Charlotte, the Queen of Southern Banking (1996)

In the early 1980s, the Texas banking industry seemed like a sure winner. The oil industry was booming. The state's population was growing rapidly as workers came in search of Sun-Belt prosperity. Major Texas-based manufacturing and retail enterprises burgeoned. Not surprisingly, some of the fastest- growing U.S. banks were located in bustling Houston and Dallas. But then the bottom fell out of gas prices--and the banking industry. By 1990, the state's largest banks no longer existed, resulting in billions of dollars in bad loans and leaving bank customers confused and angry. Suddenly, the dominant players in the state's banking industry were those that hailed from faraway places like North Carolina and Ohio. It was not pleasant to be a bank customer in Texas back then. If you were a depositor in a bank that collapsed, you may have gotten all or part of your money back from the FDIC--but you lost other things, such as convenience and a sense of security. If you owned a small business and badly needed a loan to expand, the picture looked even bleaker. Failing banks aren't likely to lend you money or cut you slack when you need it most. Other states have seen downturns in their dominant industries without suffering the double- whammy of bank failures. The difference is government regulation. Until recently, Texas imposed strict geographical and size restrictions on its banks. Statewide branching was prohibited. These regulatory barriers kept Texas banks tethered to particular cities or regions, protecting them from competition and giving them little incentive to embrace innovation and serve consumers better. Lacking the diversification necessary to weather the oil glut of the 1980s, the state's banks either went under, saw the value of their equity drop, or were bought by stronger banks from more competitive, less regulated markets. One such market was Charlotte, North Carolina, home to NationsBank and First Union, two of the nation's 10 largest banks. At first glance, the idea that Charlotte would be one of America's leading financial centers seems absurd. With one-fifth the population of Houston, Charlotte has no obvious advantages in commercial influence or financial acumen. Yet Charlotte has become the banking capital of the Southeast. And NationsBank has become the largest bank in Texas. A major reason for the ascension of North Carolina banks to the upper tier of the industry is, once again, regulation. The state has some of the least restrictive bank regulations in the country. The state legislature authorized statewide branching in 1814; at the beginning of this century, the state began to charter banks and allowed them to sell insurance and other financial services. In the following decades, banks in the largest cities established branches across the state and began selling such products as annuities, commercial insurance, and securities. By the 1980s, a bank customer in North Carolina enjoyed many benefits unavailable to his peers in Texas. He could transact business with the same bank virtually anywhere in the state, which accelerated routine tasks such as clearing checks, depositing funds, and seeking balance information. He could purchase more services at lower cost than in Texas, because statewide banks can spread fixed administrative expenses over more branches and customers and can hire more experienced bankers. He was much more likely to have access to national ATM networks and bank credit cards with low interest rates. Most importantly, he had security. With a diversified loan portfolio and depositor base, his bank was less dependent on the economic health of dominant local industries. The benefits of competition in banking have become increasingly clear. In 1960, the year that NCNB (NationsBank's predecessor) was created from the merger of two small banks, North Carolina was one of 16 states with statewide branching. Over the next 20 years, there were only 17 bank failures in those states, compared with 45 failures in the states that allowed limited regional branching and 66 failures in the states that prohibited branching altogether. …