Iowa is reconsidering its deposit-concentration law, the nation's toughest.

The state General Assembly is expected early next year to propose changes to the cap, which since 1984 has barred a financial institution merger if the combined company would hold 10% or more of the state's total bank and thrift deposits.

Bankers from both large and small institutions want to see the law revamped, but for different reasons. Community bankers claim the 10% limit is not being enforced; large banks contend it is too strict.

Interest in the issue was renewed this fall after state regulators allowed Firstar Corp. of Cincinnati to buy Mercantile Bancorp. of St. Louis. The companies' combined Iowa deposits of $5.65 billion amounted to 13% of the state total, but they got around the cap by temporarily transferring more than $1 billion to out-of-state branches. Since then, Firstar has transferred the deposits back to Iowa.

Regulators allow Firstar to continue to operate because the law permits banks to grow past the 10% limit as long as they do so through internal expansion. The transfer of funds back into Iowa qualified as internal growth, even though Firstar would not have had the funds were it not for the Mercantile acquisition.

That was not the first time a big bank tested the limit.

Minneapolis-based Norwest Corp. moved some deposits out of state in 1992 when it acquired Davenport Bank and Trust. Norwest, which now has just more than 11% of Iowa deposits, is part of San Francisco-based Wells Fargo & Co.

"Deposit cap or no deposit cap, banks have been able to get mergers done," said John Sorensen, president of the Iowa Bankers Association. "The current law is unenforceable."

Because the cap has proved ineffective, Mr. Sorensen's group is suggesting a compromise: Raise the cap, but give regulators more power to enforce it.

The most popular proposal would require regulators to base deposit share on the average of four or six quarters before a merger.

This would discourage last-minute adjustments to obtain approval.

Community banker Barry Monaghan said he could accept such a compromise.

"It's not as important what the specific cap is, as long as it's enforceable," said Mr. Monaghan, executive vice president of $53.4 million-asset Guthrie County State Bank in Panora. "We need the legislature to put some teeth in it."

Ann Wagner-Hauser, president of Norwest Bank Iowa, said the state's banks must reach an agreement workable for both sides. "The worst thing we could do is create a law that we all have trouble with and have to go back to change in another year," she said.

Only four other states have caps below 20%. Iowa's, at 10%, is the lowest.

The 1994 federal interstate branching law set a 10% national deposit-concentration cap and said no bank may hold more than 30% of a state's deposits unless the state enacts legislation setting a different level. Some states, including Michigan and Utah, have decided to place no limits on deposit concentration.

Iowa's regulators support legislation that would prevent banks from maneuvering around the law's intent. However, they are not taking a position on whether the cap should be raised.

"The current language of the law makes the cap unenforceable," said Steve Moser, deputy superintendent of the Iowa Division of Banking. Using a rolling average of deposits over a number of quarters would be one way to "give the law more teeth," he said.

Neil Milner, president of the Conference of State Bank Supervisors and former head of the Iowa Bankers Association, said the state's legislature is likely to act if the industry gets behind the bill.

"If the industry can come to an agreement as to what they want, the legislature tends to be responsive," he said. "If there is division, it gets more difficult."

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