RICKI HELFER, CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
TUESDAY, OCTOBER 17, 1995
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
Madam Chairwoman and members of the Subcommittee, I appreciate the
opportunity to testify on the status of interstate banking and trends in
bank consolidation. For over a decade, the growth of interstate banking
has been a fundamental element of the rapidly changing structure of the
nation's banking industry. Last year, Congress, recognizing the economic
and competitive advantages produced by removing the long-standing
geographical restraints on banking organizations, added impetus to the
interstate trend by enacting the Riegle-Neal Interstate Banking and Branching
Efficiency Act (the "Riegle-Neal Act"). This year, and especially over the
last few months, a number of mergers and acquisitions between large banking
organizations have been announced. Attachment 1 lists the largest merger
announcements of 1995. Thus, the banking industry is in a period of change
and transition. The challenges for the Federal Deposit Insurance Corporation
and the other banking regulators as the industry passes through this time of
restructuring are many.
The first section of this testimony contains a description
of the banking industry's ongoing restructuring, a process in which
the growth of interstate banking organizations has played a
central role. The description includes historical background on the
restructuring and places the recent activity in mergers and
acquisitions between banking organizations in the context of
longer term developments. This section draws from a study on interstate
banking in progress by the FDIC's Division of Research and Statistics.
The study examines trends in FDIC-insured institutions over the past
decade. The second section of the testimony focuses on the impact of
the banking industry's restructuring on customers of banks, and the third
section examines the future of the community bank. The final section
reviews the FDIC's statutory authority, and the agency's plans and
initiatives, with respect to matters affected by the restructuring of the
AN INDUSTRY IN TRANSITION
For much of the nation's history, state boundaries controlled and
curtailed the growth of individual banking organizations. In most
instances, a U.S. banking organization could not establish domestic
deposit-taking offices outside of the state where its home office was
located. Moreover, its ability to expand within its home state was often
limited. Attachment 2 categorizes states according to their branching
laws. One result of this situation was a banking industry with numerous
participants and protected geographic markets. The industry was also
constrained by state and federal laws that added product limitations to
the geographic limitations. Under the product limitations, banking
organizations were restricted to offering a limited number of financial
products and services. Moreover, the limitations were often interpreted
in a narrow fashion that hindered the ability of banks to adjust their
products to changes in technology and the marketplace. These geographic
and product limitations had a number of long-term negative impacts.
Businesses and consumers did not enjoy the benefits of full competition
among depository institutions and between depository institutions and
other providers of financial products and services. Benefits from
greater competition can be in the form of lower prices, better products,
and better availability of products. The less-than-optimal level of
competition among depository institutions hindered the movement of
banking resources. This allowed less efficient banks to command excess
resources, and prevented more efficient banks from bringing their capital
and expertise to markets that could have benefitted from their presence.
Finally, banking organizations were constrained in their ability to meet
the competition from other segments of the financial services industry.
The competitive disadvantage banking organizations operated under is
evidenced by their declining share of the assets of the financial services
industry. For example, in 1952, banks and thrifts held 63 percent of those
assets. That proportion declined steadily over the years and at midyear
1995 was 32 percent. The marketplace distortions arising from the
geographic and product limitations on depository institutions led to a
variety of pressures for change. At the institution level, creative
management explored ways under existing laws to offer the products and
services that businesses and consumers demanded. At the industry level,
changes were sought in the state and federal laws that created the
Indeed, over the brief period of little more than a decade, the U.S.
banking industry has undergone a geographic structural change of
considerable proportions. Attachment 3 enumerates mergers, failures and
new charters of FDIC insured institutions over the past ten years. State
banking barriers have dropped significantly. At midyear 1984, 33 percent
of the nation's banking assets were controlled by bank and thrift
organizations with operations in two or more states. At midyear 1994,
the proportion was 64 percent, almost two-thirds of the nation's
banking assets (See Attachment 4). A major consequence of the rise of
interstate banking has been consolidation in the industry. The number
of banking organizations has declined, and the
proportions of banking assets and deposits controlled by larger banking
organizations have risen. This is reflected in a corresponding decline in
the number of commercial banks and savings institutions, as well as an
increase in the number and assets of larger institutions (see Attachment 5).
