WASHINGTON - A key House Banking subcommittee has launched a drive to enact interstate branching legislation, hearing testimony Tuesday from three government officials friendly to the measure.

Federal Reserve Board Governor John P. LaWare told the financial institutions subcommittee that interstate branching would increase competition among financial services providers and bring stability to the banking system.

Richard Syron, president of the Federal Reserve Bank of Boston, said New England banks would have come through the 1980s in much better shape had they been able to diversify into other parts of the country.

And Assemblyman Herman D. Farrell, chairman of the New York State Assembly banking committee, said branching "enhances competition and benefits consumers."

Boost to Lending Seen

Mr. LaWare added that interstate powers would help wring excess capacity out of the banking system, while the entry of large banks into new markets might result in more lending.

"Large banks have higher loan-to-deposit ratios than small banks," he said. "This could imply that large banks entering new markets would make both more in-market loans and more out-of-market loans."

Opinions Differ on Prospects

Rep. Stephen L. Neal, D-N.C., the subcommittee chairman and a staunch advocate of interstate legislation, expressed optimism that a bill could clear Congress this year or next.

"Given a chance to stand on its own, this legislation would pass handily," said Rep. Neal. "There is no substantive opposition," just political opposition."

However, Stephen J. Verdier, a lobbyist for the Independent Bankers Association of America, said the idea is likely to run into the same roadblocks as in the past.

In 1991, the House approved an interstate amendment by a lopsided margin but voted against the overall legislation, which included limits on bank insurance powers. Most observers assume that the same insurance provisions would again be tacked onto an interstate bill.

Formidable Opposition

"Even if you could get the banking industry together, which is doubtful, the securities industry, the insurance industry, the consumer groups, and so forth would still be there," said James B. Watt, president of the Conference of State Bank Supervisors.

Rep. Neal, Mr. LaWare, and others argued that interstate banking is already a reality, with 49 states permitting some degree of entry by out-of-state banks. But branching advocates claim they are denied the efficiencies that would be gained if they could convert acquired banks into branches.

While the financial institutions subcommittee may be the friendliest forum for an interstate bill this year, even some of its members expressed doubts.

Effect on Capital Levels

Rep. Jim Leach, R-Iowa, argued that in the Midwest, interstate purchases have led to a reduction in capital levels at acquired banks. Although the levels remain above those mandated by the international Basel accords, Rep. Leach said those standards were "minimalist and weak."

"You have got to address this from the standpoint of safety and soundness and not just hide behind the Basel standard," he said.

Mr. LaWare told the Iowa lawmaker he would have the Fed's staff study that issue.

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