Board of Banking Summary

Issue Area 1: The Board of Banking and Financial Institutions Operates Effectively but Has Failed to Implement the Statute Requiring Economic Analysis for Branch Banking Decisions.

This preliminary review of the Board of Banking and Financial Institutions concludes that the Board operates effectively overall. The Board is responsible for reviewing State bank applications that require the Board's approval to establish a new bank, establish a branch bank, merge with another bank, purchase the assets of another bank, or form a bank holding company. The Board must consider statutory criteria in making a decision of approval or disapproval of a bank application. In general, the criteria are designed to ensure that the business transaction is financially sound, the organizers of the transaction are responsible and experienced in banking, the transaction will promote public convenience and advantage, competition will not be lessened, and that local conditions will assure reasonable success for the proposed entity and existing banks in the community.

The results of the review show that bank applications are being reviewed by the Board in a timely manner, consistent with statutory time frames, and, for the most part, the analysis for each application is consistent with statutory criteria. However, one part of the analysis for branch bank applications is not being implemented by the Board's staff. The statute requires the Board to assess local conditions to determine if a proposed branch bank and the existing banks and branches will have a reasonable promise of success. The Board does not conduct this analysis. The legislative intent for assessing local conditions is to prevent excessive branching in local markets that cannot support additional branches, thus, causing financial difficulties for new entrants or existing institutions.

The Commissioner of Banking acknowledged that assessing local condition has not been done for branch bank applications and provided four reasons. One reason given is that there is a lack of data for branch banks to develop a credible criteria for "reasonable promise of success". Second, there is no evidence that the lack of assessing local economic conditions has led to financial difficulties for banks. Third, it would not be in the best interest of bank management if a healthy bank is denied expansion into a market because of other banks that are not as profitable. Finally, it would not be in the best interest of citizens to limit them to do business with possibly poorly managed banks.

The report concludes with the following recommendation:

Recommendation 1

The Board should fully implement the statute regarding branch banking or the Legislature should consider amending the statute.