Lawmakers and industry officials urged Congress on Wednesday to make it easier for state-chartered banks to branch across state lines, insisting that the future of the dual banking system is at stake.

"Current law creates an artificial, unintended incentive to choose a national bank charter," New Jersey Deputy Banking Commissioner John Traier told the House Banking Committee's financial institutions subcommittee.

Mr. Traier, testifying for the Conference of State Bank Supervisors, argued state-chartered banks must be allowed to offer the same products in all their branches, regardless of where they are located.

The hearing came as the June 1 trigger date looms for final enactment the Riegle-Neal interstate branching law. That legislation, passed in 1994, allowed national banks to maintain their full powers when branching interstate, but left unclear who controls the activities of state banks when they cross state lines.

In a bid to clear up these questions, the financial institution subcommittee's chairwoman, Rep. Marge Roukema, R.-N.J., has introduced legislation that would exempt out-of-state branches from most of a state's banking laws.

Mr. Traier strongly endorsed the measure, but

some state legislators said the bill would usurp their authority. In joint written testimony to the subcommittee, Alabama state Rep. Al Knight and Colorado state Sen. Bill Schroeder said the legislation would strip states of the right to regulate banks within their borders.

Consumers of out-of-state banks should not be "forced to seek assistance from banking authorities in the next state or in a state across the country," they said.

But Mr. Traier argued that without a healthy dual banking system, state banks will cease to be a source of innovation and competition in the industry.

Without legislation, state-chartered banks will not branch across state lines, he said. For instance, if a home state allows banks to sell mutual funds from a subsidiary, institutions in that state would be reluctant to branch into states that limit mutual fund sales to holding company affiliates.

Rep. Roukema said Congress must give state banks an incentive to retain their charters.

"If we fail to enact this legislation, it would lead to a solely national bank system and erode the state bank system," she said.

John Bley, Washington director of financial institutions, said few states would see their banking laws trampled if the bill is passed. He noted that 35 states already have "parity" laws on the books to keep state bank powers equal with national banks.

Also speaking in favor of the bill was Anthony S. Abbate, chief executive officer of Interchange State Bank in Saddle Brook, N.J.

"Without a strong presence in interstate branching, the state banking system will decline," he said.

In addition to state legislators, consumer groups also opposed the bill. Michelle Meier, government affairs counsel for Consumers Union said the bill would hurt customers who are defrauded by banks.

"The consumers' own elected representatives would be powerless to correct these problems," she said.

The National Conference of State Legislatures has proposed two amendments that would let host states keep more power. First, out-of-state branches would be required to get approval from the host supervisor before conducting any activities not allowed to in-state banks.

Second, host-states would have the right to "opt-out" of the new law.

Rep. Bruce Vento, D-Minn., said the Banking Committee should work out a compromise between the state legislators and regulators.

"The impact of the legislation on consumers is unclear," he said. "Consumers could be hurt by weaker standards."

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