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The joy of interstate banking: II

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FRBSF WEEKLY LETTER July 26, 1985 The joy of Interstate Banking: II Last week's Letter provided an overview of the current dimensions and nature of interstate bank- ing, including legislation designed to facilitate its development at the regional level. As that Letter pointed out, interstate banking already exists in the form of nonbank organizations that provide banking services on a nationwide basis. Whether banks per se will be allowed to conduct business on a nationwide basis, however, depends on the resolution of several thorny and related policy issues. These include "nonbank banks," expan- sion of asset and liability powers for banks, deposit insurance reform, and regulatory restructuring. This Letter reviews these issues and developments that may variously act as catalysts or obstacles in influencing the pace of the move towards inter- state banking legislation on the national level. Views from Capitol Hill One of the issues that some members of Congress insist must be addressed in conjunction with any discussion of interstate banking is the nonbank bank movement. This movement presents a par- ticularly difficult policy problem because many nonbank banks are not owned by banking organi- zations and therefore run counter to the long held view that banking and commerce ought to be separate. Moreover, since nonbank banks do not offer both demand deposits and commercial loans, they are not banks in the technical sense and are able to skirt restrictions on interstate branching directed at banks. In response, legislation has been passed by the House Banking Committee (Chairman St Germain's HR 20, the "Financial Institutions Equ ity Act") or will be re-introduced in the Senate to plug the nonbank loophole by broadening the definition of a bank to include any institution insured by the FDIC. Completely pluggingthe nonbank bank loophole, however, may prove difficult. A number of large commercial banks already view nonbank banks as a means of extending their operations across state lines. A

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