Over the vehement objections of small banks, Colorado's governor has vetoed a bill that would have barred national banks from branching into or out of the state.

Gov. Roy Romer vetoed a plan for the state to "opt out" of the federal interstate branching law. Colorado's legislature last month became the first in the country to support opting out.

The governor's action could slow the momentum for other state's to reject the federal law. Opt-out proposals are pending in eight other central and western states.

In his veto, Gov. Romer cited arguments from large banks that such a bill would isolate Colorado and prevent it from becoming "a regional economic center for the western United States."

The veto set off a firestorm of criticism from the state's bank trade groups, with charges that the governor buckled under intense pressure from national interests. Both the Colorado Independent Bankers and the Colorado Bankers Association support opting out.

"The governor has chosen to represent out-of-state interests of that of his own communities and his own legislature," said James Thomas, head of the Colorado Independent Bankers Association, who had shepherded the opt- out bill through an overwhelmingly supportive legislature.

"My membership is absolutely astounded that a sitting governor would so treat the citizens of this state," Mr. Thomas added. "The more vocal ones are irate, the rest are simply thunderstruck."

He threatened to challenge the veto. The group could seek either a legislative override or a statewide referendum.

The Riegle-Neal Interstate Banking and Branching Act, signed by President Clinton last year, specifically allows states to reject the law's provisions. A state legislature must pass a bill, like Colorado's, prohibiting national banks from branching into or out of the state.

Opponents of interstate branching have been concentrating resources on Colorado and a group of neighboring states, expecting their first victory in the Rocky Mountain state.

"We regret the governor's action very much," said Kenneth Guenther, executive vice president of the Independent Bankers Association of America, which has provided state banking groups hundreds of thousands of dollars to push for opting out. "He's taken the side of powerful outside interests over overwhelming popular will."

In the last two weeks, both national and local proponents of interstate branching lobbied the governor heavily.

"We pulled it out of the jaws of defeat," said one big-bank lobbyist. "This was about the issues, and we knew that if we were able to present the issues in rational format before the governor, we would win."

Norwest Corp., Key Banking Corp., First Interstate Corp., First Bank Systems Inc., and Banc One Corp. all have invested heavily in Colorado in recent years. Together they hold a 68% market share in the state. All of the state's major banks are now owned by out-of-state holding companies.

"We are very pleased that the governor chose to veto this bill in the face of fierce political opposition," said Roy Whitehead, president of First Interstate Bank of Denver. "This is a victory for the banking industry and for consumers and businesses in the state of Colorado."

"It was a difficult political decision for the governor," said Edmund Keane, an executive vice president at Key Corp. who is spearheading the creation of a regional headquarters for Key in Denver.

Mr. Keane said if Romer had signed the bill, Key would have located the headquarters in another state. "We appreciate his willingness to listen to both sides."

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