Interstate Banking and Product-Line Freedom: Would Broader Powers Have Helped The Banks?

Abstract

The banking difficulties of the 1980s prompted Congress to enact the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Advocates of structural reform have criticized the FDICIA because it does not include broader interstate banking authority and product-line freedom. In this. Article, Mr. Litan predicts the effect the absence of such reforms can be expected to have on the U.S. banking industry. The predictions are derived from counter-factual exercises in which the author measures the impact the reforms would have had on the banking industry of the 1980s had the reforms been enacted. These exercises suggest that broader interstate powers would be more effective than expanded product-line authority at reducing bank failure, but they also indicate that neither reform would significantly reduce the number of bank failures during the next several years. Nevertheless, it appears that broader interstate authority, coupled with broader product-line freedom subject to suitable safeguards, would strengthen the industry overall by mitigating the risks associated with banking and lowering the prices of financial services. As a result, Mr. Litan concludes that structural reform of the banking system should remain on the congressional agenda.