In a move that could determine how new products are delivered, bankers are pressing the Federal Reserve Board to stop insisting the government subsidizes the industry.

The issue exploded at last week's Federal Advisory Council meeting when bankers confronted Fed Chairman Alan Greenspan and three governors with studies rebutting the notion that deposit insurance and access to the Fed's discount window are subsidies.

"The banking industry pays its own way to ride the train," said Charles T. Doyle, a member of the council and chairman and chief executive of Texas Independent Bancshares, Texas City. "There is no net subsidy from the federal government."

How banks deliver services such as securities and insurance underwriting will be affected by the outcome of this debate.

So far, the Fed is winning on Capitol Hill, where lawmakers are proposing to severely restrict bank operating subsidiaries.

For months the Fed has bashed the Office of the Comptroller of the Currency's plan to let national banks conduct new activities directly through their own rather than holding company subsidiaries. Asserting that deposit insurance gives banks a funding advantage over nonbank rivals, the Fed prefers these nontraditional activities be limited to separately capitalized subsidiaries of the parent company.

The OCC rejects the Fed's argument, saying banks are not subsidized by the government and ought to have the freedom to decide which corporate structure suits them best.

The question ultimately comes down to turf. The OCC regulates national banks and their subsidiaries, while the Fed has jurisdiction over holding companies and their subsidiaries.

Fed officials declined to comment, and the Oct. 31 advisory council meeting was closed to the public. But according to people present, Norwest Corp. chairman Richard M. Kovacevich led the charge, arguing that safety- net services are a commodity purchased by banks.

Mr. Kovacevich was unavailable to comment, a Norwest spokeswoman said. But sources said studies prepared by the Bankers Roundtable, the American Bankers Association, and the consulting firm Ely & Co. were debated at the meeting. All three studies rebutted the reality of a subsidy.

The ABA and Ely papers argued that the Fed is defining "subsidy" wrongly. The Fed says a subsidy exists when the private sector benefits more from a government service than it pays. But the ABA and Ely argued that a subsidy only exists when the government fails to recover the cost of providing a service to the private sector.

In an interview, ABA chief economist James H. Chessen likened the situation to an apparel maker selling a shirt. The company is not subsidizing every consumer who believes the shirt is worth more than its price, he said.

"That is not a subsidy," he said. "A subsidy would be if the maker of the shirt does not receive enough money to cover the costs of producing it."

Ely & Co. president Bert Ely said the banking industry is actually subsidizing the government. The insurance funds' reserves "are essentially a $36 billion noninterest loan to the federal government," he said. At market rates, that equates to a $2 billion-a-year industry subsidy to the federal government, he said.

The Bankers Roundtable paper tried to refute a Fed study on the subsidy issue that was distributed Oct. 3 to the 12-member council, which meets quarterly to discuss policy issues with senior Fed officials.

In the Fed paper, economists Myron L. Kwast and S. Wayne Passmore said deposit insurance gives banks an advantage over finance companies in attracting low-cost funds. The government has an obligation to prevent banks from using the subsidy to finance their entry into new businesses, such as securities or insurance underwriting, they wrote.

"Such powers should not be financed with expanded taxpayer subsidies," the Fed economists said.

But the Bankers Roundtable study countered that the industry would be gaining-not losing-market share if it were subsidized.

"The Federal Reserve staff paper betrays an underlying hostility not only toward the bank subsidiary concept but to financial modernization in general that is not justifiable," the study said.

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