Concerning consolidation -- defined as the reduction in the number of
institutions due to mergers and acquisitions of healthy institutions and to
failures of troubled institutions offset by the addition of new
institutions -- a representative statistic is the decline in the combined
number of bank holding companies and independent banks and thrifts. This
decline was 32 percent, from 14,887 to 9,804, between year-end 1984 and
midyear 1995 (see Attachment 6). In contrast, the decline does not mean that
new institutions are not being established. In fact, between 1984 and
mid-year 1995, 2,476 new commercial banks and savings institutions were
chartered. At the national level, the share of industry deposits held by
the largest institutions has increased. At year-end 1984, the 42 largest
banking organizations held 25 percent of the nation's domestic deposits. By
midyear 1995, 25 percent of domestic deposits was held by the largest 16
banking organizations (see Attachment 8). It should be noted that increased
consolidation in the banking industry at the national level has not resulted
in more concentrated local banking markets. Among the reasons are that much
of the consolidation has involved mergers between organizations in different
markets and new institutions have entered markets.
The states have played a major role in the growth of interstate banking
and the accompanying industry consolidation. Beginning in the late 1970s and
early 1980s, a number of states acknowledged the changing economics of
banking by allowing the creation and development of interstate bank holding
companies -- companies that own banks in two or more states
(see Attachment 9). The state laws varied considerably. Some states acted
individually, while others entered into compacts with neighboring states.
Some states required reciprocity -- an out-of-state bank holding company
could acquire an in-state bank only if the out-of-state holding company's
home state granted similar acquisition privileges to holding companies in
the target state. Other state laws, particularly those enacted pursuant to
regional compacts, limited permissible out-of-state entrants to those from
the neighboring geographic region.
Any uncertainties regarding state initiatives to remove barriers to bank
holding company expansion across state lines were eliminated in 1985. In the
decision of Northeast Bancorp v. Board of Governors of the Federal Reserve
System, 472 U.S. 159, the U.S. Supreme Court upheld the ability of the states
to reduce selectively, under the Douglas Amendment to the Bank Holding
Company Act, restrictions on entry by out-of-state holding companies.
In 1994, Congress in the Riegle-Neal Act added a federal element to
the states' initiatives on interstate banking. Under the Act, most remaining
state barriers to bank holding company expansion were removed on September
29, 1995. Holding company growth, however, will be restrained by explicit,
statutory deposit concentration limits: a 10 percent nationwide and a 30
percent statewide limit.
The Riegle-Neal Act also authorizes another form of interstate expansion
for banks -- branching. Beginning June 1, 1997, banks may merge across
state lines, a process that will result in the offices of one bank becoming
branches of the other. Interstate branching through mergers is subject to
the same concentration limits as are interstate acquisitions by bank holding
companies. States may elect to prohibit interstate branching through mergers
or to authorize it prior to June 1, 1997. States may also elect to authorize
de novo interstate branching. The current status of state elections is
summarized in Attachment 10.
Recent announcements of mergers and acquisitions by a number of large
banking organizations should be viewed in the context of the ongoing trends
of consolidation and interstate growth. The long-existing economic pressures
on banking organizations to grow and to cross state lines, coupled with the
removal of legal barriers based on geography, are likely to continue for the
foreseeable future, and the number of banking organizations likely will
continue to decline for some time.
