Next year could hold more than a Y2K-bug surprise for some banks that sell insurance -- the census could force them to move their insurance subsidiaries.

Nationally chartered banks may sell insurance if they base the agency in a place with 5,000 or fewer residents.

Though the "place of 5,000" rule has been around since 1916, when the National Bank Act was written, some states had passed laws to restrict sales of insurance by banks. The Supreme Court threw out those restrictions in March 1996 in the historic Barnett decision, ruling that states could not significantly interfere with a national bank's right to sell insurance from a location with a qualifying population count.

But states could move to prevent some banks' sales of insurance if the populations in their chosen location have ballooned beyond 5,000 residents when the next census is released. That is expected to happen by December 2000.

"It's a potential problem, although with the financial services modernization bill gaining some momentum in the last week it may be moot," said Kenneth Kehrer, a Princeton, N.J.-based consultant. Mr. Kehrer said he has been asked to look at the issue for several bank clients.

"It won't shut them down but it's one of these nuisance things that banks have to put up with," Mr. Kehrer said.

Until the census is released, it is unclear how many programs might be affected. But the threat is real, James T. McIntire, general counsel for the Association of Banks-in-Insurance, said at the organization's recent conference. Banks have to situate their agencies " in a place of 5,000 and in the next census if the place goes over 5,000 you'll have to relocate," Mr. McIntire said.

But banks don't necessarily have to restrict themselves to remote locations.

"The census publishes a list of designated places and you'd be surprised how many of those are located within metropolitan areas," Mr. McIntire said. For example, Mr. Kehrer recalled looking at a barren area between the San Francisco Airport and the main city, peppered with just a few office buildings. That's where Wells Fargo had its insurance headquarters. The new Wells Fargo, formed by the combination of Wells and Norwest Corp., could use Norwest's grandfathered insurance powers to exempt it from the "place of 5,000" concerns.

Mr. Kehrer said that in some regions of the country, however, finding small locations to replace one that has grown could be difficult. A few years ago there were just 14 places in New York State that qualified, he said. Banks using the loophole to offer insurance have encountered other problems as well. Phone and other services are often lacking in "place of 5,000" locations, Mr. Kehrer said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.