Last year's interstate branching law is bearing its first fruit. Three huge mergers have been announced in as many weeks, and almost everyone who pays attention to the industry believes the interstate law is at least partly responsible.

The banking concerns involved - including First Union Corp., PNC Corp., and First Chicago Corp. - are getting a jump on the interstate banking part of the law, which takes effect Sept. 1. After that date, banking companies will be free to buy banks in any state.

But the real payoff may come next year, when interstate organizations will be free to consolidate their holdings into a single branch network if they choose.

If the pleadings of interstate advocates such as NationsBank Corp. and BankAmerica Corp. can be believed, the branching part of the law will lead to cost savings in the range of tens of millions of dollars for large organizations.

That may be good for the banks involved. But the sheer magnitude of the deals being announced - and those that are sure to follow - is likely to focus attention on issues of size and concentration that big banks may find inconvenient to answer.

To be sure, the largest part of the financial services industry - bankers, regulators, analysts, and even many of the lawmakers who serve on relevant committees - will argue that the trend toward bigger institutions is overwhelmingly positive.

In this view, the nation is overbanked. Too many institutions are chasing the same loans, cutting prices too far to get good credits, and then latching on to marginal borrowers when all else fails.

Size also adds diversity to a business that has suffered greatly in the past from narrow deposit and loan bases. From the failure of Continental Illinois Bank to the collapse of the Texas and New England banking systems, geographic concentration has been the curse of the industry.

But size also carries its own set of traps. Americans have traditionally been mistrustful of banks, and the bigger the institution, the bigger the suspicions.

Rep. Bruce Vento, D-Minn., one of the principal authors of the interstate branching law, has already called for hearings on the new round of mergers to find out whether the deals follow the letter and spirit of the statute.

In particular, he is concerned about whether the concentration limits - a safeguard he wrote into the law - are being observed, and whether the new combinations will adversely affect local communities. Under the law, a single bank is not permitted to hold more than 30% of any one state's deposits or 10% of the national deposit base.

The concentration limits are probably not in danger of being breached. PNC, for example, will only have 8.9% of the New Jersey market after the merger and First Union will be at 13%.

But Rep. Vento makes a larger point, and this one could cause problems for larger banks down the road.

"We are seeing vertical integration on a large scale," he said in an interview this week. "Now, with Glass-Steagall repeal being proposed, we are going to see massive horizontal integration."

Rep. Vento no longer has the power of the majority party behind him, and it's easy to dismiss his concerns. But the Glass-Steagall bill is already in precarious condition, and if Democrats like Rep. Vento begin jumping ship, the bill could be in serious trouble.

The Independent Bankers Association of America had reluctantly gone along with Glass-Steagall repeal out of deference to the bill's sponsor, Rep. Jim Leach, R-Iowa. Now the trade group is reassessing its position, in large part because of the merger announcements of the last three weeks.

Regulators also have concerns. In particular, they are worried about whether bank management is up to the challenge of managing institutions of such imposing scale.

Those concerns are shared big-time on Capitol Hill. Right now, the economy is still growing and banks are enjoying record profits.

That won't last forever. And when the cycle turns and the inevitable problems begin coming to the surface, nobody in a position of power wants to discover that they helped create a new class of institutions that may be deemed too big to fail.

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