WASHINGTON - The Clinton administration formally endorsed interstate branching Monday and also indicated that it would support special treatment for small banks under the Community Reinvestment Act.

In his first major policy address on banking issues, Treasury Secretary Lloyd Bentsen stopped short of endorsing full branching, however.

"Our preference is to build upon what the marketplace has created rather than reinventing the banking business," he said. "The basic approach would be to let banking organizations convert existing multibank, multinetwork operations into a single bank, multibranch operation."

|Talking About Consolidation'

Under Secretary Frank Newman said afterward that the administration does not contemplate permitting banks to branch into states in which they do not already own banks.

"We are not talking about that," he said. "All we are talking about is consolidation."

Mr. Bentsen said in his speech that the administration will propose a streamlining of the bank regulatory structure. However, a new agency must "remain responsive to the electorate," he added, indicating that he wants any new regulator to be part of the Treasury Department.

"Banking policy is such a vital component of economic policy that those who direct the policy must be able to affect its implementation," he said.

Welcomed by Bank Groups

While Mr. Bentsen provided few details about the administration's approach to interstate, CRA, or regulatory consolidation, banking groups were generally pleased with the remarks.

"Overall, we have a very positive reaction," said Edward L. Yingling, chief lobbyist for the American Bankers Association. Mr. Yingling said he was particularly pleased that the treasury secretary said he wants to keep interstate branching from becoming entangled with insurance issues.

"Our position is, any bill that starts to move that has insurance restrictions in it, we will try to kill," he said.

Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, said: "The IBAA is very pleased that Secretary Bentsen clearly recognized that CRA has to be applied differently to small banks and big banks."

Break for Smaller Banks

The group has opposed interstate branching in the past. But special CRA treatment for small banks could prove to be a powerful lure to attract the organization's support on other issues.

Mr. Guenther did not comment on that possibility, but his criticism of the interstate proposal was more muted than his reaction to the Bush administration's effort to lift branching restrictions.

"While the secretary promotes interstate branch consolidation, he keeps open an important state's rights role," he said. "We will carefully review the Treasury's detailed proposal."

On Capitol Hill, one of the primary proponents of interstate branching said he welcomed Mr. Bentsen's comments, but wished the Treasury chief had gone further.

"It is encouraging," said Rep. Stephen L. Neal, D-N.C. "Interstate will save hundreds of millions of dollars, some say billions.

"But when we make the change, it seems to me that we ought to be fair to everybody," he added. "We should not just give the edge to those who are already there. I would take the small step to also permit de nova branching."

Congressional Hearing

Rep. Neal, chairman of the House Banking subcommittee on financial institutions, will hold a hearing on interstate branching today. Mr. Newman, the under secretary for domestic finance, will testify along with Comptroller of the Currency Eugune A. Ludwig.

Mr. Newman suggested in comments to reporters Monday that he will elaborate on the administration proposal today.

In his speech, before the Center for National Priorities, Mr. Bentsen also urged quick action on funding for failed savings and loans and on the administration's proposed community development lending bill. Both pieces of legislation appear to have stalled.

He also endorsed the Fair Trade in Financial Service which gives the Treasury Department authority to deny applications from financial institutions whose home countries do not place U.S. financial companies on the same footing as their own.

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