Q:

What is unit banking?

A:

Quick Answer

Unit banking refers to a banking system in which banks remain stand-alone organizations and are forbidden by law to open branch offices. Banking institutions tend to look toward branching out or merging with other banks to diversify risk, but many United States banks were unable to do so until the passage of deregulation legislation in the 1990s. Prior to that time, about one-third of the states had various forms of unit banking or branch office laws in effect.

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Full Answer

Before deregulation, many of the Midwest states, such as Illinois, Iowa, Kansas and Minnesota, maintained strict unit banking laws that limited a bank to a single office. The rationale behind many of these state laws has been attributed partly to a traditional distrust of large banks within regions of the U.S. that contain large communities of farmers.

The smaller, local bank was viewed as an institution that could be counted on to be more responsive and sensitive to the needs of local communities. However, stand-alone banks faced a disadvantage in their vulnerability to the ups and downs of their regional economies, and were unable to offset their losses by the profitability of branch offices in regions not affected by a localized downturn.

Critics of large, consolidated banking organizations claim that the diminishing number of small, localized banks will make it increasingly difficult for small businesses to acquire the funding they need. An additional criticism of large financial institutions is that they will grow and develop into corporations that are "too big to fail." The phase is a euphemism which reflects the significantly negative impact that the organization's failure would have on the greater economic system, and the need for a federally-funded rescue to prevent severe harm to the overall economy.

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