Federal Reserve Chairman Paul A. Volcker's recent statement calling for some form of interstate banking lends further credence to the D.C. Bankers Association's original position on the matter.
Volcker suggested in testimony before a House Banking subcommittee last month that Congress authorize interstate branching within metropolitan areas and for neighboring areas of contiguous states. Whatever approach Congress takes should provide for a transitional period before full interstate banking is approved, Volcker added.
Coming as it did, in the midst of a scramble by banks to get a head start on national interstate banking -- which seems inevitable -- the Fed chairman's call for a gradual approach along natural market and geographic lines is significant. The concept is far from new, however, even though Volcker on previous occasions has emphasized the need for Congress to write legislation that addresses changes in the banking system.
The DCBA first recognized the logic of the limited-interstate-banking concept several years ago but found few supporters, especially among bankers and lawmakers in Maryland and Virginia. How, after all these years, the logic of it all has escaped Congress and legislators in states adjoining the District is one of the great mysteries of the continuing debate over interstate banking.
Long before Maryland and Virginia joined the stampede toward reciprocal interstate banking in the Southeast, the D.C. Bankers Association had urged bankers in the two adjoining states to support limited interstate banking in this region. The proposal was put in legislative form, with the hope of winning passage in Congress, but got nowhere.
The logic of the DCBA proposal was never in question. As recently as this year, the author of a Greater Washington Research Center study on financial services in the region recommended a limited form of regional interstate banking for the Washington area.
In truth, there was little enthusiasm for any proposal that would have allowed D.C. banks to extend their reach into what they like to call their "natural market." Indeed, at the height of debate on interstate banking bills in Maryland recently, a prominent member of the state legislature worried that D.C. banks might gain an advantage over Maryland banks, if permitted to cross the state line.
As early as 1980, the Association of Bank Holding Companies concluded that interstate banking was inevitable. It, too, endorsed trade-area banking as a prelude to full interstate banking. The issues to be resolved, the association pointed out then, were timing and structure.
In the absence of any structure to accommodate interstate banking -- or, a federal framework, as Volcker described it -- interstate banking is spreading in one form or another, through technology, expanded services of nonbank competitors, alliances among states and loopholes in existing statutes. What's more, pressures for change are apparent in initiatives by several states, Volcker noted.
Like the Association of Bank Holding Companies, the DCBA recognized this trend several years ago and sought to establish a framework in which its members might increase their size and market share before full interstate banking becomes a reality.
Since then, of course, Virginia and Maryland have opted for passage of regional interstate banking laws that provide for reciprocity with 13 southeastern states and the District. A bank holding company in Florida, for example, may acquire a Virginia institution, so long as Florida extends the same right to Virginia bank holding companies.
Logic was on the side of District bankers but, apparently feeling the pressure to go along with Maryland and Virginia, local bankers and D.C. government officials are prepared now to adopt a bill that would make the District part of the southeastern region.
Given the Fed's posture on interstate banking, which reinforces the DCBA's original position, the idea that the District belongs in a southeastern banking region makes less sense than some would have us believe. It would make more sense, in fact, for the District to define and participate in a more limited region, one that is likely to be of greater benefit to local banks and consumers.
Geographically, economically and demographically, reciprocity with Maryland, Virginia, West Virginia and Pennsylvania seems better suited for the District than agreements with Mississippi and Louisiana. Banks in the Southeast may be eager to get into the District, but would it be practical, or even desirable, for a District bank holding company to seek entry into the Deep South?
D.C. officials may find it useful to compare the assets and deposits of banks in the Middle Atlantic and the Southeast regions. Even though Maryland decided to align with the Southeast region, an economic analysis prepared for the state last year concluded that there is a "greater probability that funds would flow into Maryland from the Middle Atlantic region" than from the Southeast.
A trip back to the drawing board, while there is still time, may prove beneficial.