REGIONAL RECIPROCAL INTERSTATE BANKING - THE SUPREME-COURT AND THE RESOLUTION OF UNCERTAINTY

In 1985, the Supreme Court affirmed the ability of the states to enter into regional reciprocal compacts in Northeast Bancorp, Inc., et al., v. Board of Governors of the Federal Reserve System. The current study tests the hypotheses that the Court's decision exerted a material influence on the wealth of shareholders in bank holding companies (BHCs) operating within regional banking compacts and that shareholder reactions were affected by the size of their BHC as a proxy for the likelihood that a BHC would be an acquiror vs. a target in the new legislative climate. The analysis uses a sample of 52 BHCs that were members of regional interstate banking compacts and a control sample of 107 BHCs based in states that had not passed such enabling legislation as of the event date. Both portfolios of BHCs exhibited a statistically significant average positive reaction to the Supreme Court decision. Further, there is evidence that the average BHC in each group reacted significantly differently to that event. The reactions of BHCs in regional compacts were associated negatively with their relative size within their respective regional compact but related positively to their absolute size. Interestingly, the reactions of BHCs in the control sample were also negatively associated with their relative size within their home office's state but also positively related to their absolute size. All in all, shareholders viewed the interstate banking opportunities brought by the Supreme Court decision to be consistent with their interests.