For Terry J. Jorde, North Dakota's requirement that no bank control more than a quarter of the state's deposits has ensured her $25 million-asset bank can compete against giants such as Norwest Corp. and U.S. Bancorp.

"Having a cap is important," said Ms. Jorde, president and CEO of CountryBank USA, Cando, N.D. "The larger the bank, the more it can afford to bleed until there is not any competition. There is only so long that a (small) bank can compete against a financial giant that can afford to bleed."

It is a feeling shared by many community bankers. "The caps are necessary to preserve and protect community banking," said Walter E. Daller Jr., chairman, president, and CEO of Harleysville (Pa.) National Bank and Trust Co.

Anti-big-bank views such as these help explain why deposit caps-which most economists and antitrust experts say do little to ensure competition- exist. Forty-eight states and the federal government limit the percent of deposits any single institution may hold.

The 1994 interstate branching law said no bank may control more than 30% of a state's deposits or more than 10% of the nation's deposits. The merged NationsBank Corp.-BankAmerica Corp., expected to hold 8.1% of the country's deposits, would be the first bank to confront the national cap.

Congress gave states the right to modify or eliminate the cap. Thirty- four states have left the cap at 30%; only Michigan and Utah have abolished deposit caps. Farm Belt states have the lowest caps, including Iowa at 10%, Oklahoma at 12.25%, Missouri at 13%, and Nebraska at 14%. New Mexico, at 40%, has the most liberal cap.

All the caps work by barring banks from making an acquisition if the deal would push the bank over either a state or the federal limit on deposits. Banks may grow above the cap by attracting new deposits.

"The reason we have caps is because people have a distrust of large banking institutions," said Gary Whalen, senior economic adviser at the Office of the Comptroller of the Currency.

There is no economic rationale for deposit caps, according to Federal Reserve Board Governor Roger W. Ferguson Jr. "Caps are a second line of defense that focuses more on perceptions of concentration of power as opposed to the science of economics," he said.

These experts argue that competition for banking services is inherently local, which means state or national deposit caps are irrelevant. That is why regulators, before approving bank mergers, look at the effect of the deal on local markets.

"They are good politics, but they are not necessarily good economics," said Stuart C. Stock, a partner in the Washington office of the Covington & Burling law firm who has represented many of the country's biggest banks, including NationsBank. "They may prohibit transactions that are good in terms of economics and not catch those that would hurt competition."

This has led some to conclude that the caps should be eliminated. "Antitrust laws alone are sufficient to handle these issues," said Richard M. Whiting, general counsel to the Bankers Roundtable, which represents the country's 125 biggest banks. "You don't need a one-size-fits-all approach."

Deposit caps may even hurt consumers, warned Steven C. Sunshine, the Justice Department's former top bank merger lawyer who is now a partner in the Washington office of the Shearman & Sterling law firm. "You prevent efficiencies and raise costs, which is the antithesis of what you want to achieve," he said.

States with low deposit caps have proportionately more banks than those with high limits or no caps, according to an analysis of Sheshunoff Information Services Inc. and Census Bureau data.

For instance, Iowa and North Dakota, which have low deposit caps, have one bank per 4,629 and 3,642 residents, respectively. By contrast, New Mexico, which has the highest cap, and Michigan, which has no cap, have one bank per 13,699 and 14,381 residents, respectively.

States with low caps also seem to have fewer banks with at least 5% of the state's deposits. For instance, both Iowa and North Dakota have only three banks with more than 5% of deposits, while Michigan has six banks and New Mexico four banks with more than 5% of state deposits.

But the caps enjoy broad political support. Lawmakers imposed the limits in the 1994 interstate banking bill to appease those who feared the creation of megabanks.

House Banking Committee Chairman Jim Leach said he would oppose any effort to either eliminate the caps or raise the national limit. Deposit caps produce "vibrancy at the local level" by ensuring that small banks are around to woo customers turned off by the big banks, he said.

"This republic was founded on a profound suspicion of too few people controlling too much of the financial wealth," explained Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.

"Political power follows economic power. If you allow a few financial magnates ... to control more than 10% of deposits, then you are giving them too much power."

Bill Kelly, vice president for government relations at Norwest Corp., which has run into deposit cap troubles in Iowa and other Farm Belt states, said these laws are outdated.

"They don't make sense anymore," he said. "The financial world has gone far beyond banking. It is not just deposit-taking institutions anymore. It is all the other people trying to get people to invest their assets.

"Deposit caps reduce consumer and customer opportunities to get the products and services they want."

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