Assuming the current restructuring of the industry continues,
consumers of banking products and services should benefit. The marketplace
over time is likely to perform its function of matching supply and demand,
although there may be some disequilibrium during transition periods. Over
the long term, fewer restrictions on competition should foster innovation and
ensure that consumer financial needs are met and that products and services
are available at the lowest economic prices. Furthermore, the reduction of
legal barriers based on geographic boundaries should enable banking
organizations to expand operations more easily into underserved banking
For their part, banking organizations also should benefit. A
consolidating industry is one where excess capacity is being eliminated and
costs are being cut. In addition, when an institution expands
geographically, it is able to diversify its risk against being subject to
both localized and rolling recessions. For example, Attachment 11 shows
that in nine of the ten years during the period 1985 to 1994, banks and
savings institutions in multi-state banking organizations failed less
frequently than multi-institution banking organizations confined to single
states. The lessons learned from this experience, as well as more recent
experience with failed banks in California and New England, are that less
diversification renders banks more vulnerable to regional economic downturns
than more diversification does. Recent statistics on the profitability of
the commercial banking industry in California indicate that the state's
largest banks were least affected by the severe recession, reflecting
their diverse income sources beyond California's borders. In addition,
full interstate banking could also offer to many banks significant
risk reduction through increased opportunities for building a stable retail
IMPACT ON BANK CUSTOMERS
The pace of the restructuring of the banking industry has
raised concerns on the part of some observers about possible negative impacts
on bank customers. There is little evidence, however, of such detrimental
effects. Moreover, the increased competition that is causing the
restructuring of the industry should not only prevent any long-term
degradation in the availability and quality of banking services but ensure
that availability remains widespread and that quality increases.
One indication that bank customers are being served adequately
in this period of restructuring is that bank loans have been growing steadily
since the recession of 1990-91. For the twelve-month period ending this past
June, loans of commercial banks and savings institutions grew by 10.6
percent. In addition, the FDIC's data show that roughly half of the
increase in loans by commercial banks and savings institutions consists of
growth in retail loans - home mortgages and other loans to consumers. And
significantly, for every dollar of loans that banks and thrifts carry on
their books, an additional 65 cents in unused loan commitments is outstanding.
This suggests that the credit needs of bank and thrift customers are more
than being met.
Although the number of banking organizations has been declining over the
past decade, the number of banking offices has not significantly changed. As
of midyear 1995, there were nearly 83,000 deposit-taking offices of banks and
thrifts. In 1984, the number of offices was approximately 81,000. The fact
that the number of banking offices is not much different than it was eleven
years ago is an indication that access to banking offices has not been
curtailed. The statistic is significant when viewed against the decline in
the number of banks and thrifts described in the first section of this
testimony. Although consolidation among institutions is occurring, banks and
thrifts are in general not closing offices.
Furthermore, electronic means of delivering banking services have grown
significantly. The number of automated teller machines (ATMs) reached over
109,000 in 1994, up 15 percent from the previous year and almost double the
55,000 in existence in 1984. There also has been significant growth in
point-of-sale (POS) terminals. These numbered 95,000 in June of 1992,
155,000 a year later, and 344,000 in June of 1994, an increase of more than
250 percent in two years.
Finally, deposit-taking offices, ATMs, and POS terminals are not the
only means through which the banking needs of customers are met. Loan
production offices and offices of nonbank affiliates also are significant,
and numerous. Moreover, the nation's customers and businesses are served by
a diverse financial industry consisting not only of depository institutions
but also of such product and service providers as finance companies, credit
unions, pension funds, mortgage bankers, securities brokers and dealers, and
mutual funds. Regional banking companies have expanded their office networks
to compete in markets beyond the states where they have established
deposit-taking branches. An analysis of recent Annual Reports from six
prominent bank holding companies shows that while they operate deposit-taking
branches in 8 to 15 states, they have loan production offices in nearly three
times as many states.
In summary, the ongoing restructuring of the banking industry does not
seem to have reduced the availability of bank services to their customers.
THE FUTURE OF THE COMMUNITY BANK
Despite the overall benefits that should result from the current
restructuring of the banking industry, some observers have concerns. One set
of concerns involves the community bank. What is the future of institutions
based in, and serving mainly, a local community? This question is important
for their customers and the communities served by these institutions. In
addition, the future of these banks is particularly relevant to the FDIC,
which is the primary federal regulator for two out of every three insured
institutions with less than $100 million in assets. These 4,912 institutions
hold $180 billion in deposits in more than 25 million accounts. They
operate in 49 states and the U.S. territories. Their future is important for
their customers as well.
