The Push for Interstate Banking : Finance: Lower costs and diversified loan risks would result, bankers say. Others fear a loss of local service.

Relaxing the last remaining barriers to interstate banking, as the Bush Administration proposed Tuesday, is moving quickly to the top of the banking industry’s wish list of changes, although consumer groups and small banks remain wary of broad reforms.

Other proposed rule changes--such as granting banks full securities powers or allowing industrial and service companies to buy banks--have attracted more attention. But the final relaxing of barriers that now make interstate banking cumbersome and costly would have a quick payoff. Banks would save billions of dollars in overhead costs. They also could spread their loan risks across wider geographic areas.

“Geographic diversity is more important to us than expanding powers beyond those we have,” said Frank L. Gentry, senior vice president and corporate strategist for Charlotte, N.C.-based NCNB Corp., one of the nation’s top regional banks.

The proposal to bring down the final interstate barriers is part of the Treasury Department’s broad plan designed to better protect taxpayers from problems in the deposit insurance system and bolster the sagging banking industry.

It would allow in three years “interstate branching,” or the power to open branches in any state, and would also allow institutions that operate banks in several states to turn those operations into mere branch operations. Bank parent companies now must set up separate banks, boards of directors and other operations, and are prohibited from entering some states.

It would especially benefit increasingly powerful “super-regional” institutions, saving them billions of dollars by better integrating their separate banks. Treasury Secretary Nicholas F. Brady estimated that banks could save between $5 billion and $10 billion in the first five years--a healthy shot in the arm for the industry.

But such reforms are opposed by consumer groups and small banks, who warn that allowing institutions to set up branches across state lines may result in credit drying up in local communities because loan decisions will be made from faraway offices.

“Interstate branching is about the nationalization of banks and making their ties to local communities much less clear than they are now,” said Allen Fishbein, general counsel with the Center for Community Change, a nonprofit group in Washington involved with banking issues.

Any reforms are far from certain, and there are early signs that the plan could face considerable opposition from members of Congress, some of whom are wary of reforms following the nation’s savings and loan fiasco.

But industry officials are betting that laws allowing interstate branching will be much more acceptable to Congress than other, more drastic proposals, such as allowing banks to invade Wall Street or allowing a General Motors or Exxon to buy a bank.

The inefficiencies of the current system are illustrated by First Interstate Bancorp in Los Angeles, which has the nation’s largest interstate banking network. It has 232 directors spread across 13 states, and another 16 directors for the parent company. In New Mexico alone, First Interstate has 33 directors because it must maintain a board for each of its four banks there.

Although some operations, such as auditing and data processing, can be combined for separate banks, bankers argue that it is much less efficient to operate banks independently. Fred J. Martin Jr., BankAmerica senior vice president and director of government relations, says the San Francisco-based institution believes that it can save at least $30 million a year if the new proposals are enacted.

The argument for doing away with all interstate banking barriers has taken on new strength with the failure of nine of the top 10 Texas banks in the 1980s, due largely to tumbling energy and real estate prices. Last month’s failure of Bank of New England, which had bet heavily on the New England real estate market, also is cited by interstate banking proponents.

P. Kenneth Ackbarali, vice president and senior economist with First Interstate, said the experience of Canadian banks in the 1980s shows why banks must spread risks geographically. While Texas banks were dragged down by tumbling energy prices, lenders in Canada’s Oil Patch survived because they operate throughout that country, he said.

Independent bankers and consumer groups, however, believe that the new rules would seriously erode the power of state authorities over banking. They say state officials have been more progressive than federal authorities in enacting bank-related consumer protections and requiring lenders to provide credit to low-income areas. Others wonder whether allowing banks to spread branches across state lines will result in poorer service.

HIGHLIGHTS OF THE BUSH BANKING REFORM PACKAGE Deposit Insurance: In two years, insurance coverage for an individual would be limited to $100,000 for savings and $100,000 for retirement accounts in each bank. In five years, coverage for individuals would be cut back to a total of $100,000 for savings and $100,000 for retirement in all accounts in all banks.

Expansion: In three years, all banks could move across state lines to establish branches.

New Powers: Bank holding companies could own banks, insurance and securities firms.

Commerce and Banking: Industrial companies, such as USX or Ford, would be permitted to own banks, but would have to keep them separate from commercial enterprises.

Regulators: Treasury would take over Comptroller of the Currency and Office of Thrift Supervision, regulating all national banks, thrifts and their holding companies. Federal Reserve Board would regulate state chartered banks and their holding companies.

BANKING REFORM

Consumer implications of proposed reforms are examined. D5