The current essay deals with a crucial issue of interstate banking and its beneficiaries. The significant expansion of the interstate banking sector leads to changes in the general organization of the banking system and the legislative sphere regulating it. What is more important it opens a wide perspective for the development of the financial market and a rising possibility for a wide range of stakeholders. To reveal all these facets of interstate banking is thus the main purpose of this essay.
Interstate banking generally refers to banking expansion across state lines by means of bank company acquisition. This process began in the 1980s when the corresponding legislative act allows these acquisitions to be made across the state lines.
The process of interstate banking development has passed three main phases: 1980s – Regional Interstate Banking – mergers of the banks within regions and forming large banks; regional expansion allowing mergers with a bank located outside a given state; at last Interstate Banking and Branching Efficiency Act designed by Riegle and Neal allowed all large banks to acquire any banks or bank holdings in the United States.
The benefits from interstate banking legislation, which allowed free acquisitions of banks, are essential to developing of American financial market. Removing barriers for interstate branching is one of the most crucial benefits for banks as they can easily expand their activities to new states and hence increase the network of their clients and counterparts. Secondly, geographic restrictions had for a long time posed significant restrictions on banking activities nationwide, imposing tax burdens on interstate transactions among regional banks and considerably reducing profitability and cost-effectiveness of transactions. This resulted in the formation of a large number of banks which activities were reduced to the state’s territory without future prospects for development. As the analysis of Hughes et al. shows, deregulatory policies and legislation act starting from the 1980s until now resulted in a sharp fall in banks’ operating costs and loan losses.
These benefits are mainly a result of successful federal and state policies. It is noteworthy that not only banks but borrowers were beneficiaries of deregulation of interstate banking as the cut of bank costs and increasing profitability led to lowering loan rates for banks’ clients. It was also caused by banks ability to occupy new niches on the financial market provided by new legislation.
Geographic diversification of activities created opportunities for generating a profit by utilizing more favourable credit conditions in other states. This benefit was not evident until banks were allowed to make the acquisition without creating Bank Holding Companies (BHC) but rather by cooperating with their counterparts directly. As a consequence, this allowed significantly lessen risks and provided benefits of risk hedging and using financial instruments such as derivatives at the national levels. In sum, it fostered new energies for the successful development of the American banking system and state banking systems in particular.
To sum as the current essay suggests, interstate banking processes were beneficial to the wide variety of stakeholders in the financial system, among which banks, citizens, states and the entire financial system. Hence, interstate banking practices proved to be effective.
References
Hughes, Joseph P., William Lang, Loretta J. Mester, and Choon-Geol Moon. “Efficient Banking under Interstate Branching.” Journal of Money, Credit & Banking 28.4 (1996): 1045-1076.