Proponents of a nationwide interstate banking and branching law believed that removing restrictions would strengthen the banking industry and benefit customers by (1) increasing competition and geographic diversification, (2) reducing the need for customers to maintain separate accounts in different states, and (3) offering a wider range of products and services that are generally associated with larger banking companies.Opponents feared such actions would lead to adverse effects such as excessively concentrating assets and deposits under large banks’ control, impairing smaller banks’ survival, and reducing small businesses’ access to credit. Smaller banks as a group were recapturing market share. This decline had more to do with Arizona’s “boom and bust” economy than with geographic deregulation, according to regulators and industry experts. In all three states, some markets lacked smaller banks. Senior officials from these banks viewed small businesses as belonging to a sector with opportunities for profit. Although the scoring system might protect the bank from defaults and increase the bank’s total amount of small business lending, it could result in the bank rejecting loan applications that could have been repaid by the would-be borrowers. New bank entry offset much, and in some years all, of the decline in the number of banks in the state. Nevertheless, by-products of in-state and interstate geographic deregulation, namely industry consolidation and standardized and centralized loan decisionmaking practices of large banks (which in Washington are interstate banks) led some small business experts, bankers, and government officials to have the following concerns:
Will small businesses become more dependent on large banks for credit as the industry continues to consolidate? These practices depersonalized the relationship between the loan applicant and the banker making the decision, thereby creating difficulty for certain businesses that did not meet the banks’ preestablished criteria. Branching is not permitted.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed three states' experiences with interstate banking deregulation.

What GAO Found

GAO found that: (1) geographic banking deregulation has not resulted in significant consolidation in the banking industry; (2) the banking industry in the three states reviewed is already highly concentrated; (3) the large banks' experiences with geographic deregulation have been mixed; (4) although smaller banks continue to play an important role and frequently are among the most profitable banks, some small banks' market share has declined; (5) although the standardization of loan criteria may restrict small businesses' access to credit, depersonalize the loan officer-borrower relationship, and make it difficult for loan officers to analyze relevant credit information, large banks believe that geographic deregulation has enabled them to become more efficient and serve more small businesses; (6) some banking industry officials attribute credit difficulties in the three states to the decline in the number of small banks and the increased emphasis on consumer lending; (7) although small banks do not have a large presence in some inner cities and rural markets, industry officials view these banks as strong providers of credit; and (8) antitrust enforcement of the banking industry is needed to better meet the needs of small businesses and ensure that any adverse impacts of consolidation on the small business sector is minimized.