By WILLIAM R. BRYAN
A professor of finance at the University of Illinois, Urbana, he was formerly an assistant to the director of the Office of Debt Analysis, U.S. Treasury, and a senior economist at the Federal Reserve Bank of St. Louis. Bryan serves as a consulting economist at the Federal Reserve Bank National Bank of Chicago.

To branch or not to branch, an issue that finds Illinois bankers divided

THE STATE legislature has again turned aside efforts to permit banks in Illinois to engage in multi-office banking. Thus, one more chapter in the "Branch Banking Controversy" has been written. But more will follow.

Illinois is one of two remaining "holdouts" in the movement toward multi-office banking. As of this writing, Illinois and Oklahoma are the only remaining "pure" unit-banking states. Sixteen states, mostly in the East, permit a limited form of branching—for example, within a county. Nineteen states, chiefly in the West, permit unlimited statewide branching. The remaining states retain the appearance of unit banking, but permit multi-bank holding companies (though some states have stopped the growth or formation of new holding companies).

In recent years, the branch banking issue has formed the basis for an open, but ambiguous, split in professional banking organizations in Illinois. There are too many exceptions to characterize the split as being between large banks and small banks—or between Chicago banks and downstate banks—or city banks and country banks. In any event, the two sides of the question are represented by the Illinois Bankers Association on the one hand, and the Association for Modern Banking in Illinois (AMBI), on the other. However, dual memberships in these professional organizations have muddied the precise alignment of the competing groups. The Illinois Bankers Association has been steadfast in its continued advocacy of unit banking and in its resistance to the further spread of branching and holding company banking. In contrast, AMBI has led the push toward a change in state laws that would enable Illinois banks to operate multiple offices.

The present situation in Illinois
A commercial bank cannot operate a branch in Illinois, though it may operate a "facility" located within 1,500 feet of its main office, The banking operations permitted at a facility are limited to routine transactions—such as cashing checks, making deposits, and making payments on installment loans. Thus, in no sense does a facility constitute a full-service bank. It usually takes the form of a drive-in window.

Over the years, a facsimile of multi-office banking has been created by the juxtaposition of "chain-banking" along with a strong correspondent banking system. The term "chain-banking" refers to a situation in which informal groups own or control more than one bank. Several years ago the Illinois Bankers Association Committee on Bank Structure reported that more than 400 banks in Illinois were part of such "chains." No doubt that number has grown considerably in the period since that study was completed.

The correspondent banking system consists of interlocking "pyramids" of banks throughout Illinois, the United States, and internationally. Banks are held together by informal networks of checking accounts—that is, banks holding deposits with other banks. Each correspondent network consists of a large group of small banks (at the base of the "pyramid") holding deposit accounts with increasingly larger banks in increasingly larger, or more important, money centers (toward the apex of the "pyramid"). Each major Chicago bank has its own network of correspondents. In turn, major Chicago banks maintain correspondent relationships with major New York banks and throughout the world. In some instances, large, "flagship" banks help finance bank acquisitions in return for favorable consideration in the highly competitive solicitation of correspondent accounts. Major correspondent banks may also make training facilities available to their client banks, and otherwise serve as a basis for central direction,

More recently, national banks have been told by the United States comptroller of the currency that they can open automatic "tellers" anywhere they wish within 50 miles of their home office. Even though this comptroller ruling remains subject to challenge in court, a number of large banks have begun installing equipment at such locations as supermarkets, railway terminals, airports, and shopping centers.

Bank competitors fare somewhat better in Illinois. Savings and loan associations, often referred to as "S and L's," provide banks with their strongest direct competition. S and L's are permitted by law to offer somewhat higher returns to the ordinary saver. They differ from banks in that they are not able to provide checking accounts to their customers. In addition, S and L's specialize in mortgage lending, home-improvement loans, and other housing-related credit. In contrast, banks engage in virtually every type of financial activity. Chartered by the federal government, these associations have been given the opportunity to branch and have done so with vigor. Currently Illinois does not permit branching by state-chartered associations.

364 / Illinois Issues / December 1975

Proponents of branch banking contend that it will increase efficiency. Foes argue that the 'personal touch' will be lost

Why multi-office banking?
There are a number of factors that over the years, have made banks wish to establish multiple offices. First, the emphasis on continual growth in per share earnings has created for banks, like other forms of business enterprise, a strong incentive for expansion. Private business firms can achieve substantial savings by expanding or merging, especially in the area of reduced managerial overhead. Also, it is sometimes the case that a "turnaround" situation can be identified. In such cases, better management may be achieved for the acquired firm; problems may be solved; and the firm may be converted into a profitable enterprise. The point is that profit opportunities are greater when tested managerial or technological techniques are introduced to acquired firms through expansion, rather than through devising new and better managerial and technological techniques for existing, well-run enterprises. Banks would like the same opportunity to expand and merge enjoyed by other commercial enterprises.