There are many reasons to believe that community banks will continue to
play a critical role in the financial system. Smaller banks still account
for the majority of institutions. As of June 30, 1995, there were nearly
8,000 commercial banks and savings institutions with less than $100 million
in assets, accounting for two out of every three FDIC-insured depository
institutions. More than 95 percent of all insured institutions have less than
$1 billion in assets. Although institutions with less than $100 million in
assets together represent only 6.8 percent of industry assets, they supply
nearly one-quarter of all loans to small businesses. They operate in over
4,000 communities in which there are no offices of larger banks, providing
essential financial services to consumers and businesses.
Moreover, smaller banks have continued to play an important role in
states such as California, New York, and Virginia where statewide branching
has long been allowed. For example, in California, which has allowed
unrestricted statewide branching since 1927, community banks generally have
prospered, despite being challenged by the statewide systems of California's
largest banking organizations. Recently, we have observed an increase in
charters throughout the country. This would seem to indicate that community
banks can develop combinations of products, services, and fees that are
competitive with those of larger institutions. Indeed, by enabling smaller
banking organizations to contract for off-site back-office support and to
offer products and services from remote vendors, technology in the form of
computerized communications may be leveling the field on which small and
large banks compete.
In the Federal Reserve Board's most recent Annual Report to the Congress
on Retail Fees and Services of Depository Institutions (September 1995), the
competitive abilities of local institutions are highlighted. The report
compared for the first time fees charged by in-state and out-of-state banks.
The report concluded that average fees charged by out-of-state banks are
generally higher than those charged by in-state banks. This would seem to
support the contention that the growth of interstate banking is not
necessarily a death knell for local depository institutions. If they can
compete on price or service with out-of-state competitors, in-state banks
would seem to be assured of a place in a restructured banking industry.
The recent performance of small banks and thrifts provides
testimony to their viability. In four of the last six years, and in four of
the last six quarters through the middle of 1995, institutions with less than
$100 million in assets have been more profitable than the industry average as
measured by return on assets (ROA). In 1994, and through the first six
months of 1995, more than 95 percent of these institutions were profitable.
More than half reported ROAs above one percent, which is recognized as a
benchmark for strong profitability. More than three-quarters had ROAs above
0.75 percent. These proportions are comparable to those of larger
institutions, and demonstrate the competitiveness and viability of the
small-bank segment. Institutions with less than $100 million in assets have
the lowest proportions of troubled assets and the highest capitalization
levels of any asset-size group.
Finally, along with all other banks and savings associations, community
banks are protected from monopolistic practices and unfair competition by the
antitrust laws. Community banks may be subject to rigorous competition, but
the antitrust laws ensure that it is fair competition. The competitive
effects of mergers and acquisitions between banks are considered both by the
appropriate bank regulator and the Department of Justice. Combinations that
would result in a monopoly are prohibited by law. Combinations that would
lead to concentration in an unconcentrated market may only be approved if
such anticompetitive effects would be clearly outweighed by the public
interest in meeting the needs of the community to be served.
In summary, the smaller banking organization, focused on service to a
particular local community and taking advantage of competitive strengths
resulting from that focus, continues to have a place in the restructuring
U.S. banking industry.
The restructuring of the banking industry -- a restructuring due in
large measure to the growth of interstate banking -- poses many challenges
for industry regulators at both the state and federal levels. The foremost
goal of banking regulation is to ensure that regulated institutions adhere to
appropriate standards of safety and soundness. Regulators are not just
concerned with prudential issues, however. Congress also has given the
federal banking agencies duties regarding such matters as the adequacy of
banking services to communities, the prevention of discriminatory lending
practices, and anti-competitive effects.
The Regulatory Approval Process
Many of the concerns that are raised about particular merger and
acquisition transactions between large institutions, including interstate
transactions, can be examined and alleviated during the applications process.
