Interstate Banking to Be Eased With Plan for Interstate Branching

LIKE many large banks, U.S. Bancorp does business in more than one state. But a complex web of federal and state rules means that the Portland, Ore., company must operate as a separate corporation in all five of the states it serves. Each corporate entity must have its own chief officers, board of directors, and regulatory audits.

Soon that may change, not only for this leading Northwest bank, but also for most of the industry.

After years of talk, momentum is gathering in Congress to allow banks to create branching systems across state lines. The move would not entirely do away with the dual system of state and federal regulations; states would be free to opt out of the system or set some of the rules for bank entry within the system.

The measure holds out the possibility of significant cost savings for banks and improved service to customers. Analysts say it will also accelerate a healthy trend of consolidation among the nation's 11,000 banks. The United States, long wary of concentrating financial powers in too few hands, is considered ``overbanked'' relative to other nations. By encouraging banks to expand across several regions (as few banks do today), big banks also could be protected from sharp regional downturns, such as the one that occurred in New England in 1989-90.

Few Banks have calculated the potential cost savings from interstate branching. NationsBank, based in North Carolina, projects its savings at $50 million a year, about 1 percent of noninterest expenses. Banks are already streamlining within the current system, trying to satisfy the letter of the law at minimum cost.

Even if Congress overturns the bar to branching, contained in the Depression-era McFadden Act, banks will still have to balance cost-cutting with a localized, ``close-to-the-customer'' approach, says Phyllis Campbell, president of U.S. Bank of Washington, a Seattle-based subsidiary of U.S. Bancorp.

The bill's ``bigger benefit, as I see it, is to the consumer,'' Ms. Campbell says. She gives the example of customers who live in Washington State and work in Portland. Currently, a deposit made in their hometown is available anywhere in Washington State the next day, ``but they drive across the river'' into Oregon and their credit is delayed because of current regulations.

``Corporate customers will also see a big difference,'' Ms. Campbell adds. A restaurant or hotel chain spanning several states may use U.S. Bank subsidiaries in each state, but in each one the customer now needs a separate account number; moving money among them can involve hassles and delays.

The Senate Banking Committee approved the interstate banking bill last week, and on March 9 the counterpart committee in the House of Representatives will consider a similar measure.

Banks would have to enter new states through acquiring an existing bank and then turning its units into branches. This is the cheapest way most banks expand anyway, says Larry Wall, an economist at the Federal Reserve Bank of Atlanta.

But if this provision fuels a bidding war for banks in highly prized regions, then it will represent an unfair ``transfer of wealth from depositors and borrowers to the owners of community banks,'' says Alan Hess, a University of Washington economist.

Several groups are hoping to influence the legislation:

* While happy with the ``opt-out'' provision on branching, the small banks that form the Independent Bankers Association of America say the same option should apply to another part of the bill: allowing banks to own subsidiaries in any state. At present, all states except Hawaii allow some form of interstate bank ownership. Most allow ownership by a holding company based anywhere in the US, while 14 states limit ownership to companies based in the region.

* The Conference of State Bank Supervisors says the Senate bill fails to treat nationally- and state-chartered banks equally. The state regulators also want to ensure that states have ample time to opt out, complaining about a de facto two-year limit.

* Consumer-interest groups hope to add provisions requiring banks to offer low-cost services for poor people and to cash government entitlement checks.