BANKS AND BANKING. The first institution designated a bank in Texas and authorized to conduct banking activity was the Banco Nacional de Texas,^qv established by decree of a Mexican governor of Texas, José F. Trespalacios,^qv in 1822, shortly after Mexico won its independence from Spain. Its primary function was to issue banknotes, but in 1823 the Mexican government repudiated the redemption of the notes in specie and ended its life. This institution has been referred to as the "first chartered bank west of the Mississippi." In 1835 the legislature of Coahuila and Texas^qv chartered the Banco de Commercia y Agricultura. This, the first commercial bank in Texas, provided a variety of banking services. The principals of the bank, which was based in Galveston, were merchants Samuel May Williams and Thomas F. McKinney.^qv This bank helped arrange loans for the Texas Revolution^qv and for funding the republic.

No banks were chartered in the Republic of Texas.^qv Several banking projects were authorized, but the promoters were unable to raise funds to begin operations. The Constitution of the Republic^qv contained no provisions for banks, but the Texas Congress apparently contemplated the establishment of a banking system. President Mirabeau B. Lamar,^qv in his message to Congress on December 31, 1838, urged the organization of a National Bank of Texas, but the proposal was not approved. Private firms carried on banking activities for both businessmen and for government. The most prominent was the mercantile firm of McKinney, Williams and Company,^qv based in Galveston, which issued paper money.

The state Constitution of 1845^qv prohibited the incorporation of banks and the private issuance of paper money. Merchants increasingly performed limited banking functions, as commission merchants, factors, insurance agents, and bankers. Financial agents flourished first in Galveston, but other agencies opened offices as agricultural development spread to the interior. In time, moneylenders could be found in most towns and many villages; in 1859 they numbered more than 3,000, with loans in excess of $3 million.

The Commerce and Agricultural Bank opened in 1847 in Galveston, and was the only chartered bank in Texas before the Civil War.^qv Both the republic and the state of Texas recognized its Mexican charter (1835), but the investors had difficulty raising the $100,000 in specie required to operate. The bank could establish branches, but a branch at Brownsville was the only one opened. The bank issued notes, underwritten by deposit currency, and engaged in various types of lending. It catered to customers in the mercantile business, but also provided exchange and other financial services to the public. After a decade of activity, an adverse state court decision prohibited the bank from issuing circulating notes, and it closed in 1859.

The constitutions of 1861 and 1866^qv prohibited state chartered banks. Under the Reconstruction^qv government the Constitution of 1869^qv omitted this feature, and during the next four years several state banks were established by special acts of the legislature. Ten additional banks were authorized under a general banking law in 1874. The Constitution of 1876^qv again prohibited state-chartered banks.

From 1865 to 1900, state banks, national banks, and private banks flourished in Texas. Private banks dominated the financial scene immediately after the war. They were built around cotton exporting and other trade and mercantile businesses, and were unregulated and unsupervised. Between 1869 and 1876, only a few state-chartered banks opened for business. The first nationally chartered bank was the First National Bank of Galveston, established on September 22, 1865. Partly because of the $50,000 capital requirement, only thirteen national banks were organized up to 1880. The number grew to 68 in 1885, 189 in 1890, and 440 in 1905.

Expanding agricultural, commercial, industrial, and mining activities produced a need for additional financial facilities. A movement for a state banking system began in the 1890s, supported by public officials, the private sector, and the Texas Bankers Association.^qv In 1904 the state constitution was amended to permit state banks, and under the leadership of Thomas B. Love,^qv the system was established in 1905. State banks numbered more than 300 by 1908 and two years later exceeded the number of national banks in the state.

National money and banking panics focused attention on the need for banking reform. The Panic of 1907 saw the establishment of the National Monetary Commission to address money ills. Laws guaranteeing deposits in state-chartered banks were enacted in Texas, Oklahoma, Kansas, Nebraska, Mississippi, South Dakota, North Dakota, and Washington. As many Texas banks restricted cash withdrawals during the panic, agitation grew for a system to protect depositors. In the fall of 1907 the Dallas Morning News^qv campaigned for a depositors' guaranty-fund law, and the state banking commissioner proposed a guaranty bill in his biennial report. Robert R. Williams and Thomas M. Campbell,^qqv both candidates for governor in 1908, endorsed the idea. When the legislature failed in 1909 to pass a guaranty act, Governor Campbell called a special session. William Jennings Bryan addressed the legislators, urging immediate passage of the bill; in a second special session, they voted approval.

