While bankers, insurance agents, and Congress squabble over federal legislation on interstate branching, some states are taking the issue into their own hands.

Several state banking regulators are planning to propose reciprocal branching laws next year, bypassing the logjam in Washington.

Many want their state-chartered banks to be able to expand across borders without having to establish separately chartered banks.

Prodding Congress

They also hope to put pressure on Congress to advance interstate branching nationally.

"We know it's a nationanl issue," said Derrick D. Cephas, superintendent of banks in New York. "But in the absence of federal action, we're moving on it."

Interstate branching is a political hot potato for bankers and Congress. Most big banks support it because it would allow them to expand without chartering separate banks.

Small banks generally oppose nationwide branching, fearing that big banks will move onto their turf.

With bankers divided, the issue was dropped from the federal government's banking reform package last year.

But several regulators said the realities of bank consolidation and the need to make banking more efficient will inevitably lead to interstate branching.

"The federal move toward interstate branching will not be stopped," said Geoffrey M. Connor, New Jersey banking commissioner, in a recent speech. "We can watch it happen, or we can try to direct it."

The state regulators, with the support of many local banking trade groups, have been meeting to hammer out compacts.

Trade-Off Proposed

Meanwhile, a coalition of large regional banks is pushing a federal legislative package that would forgo some insurance powers in return for the right to branch nationwide.

The insurance industry, which has strong influence in Congress, has been a key factor in defeating recent broadly conceived banking bills.

However, the compromise proposal has itself become mired in turf battles among insurers, large banks, and small banks.

That has given more impetus to support a model bill from Mr. Cephas' office and the New York State Bankers Association. It would allow out-of-state banks to branch either by establishing de novo banks, or purchasing an institution's assets.

It calls for newcomers to set up a "lead branch" in each state and adhere to the regulations imposed on local banks.

Mr. Cephas circulated drafts of the plan to fellow regulators last month. His aim to persuade at least a dozon of this compatriots to present similar bills to their legislatures.

Regulators and banking groups in California and North Carolina said they are interested in the New York bill. Sources say that New Jersey and Pennsylvania have also looked at the proposal but taken no position.

There is no guarantee, however, that the New York initiative will remain free of partisan battles.

Mr. Cephas said he has encountered resistance from some state regulators who fear that the initiative will allow deposit-seeking invaders onto their home turf. But that, he argues, is a "misconception."

"New York banks don't need to go to other states for deposits," Mr. Cephas said.

"We think it's a sound approached," said Larry D. Kurmel, executive director of the California Bankers Association. "We're going to go ahead and work with then on what specific language should be included in the bill."

Eligibility Limits

The New York bill pertains only to state-chartered banks that are not members of the Federal Reserve Board system. That leaves out most large institutions whose subsidiary banks have national charters.

The architects of the state proposals say some nationally chartered banks may want to switch to a state charter and pull out of the Fed system, particularly if they have concentrations near their home state's borders.

While the scenario may be unlikely for big banks that are to d to the Federal Reserve system or its discount window through custom or necessity, the most important motive behind the New York drive is to energize the interstate movement.

The state initiatives send a message that "with Congress sitting on its collective duffs, we're going to do it on our own," said Mr. Kurmel at the California association.

The Independent Bankers Association of America, the most vociferous banking opponent of interstate branching, does not have a strong reaction to the New York plan at this point. The proposal is too narrow to have a major impact on the industry, said Stephen Verdier, senior legislative counsel.

Usefulness Doubted

"Until a national measure permits interstate branching, it will be very difficult for most banks to assume these powers no matter what state law says," said Mr. Verdier.

Nevertheless, his group and others are keeping a close eye on state regulators and others who have shown a crusaders' zel for liberizing bank powers.

"It's not just the big banks that I want to branch," said Mr. Kurmel of the California Bankers Association. "We have a number of community banks that would very much like to open branches across state borders."

Indeed, there have been some small interstate initiatives that worry staunch opponents of nationwide branching.

Pennsylvania regulators last February allowed a Delaware bank to branch into the Keystone State by acquiring the assets of a failed institution. The action was an "emergency situation," said a spokeswoman for the state's secretary of banking.

She would not speculate on whether the secretary would use her authority to allow other out-of-state banks to branch in Pennsylvania.

Some state regulators, however, don't mask their intentions to lead the interstate effort.

"If we wait and see [what Congress does] when branching comes there will be no role in it for the state, including the state bank regulator," said Mr. Connor, the New Jersey banking commissioner, in his speech to local bankers last month. "I know that many of you . . . strongly oppose interstate branching.

"I hope you all will agree, however, that it's good public policy to prepare our state and its banking environment by defining how we want interstate branching to work for New Jersey, and not against it."

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