Regulators Approve Interstate Bank Branches : Finance: A legal loophole allows regulators to give banks a head start on establishing branch networks in other states. Smaller banks are crying foul.

Clinton Administration regulators used a legal loophole Monday to permit a Pennsylvania bank to operate branches in two states, getting a jump on Congress before it considers interstate banking legislation this year.

The Treasury Department’s Office of the Comptroller of the Currency said it would allow First Fidelity Bank to have branch offices in both Pennsylvania and New Jersey.

The decision, by Comptroller Eugene A. Ludwig, was made under a legal provision that allows a bank to move its main office to another location within 30 miles.

The relocation of a main office from one state to another has previously been permitted, but according to the comptroller’s office, this is the first time the relocating bank is being permitted to keep branches in two states.

First Fidelity Bancorp., a holding company, currently owns separate banks, one headquartered in Newark, N.J., and the other in Philadelphia. It will move both headquarters to Salem, N.J., and combine the operations of the two banks.

Analysts expect Monday’s ruling to be just the first of many that will put increasing pressure on Congress to approve interstate banking legislation proposed in November by Treasury Secretary Lloyd Bentsen.

Nationsbank Corp., the country’s fifth-largest bank holding company, has a similar application pending to consolidate its Washington-area operations by moving its headquarters in the District of Columbia to Maryland.

Bank holding companies currently may operate across state lines only through separately chartered banks in each state, each with a separate corporate officers and boards of directors.

Analysts estimate that the industry could save as much as $10 billion a year by allowing the banks themselves, rather than just the holding companies, to have multistate branch networks.

“In an industry that’s over-regulated and required to over-report, it’s a good decision. It’s the right thing to do and it means improved profitability,” said analyst Anthony R. Davis of Dean Witter.

He praised Ludwig’s decision not to wait for Congress to adopt the proposed legislation, likening it to the Federal Reserve’s decisions that have allowed some banks to underwrite corporate stocks and bonds even though Congress has never repealed a Depression-era law barring banks from the securities industry.

“There’s a sense of paralysis in Congress . . . and the only progress the industry seems to make is on the administrative front,” Davis said.

But small, community-based banks are criticizing the move as an infringement on states’ rights.

“This underscores Eugene Ludwig’s intention to use the law to promote interstate banking and branching. It is the full exploitation of loopholes that . . . were never intended to be used in this fashion,” said Kenneth Guenther, executive vice president of the Independent Bankers Assn. of America.