Riegle-Neal Act Enables Nationwide Bank Consolidation, Mortgage Market Transformation

President Clinton signs the Riegle-Neal Interstate Banking and Branching Efficiency Act, removing Depression-era restrictions that prevented banks from operating across state lines. The law enables massive consolidation in the banking industry, with the number of commercial banks declining from over 10,000 to fewer than 5,000 over the following two decades. This concentration fundamentally transforms mortgage lending and housing finance.

The legislation fulfills decades of banking industry lobbying to eliminate geographic restrictions. Large banks argue interstate banking will increase efficiency and competition, but the actual result is a wave of mergers that creates “too big to fail” institutions. Within four years, NationsBank acquires BankAmerica to create Bank of America; Chase acquires Chemical Bank; and Wells Fargo absorbs First Interstate. These megabanks dominate the mortgage market, originating loans that are immediately securitized and sold to investors rather than held in portfolio.

The consolidation has profound effects on housing and community lending. Research shows that merged banks reduce small business lending in acquired communities, particularly in low-income neighborhoods. The shift to securitization-based mortgage lending separates loan origination from long-term risk, creating incentives for volume over quality that will fuel the subprime crisis. Local banks that once knew borrowers and neighborhoods are replaced by automated underwriting systems optimized for securitization. When the housing bubble inflates, these “too big to fail” institutions will require massive taxpayer bailouts while suffering no consequences for their role in the crisis.