The national bank charter may be threatened by financial reform legislation, but in recent years it has been far more popular than the state alternative.

Assets held by national banks surged 45%, to $3.2 trillion, from 1994 through 1998. Over the same five years assets held by state banks grew 28%, to $2.2 trillion. What's more, more banks switched from state to national charters than the other way around.

A state charter was chosen by 70% of the 651 banks created between Jan. 1, 1994, and Dec. 31, 1998, but most that selected it were small banks.

Legislation approved by the Senate on May 6 would generally broaden bank powers by allowing banks to merge with securities and insurance firms. But it would also require national banks with more than $1 billion of assets to house new products and services in a holding company affiliate. Senators said it would be too risky to let these larger banks conduct new activities directly.

The restriction infuriates Treasury Department officials, particularly those at the Office of the Comptroller of the Currency, which is the national bank regulator.

"It discriminates against the national bank system," said Julie L. Williams, the comptroller's chief counsel. "It could certainly have an effect on the health and size of the national banking system."

Lawmakers in the House are at odds over the scope of new powers for direct bank subsidiaries. The Treasury backs a House Banking Committee compromise that would let banks underwrite securities and do merchant banking, but the House Commerce Committee's finance subcommittee last week approved an alternative reform bill that would bar subsidiaries from these activities.

Experts say the exceptional growth of national bank assets since 1994 was fueled by industry consolidation and interstate branching. Of the $1 trillion gain, nearly $700 billion came after the law permitting branching across state lines.

National banks operating in multiple states follow a uniform set of rules and are examined by a single agency.

"The national bank charter, for any bank with geographic aspirations, is the better platform," said Karen Shaw Petrou, president of ISD/Shaw Inc., a Washington-based consulting firm. "It's a single charter that works the same in any state you go into."

That may explain why, over the last five years, 179 state banks converted to national charters while 156 national banks switched to state charters. Those conversions include acquisitions of smaller banks, typically state-chartered, by bigger multistate banks, which typically have national charters. Fourteen of the 20 largest banks have national charters.

But Ms. Petrou and other observers credit state regulators for encouraging innovations and creating opportunities, such as interest- bearing NOW accounts and interstate branching. This is one of the arguments made in favor of a strong dual banking system, with federal and state chartering alternatives.

New York is currently trying to nudge Congress into repealing the Glass- Steagall Act. A bill in the state legislature would let insurance companies and securities firms merge with New York-chartered banks.

Three of the largest New York banks-Chase Manhattan Bank, Morgan Guaranty Trust Co., and Bankers Trust Co.-hold New York State charters.

"The attractiveness of regulation and the business environment in your state are essential components in what charter a bank may choose," said Elizabeth McCaul, New York's acting superintendent of banks.

Donald P. Mann, deputy commissioner of the Michigan Financial Institutions Bureau, said organizers of new banks with state charters find they have easier access to officials, lower regulatory costs, and greater freedom to explore new activities.

The pending financial reform bills have only heightened the competition among chartering authorities.

Federal Reserve Board Chairman Alan Greenspan has testified repeatedly this year that the national banking system is healthy and would not be threatened by the reform bill.

"In fact, the share of assets controlled by national banks is predominant and growing, in part the result of the enactment of interstate branching authorities," Mr. Greenspan told House Commerce's finance subcommittee April 28.

"National bank assets have increased in each of the last three years while state bank assets have declined over the past two years," he said.

If national banks could conduct most or all of their activities directly through operating subsidiaries, they could abandon their holding companies and escape Fed oversight.

"One of the Fed's concerns is that it's losing regulatory business," said consultant Bert Ely, president of Ely & Co., Alexandria, Va. "It is a real concern to the Fed, no question about it."

To appease the Fed, Congress may require banks with more than $10 billion of assets to continue using holding companies.

If Congress does limit national bank powers, the trend of asset growth and conversions could be reversed, said the OCC's Ms. Williams.

"The state bank charter could become more attractive," agreed James C. Sivon, a banking lawyer and secretary of the Support Group for Modern National Banking, which is devoted to protecting the national bank charter.

Texas Banking Commissioner Catherine A. Ghiglieri said tension between the state and national banking systems is positive. "I think the dual banking system promotes a healthy competition among the regulators."

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