Short interest on major banks and thrifts traded over the counter rose 4.9% from mid-March to mid-April.

Arbitrage was the primary reason in several instances, but Wall Street analysts also ascribed the increase to speculation by some investors that the industry's earnings gains and stock valuations have peaked.

Short interest is the outstanding volume of shares sold short - that is, borrowed and promptly sold. Short sellers are betting that the price will fall, so their short positions can be covered profitably with cheaper shares.

The largest short position among large over-the-counter banks was in West One Bancorp., Boise, Idaho. More than 2.1 million of its shares had been sold short by April 13, according to data from the National Association of Securities Dealers.

Besides West One, total short interest was also significant in Rochester Community Savings Bank, Rochester, N.Y., and Roosevelt Financial Group, St. Louis.

But striking declines also were evident in short activity among some Nasdaq-traded banks. Short interest plunged 69% in shares of Michigan National Corp., Farmington Hills, Mich., which is being acquired by National Australia Bank.

The large short interest position in West One shares - which actually shrank last month by 47,508 shares, or 2.1% - is arbitrage-related.

"We have $50 million of 7.75% convertible notes outstanding," said Larry Prescott, West One vice president.

"Some large holders of the notes have a short position in our stock to hedge the price volatility while they are in the convertibles," he said. "Basically, they are collecting the coupon without any price-risk exposure."

Mr. Prescott said the company expects the short position to persist "until the notes are either called or converted." The first call date for the convertibles is in June, four years after their issuance.

Similar maneuvering is apparent in the common shares of Rochester Community Savings, which has an issue of convertible preferred stock callable in July 1996.

"Some people are shorting the common as a hedge against the preferred," said Katrina Blecher, a banking analyst at Gruntal & Co., New York, who follows the company. Short interest in Rochester Community totaled nearly 1.5 million shares on April 13, up by 83,367 or 6.1% from the month before.

The activity in shares of both institutions is a smaller-scale version of the arbitrage-related activity surrounding the convertible preferred stock of Citicorp. The New York banking giant has the industry's largest short interest by far, with nearly 21 million of its common shares sold short.

The short activity in West One and Rochester Community, combined with the low daily trading volume in their stocks, produces a sizable short interest ratio, the number of days of normal market activity that would be required to cover the short position.

Short interest in West One, whose stock trades 100,081 shares daily, would required 21.8 days to cover. For Rochester Community, with average daily turnover of 67,457 shares, the coverage ratio is 21.7 days.

Short interest in shares of Roosevelt Financial was also near 1.5 million April 13. But Wayne Bopp, an analyst at Stifel, Nicolaus & Co., St. Louis, noted that is only 3.5% of the thrift institution's 40 million shares outstanding.

The analyst said that Roosevelt sells at a fairly high price-to-book ratio of 167%, which might attract some short players. Thrifts typically trade at only small multiples to book value.

Mr. Bopp pointed out that Roosevelt, which he termed a "high-performing thrift," is undervalued by another important measure, its price-to-earnings ratio.

"We expect Roosevelt to earn $2.20 per share this year, and it is only selling at $16, a price-to-earnings ratio of 7.5," said Mr. Bopp. "It would seem very dangerous to sell short a stock carrying a price-earnings ratio that low."

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In trading Wednesday, Mellon Bank Corp. fell 87.5 cents a share, to close at $37.875, after a Boston newspaper reported that investors had pulled out $2.2 billion of assets from the banking company's Boston Co. Asset Management Inc.

The Mellon subsidiary has been rocked by high-level defections in the past week. Before the disclosure, the subsidiary had $26 billion of assets.

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