Banking organizations have long been required to file applications with the
federal banking agencies to merge with or acquire other institutions.
Pertinent legal provisions are found in the Bank Merger Act, the Bank Holding
Company Act, and the Riegle-Neal Interstate Banking and Branching Efficiency
Act. These laws set forth criteria that the regulatory agencies must
consider in determining whether to approve transactions.
For example, under the Bank Merger Act, approval is required from the
appropriate federal agency for an insured depository institution to merge
with, acquire the assets of, or assume the liability to pay deposits made in
any other insured depository institution. In considering applications under
the Bank Merger Act, the agencies are required to focus on the competitive
effects, the financial and managerial resources and future prospects of the
existing and proposed institutions, and the convenience and needs of the
community to be served. Under the Riegle-Neal Act, interstate mergers are
subject to the above-discussed nationwide and statewide deposit concentration
limits as well as an even more probing CRA review.
Merger and acquisition applications also trigger a review of
an institution's record under the Community Reinvestment Act in meeting the
credit needs of its community, including low- and moderate-income
As a result of the statutory requirements, the effects of merger and
acquisition proposals by banking organizations receive thorough scrutiny.
Competition issues, safety and soundness matters, and community service
records all are examined. The FDIC is satisfied that the current statutory
framework allows the consequences of merger and acquisition proposals by
banking organizations, including the largest ones, to be addressed adequately.
Interstate banking organizations generally involve multiple charters
and subsidiary banks located in different states. Thus, as the number of
interstate organizations increases, the coordination of activities and the
sharing of information among the banking regulators will become more
important. The FDIC has a long history of working with and assisting the
state banking departments. In 1992, the FDIC and the Conference of State
Bank Supervisors (CSBS) issued a joint resolution encouraging the adoption
of working agreements between the FDIC and the state banking departments.
Virtually every state now has some type of working agreement with the FDIC.
These agreements typically cover such matters as the frequency and type of
examinations, pre-examination procedures, common examination and application
forms, the coordination of enforcement actions, the sharing of supervisory
information, the training of personnel, and access to the FDIC's computerized
The CSBS has played a key role in the cooperative process. This past
May, CSBS issued a protocol on interstate banking and branching that outlined
the responsibilities of home and host state regulators in the evolving
interstate banking environment. The FDIC is working with CSBS and state
regulatory authorities in the implementation of this protocol. Among the
issues under discussion are the precise roles and responsibilities of home
and host states with regard to supervision, enforcement of state laws and
regulations, and the types and frequency of information exchanges.
Concerning coordination among the federal banking regulators, the FDIC
is currently working with the Office of the Comptroller of the Currency
(OCC), the Federal Reserve Board, and the Office of Thrift Supervision (OTS)
to implement Section 305 of the Riegle Community Development and Regulatory
Improvement Act of 1994. This provision directs the federal banking agencies
to coordinate their examinations of institutions and to develop a system for
selecting a lead agency to manage a unified examination of each depository
institution. This system will be particularly useful for ensuring that large
multi-state institutions are adequately supervised.
Since the primary federal regulator of most large banks is either the
OCC or the Federal Reserve Board, the FDIC is dependent to a significant
degree on those agencies, as well as the OTS, for some of the information on
large institutions required to monitor risks to the deposit insurance funds.
The types and amount of financial and other information needed by the FDIC
for monitoring risk to the funds, for direct supervision of state nonmember
institutions, and for backup supervision of nationally chartered institutions
and state-chartered Federal Reserve members are likely to undergo changes as
industry restructuring and interstate banking growth continue.
For example, in order to assess insurance risk and to monitor liquidity,
examiners may need to focus more on cash flows, deposit stability, loan
commitments, and borrowing arrangements. Data on geographical
diversification and product segments may prove to be important. The FDIC
does not expect that more information will be needed, only that the type of
information may change.
