The imminent arrival of nationwide branch banking will unleash a host of competitive challenges for midwestern rural bankers, warned an official from the Federal Reserve Bank of St. Louis.

R. Alton Gilbert, vice president of the St. Louis Fed, based that prediction based on the observation that big banks have historically penetrated rural counties in states that have permitted statewide branching.

"With nationwide branch banking, the ability of rural community bankers to maintain their important role in the local economy may be vulnerable," said Mr. Gilbert in an interview Dec. 5 at the Kansas City Fed's Financing Rural America conference.

During his presentation for the nearly 100 industry officials and regulators attending the conference, Mr. Gilbert examined 1990 call report data from 21 states demonstrating how well the five largest banks in each had penetrated rural counties.

He cited the 1990 figures because some states subsequently modified their branching laws, creating some marketplace adjustments.

Examining data on 12 states that allowed statewide branching, he said big-bank behavior in those markets may foreshadow how the giant institutions act on a countrywide scale once interstate branching goes into effect next June.

The numbers showed that, unrestricted, the big banks will move into rural areas.

In pre-1990 California, a state with unrestricted branching, the five largest banks were present in 16 of 18 rural counties with 50,000 or fewer people and controlled 50% or more of deposits in those 16.

Similarly, in pre-1990 North Carolina, the five largest banks were present in 43 of 52 rural counties with 50,000 or fewer people, and controlled 50% of deposits in 35 markets.

There was less penetration of rural markets by the largest banks in three states that don't allow unrestricted branching but do allow multibank holding companies. For example, in Colorado the five largest banks were present in only 10 of 42 rural counties and controlled 50% of deposits in eight of them.

The big banks made fewer inroads into rural counties in six states that limit market share through deposit caps and other techniques.

"State restrictions on the share of state deposits controlled by each banking organization may limit" rural penetration by large banks, Mr. Gilbert said.

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