Try not passing by a bank during your daily routine tomorrow. Chances are you’d have to drastically change your plans. We have more banks here, 650, than any other state in the country. Georgia is a distant second with about half as many as Illinois. But, as we learned this week, we also have more failed banks than anywhere else in the country. Why are there so many banks here?
Legislation.
Illinois was one of the last states to allow branch banking. And for many decades Illinois was one of the most restrictive branch banking states in the U.S. These restrictions existed to limit banks’ size and prevent them from exerting too much political or economic influence. No branch banking meant smaller banks were popping up all over the place.
After a few revisions to the law, the state finally allowed unrestricted interstate branching in 1993. “For the first time Illinois banks were allowed to branch freely within the state,” according a May 2007 Chicago Fed letter.
“Illinois is one of the states that was a unit banking state,” said Ed Paules, 64, of Greer, S.C., who works for the FDIC and lived in Wheaton, Ill. from 1989-1997. “That is, banks were not allowed to have branches.”
“While I think this is now no longer true, the results of the past suggest there are more smaller banks and fewer larger banks,” said Paules. Paules has four decades of experience as a banking executive and corporate treasury officer and is also a certified financial risk manager.
Paules is right. Restrictive branch banking provided a safe environment for smaller banks in Illinois. According to the Chicago Fed letter, as of June 2006, Illinois had 650 banks (0.54 banks per 10,000 residents) and other states had on average 145 banks (0.43 banks per 10,000 residents). And even though there are fewer banks nationwide today, Illinois still has more small banks than other state on average, according to the Fed letter.
And the boom in the number of banking offices can be attributed to small Illinois banks and large out-of-state banks competing for market share, according to the letter. In 2006, Illinois had 3.39 banking offices per 10,000 residents compared to the national average of 3.21 per 10,000 residents, the Fed letter says.
But Paules thinks the title of most failed banks might not belong to Illinois for very long.
“If you check the statistics, I suspect Georgia, Florida, Arizona and California will surpass Illinois in the number of failed banks,” he said.
So, no, you’re not going crazy. There are a ton of banks here. Now if all of them could work on not charging ATM fees, then we’d be getting somewhere.
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John Kristoff
Hailing from the great state of Minnesota (though people have told him he doesn’t have one of those Fargo-esque accents), John came to Chicago for college. He's studying in DePaul University's M.A. in Journalism program. He loves simplicity, "Curb Your Enthusiasm" and a great story.
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