REP. STEPHEN L. NEAL, a North Carolina Democrat who is chairman of the House Banking subcommittee on financial institutions, is one of Capitol Hill's most enthusiastic advocates of interstate branching.

So it came as no surprise to most observers that his first hearing on the subject featured three witnesses who also happen to favor branching.

Federal Reserve Governor John P. LaWare, Boston Fed President Richard Syron, and New York Assemblyman Herman Farrell all cheered the cause.

And for the community banks that think they would have trouble competing in a world in which giants like NationsBank are allowed to roam free, the three had a concise message: Stop worrying.

"When a new bank comes in, it often offers an opportunity and not a threat to the local banks," said Mr. LaWare. The local institution, he said, can compete on the basis of local ownership and superior understanding of local businesses.

The argument is a familiar one that was trotted out frequently during 1991, when the House last considered interstate branching. But it's unlikely to be any more persuasive among community banks this year than it was two years ago.

Kenneth Guenther, executive vice president of the Independent Bankers Association of America, said the big bank's argument is ludicrous.

"There is a shrinking market for core deposits," he said. "What interstate branching will do, by increasing the number of branches of large banks, is reallocate the market in favor of the big banks."

Mr. LaWare cited the case of New York, noting that a number of large New York City banks sought an upstate presence once they were allowed to branch statewide.

Little Gain Seen

"By the early 1980s, the acquired banks had gained on average less than one percentage point in market share, with the largest gain less than three percentage points," he said.

Today, he said, the city banks have either abandoned the upstate market or maintained small market shares.

In some cases, he said, community banks actually have gained market share once an out-of-state bank has moved into a market and tried to compete.

Mr. Guenther said that such cases are atypical and warned that interstate threatens local economies, as he said was the case with BankAmerica Corp.'s move into New Mexico.

"They only have three lending officers in the entire state," he said. "So, obviously, they are there after the deposit base."

Mr. Guenther said the New Mexico operation gets a free ride on the Community Reinvestment Act because its operations in that state are not evaluated separately from the San Francisco bank.

A BankAmerica spokeswoman said that officers in each of the bank's 39 New Mexico offices are permitted to make loans, and that the operation has its own CRA rating.

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