IF A BIG BANK gets into trouble, the federal regulators strangely limited in arranging a rescue. The regulators operate under laws that were originally intended to preserve competition but, under modern circumstances, are having unintended and perverse effects. With another recession apparently arriving, it is not impossible that a large bank might find itself in need of help. Foresighted people in both Congress and the federal agencies are not beginning to cut an emergency exit through the present legal maze.
They are trying to avoid a repetition of the Marine Midland case. The Marine Midland Bank of Buffalo, N.Y., the twelfth, largest in the country, fell into deep difficulties in the aftermath of the last recession. Everyone agreed that the neatest and safest solution was a takeover by another large bank. That's the point at which things began to get complicated.
A rescue by another bank in New York state would have violated the antitrust laws by creating an excessive concentration in that state's banking market. But rescue from another state would have been illegal; federal law in effect prohibits banking across state lines. The only remaining possibility was a takeover by a foreign bank. That is how Marine Midland came to be sold to a bank in Hong Kong.
There's nothing wrong with a policy that permits foreign banks to come into the United States. But it is lunatic to insist on a concept of competition that, when big banks are involved, requires the salvage operation to come from beyond the three-mile limit.Rep. Henry S. Reuss, chairman of the House Banking Committee, reflecting on the unpleasant possibilities in the presents rules, recently asked the Federal Financial Institutions Examination Council to draft a bill. The council represents the five agencies that regulate the federal banking and credit systems. It delivered a proposal to the committee the other day, suggesting an exemption in extreme circumstance to the law against interstate banking. That bill moves in the right direction, and Congress would be wise to push it along without delay.
But the bill also leads toward a larger subject. The character of competition in the banking industry is changing, as the scale of the markets expands. Few Americans would want to see U.S. banks follow the Canadian and European pattern, in which each country has a very few huge banks, with innumerable branches, that dominate its financial life. But the present prohibition against interstate banking frequently shelters local banks, especially in small states, against the rigors of meeting national standards of efficiency and service. That prohibition currently is doing more to restrict competition than to encourage it. And, as the Marine Midland example suggests, it can also be a very awkward impediment in an emergency.