A recent analysis by the D.C. Department of Employment Services (DCDES) of occupational trends in the area raises a provocative question about the validity of certain assumptions that formed a basis for enactment of the city's interstate-banking law. The observation noted by the Department of Employment Services comes at a time when other assumptions about the District's interstate-banking law are being sorely tested.
D.C. officials are certain, as DCDES notes, that regional interstate banking will create many jobs in the city. A summary of projections by DCDES staff economists shows that the area's banking industry will have an annual employment growth rate of 2.3 percent through the remainder of the decade compared with a much smaller annual growth rate of only 1.2 percent since the end of the 1981-82 recession. Interestingly, most of the growth in banking employment since then occurred between 1984 and 1985, when the increase was 2.5 percent, according to DCDES.
Between now and 1990, interstate banking "may have a profound effect on the industry's employment base," DCDES said in its monthly labor summary. Under the District's recently enacted interstate-banking law, an out-of-state institution must agree to create 200 jobs and invest between $50 million and $100 million in designated communities before it can do business in the city.
That attempt ostensibly to promote economic development is the result of a shaky assumption that banks will pay any price to get into the District. The assumption already has been proven wrong; no fewer than 11 banking organizations are attempting to circumvent the stiff investment and jobs requirements by asking the comptroller of the currency to approve charters not covered by the city's interstate-banking law.
But even if all or some of those firms elect to abide by the District's statute, the new banking law "may not lead to a maximization of employment in the District or the area," according to DCDES. Regional banks may seek to minimize costs by consolidating regional "backroom" operations such as accounting, data processing, check clearing and other support functions, DCDES noted. Such activities, it pointed out, could be placed in relatively inexpensive facilities in Banks now try to consolidate backroom operations in areas with less expensive office space. industrial parks or near regional headquarters, that "may or may not be in the Washington area." Thus, the positive impact of the District's interstate-banking law "may be derived more from the expansion of loanable funds and the availability of additional risk capital to expand new firms in the area, than from increased employment."
This certainly raises an interesting question about the efficacy of the interstate-banking law in creating arbitrary job totals. DCDES's conclusion that the availability of funds may be the more positive impact of the law is more than just a theory. Bank companies as well as other businesses with extensive so-called backroom operations find it more cost-effective nowadays to consolidate those functions in less expensive office space, far removed from commercial centers.
This is precisely the point Perpetual American Savings Bank made when it moved its headquarters and support operations from the District to Alexandria. Ditto Hecht's, which moved its administrative offices from downtown Washington to Arlington. Woodward & Lothrop Inc. plans a similar move when it completes construction of a facility just off the Capital Beltway, near Perpetual American.
Sovran Financial Corp., the giant Norfolk bank-holding company that acquired D.C. National Bank and Bethesda's Suburban Bank, plans to build an operations complex and a new headquarters building for its mortgage subsidiary on a 170-acre site near Richmond.
That certainly shouldn't be interpreted as a sign that Sovran soon will eliminate area jobs. But it's a concrete example of DCDES's point. And one can conclude that competitors in the area will try to realize similar savings. Certainly District officials can't expect to hold one industry hostage to an arbitrary requirement while others are free to seek greater economies of scale in their operations.
Rather than testing the legality of certain provisions of the law, some out-of-state bank companies (Citicorp and Virginia bank-holding companies are the exceptions so far) are likely to avoid the District altogether or try to enter through a loophole, as 11 are doing.
And now that those institutions are trying to take advantage of a loophole that wasn't supposed to be there, Mayor Marion Barry and other city officials ironically find themselves trying to block their entry and possibly losing a chance to attract more jobs, more capital for business and more loans for consumers.
That's the legacy of legislation based on erroneous assumptions.