Issue: Branch Banking in Illinois
There was a period in Illinois history where banks could not freely establish branches at different locations, suppressing bank expansion and limiting consumers to only their local community bank to suffice financial needs.
Illinois’ Constitution in 1870 prohibited branch banking unless the General Assembly voted by a three-fifths margin to legalize it (Article 13, Section 8). This law remained in effect until regulations were loosened beginning in the late 1960s and it was not fully dissolved until 1993.
Prior to 1993, Illinois operated on a “unit” banking structure, where banks only had one location and headquarters. The mid-1960s saw more states revising their banking laws as the middle class expanded along with more methods of transportation and communication.
The General Assembly took its first step at loosening branch banking regulations in 1967 by allowing a bank to set up a drive-through office as long as it was within 1,500 feet of its headquarters.
This was the norm until the city of Chicago tried to loosen its own banking regulations when the City Council passed the Chicago Financial Services Ordinance in 1976. The General Assembly followed suite that same year by passing a law that allowed banks to set up a full second office as long as it was within 3,500 yards of its headquarters (Public Act 79-1388).
Chicago’s ordinance allowed State and federally chartered banks to perform and offer some banking functions away from their headquarters, such as allowing ATM machines. The Commissioner of Banks and Trust Companies for the State of Illinois, Richard Lignoul, sued the city – arguing that the ordinance violated Illinois’ Constitution (People ex rel. Lignoul v. City of Chicago). The Illinois Supreme Court ruled that the city of Chicago’s ordinance was unconstitutional.
Bank deregulation in Illinois nonetheless continued to expand throughout the 1980s. By 1985, Illinois allowed banks to set up as many as five facilities as long as they were within 500 yards of their headquarters. Additionally, the state allowed banks to set up facilities in other counties as long as it was within 10 miles of their headquarters.
In 1990, the General Assembly again expanded branch banking by allowing up to ten branches in the county where the bank was headquartered and up to five in other counties as long as its within ten miles of headquarters. Illinois ended all branch limitations with the passage of Public Act 88-4 in 1993. Banks could now establish branches anywhere in the state without regulation.
Bank expansion, however, was still limited in some capacities due to federal regulations. Prior to 1994, banks could not freely establish branches in other states if they had rules and regulations that impeded expansion. That changed when Congress passed the The Riegle–Neal Interstate Banking and Branching Efficiency Act (IBBEA) in 1994, which removed any state restrictions and fostered interstate banking.
The reforms have caused a dramatic increase in the number of branches banks have established throughout the state. According to a 2007 report by the Federal Reserve Bank in Chicago, there were 66% more bank branches in Illinois in 2006 than 1994. In comparison, branches grew only 23% nationwide.
While the economic impact of more branches is less clear, expansion of branches have nonetheless provided Illinoisans with more choice on banking options and have increased accessibility. Moreover, for some it may be hard to fathom it was only 27-years-ago that Illinois fully lifted such restrictions, considering the plethora of banking options we have today.