The Barnett Banks Inc. insurance case before the Supreme Court and the expected legal challenge to the Federal Reserve Board's approval of the Chemical-Chase merger share more than most bankers realize.

How so? After all, one case deals with the authority of states to ban banks from insurance sales, while the other challenges a banking agency's decision that a merger meets the convenience and needs of the community.

The answer is centered on the deference that federal courts must give banking regulators.

The Barnett case, in which the justices heard oral arguments yesterday, questioned whether lower court judges erred when they overruled the Office of the Comptroller of the Currency's interpretation of the National Bank Act. The Comptroller's office has concluded that national banks can offer insurance in towns with fewer than 5,000 residents, even if state law prohibits such sales.

The expected challenge to the Fed's action on the Chemical-Chase deal - as well an existing suit over the Fed's prior approval of an earlier Chase acquisition - poses a similar question. The community groups want the courts to overturn the Fed's interpretation of the Bank Merger Act and the Community Reinvestment Act.

The banks have a strong shot at winning both disputes. The Supreme Court rarely second-guesses an agency's interpretation of the law.

The justices' January 1995 decision in the Valic case demonstrates this point. The Supreme Court ruled that judges had to give great deference to the interpretation of the Comptroller's office as to which nontraditional products are incidental to banking. The finding let stand the agency's decision that national banks can sell annuities.

Warren Traiger, a New York attorney, said the only time the courts challenge an agency's decision is when the agency misinterpreted the law.

Judges at the trial court and federal appeals court levels in the Barnett case relied on this misinterpretation-of-the-law loophole to overrule the Comptroller's office.

The decision to look beyond the agency's interpretation was easy for those judges because another federal law, the McCarran-Ferguson Act, appears to contradict the National Bank Act. This establishes a genuine conflict, and bankers were not surprised that a judge decided to make his own conclusion about which law reigned supreme.

The challenges to the Fed's approval of the Chase deals lack a similar conflict. The community groups can't point to another law the agency should have followed. Instead they must argue the Fed's decision was "arbitrary and capricious" - not based on the facts of the case.

"It would have to be very clear the Fed shouldn't have approved it but did anyhow," Mr. Traiger said. "It is a very high standard."

The Jan. 11 release of Chase's 1995 Community Reinvestment Act grade didn't help the community groups either. In that report, examiners from the Comptroller's office found that Chase did an outstanding job serving the banking needs of its community. This constitutes an improvement from the "satisfactory" grade it got in 1993.

Community groups had threatened to base their challenge on the Fed's refusal to wait for the Comptroller's exam. Mr. Traiger said the groups might have been able to interest a judge if the Comptroller office had given Chase a "needs to improve" or "substantial noncompliance" grade. The groups could have argued that this grade would show that the Fed had ignored Chase's real record.

But the "outstanding" rating kills that strategy, because it shows the Fed and the Comptroller's office reached similar conclusions.

The "outstanding" rating also damages the community groups' secret weapon. The groups had wanted to parade Chase's alleged shortcomings before the court, a move sure to garner publicity. The "outstanding" rating, however, gives the bank a powerful weapon for a public relations counterattack.

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