branch banking
issue has formed the basis for an open,
but ambiguous, split in professional
banking organizations in Illinois. There
are too many exceptions to characterize
the split as being between large banks
and small banks—or between Chicago
banks and downstate banks—or city
banks and country banks. In any event,
the two sides of the question are represented by the Illinois Bankers Association on the one hand, and the Association for Modern Banking in Illinois (AMBI), on the other. However, dual
memberships in these professional organizations have muddied the precise
alignment of the competing groups. The Illinois Bankers Association has been
steadfast in its continued advocacy of
unit banking and in its resistance to the
further spread of branching and holding
company banking. In contrast, AMBI
has led the push toward a change in
state laws that would enable Illinois
banks to operate multiple offices. The present situation in Illinois Over the years, a facsimile of multi-office banking has been created by the
juxtaposition of "chain-banking" along
with a strong correspondent banking
system. The term "chain-banking"
refers to a situation in which informal
groups own or control more than one
bank. Several years ago the Illinois
Bankers Association Committee on
Bank Structure reported that more than
400 banks in Illinois were part of such
"chains." No doubt that number has
grown considerably in the period since
that study was completed. The correspondent banking system
consists of interlocking "pyramids" of
banks throughout Illinois, the United
States, and internationally. Banks are
held together by informal networks of
checking accounts—that is, banks holding deposits with other banks. Each correspondent network consists of a large
group of small banks (at the base of the
"pyramid") holding deposit accounts
with increasingly larger banks in increasingly larger, or more important,
money centers (toward the apex of the "pyramid"). Each major Chicago bank
has its own network of correspondents.
In turn, major Chicago banks maintain
correspondent relationships with major
New York banks and throughout the
world. In some instances, large,
"flagship" banks help finance bank
acquisitions in return for favorable consideration in the highly competitive
solicitation of correspondent accounts.
Major correspondent banks may also
make training facilities available to
their client banks, and otherwise serve
as a basis for central direction, More recently, national banks have
been told by the United States comptroller of the currency that they can
open automatic "tellers" anywhere they
wish within 50 miles of their home office. Even though this comptroller ruling remains subject to challenge in
court, a number of large banks have
begun installing equipment at such
locations as supermarkets, railway terminals, airports, and shopping centers. Bank competitors fare somewhat
better in Illinois. Savings and loan
associations, often referred to as "S and
L's," provide banks with their strongest
direct competition. S and L's are permitted by law to offer somewhat higher
returns to the ordinary saver. They
differ from banks in that they are not
able to provide checking accounts to
their customers. In addition, S and L's
specialize in mortgage lending, home-improvement loans, and other housing-related credit. In contrast, banks
engage in virtually every type of financial activity. Chartered by the federal
government, these associations have
been given the opportunity to branch
and have done so with vigor. Currently
Illinois does not permit branching by
state-chartered associations. 364 / Illinois Issues / December 1975
A professor of finance at the University of
Illinois, Urbana, he was formerly an
assistant to the director of the Office of
Debt Analysis, U.S. Treasury, and a senior
economist at the Federal Reserve Bank
of St. Louis. Bryan serves as a consulting
economist at the Federal Reserve Bank
National Bank of Chicago.
A commercial bank cannot operate a
branch in Illinois, though it may
operate a "facility" located within
1,500 feet of its main office, The banking operations permitted at a facility are
limited to routine transactions—such as
cashing checks, making deposits, and
making payments on installment loans.
Thus, in no sense does a facility constitute a full-service bank. It usually
takes the form of a drive-in window.
Proponents of branch banking contend that it will increase efficiency. Foes argue that the 'personal touch' will be lost
Why multi-office banking? Tied to one central location, it is difficult, many bankers feel, to expand
business and increase profits. The
general growth and movement of population centers often takes place in
areas well removed from the downtown
locations of most established banks. As
suburban belts have grown up around
our cities, clusters of business enterprise—later the shopping centers—have
been built to meet the needs of these
new population areas. To a major extent, the businesses were offshoots of
old firms located "downtown." It is
only natural that central city banks
would look longingly at these business
opportunities. A second aspect of population movement has been the actual decrease of
numbers in central cities. Multi-office
banking, branching in particular, is an inviting means of adjusting to these
demographic changes. A multi-office
facility can grow or be scaled back with
the community, indeed, this is precisely
what has happened in other states. Aside from business growth
associated with population movement,
non-bank business enterprise has expanded by merger, acquisition, or has
moved to take advantage of less costly
physical accommodations. As a result,
many Illinois firms have business
operations that are spread over a substantial geographic area. Banks have
looked with interest at business opportunities created by the growth of their Finally, the problem of management succession is especially troublesome for banks. Banks, especially small ones, have had difficulty in tapping a continuing flow of managerial talent. Well-
qualified prospects often prefer larger
corporations. There they can enter
management training programs and
have the security of several potential
career options within the same organization. Other forms of business enterprise have faced similar problems. But,
unhampered by statutory prohibitions,
other types of businesses have resolved
these problems by merger and acquisition. In contrast, Illinois banks either
have failed to resolve their management
succession problem or have resorted
to the chain banking vehicle.
