Colorado's Version of Branch Banking
| Publication year | 1991 |
| Pages | 1611 |
| Citation | Vol. 20 No. 8 Pg. 1611 |
1991, August, Pg. 1611. Colorado's Version of Branch Banking
On May 31, 1991, branch banking was legalized in Colorado when Governor Romer signed House Bill ("H.B.") 1254. H.B. 1254 provides that branching can begin on a limited basis August 1,1991. Thus, Colorado is no longer the only state that totally prohibits branch banking, although for the immediate future it may be the state with the most restrictive branching laws.
Colorado's new branch banking law is best examined against a background of national factors, both historical and recent, and local Colorado concerns and developments. These are the forces that shaped H.B. 1254. Following a discussion of these forces is an overview of the bill, from its scope to its effect.
The U.S. banking system is a dual one, which, since the early 1900s, has been based on competitive equality. Dual banking refers to banks chartered and regulated under federal law ("national banks") and those chartered and regulated under state law ("state banks"). Competitive equality means that neither type of institution has a competitive advantage over the other. Historically, the U.S. financial industry has feared the concentration of banking power. The dual banking system based on competitive equality has been viewed as a means of preventing a few national banks from dominating the market, as they do in much of Europe.
Since the 1930s, the federal position on branching for commercial banks has been a hallmark of the U.S.'s dual banking system. This position is stated in the 1933 McFadden Act, which provides that national banks can open branches only if, and to the extent that, the law of the state where the bank is located permits state banks to branch.(fn1) The McFadden Act is important because it gives each state the sole authority to decide whether banks in its jurisdiction can have branches at all and, if so, how many, where and to what requirements they are subject. With its unit banking system, Colorado long has prohibited commercial banks from establishing branches except in limited situations.(fn2) To expand, Colorado bankers have had to purchase charters and capitalize each unit bank.
The federal government did not impose the same restrictions on savings and loan associations but, instead, decided early on to permit statewide branching for federally chartered savings and loan associations. To maintain federal and state competitive equality for this type of institution, Colorado and most other states followed federal policy. Consequently, both state and federally chartered savings and loan associations have enjoyed broad branching powers.(fn3) For many years, federal policy has controlled savings and loan branching, while state policy has controlled branching for commercial banks.
In the past, the fact that savings and loan associations had branching powers and banks did not (except where state law permitted) was not a significant issue, in part because the two types of institutions had such different powers and functions. Because of these differences, there did not seem to be a need to maintain competitive equality between commercial banks and savings and loan associations.
The situation regarding bank branching changed during the 1980s. First, there were developments within the banking industry that made centralization economically important. Computer technology advanced dramatically, leading to greater centralization. In addition, because lending became more complex and sophisticated, banks needed to develop specialized lending expertise. Commercial banks now need bankers who understand consumer loans, others who understand real estate loans and still others who specialize in commercial loans. This development encouraged cen-
tralization and branching because it is too expensive to have all the necessary expertise in every banking unit.
Second, the Garn-St. Germain Depository Institution Act of 1982 gave savings and loan associations expanded powers, making banks and savings and loan associations more competitive with each other.(fn4) Finally, the 1980s saw an unprecedented number of bank failures. Federal regulators attributed these failures, in part, to self-inflicted "wounds due to banking laws that restricted branching and competition." Thus, they began to argue for more federal control over branching for national banks.(fn5)
This was reflected in a Mississippi case, Department of Banking and Consumer Finance v. Clark(fn6) (commonly referred to as Deposit Guaranty, the name of the national bank that requested the Comptroller of the Currency to approve its branching application in spite of state law branching prohibitions). In Deposit Guaranty, the Comptroller sought a new interpretation of the McFadden Act, which would permit national banks to branch if any state-chartered financial institution in the banking business was permitted to branch under state law.(fn7)
In Mississippi, as in many other states (including Colorado), state commercial banks and state savings and loans have substantially the same powers and functions. The Comptroller argued that this means both types of institutions engage in the business of banking. Because Mississippi savings and loan associations have branching rights, the Comptroller argued that national banks in Mississippi should have the same rights. Under the Comptroller's...
To continue reading
Request your trial