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US edges steadily toward new system of nationwide banking

Several months ago a Los Angeles-based maker of canning machinery needed financing for a sale in Mexico. In a few weeks it got the money -- but not from the Bank of America, the Wells Fargo bank, or some other California bank. It got $800,000 from the First National Bank of Boston, 3,000 miles away.

This is just a single example from one bank's files of a quiet trend toward limited nationwide banking. Such files are growing fatter as many banks spread across the country with a variety of banking offices. Some banking executives believe this trend will lead to complete nationwide banking, with some of the larger banks having full-service branches in every major city.

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Those who favor this movement say nationwide banking will lead to more competition, the availability of a wide variety of banking services in places that haven't had them before, and lower costs for the banks and customers.

Opponents worry that smaller, "community" banks will be squeezed out. Thousands of banks, some authorities say, could go out of business. Local investment decisions will be made in banking offices thousands of miles away.

Many bankers are concerned that without more liberal rules on interstate activities, they will lose increasing shares of profitable business -- consumer loans and savings deposits, for example -- to firms that are not even banks.

The Boston-Los Angeles-Mexico deal was carried out through the Boston bank's "Edge" office in Los Angeles. The office gets its name from the federal Edge Act, which permits US banks to set up branches outside their home states, as long as those branches are only used to finance the production of exports.

A modification of that law last year gave these offices much broader powers and the banks have reacted accordingly: They are quickly widening their network of Edge offices.

For instance, the nation's two largest banks -- Bank of America and Citibank -- will each have 11 Edge offices around the US within a year.

Other banks have established toll-free "800-numbers" in an attempt to keep customers that move out of state -- for instance, retire to Florida.

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"You have to believe in the emperor's clothes to say there isn't interstate banking," Citibank chairman Walter Wriston told a recent meeting of the American Bankers Association. Mr. Wriston was attempting to relieve people of the notion that, just because federal law prohibits banks to open full-service branches in different states, he and his colleagues weren't carrying on a nationwide business.

The banks are not just trying to increase their business with all this state-line crossing. They are responding to two growing developments of recent years: the increasing presence of foreign banks in the US, and the growing number of banking services being carried out by nonbank firms.

While American banks have to stay in their home states for retail purposes, foreign banks used to be able to open full-service branches in any city they chose, as long as state laws permit it. The foreign banks moved quickly to take advantage the number had more than tripled to about 200.

In 1978, the International Banking Act limited foreign bank full-service branches to one state, though "grandfathering in" to some extent the then-existing interstate banking activities of a number of foreign banks. US banks, in contrast, often face severe restrictions on their activities abroad.

During the same period, nonbanking institutions have been moving in on banks' territory. Money-market mutual funds are offering higher interest rates and taking mailed-in deposits from throughout the country. While the funds are subject to securities regulations, they are free of many of the more severe rules that govern banks.

While the big banks are positioning themselves to carry out an increasing number of activities across the country, many of the nation's smaller banks are scrambling for ways to defend themselves against the "outsiders."

"The community bank is not dead," says Dr. Charles Williams, professor at the Harvard Business School and a banking expert. "If local banking needs are not being met, smaller banks can come in and find ways to compete."

One such institution is the Mutual Bank for Savings in Newton, Mass. It has joined with five other savings banks in suburban Boston in an effort to share some costs, says bank president Keith Willoughby. The bank started by sharing marketing chores, jointly printing brochures, buying television time, and sharing some advertising. They have also hired an accounting and systems expert to evaluate the banks' operations and suggest improvements.

But the most important thing the banks share is a joint data center, which performs many common computer functions. Customer records, loan information, financial statements, and other tasks that require a computer can be handled in a common unit in such a way that, while costs are shared, only the bank that put the information into the computer can get it out.

While big banks and little banks find ways to deal with changing rules, Congress and the White House are considering whether to liberalize them further. Later this fall, says Orin S. Kramer, associate director of the White House policy staff, President Carter is expected to release a report ordered by Congress on interstate banking. This political hot potato was due some 13 months ago, but its release has been delayed until after the election.

That report, some banks analysts believe, will address two laws governing interstate banking: the McFadden Act of 1927 and its Douglas Amendment of 1956. McFadden prohibits branching across state lines, and the administration is expected to continue this policy, Mr. Kramer says.The Douglas Amendment prohibits a bank holding company from acquiring a bank in another state unless specifically authorized by the legislature of that state. The report is expected to recommend liberalizing the amendment to permit holding companies to acquire banks in adjoining states.

Modifying the Douglas Amendment, Harvard's Dr. Williams says, would be an answer to the problem of what to do when a bank has to sell out. This is what happened, he remembered, with the Marine Midland Bank in New York. "There were banks in Philadelphia that could have bought it, but the law wouldn't let them," he said. Instead, Marine Midland was purchased by the Hong-Kong and Shanghai Banking Company. "That shouldn't have happened," Dr. Williams commented. "We have to have a broader concept. The banking industry is not in trouble. But in turbulent times, we need new answers."

It will be up to Congress to rewrite the laws, a task that may be undertaken next year.

Under these laws it is possible for states to agree on reciprocal branching privileges for their banks.

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