On July 21, 2008, New York State enacted a new law, P.L. 2008, ch. 316 (the “Interstate Amendment”), which will be of interest to banks wishing to branch into or out of the state of New York. The Interstate Amendment, which took effect immediately, permits de novo interstate branching into the state of New York by banks located outside the state.

What Does This Mean for Out-of-State Banks Looking to Enter New York and for New York Banks Looking to Enter Another State?

Under the previous law, out-of-state banks, including out-of-state national banks, could enter New York only by acquiring an existing New York bank or bank branch and only if the law of the state in which the out-of-state bank is chartered or (if it is a national bank) has its main office (the bank’s “Home State”) was “reciprocal,” meaning that it permitted New York banks to acquire banks or bank branches in the out-of-state bank’s Home State. As a result, New York banks were prevented from entering a state which required reciprocity without first acquiring a bank or a bank branch located in that state.

Under the Interstate Amendment, the only requirement for de novo entry into New York is home state reciprocity. Therefore, if an out-of-state bank now wishes to come into New York for the first time, it can do so by simply opening up a branch office in New York (after applying to, and obtaining the approval of, the Superintendent of Banking of New York), without having to acquire a New York bank or bank branch, so long as the law in the out-of-state bank’s Home State would permit a New York bank to branch de novo into that state.

Where Does This Put New York in Relation to its Neighboring States?

Among the relevant state interstate banking laws in force in the northeast region, only New Jersey’s does not now appear to be reciprocal with the New York law as amended by the Interstate Amendment. (Pennsylvania, Connecticut, Massachusetts, Vermont, New Hampshire, Rhode Island and Maine all appear to allow for reciprocal de novo interstate branching.) The New Jersey law, in fact, is similar to the prior law in New York. It requires an out-of-state bank’s initial entry into New Jersey to be by means of an interstate merger with or acquisition of a New Jersey bank or bank branch. The result is that, despite enactment of the Interstate Amendment by the State of New York, New York banks will still not be able to branch into New Jersey de novo and New Jersey banks will not be able to branch into New York de novo.

The Commissioner of the New Jersey Department of Banking and Insurance (“NJDOBI”) has indicated that one of the priorities of the NJDOBI will be to seek enactment of a law in New Jersey permitting de novo branching. Bills to accomplish this goal have already been introduced in both the New Jersey Senate and Assembly (S- 1903/A-2903), and the prospects for passage of such a law in the near future appear good.

What About the NY/NJ/PA Interstate Compact? 

The change in the New York interstate banking law effected by the enactment of the Interstate Amendment complements an interstate compact entered into this past April by the Superintendent of Banking of New York, the Secretary of Banking of Pennsylvania, and the NJDOBI Commissioner (the “Compact”). The intent of the Compact is to create, to the extent possible, a level regulatory playing field vis-à-vis national banks for statechartered banks operating across state lines within the states that are a party to the Compact. The Compact thus seeks to eliminate the competitive advantage from a regulatory standpoint that national banks with interstate branches currently enjoy over their state-chartered counterparts.

The Compact attempts to accomplish its goal by giving exclusive regulatory jurisdiction over an interstate statechartered bank’s branches to the banking regulator of the bank’s Home State. For example, a bank chartered in New York which has branches in New Jersey and Pennsylvania (which would be the bank’s “Host States”) would be supervised under the Compact exclusively by the Superintendent of Banking of New York. It would not be subject to examination and regulation by the Pennsylvania Department of Banking or the NJDOBI with respect to activities conducted at its Pennsylvania or New Jersey branches. In addition, such a bank would as a general rule be subject to New York law, rather than New Jersey or Pennsylvania law, even with respect to activities which it conducts at its New Jersey and Pennsylvania branches.

There is, however, an exception to this general rule as to which state’s law will apply to activities conducted at a Host State branch of an out-of-state state-chartered bank. If, despite the broad scope of federal preemption enjoyed by national banks, a branch in a Host State of an out-of-state national bank is subject to a particular Host State law, then a branch in that Host State of an out-of-state state-chartered bank would also be subject to that same Host State law.

How Do the Riegle-Neal Interstate Banking Rules Fit In?

New Jersey’s continuing de novo branching restrictions and New York’s former de novo branching restrictions have their origin in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (“Riegle-Neal”). Riegle-Neal gave states the opportunity to opt in or opt out of interstate bank branching and, if they elect to opt in, to put certain restrictions on de novo entry by an out-of-state bank. Riegle-Neal is also the source of the principle that a branch in a Host State of an out-of-state state-chartered bank is subject to Host State law only if and to the extent that a branch in the Host State of an out-of-state national bank is subject to Host State law.

What About Thrifts?

While the National Bank act as amended by Riegle-Neal requires national banks to comply with state law branching provisions, federally-chartered thrift institutions are permitted by the Home Owners Loan Act to branch outside their home office state irrespective of the branching laws of their home office state or the states where the branches will be located. State-chartered thrifts, on the other hand, continue to be subject to whatever interstate branching restrictions may exist in their Home States and in their potential Host States.

What Is the Collective Impact of the Interstate Amendment and the Compact?

Enactment of the Interstate Amendment by the State of New York and the signing of the Compact by the New York, New Jersey and Pennsylvania regulators should enhance the value of the state charter in those states, moving it one step closer to being on an equal competitive footing with the national bank charter as regards interstate activities. It will be interesting to see how New Jersey responds to this change in New York law, particularly as it isolates New Jersey as the only state among the three Compact states (and apparently within the entire northeast region) not to permit de novo interstate branching.