Angry about Iowa's cap on deposits, Norwest Corp. in 1993 threatened not to expand in the state, called its competitors there "scared," and quit the Iowa Bankers Association.

But after nearly three years, lawmakers have yet to even bring a bill to the floor of the Iowa Legislature that would raise the state's cap on deposit holdings above 10%.

Until the law is changed, Norwest, which holds $3.5 billion in Iowa deposits, or about 10% of the state's total, is prohibited from acquiring banks in the state.

Similarly, Boatmen's Bancshares is banned from acquiring in its home state of Missouri. It holds about 15% of the state's deposits, a full 2% above the state's limit. Banks in Missouri are allowed to exceed the cap by internal growth, but not by acquisition.

Like Norwest, Boatmen's has faced tenacious opposition from community banks in its effort to change Missouri's deposit cap law.

Twenty-one states have deposit caps that range from 10%, like Iowa's, to 40%, as in New Mexico, according to the Conference of State Bank Supervisors. However, states that never considered caps are doing so now as a result of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Community banks, frightened by the consolidation spurred by interstate banking, have pushed their lawmakers to take up the deposit cap issue.

The federal interstate banking law says states that don't already have caps should either set their own, use a cap of 30%, or give their banking superintendents the power to decide on a case-by-case basis.

States have the right to exceed the 30% cap if they don't have a cap of their own, or they can choose to set any cap they want, said Ellen Lamb, a spokeswoman for the Conference of State Bank Supervisors.

In some cases, caps aren't set in stone. Already, 12 states have given their banking commissioners power to waive them, Ms. Lamb said.

She describes the deposit caps as tools for states to control the growth of institutions as the industry consolidates.

"States can't prohibit interstate banking anymore," Ms. Lamb said. "But one of the few decisions left to the states is the question of deposit caps."

In the Midwest, where four states have the strictest caps in the country, the issue has been especially contentious as community bankers gang up to defeat big banks' efforts to raise the limits. Along with Iowa, states with the lowest caps are Oklahoma, 11%; Missouri, 13%; Nebraska, 14%; and Kansas, 15%.

"I think it's that grand old American tradition of being wary of institutions that get too big," said Ms. Lamb. "There has always been a real spirit ... to protect the community banking franchise. In the Midwest we've traditionally seen an unwillingness to let any institution get real big."

Peter Kravitz, legislative counsel for the Independent Bankers Association of America, underscored the point. "We're very concerned about consolidation in the industry," he said. "Those deposit caps are very important to maintain a competitive balance."

For their part, the Independent Bankers Association and the American Bankers Association have stayed out of the battles being waged within the states.

But big-bank executives balk at what they say is anticompetitive rhetoric from community bankers.

"The resistance is from bankers who are scared of the competition," said Richard Kovacevich, chief executive of $74 billion-asset Norwest.

Boatmen's officials, who have been trying to change Missouri's law for two years, argue they're being unfairly restricted from growing.

"There's no logic to the cap to start with," said Norman Tice, Boatmen's government relations liaison. "It's kind of like telling Anheuser-Busch they can only sell 20% of their beer in the state of Missouri."

Wichita, Kan.-based Fourth Financial Corp. persuaded state lawmakers twice to raise Kansas' deposit cap to its current 15%, but the bank is not certain it can talk them into raising the cap again.

What state deposit caps do, according to a University of Northern Iowa professor who studied them, is devalue the institutions. It keeps competitors out of the market and makes it generally less attractive - if not impossible - to buy into the state.

"There's a significant reduction in the selling price of banks in states that have deposit caps," said David Hakes, associate professor of economics. "What's unique is, the degree of (price) reduction is uniform regardless of the amount of the deposit cap."

Mr. Hakes said community banks are mistaken to fight a deposit cap, because it does not shelter them from takeover.

"They're under the confused perception that somehow it protects small bankers," Mr. Hakes said. "A cap does not reduce the number of mergers."

But for the Iowa Bankers Association, which has joined the Iowa Independent Bankers in opposing a raised cap, it makes sense to limit the number of banks in a small state like Iowa.

"We hope Norwest grows a lot in Iowa," said Sharon Presnall, a lobbyist for the Iowa Bankers Association. "We just don't want them to do it through acquisition."

The Iowa Legislature is expected to take up the deposit cap issue sometime after lawmakers reconvene in January. So far, Norwest's pleas to bankers and legislators have fallen on deaf ears.

Until now, Iowa's lawmakers have been more sympathetic to the state's small bankers.

"We've invested millions and millions of dollars in Iowa, and they say, 'We don't want you to grow anymore,'" said H. Lynn Horak, chairman of Norwest Bank Iowa.

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