Memories of unit banking

An article in today's Washington Post brought back some memories and raises important questions.

In 1974 I moved from North Carolina to Illinois and went to work for what was then the fourth largest bank in Chicago. Illinois was a unit banking state – banks were not allowed to have branches. After North Carolina, I found that environment rather weird. With the exception of the large downtown banks, customers were served by small independent banks that had only one physical location. (Even the large downtown banks had only one location, but it was designed to impress the customer.)

To be precise, in 1974 the unit-banking system was experiencing its first tiny cracks – banks could have exactly one additional location, and technically it was not a branch, but a facility. It was not a full-service location; you could not, for example, close your mortgage at a facility. There was a strict geographic limit to the distance between the main location and the facility. But it was the tiny beginning of the transition of Illinois from a unit-banking state to what was normal everywhere else in the US. (Except Texas. But that's a different story.)

Through the next decades, the banking system in Illinois changed dramatically.

In fits and starts, legislation was passed that allowed ever-increasing numbers of branches, then acquisition of small banks by larger ones, and finally expansion into the suburbs. The bank I had joined in 1974 became a holding company, expanded into several US states, then internationally. Today the international operations are an important component of the company. It's a completely different company than it was in 1974.

During the same period, all three of the banks that were larger were acquired by a banking behemoth. It started with Continental Bank going down in flames, then First National and Harris Bank were bought by out-of-town or international companies. That leaves Northern Trust as the only large financial institution in Chicago that's still independent.

Which finally brings us to the point of the Washington Post article mentioned above. The gist of the article is that one of the issues that caused our current financial meltdown was that the large companies are "too big to fail" so they were bailed out with our tax money. The consequence of that is that they're now bigger than ever and this it's even more likely that they will be bailed out if they do incredibly stupid things in the future.

When I look at the service offered to customers in 1974 in Illinois and compare it to the service offered to customers in 2009, I get a mixed picture. Bigger institutions can offer more and better service. But they really don't give a damn about their customers. There has to be a happy medium between tiny banks that don't have the resources to offer decent service and gigantic institutions that are "too big to fail" and thus feel free to take stupid risks. I don't know how to get there, but I wish someone could figure it out.