Now that Congress has refused to provicde them with broader powers, bankers once again are pinning their hopes on state lawmakers.

With Capitol Hill likely to be mired in presidential politics next year, state legislatures are expected to become the battle-ground in the fight over new powers.

To be sure, any bank victories will fall far short of the kind of sweeping changes advocated this year by the Bush administration.

But financial institutions have traditionally found a sympathetic audience at the state level. And banks will be pressing hard for the authority to provide products and services that would help them compete better against securities companies, insurers, brokers, real estate firms, and mutual funds.

New York, Florida and Illinois, for instance, are expected to consider bills that would allow banks to sell insurance.

Some legislatures may jointly agree to allow interstate branching across two states.

Overhauls in the Works

And Florida, California, Montana, and Wyoming will likely overhaul their banking laws, possibly leading to wider powers.

"We are going to see a fair amount of experimentation," said James B. Watt, president and chief executive of the Conference of State Bank Supervisors. "Where the federal government has failed to act, the states won't.

In the past, states have proven to be adept at poking holes in federal banking legislation and serving as incubators for new products and ideas.

Homespun Innovation

For instance, a Massachusetts state-chartered savings bank invented the first interest-bearing checking account, called the NOW account, in the 1970s.

Also pioneered by state-chartered banks: credit cards, automated teller machines, home equity loans, and savings bank like insurance.

These changes have grown out of this country's unusual dualbanking system, which allows banks to be chartered either by states or by the federal government.

The system, which has left state-chartered banks with somewhat broader powers than national banks, has created a rivalry between state and federal officials over who should control the banking industry.

In fact, the banking bill passed by Congress last month - the Federal Deposit Insurance Corporation Improvement Act of 1991 - rolled back some of the authority of state banks. It gave the Federal Deposit Insurance Corp. wide-ranging authority to review all state bank powers that are not allowed to national banks.

The bill, for instance, generaly prohibits state banks and subsidiaries from underwriting insurance, unless the activity is permissible for national banks. That was a blow to some large New York banks that wanted to take advantage of a 1989 Delaware law allowing subsidiaries based in the state to underwrite insurance policies nationwide.

The bill, which is expected to be signed this week by President Bush, also prohibits state banks from making direct equity investments in real estate if such investments are not permissible for national banks.

Mr. Watt and banking attorneys are examining the bill to see if real estate investments can be maintained in a separately capitalized subsidiary.

'Net Loss' on Real Estate Front

The law will affect 20 states, including Arizona, California, Ohio, and Rhode Island, that permit their banks to make equity investments in real estate.

"It is a net loss for state banks," said James E. Gilleran, superintendent of California's State Banking Department.

Mr. Gilleran said banks in California have used their real estate investment powers conservatively. Only 70 banks of 270 state-charted institutions in California have the power, and they have invested about $500 million in real estate projects out of $108 billion in assets, he said.

Another provision of the new bill prohibits state banks, within a year of enactment, from engaging as principals in activities that are not permissible to national banks. Such activities would include real estate, insurance, and securities underwriting.

There are exceptions, however. A bank can engage in those activities if it is in compliance with capital standards or if the FDIC determines that the activity poses "no significant risk" to the fund.

Grounds for Argument

Mr. Watt said the provision is a "first swipe" at putting state banks on par with national banks, but still doesn't threate specific state bank activities.

"The standard is 'no significant risk to the fund'. I think there is room to get in there and argue," said Doyle C. Bartlett, vice president of legislative services with the state regulators' association.

"I think we have the same opportunity to innovate that we always had," said Margie H. Muller, Maryland's bank commissioner. "The FDIC has always been quite reasonable about these things."

But Rebecca Laird, a partner with Kirkpatrick & Lockhart in Washington, disagrees. She said the FDIC isn't likely to bend, especially when it considers real estate development authority.

Battle for S&Ls, Too

She said the 1989 thrift bailout legislation put similar curbs on state-chartered thrifts. A number of her clients, which were well capitalized, were denied permission by the FDIC to continue the real estate investments.

"It is an uphill battle to convince them that real estate development does not pose a risk to the insurance fund," she said. "The FDIC is not likely to be real flexible."

Karen Shaw, president of Institute for Strategy Development, said that despite the rollbacks, the bill leaves states with plenty of opportunities.

For one, it didn't place limits on state banks' ability to sell products for a fee, such as insurance and securities brokerage services.

"There is a major victory there in the sense of keeping what you got," she said.

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