There are a number of factors that
over the years, have made banks wish to
establish multiple offices. First, the
emphasis on continual growth in per
share earnings has created for banks,
like other forms of business enterprise,
a strong incentive for expansion.
Private business firms can achieve substantial savings by expanding or merging, especially in the area of reduced
managerial overhead. Also, it is
sometimes the case that a "turnaround"
situation can be identified. In such
cases, better management may be
achieved for the acquired firm; problems may be solved; and the firm
may be converted into a profitable
enterprise. The point is that profit opportunities are greater when tested
managerial or technological techniques
are introduced to acquired firms
through expansion, rather than through
devising new and better managerial and
technological techniques for existing,
well-run enterprises. Banks would like
the same opportunity to expand and
merge enjoyed by other commercial
enterprises.
The resistance
Resistance to the further spread of multi-office banking stems chiefly, though certainly not exclusively, from small banks in rural areas. The most prominent arguments against branch and/or holding company banking revolve around issues relating to monopoly. Some fear that several gigantic Chicago banks would dominate the state. Others believe that large banks in important downstate cities would carve out "spheres of influence" in immediately surrounding areas. Small bankers see themselves as unable to survive the intense, but temporary, competitive drive of larger branch banking systems. Later, they argue, when the established positions of small banks have been undermined, the consuming public will feel the adverse effects of the newly imposed monopoly. Opposition to multi-office banking has also stressed the loss of "local touch" that would accompany the spread of branch banking and holding company banking. Instead of sitting across the desk from a local citizen whose interests are focused toward the growth of his own community, the borrower would deal with a stranger whose career interests are focused in the home office. As a consequence, local credit requirements would hold no priority over those in distant cities. Growth in rural areas could often take a back seat to economic interests in large urban areas. |
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While it is often argued that small, rural bankers are only trying to protect
their own local monopolies by resisting
multi-office banking, this charge isn't
completely persuasive. It is worth pointing out that those same rural bankers
have the most to gain from permitting
themselves to be acquired—often at
premium prices.
The public interest The relation between banking structure—including unit systems, branching
systems, or systems consisting of holding companies—and bank performance
has not yet been well established. Fragmentary evidence, however, suggests
that a larger number of banking offices
in an area tends to: lower the interest
rates charged for loans; raise the interest payments on deposits; and lower
service charges. December1975 / Illinois Issues / 365
It is difficult to make an unambiguous statement regarding the interest of the public in the outcome of the branch banking controversy. For one
thing, there is not a strong consensus
regarding the likely effects of branch
banking on the future costs of banking services.
Branch Banking
Evidence also suggests that branch banks hold a higher portion of their assets in loans than do unit banks, and holding company banks hold a larger percentage of loans than those independently owned. Finally, there is no evidence that profits are greater among branch banks or holding company banks than among unit banks.
To repeat, however, the evidence regarding the effect of structure on performance is incomplete. Even though the findings have generally been statistically significant, the impact of structure is probably not very important compared with other forces—such as regulation, the general economy, management, etc.
The future
Even if the issue isn't resolved locally, it is plausible to believe that federal legislation will preempt the field. In 1970, President Nixon appointed the Commission on Financial Structure and Regulation, chaired by Reed 0. Hunt (former chairman of the Board of the Crown Zellerbach Corporation). Its report, typically referred to as the Hunt Commission Report, advocated statewide branching. The drift of other recent legislative proposals—from the Federal Reserve and others—has been toward fostering uniformity in the statutory and regulatory environment within which banks operate. Thus, it appears that, for better or worse, the die has been cast for multi-office banking throughout the United States.
366 / Illinois Issues / December 1975