Stung by a tough legislative defeat in Texas this summer, banking industry officials are working other angles to ease restrictions on insurance sales in the state.

Trade group officials are trying to persuade Texas Insurance Commissioner Jose Montemayor to use his regulatory authority to lift limits on banks. They are also lobbying at the federal level, pressing lawmakers to liberalize bank insurance powers through the broad financial reform legislation.

But state law handcuffs the insurance commissioner and financial reform talks could drag into next year or even stall, so banking representatives are preparing to sue Mr. Montemayor.

"We are looking at a lawsuit as one of our options," said Larry LaRocco, managing director of the ABA Insurance Association, "but it's not foremost in our minds."

Yet if Congress does not act by January and Texas regulators offer no relief, Mr. LaRocco said, the odds are high that the industry would file a lawsuit similar to the one it won this year in Ohio.

Bankers were close to a major victory this summer when Texas lawmakers approved a bill -- based on a compromise between banking and insurance trade groups -- that would have let state-chartered banks sell insurance through branches anywhere in the state.

But Texas Gov. George W. Bush vetoed the legislation in June because of an unrelated amendment that would have taken bail bondsmen off the hook for suspects who flee.

The banking industry is hesitant to wait on the Texas legislature, which is not scheduled to meet again until 2001.

John M. Heasley, executive vice president of the Texas Bankers Association, said that he and other officials plan to meet with Mr. Montemayor within the next two weeks. And Randall S. James, Texas' acting banking commissioner, also said he plans to meet with his fellow regulator soon.

An aide to Mr. Montemayor said that the insurance commissioner is willing to consider any proposals.

Last month Mr. Montemayor issued an interpretive letter that waives residency requirements for many out-of-state insurance agents, the most sought-after provision by Texas insurance agents in this year's failed legislation. And in 1996 Mr. Montemayor's predecessor loosened insurance licensure rules on banks that were enacted by state lawmakers the following year.

Most observers, however, said that a regulatory solution is a longshot, because a 1997 Texas law requires banks to do insurance business through offices in towns with fewer than 5,000 residents, among other legislative barriers.

"They don't see any wiggle room to do anything administrative," said Ernie Stromberger, executive director of the Independent Insurance Agents of Texas.

Catherine A. Ghiglieri, who resigned as Texas banking commissioner in June to become a consultant, said the insurance commissioner would have no leeway to get around the Texas town-of-5,000 rule.

If a lawsuit is filed, industry lawyers would rely on the landmark 1996 Supreme Court decision that states may not prohibit or significantly interfere with sales of insurance by national banks, said James T. McIntyre, a lawyer for the Association of Banks in Insurance.

Similar arguments were used to persuade a federal judge in June to let federal regulators pre-empt two Ohio laws that prohibited banks from selling title insurance and that required them to sell at least 50% of their insurance to noncustomers.

The town-of-5,000 rule in Texas could not be challenged because a similar restriction exists for national banks, he said, but the lawsuit would focus on other barriers such as the requirement that banks be incorporated in Texas and have brick-and-mortar operations there to sell insurance.

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