The guaranty law took effect in January 1910 and empowered Texas state banks to secure deposits by a guaranty-fund system or by a bond security system. Most bankers chose the guaranty-fund option. By this arrangement banks contributed a percentage of their average daily deposits during the preceding year to the fund. If a bank failed, assessments could be levied on other guaranty banks up to 2 percent of their average daily deposits in any one year. Under the bond security system, banks had to furnish bond, policy of insurance, or other guaranty of indemnity equal to the capital stock of the bank. The amount of the bond could be increased as deposits rose above a specified ratio to capital.

The guaranty fund appeared successful. The number of state banks increased from 515 in 1910 to 1,035 in 1920, while the number of national banks remained at about 500. Paid-in capital of the state banks tripled, while total resources increased sixfold. Guaranty-fund receipts easily covered operating expenses. The depression of 1921 changed the situation. An epidemic of bank failures prompted heavy calls on the fund, and it became de facto insolvent by 1925. An amendment to the banking law in 1925 destroyed its effectiveness, and the guaranty-fund system was abolished two years later. By that time many state banks had become national banks to escape assessments under the fund system.

The Federal Reserve Bank of Dallas^qv was established in 1914 and soon began operating branches in El Paso, Houston, and San Antonio. All national banks were required to be, and the large state-chartered banks were encouraged to become, members of the Federal Reserve System and the Federal Deposit Insurance Corporation. State banks responded favorably to the new system. In 1933 Texas embarked on an alternative plan to insure state bank deposits, but it attracted only seventeen banks and was abolished in 1937.

The Texas banking scene preceding World War II^qv was turbulent. Downturns in the business cycle, chartering of too many banks, dishonest and incompetent bank managers, and an ill-conceived state deposit-insurance system all contributed to failures that prompted efforts to strengthen the supervisory and statutory frameworks of bank operation. More responsible bankers emerged to steer their institutions toward better service for business and the general public.

Texas banking operations expanded during the postwar years. Commercial banks, savings and loan institutions (more than 150 by the early 1950s), federal and state credit unions, investment banks that issued and distributed securities of local corporations, and brokerage houses connected with firms in New York and other financial centers all appeared. A variety of federal lending agencies emerged to fill in gaps and improve existing facilities, particularly those for agricultural credit. Lending policies and funding practices changed. As interest rates rose in the mid-1950s, there was an increased emphasis on consumer services. Credit cards came into vogue.

By the early 1970s, multibank holding-company systems had developed in Texas–particularly in metropolitan areas–encouraged by the state prohibition of branch banking. These "group banking systems," about a dozen of which were multibillion-dollar statewide entities, became the dominant organizational form. By the summer of 1985, some 130 such systems controlled almost half of the more than 1,800 separately incorporated banks and held nearly three-quarters of the bank deposits of the state. The remaining banks, principally independent banks, generally were located in the smaller cities and towns; about 500 became one-bank holding companies, mainly for federal income tax reasons. Beginning in the mid 1970s, the largest group banking organizations reduced the reliance of major Texas-based companies on out-of-state capital (especially money centers in New York and Chicago) for financing. In so doing, they facilitated capital formation and hastened economic growth in the state.

Innovations in the Texas banking industry followed. Included were electronic payment systems (such as the South Western Automated Clearing House in Dallas, which serves Texas and adjoining states), automated teller machine networks; and evolving point-of-sale funds transfer facilities in retail establishments. These technological advancements enhanced the integration of Texas industries with national commercial banking and financial services. Politically, and otherwise, the Texas Bankers Association and, to a lesser degree, the Independent Bankers Association of Texas, promoted these ties.

