States Can Protect Banks From Interstate Takeovers : Supreme Court Action Likely to Slow Mergers

WASHINGTON —  The Supreme Court, in a ruling that could sharply slow the pace of interstate banking mergers, said today that states may erect barriers to keep out-of-state firms from swallowing up local banks.

In an 8-0 ruling endorsing limits on bank takeovers by corporations outside a specified region, the court said it is a “historical fact that our country traditionally has favored widely dispersed control of banking.”

“While many other Western nations are dominated by a handful of centralized banks, we have some 15,000 commercial banks attached to a greater or lesser degree to the communities in which they are located,” Justice William H. Rehnquist wrote for the court.

The ruling came on a challenge to the regional banking zone that Connecticut and Massachusetts set up to prevent banks outside New England from merging with local banks.

‘Partition’ Argument Made

Several bank holding companies, including New York’s Citicorp, had tried to convince the high court that the practice would lead to the “partition of the country into regional banking confederations” through the establishment of regional compacts.

Justice Lewis F. Powell Jr., who was ill earlier this year and did not hear the arguments, did not participate in the ruling.

Jamie Katz, an assistant Massachusetts attorney general, said the immediate effect of the ruling will be to allow pending regional mergers, held up awaiting court action, to go through.

“Certainly the ruling will enable states to form regional pacts fairly quickly, so some pending bank mergers may be affected by new legislation,” he added.

Division Already Exists

As to bankers’ concerns about the “Balkanization” of the industry, Katz said such a division already exists among the 50 states and if it is a real worry, “it is an easy matter for Congress to take care of” with new legislation.

The banking question has become more crucial in recent months as many large banks, moving to establish themselves in distant states, have rushed to take advantage of a loophole in federal law that allows them to establish banking subsidiaries under certain restricted conditions.

At the same time, large banks claim that allowing state legislatures to erect barriers to more distant operations--typically conducted by the big money center banks--will lead to the cutting up of America into separate banking regions. This already has happened in the Southeast and in New England, where the challenge originated.

State Laws at Issue

At issue are state laws restricting control of banks. In 1982, Massachusetts passed a law allowing acquisition of that state’s banks by out-of-state holding companies only if they are located in other New England states--Connecticut, Maine, Rhode Island, Vermont or New Hampshire. Connecticut and Rhode Island passed similar laws.

Citicorp, Northeast Bancorp, a Connectictut bank holding company, and its subsidiary, Union Trust Co., claimed the laws were unfairly designed to freeze them out of the nearby New England banking business and interfered with interstate commerce.

When the Federal Reserve Board approved the merger of three sets of Massachusetts and Connecticut bank holding companies, the case went to court. A federal appeals court upheld the mergers, noting, “Congress can authorize states to enact statutes which may interfere with interstate commerce.”