The 170 banks operating 13,000 out-of-state branches are about to be required to lend at least half as much as their local competitors.

Though this was mandated by the 1994 Riegle-Neal interstate branching law, industry critics contended that Congress left federal regulators ill equipped to fairly assess compliance.

It took the agencies until the fall of 1997 to issue the rule requiring branches operated by out-of-state banks to lend at least 50% as much as local banks. Regulators took their first step toward implementing that rule last week by producing a state-by-state list of average loan-to-deposit ratios.

To pass the test, for example, an Idaho-based bank that operates a branch in Utah must lend out 48% of its Utah deposits to borrowers there, or half the 96% average of that state's local banks.

The test will be applied during routine compliance or Community Reinvestment Act examinations. The state-by-state loan-to-deposit ratios will be revised annually, using June 30 data.

"What they don't want is a bank from one state sucking deposits out of another state for the purpose of funding loans in their home state," said James A. McLaughlin, director of regulatory affairs at the American Bankers Association.

But pinning down a loan figure for out-of-state branches will be a key problem. Call reports-the only public accounting of banks' loans-do not itemize loans by geographic area. And Congress prohibited the agencies from imposing new data collection requirements on banks.

"The way Riegle-Neal was written, it didn't give us a lot of leeway," said Louise Kotoshirodo, a review examiner with the Federal Deposit Insurance Corp. "It was sort of hard to work with such specific parameters.

"We're not going to ask banks to do special reports," she said.

Some banks compile branch-by-branch lending data, but they are not required to hand it over to examiners. Even if a bank does share the information, there could be other problems.

Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America, said a large bank could rig its loan-to-deposit ratio by moving deposits from an out-of-state branch to its headquarters. "They can cook the numbers a bit," Ms. Thomas said.

The loan-to-deposit formula could also be biased against big banks, Mr. McLaughlin said, especially those that delegate mortgages or other business lines to a subsidiary based at their headquarters. Out-of-state branches of such banks may not get credit for local loans booked to their home office, he said.

If a bank lacks the necessary loan data, or if its loan-to-deposit ratio falls short, examiners are instructed to resort to a qualitative evaluation. Among the factors to be considered are the bank's CRA rating and its safety-and-soundness record.

The examiner will also weigh mitigating factors, such as the local demand for loans, the nature of the bank's loan portfolio, and whether the branches in question were acquired from an unhealthy bank.

Ms. Thomas was skeptical about the qualitative test. "If they (examiners) rely heavily on the CRA rating, they'll say, 'Oh, this bank is 'Satisfactory,' end of inquiry," she said. "Because of the constraints placed on the agencies, it's rendering the rule almost meaningless."

A bank that fails both tests may be subject to penalties. It could be prohibited from opening or acquiring new branches in the community, or could even be forced to close existing branches.

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