The banking industry will continue to find good fortune on the regulatory front in 1997, but the victories will come far more slowly than last year.

That's the assessment of a range of industry officials, who say regulators will be spending much of the year refining the new powers they handed banks in 1996.

For example, experts say, the agencies will be guiding banks in the use of new securities and insurance powers, implementing the final stages of the community reinvestment and interstate banking rules, and modifying the merger application process.

Though regulators will be pushing into some new areas - most notably, banking in cyberspace - few observers are expecting another year of rapid- fire breakthroughs.

"It is going to be hard to top 1996," said Joe D. Belew, president of the Consumer Bankers Association. "That was a fantastic year. But 1997 will be a good year. The agencies appear to be ready to make some great strides."

"Nineteen ninety-six was a year when we poured a solid foundation," Comptroller of the Currency Eugene A. Ludwig said. "Nineteen ninety-seven is the year to build cautiously on that foundation."

The biggest developments should come from the Office of the Comptroller of the Currency, which is expected to use its new operating-subsidiary rule to let banks run some businesses directly.

Mr. Belew said he expects institutions to apply shortly to move their credit card and finance company operations from holding companies to banks.

"We'll see some less dramatic uses of the operating-subsidiary rule first," Mr. Belew said. "People want to see what they may use it for now that won't get them in a prolonged legal battle that will take them to the Supreme Court."

The more politically explosive applications, such as those to underwrite securities or insurance, won't come until late this year at the earliest, he said.

Insurance also will take center stage. Banks will take advantage of a decision by the comptroller, expressed in the so-called First Union letter, that bank representatives may meet with customers outside of small towns to sell insurance.

"A number of banks are well on the way to getting into the market," said Kathleen W. Collins, Washington counsel to the Financial Institutions Insurance Association. "There is a now a process they can use to apply for and get licensed to sell insurance."

More banking companies also are expected to enter the securities business this year, taking advantage of the Fed's decision in December to allow section 20 affiliates to earn up to 25% of their revenue underwriting commercial securities.

"The regional banks, which before could not find it profitable or efficient to engage in underwriting, now will start to offer underwriting services to their corporate and government clients," said Richard M. Whiting, general counsel to the Bankers Roundtable. "This is who the change benefits. Before the rule was skewed in favor of the large broker-dealers."

In June, meanwhile, full interstate branching will take effect, allowing a single national bank to run branches in more than one state. In response to the law, state regulators have been scrambling to adopt agreements giving a single agency control over an institution regardless of the number of states it enters.

"Interstate banking will be important for banks that operate on a centralized basis," Mr. Whiting said. "They will be able to combine what are now separate corporate entities into one. They will have more direct lines of reporting and greater efficiencies in their operations."

Not all the news is good. Kenneth Guenther, executive vice president of the Independent Bankers Association of America, said he expects examiners to grill bankers on loan quality.

"It will be a more difficult regulatory climate, because credit quality problems will begin to creep up," Mr. Guenther said. "It has been well- advertised in credit cards, but it is creeping up in other areas as well."

Mr. Ludwig said his agency hopes to detect credit quality problems early on, using its supervision-by-risk program to help examiners identify troubled institutions.

The OCC also will try to determine how it should regulate electronic money and smart cards. "We are positioning ourselves aggressively to be able to supervise this issue," he said.

The Federal Deposit Insurance Corp. is expected to overhaul its application process this spring, eliminating some filing requirements for well-managed banks. It also will propose new deposit insurance rules for some joint accounts.

The Fed will continue overhauling its securities rules in 1997, although the results will be much less dramatic than last year.

The Fed is expected to propose Wednesday a complete overhaul of the 20 firewalls that separate commercial and investment banking. The proposal would allow banks to extend some credit to section 20 units for the first time, and it would eliminate duplicative restrictions on underwriting activities.

Due out later in the first quarter are proposals revamping the rules for state member banks and for foreign banks. The Regulation H proposal would let state-chartered Fed member banks enjoy the same powers as state- chartered nonmember banks. A rule currently prevents member banks from engaging in activities not approved by the Fed, even if their state regulator has given permission. The changes to Regulation K would streamline the procedures foreign banks use to apply for new offices and branches.

The Fed also is expected to approve shortly proposed changes to Regulation Y that would shorten the approval time for many merger applications, expand data processing powers, and abolish tying restrictions on nonbank subsidiaries.

James D. McLaughlin, the director of agency affairs at the American Bankers Association, said bankers also will push the Fed to exempt sophisticated investors from some disclosure provisions in Truth-in-Lending and the Real Estate Settlement Procedures Act.

It also will ask the Fed to make all fair-lending self-tests confidential, so litigants could not subpoena them in a lending bias case, he said.

The industry also will be watching the revised Community Reinvestment Act rules, which take effect fully this year. In July regulators will begin judging big banks under the new lending, service, and investment tests. Also, in March big banks must disclose the location and extent of their small-business lending.

"This at least will show the banks that actually do small-business loans in low-income areas," said Matthew Less, executive director at of the Bronx-based Inner City Press/Community on the Move. "You will definitely get a sense of what a bank is doing."

Regulators also will look for new ways to get banking services to low- income consumers. This issue is a priority because Congress has required the Treasury Department to phase out by year's end the use of paper checks to pay welfare benefits.

"There has got to be a way to pay for carrying these people," Mr. Belew said. "We either need streamlined regulations or the Treasury Department is going to have to pay for the service."

Wednesday: A preview of the 1997 legislative agenda

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