The FDIC is also looking at how data and information might best be
gathered. While on-site examinations will continue to be a mainstay of
bank supervision, they are expensive to undertake and are generally
conducted no more frequently than once a year. In view of these
considerations, the FDIC is investigating the use of automated examination
tools, and enhanced off-site surveillance techniques.
For example, the FDIC will soon field-test an automated loan review
program. This initiative will reduce the amount of time examiners spend
evaluating loan quality while at the same time assuring a thorough review.
The program will capture relevant loan data in a standardized electronic
format from a bank's data files. Those records will then be converted into
an automated loan review package. This method of evaluating the loan
function will reduce the number of specialized loan reports requested from
the institution by the field examiner and will reduce on-site examination
time because the electronic record will be analyzed outside of the bank.
Further, the FDIC is investigating the use of the Internet to permit
electronic submission of applications, and to make available materials such
as examination manuals, rules and regulations, and agency publications. The
FDIC has already used the Internet to receive public comments on proposed
rules and to provide banking statistics each quarter from the FDIC's
Quarterly Banking Profile and other publications.
Off-site monitoring has long been a tool of the regulators. The FDIC
and the other regulators have traditionally used Call Report data and other
off-site information to monitor changing risks in individual institutions
and in groups of institutions and holding companies. For example, financial
ratios computed from the Call Report data enable regulators to compare banks
with their peers and to spot movements in an institution's risk profile over
time. Call Reports also have been used to link bank performance with the
condition of state and local economies.
Interstate banking will likely impact the way the FDIC uses off-site
data to support supervision and risk analysis. Because the number of
institutions that operate in several states or regions is growing, current
off-site information is becoming less useful to identify high growth and high
risk markets. It may be possible to monitor risks to the insurance funds
more closely by having large multi-state banking organizations report on
geographic and product segments. Reporting requirements would have to be
structured to weigh the usefulness of the information against any significant
reporting burden. This burden may be minimized or eliminated by relying on
information already developed by banking organizations themselves to manage
The resolution of a failed or failing large interstate banking
organization would present the FDIC, and the other banking regulators
involved, with a wide variety of difficult problems and complex issues.
FDIC staff has been examining what problems and issues might arise and to
the extent feasible we are formulating contingency plans for handling a
large institution in trouble. In formulating these plans, the FDIC is in part
drawing upon its past experiences in resolving large failed or failing
institutions. Among the sizeable institutions included in the FDIC's
resolution history are Continental Illinois National Bank and Trust Company
(1984), eight of the ten largest banking organizations in Texas (1987-1993),
Bank of New England Corporation (1991), and Southeast Bank, N.A. (1991).
More broadly, the FDIC has undertaken a project to analyze
the lessons of the banking problems of the 1980s and early 1990s. This
project will document the historical record of this period both through the
study of written sources and through interviews with bank regulators, bank
executives, and other industry experts. The project will attempt to distill
any lessons that can be gleaned regarding early warning signals of banking
problems, the efficacy of regulatory efforts to prevent failures, and the
cost-effectiveness of alternative strategies for handling bank failures
and disposing of their assets. The project will draw on the combined
experience of both the FDIC and the RTC in handling failures and disposing
Local Community Needs
The Riegle-Neal Act amended the Community Reinvestment Act (1) to
establish an expanded evaluation process for institutions with interstate
branches; (2) to require, in CRA evaluations for institutions wholly located
in one state, a separate evaluation for each metropolitan area in which an
institution has branches; and (3) to require a more searching CRA review in
connection with applications to establish interstate banking facilities.
These new Community Reinvestment Act (CRA) requirements are being
incorporated into evaluation procedures that will go into effect on
January 1, 1996, in conjunction with revised CRA regulations. The new
procedures and revised regulations, which also streamline the CRA examination
process for smaller institutions, are currently under review by all four
federal regulators of depository institutions: the FDIC, the Federal Reserve
Board, the OCC, and the Office of Thrift Supervision. We expect to complete
that review soon.