Tied to one central location, it is difficult, many bankers feel, to expand business and increase profits. The general growth and movement of population centers often takes place in areas well removed from the downtown locations of most established banks. As suburban belts have grown up around our cities, clusters of business enterprise—later the shopping centers—have been built to meet the needs of these new population areas. To a major extent, the businesses were offshoots of old firms located "downtown." It is only natural that central city banks would look longingly at these business opportunities.

A second aspect of population movement has been the actual decrease of numbers in central cities. Multi-office banking, branching in particular, is an inviting means of adjusting to these demographic changes. A multi-office facility can grow or be scaled back with the community, indeed, this is precisely what has happened in other states.

Aside from business growth associated with population movement, non-bank business enterprise has expanded by merger, acquisition, or has moved to take advantage of less costly physical accommodations. As a result, many Illinois firms have business operations that are spread over a substantial geographic area. Banks have looked with interest at business opportunities created by the growth of their own customers.

Finally, the problem of management succession is especially troublesome for banks. Banks, especially small ones, have had difficulty in tapping a continuing flow of managerial talent. Well- qualified prospects often prefer larger corporations. There they can enter management training programs and have the security of several potential career options within the same organization. Other forms of business enterprise have faced similar problems. But, unhampered by statutory prohibitions, other types of businesses have resolved these problems by merger and acquisition. In contrast, Illinois banks either have failed to resolve their management succession problem or have resorted to the chain banking vehicle.

The resistance Resistance to the further spread of multi-office banking stems chiefly, though certainly not exclusively, from small banks in rural areas. The most prominent arguments against branch and/or holding company banking revolve around issues relating to monopoly. Some fear that several gigantic Chicago banks would dominate the state. Others believe that large banks in important downstate cities would carve out "spheres of influence" in immediately surrounding areas. Small bankers see themselves as unable to survive the intense, but temporary, competitive drive of larger branch banking systems. Later, they argue, when the established positions of small banks have been undermined, the consuming public will feel the adverse effects of the newly imposed monopoly. Opposition to multi-office banking has also stressed the loss of "local touch" that would accompany the spread of branch banking and holding company banking. Instead of sitting across the desk from a local citizen whose interests are focused toward the growth of his own community, the borrower would deal with a stranger whose career interests are focused in the home office. As a consequence, local credit requirements would hold no priority over those in distant cities. Growth in rural areas could often take a back seat to economic interests in large urban areas.

While it is often argued that small, rural bankers are only trying to protect their own local monopolies by resisting multi-office banking, this charge isn't completely persuasive. It is worth pointing out that those same rural bankers have the most to gain from permitting themselves to be acquired—often at premium prices.

The public interest
It is difficult to make an unambiguous statement regarding the interest of the public in the outcome of the branch banking controversy. For one thing, there is not a strong consensus regarding the likely effects of branch banking on the future costs of banking services.

The relation between banking structure—including unit systems, branching systems, or systems consisting of holding companies—and bank performance has not yet been well established. Fragmentary evidence, however, suggests that a larger number of banking offices in an area tends to: lower the interest rates charged for loans; raise the interest payments on deposits; and lower service charges.

December1975 / Illinois Issues / 365

Branch Banking
(Continued from page 365)

Evidence also suggests that branch banks hold a higher portion of their assets in loans than do unit banks, and holding company banks hold a larger percentage of loans than those independently owned. Finally, there is no evidence that profits are greater among branch banks or holding company banks than among unit banks.

To repeat, however, the evidence regarding the effect of structure on performance is incomplete. Even though the findings have generally been statistically significant, the impact of structure is probably not very important compared with other forces—such as regulation, the general economy, management, etc.

The future
The branch banking controversy is not dead. Supporters of multi-office banking will continue to press for enabling legislation. Resistance will continue, Given the American propensity for compromise, it seems likely that, at some point, a way will be found to accommodate conflicting interests.

Even if the issue isn't resolved locally, it is plausible to believe that federal legislation will preempt the field. In 1970, President Nixon appointed the Commission on Financial Structure and Regulation, chaired by Reed 0. Hunt (former chairman of the Board of the Crown Zellerbach Corporation). Its report, typically referred to as the Hunt Commission Report, advocated statewide branching. The drift of other recent legislative proposals—from the Federal Reserve and others—has been toward fostering uniformity in the statutory and regulatory environment within which banks operate. Thus, it appears that, for better or worse, the die has been cast for multi-office banking throughout the United States.

366 / Illinois Issues / December 1975