During the late 1980s the Texas banking industry experienced a traumatic downturn. This was caused by an overextension of bank credit and by loose lending to energy and energy-related industries and to the commercial real estate field. These lending policies, principally by major statewide multibank holding companies, coincided with declining world petroleum prices and rising speculation in commercial real estate. Excessive real estate lending caused more damage to the Texas banking system than did lending in the energy and energy-related areas. Commercial and industrial loans to oil and gas producers, unsecured by real estate, followed the pattern of oil-price changes. On the other hand, secured construction and land-development loans of sixty months or less to developers and oil and gas producers did not follow the changes in the real estate or oil-price sphere. Texas banks churned out loans through 1987, despite increasing rates of vacancy in offices and declining crude-oil prices. They soared substantially above the national average from 1978 to 1987. By the mid-1980s commercial real estate markets in the major metropolitan areas in Texas were overbuilt. As commercial real estate returns and values declined, banks were unable to shift financing from completed projects to long-term, nonbank financiers. Nonperforming assets increased from 1.75 percent in 1982 to 6.6 percent in 1987. The Texas banks that failed had a nonperforming-assets ratio of 10.4 percent. As a result the Texas commercial banking industry suffered net losses every quarter from 1986 to 1990.

Seven of the ten largest commercial banks in Texas failed between 1987 and 1990. Only Texas Commerce Bancshares and Allied Bancshares survived. They merged with major out-of-state banks and were recapitalized without governmental assistance. Seven other banks adjudged insolvent were absorbed by out-of-state interests and recapitalized with assistance from the FDIC. These included the First RepublicBank Corporation, the largest commercial banking institution in Texas, founded when RepublicBank Corporation merged with InterFirst Corporation, both in Dallas. First RepublicBank was absorbed by NCNB Texas National Bank with generous federal aid. It became the largest bank in the state, and a subsidiary of NCNB Corporation, headquartered in Charlotte, North Carolina.

Other failed institutions included MCorp, Texas American Bancshares, National Bancshares Corporation of Texas, BancTexas Group, and First City Bancorporation of Texas. The FDIC consolidated 20 MCorp banks into a branch banking system and sold them to Banc One Corporation of Columbus, Ohio. The institution is now Bank One, Texas (National Association), and second in size to NCNB Texas National Bank (renamed NationsBank of Texas, National Association, in January 1992). Texas American Bancshares (Fort Worth) became the Team Bank statewide branch system. In June 1990 the FDIC closed nine of the twelve subsidiary banks of National Bancshares Corporation of Texas and sold them to NCNB Texas National Bank as branches.

First City Bancorporation experienced financial problems by year-end 1986. In April 1988 the FDIC injected about $1 billion in "note capital" into the restructured bank holding company. This facilitated the raising of over $500 million of new equity by an investor group headed by A. Robert Abboud, who became board chairman and chief executive officer. The Abboud administration proved inefficient, and federal and state regulators closed First City and its twenty-bank system in October 1992.

Texas Commerce Bancshares was the first major statewide commercial bank in the late 1980s to seek acquisition by an out-of-state organization. Chief executive officer Ben F. Love earlier had pushed legislative changes in Texas to allow regional banks to operate across state boundaries within the Southwestern-Mountain State area. Because Love and his supporters thought the Texas economy could no longer be tied to the petroleum industry, they sought to remove state legal obstacles to external capital infusions.

Major Texas banks, with state banking-industry support, persuaded the governor to call the Texas legislature into special session in the summer of 1986. The legislature passed an interstate banking law and approved a public referendum in the November election to amend the state's constitution to permit limited branch banking. The interstate banking law took effect on January 1, 1987. Despite the depressed energy industry and collapsed commercial real estate markets in Texas, major out-of-state bank holding companies responded favorably. Texas Commerce Bancshares merged with Chemical New York Corporation (renamed Chemical Banking Corporation), and Allied Bancshares merged with First Interstate Bancorp, of Los Angeles. These combinations occurred before federal aid for distressed banks began. The first massive federal assistance bailed out the First RepublicBank Corporation in late July of 1988 and supported its merger with NCNB Corporation.

In sum, "statewide" banking giants in Texas tried to seek more efficient formats via branching systems authorized in late 1986; to secure intrastate mergers with holding company systems; and to attract external capital without losing control to outside interests.

