Interstate banking gets a big boost, but will it go beyond regional boundaries?

Interstate banking is suddenly looking a lot likelier a lot sooner. But the logos of New York or West Coast banking powerhouses -- Citibank, Chase Manhattan, Bank of America -- are not going to dominate the lives of Americans.

At least, not now.

In many areas of the United States, however, you'll be noticing more signs of banks from neighboring states. This is because regional interstate banking appears to be the chosen path, according to two recent court decisions.

Although both marketplace and banking forces will continue pushing for nationwide banking, for now Easterners will be seeing more branches of banks based in Boston; Hartford, Conn.; or New York -- besides their local banks. A Southerner might notice more branches from Atlanta; Orlando, Fla.; Richmond, Va. In the West, the logos of San Francisco, Los Angeles, and Seattle banks may predominate. In the middle of the country, however, where states appear to be holding to themselves, banking may look much the same as it is now.

Last week the Supreme Court upheld, 8 to 0, the constitutionality of regional banking compacts. The ruling was a blow to expansion-minded money-center banks. The court cited states' rights and the long national tradition of community control of banking.

The ruling came close on the heels of a May 21 finding by a three-judge panel of the US Court of Appeals in Atlanta that chartering so-called ``nonbank banks'' across state lines violated the intent of Congress. The ``nonbanks,'' also known as limited-service or consumer banks, had hitherto slipped through a loophole in federal bank law which defined commercial banks as institutions that accepted demand deposits and made commercial loans.

By shunning commercial loan making, the nonbank banks had avoided the restrictions otherwise visited upon bank holding companies, and these operations looked to be the shortcut the nation's money-center banks were going to use to find their way to Main Street.

The Atlanta ruling spawned headlines along the lines of ``Back to Square 1 on interstate banking.'' But the two decisions, seen together, ``are consistent,'' says James J. McDermott Jr., research director at Keefe, Bruyette & Woods in New York. ``Congress and the Federal Reserve have indicated a lack of enthusiasm for limited-service banks,'' he says, adding that only the comptroller of the currency has evinced any real enthusiasm for them. With 14,000 banks, 3,100 savings-and-loans, and 18,000 credit unions in the nation, Mr. McDermott asks, ``what do we need limited-service banks for?''

The two court decisions show ``that limited-service banks are not the way for geographic expansion, and that regional compacts are the way to go,'' McDermott adds. Sanctioning the status quo

There was another important development on the banking front last week: The House Banking Committee, by a 31-to-18 vote, approved a bill that recognizes the regional compacts but that would require states involved in these compacts to let in banks from throughout the nation after five years.

The five-year period would allow regional banks to get into shape to withstand eventual competition from money-center banks when nationwide interstate banking becomes a reality.

In a sense, this legislation would merely put the stamp of congressional approval on the status quo. It would also allow states to ``opt out'' of interstate banking. States that had not passed interstate banking laws or entered into any regional compacts would not be forced to let in Citicorp or any of its money-center brethren.

On the other hand, Lynn Fox, legislative aide to Rep. John Jr. LaFalce (D) of New York, who led the fight for the interstate bill in committee, says the legislation goes ``beyond the marketplace'' in three important ways:

It states that regional compacts are acceptable only as a transition to full interstate banking. ``The problem with regional compacts is not their existence but their existence indefinitely.''

The bill addresses the problem of ``undue concentration of resources,'' i.e., the antitrust question, by prohibiting any bank with more than 1 percent of the nation's deposits from buying a bank of more than $100 million in deposits, except to bail out a struggling bank.

The bill would require banks wanting to move across state lines to document how they plan to meet the needs of ``underserved communities'' and poor people in the new territory.

McDermott, however, warns against ``reading too much'' into the committee vote, and another congressional aide says, ``It's got a ways to go yet.''

Indeed, Sen. Jake Garn (R) of Utah, chairman of the Senate Banking Committee, said last week, ``I certainly see no need to have an interstate banking title in our bill at all,'' referring to separate Senate legislation on which hearings have been under way.

On the other hand, Treasury Secretary James A. Baker III endorsed the House bill, noting, ``The administration is not convinced that size is inherently bad or that current antitrust laws are inadequate to deal with concerns about undue concentration of resources.'' The regions get preference

Still, the two court rulings may have taken the wind out of the sails of national legislation.

In the Southeast, particularly, where a number of states have passed regional compacts, the Supreme Court decision has separated those bankers who have favored regionalism as the final destination from those who have seen them as a mere wayside stop.

The ``national trigger'' issue has been hugely controversial within the banking industry, and one congressional aide expresses surprise that the provision survived the committee vote. ``A couple of months ago, few were betting on a national trigger.''

Rep. Doug Barnard Jr. (D) of Georgia led a fight in the Banking Committee for a longer trigger period and was defeated. ``Five years from now the deals will be done -- the marketplace moves too rapidly,'' says Ms. Fox.

Fritz Elmendorf, a spokesman for the American Bankers Association, notes that ``before the Supreme Court ruling, most bankers had something they wanted'' legislatively. But the House bill, Mr. Elmendorf says, had ``something for everyone'' -- that is, endorsement of the regional compact, the five-year ``national trigger,'' the ``opt out'' provision for states that don't want to get involved, and the closing of the nonbank loophole. So ``there was a lot of forward momentum for all those reasons.''

Nevertheless, the two court decisions put the damper on this legislation.

Fox warns that regional ``oligopolies'' could develop if there is no national trigger. These, she says, could be more detrimental to the banking industry than the sort of freewheeling competition that would occur with full nationwide interstate banking.

Banking consultant David C. Cates, in New York, says the nation's banks don't have much to fear from Citicorp and other giants. ``They're kind of a paper tiger,'' he says, noting that they tend to be more highly leveraged than regional banks. Regionals acquired across state lines, meanwhile, tend to go for pretty steep prices, which means there is a dilutive effect on the purchasing bank's stock. Differing strategies

Not all the money-center banks, moreover, have the same acquisition strategy.

BankAmerica in San Francisco is streamlining its operations up and down the West Coast. ``We do not see the Supreme Court ruling having much effect on our plans. . . . We have not been an aggressive pusher of interstate banking,'' a spokesman says.

But in Los Angeles, J. J. Pinola, chief executive of First Interstate Bancorp, says that while the Supreme Court ruling ``did not come as a major surprise -- states' rights is one of those things like motherhood -- it was terribly disappointing.''

He is also unhappy with the House's interstate banking bill: First Interstate, which owns banks in 11 Western states -- an arrangement that predates the current law restricting cross-border bank ownership -- would be limited to acquiring only banks under $100 million in deposits. ``There aren't any that small.''

Consultant Cates concurs. ``I think it is a mistake to exclude New York banks, from a public-policy perspective.'' Not only are these banks ``a crucial national resource,'' but they need room to spread out. It would be good, Mr. Cates says, for them to ``acquire a core customer base. It would be good for their customers to have aggressive New York-style competition, and it would be good for shareholders to have the New York option.''