Under the expanded CRA evaluation process for institutions with
interstate branches, such institutions are to receive, in addition to an
overall CRA evaluation, an evaluation for each state in which they have a
branch. A state-level evaluation must present information separately for
each metropolitan area in which the institution has a branch and the state's
nonmetropolitan area if the institution has a branch in this area. In
addition, if it maintains branches in the portions of two or more states
comprising a multi-state metropolitan area, an institution is to receive a
separate CRA evaluation for this metropolitan area. The state-level
evaluations are to be adjusted by any required evaluation for a multi-state
An important aspect of the revised CRA regulations is the way in which
they encourage institutions to provide services to communities. This is
particularly true for large institutions, including interstate institutions,
that are more likely to serve multiple communities in both urban and rural
areas. How a large institution provides services to each of these areas will
be considered in the rating of the institution's overall CRA performance.
The banking agencies will evaluate service performance in several ways,
including the availability of full service branches throughout the community, alternative means to
deliver services, and community development services provided to low- and
Convenient access to full-service branches within a community is an
important factor in determining the availability of credit and non-credit
financial services. The FDIC will continue to focus evaluations on an
institution's current distribution of branches among all areas. An
institution's distribution of branches, particularly in low- and
moderate-income areas, can enhance an institution's rating.
This may be particularly important for large institutions applying to
open new branches, or to acquire or merge with other institutions, as such
applicants will need to demonstrate how they intend to meet the convenience
and needs of their communities. As in the past, the CRA evaluation will
continue to take into account an institution's record of opening and closing
branches, particularly branches located in low- and moderate-income areas
or primarily serving low- and moderate-income individuals.
The new regulations also encourage institutions to provide services to
low- and moderate-income areas in other ways. In evaluating an institution,
the regulators will consider ATMs, loan production offices, banking by
telephone or computer, and other services. Such means, however, are
considered only to the extent they are effective alternatives to providing
services through full service branches.
Lastly, the new regulations promote community services that are targeted
to low- and moderate-income individuals, or activities that revitalize or
stabilize low- or moderate-income areas. The service test of the new CRA
examination procedures elevates the importance of services considered vital
to the development of safe and sound lending and investment opportunities in
low- and moderate-income areas that otherwise may lack the capital to sustain
For example, financial institutions will receive favorable consideration
for providing technical expertise to non-profit, government, or tribal
organizations serving low- and moderate- income housing or economic
revitalization. Providing credit counseling, home buyers counseling, and
home maintenance counseling to promote community development will also
benefit an institution's performance. In addition, programs such as low-cost
or free government check cashing activities will be considered. As a result,
the importance of such vital affordable services in underserved lower income
neighborhoods will be emphasized.
Thus the performances of banking organizations in meeting local
community needs are subject to a detailed statutory and regulatory scheme.
The FDIC believes that this structure provides adequate monitoring powers to
the regulatory agencies and, coupled with incentives from the marketplace,
sufficient motivation for banking organizations to provide localized services.
The many mergers and acquisitions announced by banking organizations
this year are part of a long-term restructuring of the banking industry. The
restructuring, which is a response to the forces of the marketplace, the
greatly expanded use of technology, and the greater mobility of resources
within the economy, has been underway since at least the early 1980s. The
Riegle-Neal Act of 1994 removed several impediments to this trend.
Although the restructuring of the industry is a natural response to
economic and technological changes, and may have real advantages in
encouraging greater diversification, it is not without its disruptive aspects.
While the number of community banks has declined, the evidence suggests they
can hold their own competitively against larger banking organizations in terms
of profitability, price and service. Community banks are likely to continue
to be effective competitors because they can take advantage of the
opportunity to serve particular credit needs or particular markets and to
offer products and services at fees that are competitive.
Bank customers ultimately will benefit from the current restructuring.
Fewer restrictions on competition should result in innovations in products
and services and greater efficiencies in meeting consumers' financial needs.
The challenge to banking regulators is to ensure that any disruptive aspects
are monitored and mitigated so that the basic safety and soundness of the
industry is not threatened and bank customers are not unfairly disadvantaged.