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Historic Bank Bill Headed for Passage

IF a Bostonian travels to Singapore, she can insert her bank card in an automated teller machine and get cash immediately. But should she drive an hour to Woonsocket just across the state border in Rhode Island and want to deposit some cash in her Boston bank account, she cannot. It would be illegal.

Congress may change that later this month. When legislators return from their Independence Day recess on July 11, a conference committee will consider historic legislation that would permit nationwide interstate banking. It would set aside the 1926 McFadden Act and the 1950s Douglas amendments that restricted bank-branching to one state.

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``It is going to be extremely healthy for the banking system,'' says Paul Nadler, a finance professor at Rutgers University's Graduate School of Management in Newark, N.J.

A few banks with branches already in more than one state were exempted from the McFadden Act. And, in the past decade or so, states have been changing their laws to allow acquisitions by out-of-state bank holding companies. By now, more than 35 states have ``national reciprocal'' laws allowing acquisitions by out-of-state banks if their banks can do the same in the other state.

Nonetheless, George Salem, a bank analyst with Prudential Securities in New York notes: ``Passage of the bill would be one of the most important pieces of legislation ever to affect banking - especially in a positive way. The bill is a major unshackling of industry restrictions.''

No other major industrial nation limits its banks to one state or region. As a result, most of these countries have far fewer commercial banks than the more than 12,000 in the United States.

If the bill is passed, it would stimulate further bank consolidation. Mr. Nadler holds that this would be good for the public, as it would make banking more efficient. ``It is not an anti-consumer bill,'' he says. If big banks fail to serve local communities properly, customers will seek out more helpful competitors, either banks or nonbanking financial institutions.

Between 1985 and 1990, some 1,000 banks failed in the US, a failure rate far higher than at any time since the Great Depression. Nadler says that 82 percent of the banks that went under in the 1980s were in four states: Illinois, Oklahoma, Louisiana, and Texas, each with strict branching laws. Banks in these states weren't able to diversify their assets broadly enough and failed when a local business firestorm struck - such as the drop in oil and real estate prices in Texas. Banks doing business in more than one state are likely to have greater diversity in their investments and, thus, be financially safer.

The interstate-banking bill, Mr. Salem notes in a banking-industry guide aimed at institutional investors, will supercede the existing state laws enacted on this issue on a ``patchquilt'' basis in the late 1980s and 1990s. It would allow full nationwide interstate bank and bank holding company acquisitions a year after passage. Eighteen months to two years from enactment, multistate bank subsidiaries could be consolidated as one bank. This would save banks from the need to set up separate legal banking entities with independent boards of directors when they move into another state. In two to three years, interstate branch acquisitions would be legal. But establishing a new bank branch would remain under state jurisdiction.

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Both houses of Congress passed the bill by more than 90 percent. But some differences need to be ironed out in conference. The House and Senate bills differ on when its provisions go into effect. The Senate would require foreign banks to set up separately capitalized subsidiaries in the US before engaging in interstate branching so their cost structure is more similar to US-owned banks. Another Senate provision would make the federal five-year statute of limitation prevail over shorter state limits in prosecuting those who looted savings and loan associations.

A complication is that the bill is moving through conference in tandem with a Clinton administration bill on community-development banks, with provisions added on money-laundering, licensing of check-cashing stores, flood insurance reform, and so on. Conferees may engage in simultaneous bargaining on both bills. However, Salem and other observers expect passage this summer. ``Commercial banking is at a crossroads,'' he says.

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