SUBURBAN BANCORP in Maryland now has the federal regulators' approval to open an office in the District of Columbia. That's interstate banking -- and why not? Federal law prohibits interstate banking but Suburban, like many other aggressive and well-managed banks, is walking through a loophole in the law. As long as its out-of- state offices don't make commercial loans, they are not technically banks and do not violate the law. Suburban now has another application pending to open a similar office in Fairfax County.
Interstate banking is, in principle, a good idea. It improves the degree of competition in the banking industry and breaks up the comfortable little oligopolies that state lines have created in many parts of the country. The disquieting and slightly dangerous side of this process is the way that it's being accomplished -- through the loophole. There's nothing at all wrong with Suburban's coming downtown or going across the river. The trouble is that the loophole also allows not only banks but all sorts of enterprises to set up banking offices and start taking deposits. These non-bank banks are being set up by department stores, manufacturing companies, insurance companies and stockbrokers. The ideal solution would be congressional legislation to close the loophole, limit banking to the banks and begin an orderly transition to interstate banking. Congress was working on the subject this year, but the various factions of the banking industry fought each other to a deadlock.
Small banks and regional banks have been carrying on a frantic opposition to interstate banking. They cry that they will surely be eaten alive by the big-city boys with their moneybags and their slick city ways. What a terrible thought. Fortunately, there's very little to it. As Anthony M. Solomon, the president of the New York Federal Reserve Bank, recently observed, small and independent banks can compete very effectively with the monsters of the money centers. You can see it, he said, in New York State and California where community banks operate successfully in the same jurisdictions as Citicorp and the Bank of America.
The vehement campaign against interstate banking competition is not only misconceived but futile as well. The banks that are running this campaign probably have the political power to prevent Congress from enacting orderly legislation on the subject. But the banks on the other side of the issue, those that want to compete nationwide, appear to have the power to prevent Congress from closing the loophole. In the absence of any legislation at all, as Suburban Bancorp is demonstrating, the present evolution will continue, untidily but rapidly, toward interstate banking. A lot of bankers won't like it. But their customers will benefit.