Interstate S&L; Branches Face Growing Opposition : Finance: Small bankers and state regulators lead fight against Bush Administration order that takes effect today. U.S. officials cite savings.

Small banks and state banking regulators are mounting a legal challenge to the Bush Administration’s decision to allow savings and loan institutions to branch from coast to coast.

The Office of Thrift Supervision’s regulation granting nationwide branching powers to healthy, federally chartered thrifts will take effect Sunday.

The move is vigorously opposed by community bankers and consumer activists, who charge that big banks and thrifts will suck money out of small towns and neighborhoods and be insensitive to local lending needs.

The Independent Bankers Assn. of America and the Conference of State Bank Supervisors will file a lawsuit seeking to block the order, Kenneth Guenther, IBAA executive vice president, said.

The two groups will outline their legal strategy at a news conference today.

State authorities and bankers argue that the federal government is overstepping its constitutional powers by allowing thrifts to branch within state territory.

But OTS Director Timothy Ryan defended the branching decision at House Banking Committee hearing Friday, saying it will make thrifts safer and more efficient.

Ryan argued that geographically diverse locations will make thrifts less vulnerable to downturns in the local economies and said consolidating back-office paperwork will achieve cost savings.

Nationwide branching powers for thrifts faced stiff criticism from Committee Chairman Henry Gonzalez (D-Tex.), who said it could expose thrifts to more of the risks that caused the multibillion-dollar S&L; disaster.

“I fear we are dilly-dallying again with a very dangerous situation, which overnight can become an uncontrollable crisis,” he said.

Under heavy lobbying from the Independent Bankers, the House soundly rejected in November proposals to allow financial institutions to branch nationwide--a ban that has been in place since 1927.

Many states already allow banks and thrifts from other jurisdictions to set up within their borders, but the laws require them to operate as separate companies in each state.

Companies with financial institutions in different states must operate each one with a separate board and provide separate capital for each.

Administration officials have argued that such restrictions are cumbersome and costly to an already troubled industry.

The Bush Administration plans to get around the restrictions by exploiting a 1978 law giving it the power to allow thrifts to operate across state lines without setting up separate subsidiaries in each state.

Rep. Bill Sarpalius (D-Tex.) has introduced a bill to rescind OTS authority to grant thrifts branching powers. But he said he has little hope for its passage.

Ryan said about 1,000 thrifts would be eligible for the branching powers. But none so far has applied to the OTS.