Chagrined Maryland officials have corrected an embarrassing and potentially costly oversight in proposed regional interstate banking legislation now being considered by the General Assembly.
The matter, which was brought to the attention of legislators in Annapolis last week, should be regarded as a warning of possible pitfalls that may be hidden in the fine print of interstate banking bills in other states which, like Maryland, may eventually join a regional interstate banking pact.
The Maryland legislature is expected to pass a bill in the current session, calling for approval of regional reciprocal interstate banking agreements with 13 southeastern states and the District. Virginia lawmakers approved a similar measure last week.
Like laws that have been adopted in most southeastern states, the Maryland bill would permit establishment of interstate banking operations through mergers or formation of new banks. Only banks from those states that agree to participate in the regional pact would be permitted to enter the state, however.
The purpose of the reciprocal pacts, of course, is to bar the entry of the big money-center banks that many fear would wipe out competition in takeover forays into new markets. Similar fears have been expressed about the possible penetration of foreign-owned banks. The Maryland Bankers Association (MBA), for example, was concerned enough about the possible loss of control of state institutions that it pushed for language barring foreign banks from participating in a regional pact.
That brought cries of foul from the state's second-largest banking institution, First Maryland Bancorp, which is controlled by Allied Irish Banks Ltd. of Dublin. First Maryland, which operates First National Bank of Maryland, pointed out that, even though it is controlled by Allied Irish, the latter has designated Maryland as its "home state."
Under federal law, a foreign bank that has holdings in the United States must designate a "home state" where it maintains its principal operations. Hence, Allied Irish and First Maryland may engage only in activities permitted to other Maryland banks.
Having been satisfied that Allied Irish would not be allowed to slip in through the back door, the MBA gave its blessing to the bill. That took care of First Maryland's concerns but, incredibly, neither the MBA or legislators or a special commission that recommended the interstate banking proposal gave any thought to the status of another important foreign-controlled bank in the state.
The fact that First American Bank of Maryland and sister institution, Eastern Shore National Bank, are controlled by an out-of-state holding company that is owned by foreigners never occurred to anyone. Correction: It quickly became apparent to officials of the holding company, First American Bankshares, that an amendment to the interstate banking bill was necessary to protect its rights.
Although the holding company (formerly Financial General Bankshares, Inc.) is located in the District, its First American Bank subsidiary in Silver Spring has been operating in Maryland for nearly 40 years and is grandfathered by the 1956 Bank Holding Company Act. With assets of more than $536 million, First American Bank of Maryland is the state's eighth-largest bank and continues to add to its size through an aggressive expansion program.
Indeed, the bank is expected to play a substantial role in the parent company's plans to become a more formidable competitor in the region. As one of the few multistate bank holding companies in the country, First American Bankshares is in better position than most to capitalize on regional interstate banking laws passed by states on the Atlantic Coast. The $4.8 billion company owns banks in New York, Maryland, the District, Virginia and Tennesee.
But the bill being considered last week might have required First American Bankshares to divest its Maryland holdings, a company official told the House Economic Matters Committee. Under the proposed bill, holding companies would be required to maintain 80 percent of their assets within the 13-state region. But First American's New York subsidiary already accounts for 20 percent of the company's assets. Its projected growth "might be misinterpreted" as cause for disqualifying First American Bankshares as an acceptable out-of-state holding company, said senior vice president Jack W. Beddow.
"It would be ironic and destructive if, in an attempt to open Maryland banking to greater competition and to allow Maryland banks greater access to out-of-state opportunities, Maryland were to adopt legislation that injured Maryland banks and a bank holding company that served this state for 30 years," Beddow told the committee.
Touche', Mr. Beddow. The bill's language has been changed to correct the oversight. In the meantime, it might be a good idea for Maryland and the District -- which will soon consider an interstate banking bill -- to watch out for oversights in other states' bills which may pose threats to banks in this region.