As most bankers know by now, two California cities - Santa Monica and San Francisco - have banned surcharges on ATM withdrawals. In turn, some larger banks have responded by refusing automated teller machine access to noncustomers.

The issue, clearly, is a contentious one. USA Today had a novel suggestion for heading off clashes among banks, the government, and the public over ATM fees: Reward banks that don't surcharge with municipal deposits.

One can at first laud this incentive approach. After all, if banks choose not to surcharge noncustomers in exchange for public deposits, local governments would have no reason to try to ban these charges.

But such a proposal could set bad precedent. Do we really want to create an environment in which government is rewarding - or punishing - banks for certain behavior?

Banks are free to bid or not to bid on government business. No one can force a bank to do business at a price established by the authorities if it prefers not to do business under those terms. All we can use are programs such as the Community Reinvestment Act that make it more difficult for a bank to gain permission for certain activities - like opening a branch - if it fails to comply.

For many decades, the placement of funds was set by cronyism, under-the-table considerations, and iron-bound tradition that few dared to oppose.

In our modern, more honest - and effective - environment, decisions about where public funds repose are made with more enlightened considerations, such as highest bidding on interest payments and a bank's ability to meet liquidity claims.

The amount of public good the bank undertakes is also often considered in awarding the city's business.

If one bank supports a local youth or hospital program, while others do not, city administrators may use that as a reason for depositing its funds there, as long as the service charges and interest rates are fairly priced.

In a number of states there is controversy between the treasurer's office and the banking association over where public funds should be deposited.

Treasurers usually say the deciding factor should be the highest returns on state and local funds consistent with risk and liquidity considerations, whereas bankers want the money placed solely into the state's banks, where, they say, the money can do the most good for the public. It is an issue with validity on both sides.

But do government officials have the right to base this decision on a bank's policies, such as offering - or not offering - free ATM service? If this practice were carried to its extreme, government officials could influence loan-to-deposit ratios, types of investments, and other managerial decisions.

Many, including this columnist, feel that bank rates and charges are none of public officials' business, especially when customers can switch banks whenever they wish.

Do we want to open this can of worms just so people can get cash from a foreign ATM without paying for it? Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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