The banking crisis in Texas in the 1980s was affected by problems in the savings and loan industry, which had grown rapidly and irresponsibly since the 1970s. Both industries suffered from inadequate federal regulation and supervision. Because of widespread fraud and incompetent management the S&L industry collapsed in Texas–and in the nation generally. Congress passed a law entitled the Financial Institutions Reform, Recovery and Enforcement Act of 1989, by which the government established the Resolution Trust Corporation to address S&L failures. Federal deregulation had played a crucial role in S&L operations in the early 1980s, particularly "thrift" institutions or savings associations. The Depository Institutions Deregulation and Monetary Control Act of 1980 was an effort to improve the efficiency of depository institutions by encouraging competition among institutions and pushing the phaseout of time-deposit interest-rate ceilings (completed in 1986). This legislation also increased the service powers of depository institutions, particularly thrift institutions, with relation to commercial banks. Further deregulation followed under the Garn-St. Germain Depository Institutions Act of 1982, which permitted thrifts to make nonresidential real estate loans up to 40 percent of their portfolio assets. Since S&Ls had been mostly residential mortgage lenders, they surprisingly expanded rapidly, substantially, and haphazardly into construction, real estate development, and other real estate lending–credit areas where commercial banks had been prominent since World War II. The thrifts mounted aggressive competition for deposits and exploited their new character and lending activities, thus prompting more competitive behavior within the commercial banking industry as well. The 1980 law produced a disincentive to fund management in federally insured depository institutions by increasing the insurance coverage in a single account from $40,000 to $100,000.

These statutory acts, plus other factors, caused a deterioration of bank-loan-portfolio quality, bank operating losses, and erosion of capital. These results occurred first in Texas and the Southwest, because the region entered a recession earlier than other parts of the nation. The 1980-82 deregulatory legislation occurred when the market environment was shifting from an inflationary to a disinflationary situation, a movement that most banks and financiers failed to perceive. Hence there was an overchartering of new banks in Texas during the first half of the 1980s, a development that compounded banking difficulties. Infrequent, lax, and limited governmental regulatory supervision hastened the excessive growth and unsound behavior in the banking world. Federal examination of bank supervision in Texas and the Southwest was limited. In fact, there were fewer examinations in the state than elsewhere in the nation. The federal lowering of S&L capital requirements in the early 1980s was indiscreet and poorly timed, and exacerbated other problems that brought down the S&L industry and magnified the collateral effects on commercial banking.

In the late 1980s federal bank authorities, spearheaded by the FDIC, made a strong effort to alter the control, management, and behavior of the major Texas banks. The economy began a slow, protracted recovery. Additional large banking consolidations and restructurings began. In late 1992 the Federal Reserve Board approved the merger of Team Bancshares into Banc One Corporation, the parent company of Bank One, Texas.

During the turbulent decade that began in the mid-1980s, the Texas commercial banking industry shrank significantly. The number of banks declined from 1,800 preponderantly small institutions at the end of 1985 to slightly over 1,100 still mainly small entities in 1992. There were approximately 470 failures, some of which led to mergers with sound banking firms. The decline also saw many conversions to branches. Fewer statewide organizations now existed. With the exception of Texas Commerce Banchares and First City-Texas, these organizations are large branch-banking networks owned by major out-of-state multibank holding-company organizations. In 1993 the approximately 2,500 commercial banking offices operating in Texas (1,100 banks plus more than 1,400 branch offices) varied in size, ownership, and control. As bank assets fell from $209 billion at the end of 1985 to around $170 billion at the end of 1991, Texas banks tightened their lending policies. Like their counterparts elsewhere in the nation, they began selling existing loans and other assets in secondary markets.

By the end of 1993 the Texas banking scene was definitely improving. Only ten banks failed during the year, the lowest since six failed in 1984. None of the state's sixty-three S&Ls failed–for the first year since 1985. Of the 433 state-chartered banks, fewer than 17 had problems. This was a far cry from the preceding decade, when more than 470 banks and 200 thrifts were closed in Texas.

BIBLIOGRAPHY: William Hubert Baughn, Changes in the Structure of Texas Commercial Banking, 1946-1956, Studies in Banking and Finance No. 2 (Austin: Bureau of Business Research, University of Texas, 1959). Avery Luvere Carlson, A Monetary and Banking History of Texas (Dallas: Texas Publication House, 1930). Lawrence L. Crum, Transition in the Texas Commercial Banking Industry, 1956-1965, Studies in Banking and Finance No. 9 (Bureau of Business Research, University of Texas at Austin, 1970). T. Harry Gatton, Texas Bankers Association: First Century, 1885-1985 (Austin: Texas Bankers Association Historical Committee, 1984). Joseph M. Grant and Lawrence L. Crum, Development of State Chartered Banking in Texas (Austin: University of Texas Press, 1978). Hobart Key, Jr., and Max S. Lale, Of Money...and Men (Marshall, Texas: Port Caddo Press, 1965).

Lawrence L. Crum