The Texas Legislature passed a bill Monday restricting banks' insurance sales.

Bankers were particularly upset by a provision that would prevent them from establishing insurance sales offices in towns with more than 5,000 residents.

"This cuts banks out of some huge markets in this state," said Robert E. Harris, president of the Texas Bankers Association.

The legislation violates a 1996 Supreme Court decision, Mr. Harris said. The high court required that banks headquarter their insurance operations in towns of less than 5,000 population but permitted them to open sales offices in any location, he said.

Gov. George W. Bush is expected to sign the measure, which was drafted by the Texas Insurance Department. Nevertheless, industry groups have asked him to veto it.

Bankers also opposed provisions prohibiting a bank employee from making a loan and selling insurance to the same customer and requiring that bank and insurance records be kept separate.

Mr. Harris said his group would "give a hard look" at a court challenge if Gov. Bush signs the bill into law.

"This legislation is clearly designed to hinder the ability of banks to sell insurance in Texas," wrote Richard D. Starr, president of the Financial Institutions Insurance Association, in a letter Tuesday to Gov. Bush.

Mr. Starr also complained that banks would be barred from seeking background information on unaffiliated agents who sell policies to bank customers.

Bankers did not fight the bill in the Legislature, choosing instead to concentrate on overturning the state's ban on home equity loans. Lawmakers voted last week to end the prohibition.

"Spending considerable resources to attack the insurance bill could have doomed us to failure on home equity loans," Mr. Harris said. Also, many bankers believe the Comptroller of the Currency will preempt state insurance restrictions, he said.

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