WASHINGTON -- A federal appeals court last Friday refused to reconsider a controversial ruling that threatens to curtail bank insurance powers.

The decision by the U.S. Court of Appeals for the District of Columbia improved the prospects for interstate branching legislation, which until now has lacked the support of a key bloc of lobbyists for smaller banks.

In view of the court decision, the small-bank interests will probably need legislation to continue to sell insurance. They may compromise on interstate branching to gain the insurance authority.

"This raises the stakes for all of us," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, indicating that the court decision could boost the prospects of branching provisions that his group has staunchly opposed.

Inadvertent Repeal in 1918

The appeals court action let stand a February ruling by a three-judge panel. The jurists found, 2 to 1, that in 1918 Congress had inadvertently repealed a law passed two years earlier that allowed national banks to sell insurance from towns with less than 5,000 people.

The losers in that case - the Office of the Comptroller of the Currency and U.S. Bancorp of Portland, Ore. - sought a review by all the judges on the District of Columbia circuit. By an 8-to-3 vote, the judges declined to reconsider, which came as a surprise to lawyers involved in the case.

"I thought the odds were in our favor that they would at least reconsider the thing," said Michael F. Crotty, deputy general counsel to the American Bankers Association.

The decision "just seemed to come out of the nether world," said Leonard Rubin of Bracewell & Patterson, who represented the independent bankers.

Ninety Days to Appeal

Either the Comptroller or U.S. Bancorp can appeal within 90 days to the Supreme Court.

David Roderer, a lawyer with Jones, Day, Reavis & Pogue, who spent 10 years at the Comptroller's office, was one of several observers who said it is unlikely that the Supreme Court would hear the case. If it refused, then the District of Columbia court would have to decide how to implement the decision, he said.

"Either the judge will issue a narrow order shutting down U.S. Bancorp or it will issue a broad order against the OCC," blocking all banks from selling insurance in towns of under 5,000, he said.

"Although it is not impossible, it will be exceedingly difficult for the Supreme Court to take it up" after such strong action by the full appeals court, said Paul Equale, chief lobbyist for the Independent Insurance Agents of America.

Two-Edged Sword

Edward L. Yingling, executive director for government relations at the ABA, said elimination of the small-town exemption is a two-edged sword for the insurance agents.

"If there is no small-town exemption, then it means the National Bank Act is silent on the issue of insurance," he said. "And if the National Bank Act is silent, then we can argue to the regulators that insurance powers are incidental to banking."

Therefore, the Comptroller's office might be willing to grant banks insurance powers equal to or greater than those they enjoy now in small towns, Mr. Yingling said.

He said the ABA would not change its negotiating posture on insurance and interstate branching because of the court case.

The insurance agents and a coalition of regional banks have recently begun to push a legislative package that would permit banks to branch across state lines while overhauling the laws governing bank insurance powers. One provision in the package would reinstate the small-town exemption for national banks' insurance sales.

The Bush administration has been trying to bring the ABA and IBAA into agreement on interstate branching by proposing a measure that would protect banks in small towns from new entrants.

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