WASHINGTON -- The single most important banking reform Congress could enact is full-scale interstate banking, E. Gerald Corrigan said Tuesday.

Testifying before the House Banking Committee's financial institutions subcommittee, the former president of the Federal Reserve Bank of New York said: "If I were asked to pick the single thing that stands in my mind to produce the largest benefits at the least cost...interstate banking is what I would pick."

The cause of interstate banking also was bolstered by a state regulator, a customer, and a regional banker. This was the third in a series of hearings the subcommittee is holding on the topic.

Chance for Passage

Legislation to let banks branch across state lines has been introduced and defeated many times in recent years, but observers say the measure has a shot at passing this Congress. In part, that is because the Clinton administration is backing it.

The major problem of interstate banking is the Independent Bankers Association of America.

Subcommittee Chairman Stephen L. Neal, D-N.C., sought to counter the community bank's argument: that deposits would be siphoned from small communities to fund lending in big cities. depriving borrowers in small towns of credit.

Competition would keep that from happening, Mr. Corrigan said. People would not put their money in banks that invaded small towns, sucked up deposits, and only made loans back in the big city.

Mutual Fund Investments Cited

This "savings drain" is more likely to occur if interstate banking is not enacted, Mr. Corrigan said. Because their local banks can't compete people are using the telephone to invest their money in stock and bond funds, he said.

Retired from the New York Fed in August, Mr. Corrigan is now chairman of the Russian-American Enterprise Fund.

Sarah W. Hargrove, Pennyslvania secretary of banking, said lifting branching restrictions in her state has benefited banks of all sizes as well as their customers.

"We have not seen the wholesale gobbling up of small community banks by the large urban-based bank holding companies," she said. "Community banks remain healthy and vital components of our financial services industry."

Diversifying Assets

The banking system would be safer if banks were allowed to branch freely across state lines, Mr. Corrigan said.

"Excessive [lending] concentrations were at the heart of many, if not most, bank failures over the past decade," he said. With interstate branching, banks would be able to better diversify their assets, Mr. Corrigan explained.

With interstate powers, more money would be available for loans, he added. Banks would cut costs if they could consolidate individual operations in a number of states. Those savings could fuel more lending, he said.

Edward P. Junker 3d, vice chairman of PNC Bank Corp., agreed.

"Customer would receive greater credit availability," he said. PNC would save at least $30 million a year if it could consolidate all its banks under one charter, according to Mr. Junker.

"Those are dollars that otherwise would have been spent on unnecessary functions and duplicate operations," he said.

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