James G. Cairns Jr., president of the Peoples National Bank of Washington in Seattle, last month was elected president of the American Bankers Association. He talked with Washington Post Staff Writer James L. Rowe Jr. about the condition of the nation's banking system and the future prospects for both banks and their customers. Q Banks have been in the news more in the last 2 1/2 years than probably any time since the Depression. One of the things that's on almost everyone's mind is the overall health of the banking system.

What kind of shape is the banking system in, and why are bank problems still growing? A The commercial banking industry has about $147 billion in capital and subordinated debt. It got that because it's had a good running stream for a long time and earnings have been reasonably good the last two years, in spite of the fact that we have put more of our earnings in the reserves than we have before. In the last six years we've added to the loan loss reserves in the commercial banks in our country, and in the last four years -- each of those years -- we've increased the overall capital strength. There is a lot of strength in the banking system.

We have closed more banks in 1984 than before for some time, but we've opened more than we've closed. There's also a lot of talk about the problem bank list, and I think that many people look at that and say, "Well, these are the next banks to fail." Some of those banks in that problem bank list may well fail, but I don't think it's true that they all will. The problem bank list is a list of bank names where the regulators have felt some additional attention is necessary, and they're applying that attention in many of those banks. Most of those banks will wind up not failing as a result of having some extra help and attention.

The industry is strong, it's healthy, it has problems, but it's addressing those problems in a very responsible way. Q What about the quality of bank regulation? Regulators have come under a lot of criticism in Congress and elsewhere in the wake of Penn Square and Continental and other bank failures. A I think a regulator can do the job that he's supposed to do. The things that have hit banks have been outside of anybody's control -- management of the banks, regulators or anybody else. Who could possibly have forecast the energy crisis several years ago? Who could have forecast the high interest rates, the size of the national debt, which has had an impact on business.

When you go down the path of starting to be critical of either bank management or of the regulators, you need to stop for just a moment and realize that they've been coping with things that have been really impossible to forecast, and yet they've been very, very large and had a big impact on the system.

The question is, "Is the system responding and working?" And I really think it is. I think it's working very well. Q Ought banks to be able to get expanded powers, such as securities and insurance businesses? A Unfortunately, we've settled on this word "powers" and I wish now that we hadn't. What we're really talking about is the opportunity to respond to what our customers are saying they need and want from us. They want a better value for their dollar. They certainly said that a few years ago, when banks couldn't pay market rates and the customers took their money out of the banks and put it someplace else. Rate deregulation came along, the money started coming back into banks. That was an essential step, because only with those deposits are bankers able to meet the needs of businesses and farmers and consumers.

The same thing is going on in other fields. The consumer is saying, "I've got to have a better deal. I haven't got enough money to leave it laying around, not working for me, and I can't spend it unwisely."

If banks were permitted to sell casualty type insurance -- homeowners' policy, automobile policies and the like -- several things would accrue to the benefit of the consumer. The commissions paid by insurance companies on that type of insurance generally average about 18 percent. Studies have indicated that if bankers were permitted to act as insurance agents, that those commissions could be reduced to about 12 percent.

The 6 percent of my own insurance premiums, which are high because I have a couple of teen-aged drivers, turns out to be $145.50. That's not a fortune, but I'd rather have it than not have it.

In the area of securities, one of the prime needs all across this country is for term credit. Everybody needs it. Consumers need it. Businesses need it, for corporate real estate. Farmers need it, whatever. Well, the banks' source of money -- deposits -- doesn't come in the form of long-term instruments any longer, or not certainly very much of it. Their ability to fulfill that need in the marketplace is diminished drastically over what it used to be.

If we had the ability to pool loans and sell little pieces of that pool as a money market mutual fund or direct placement, we would have a better opportunity of providing that term money to our customers in the communities in which we operate. The same thing could be said in the real estate area. There's just a need in this country to bring the banking system in the modern state of affairs so that it can respond to the modern and current needs of our customers. Q What about interstate banking then? Would you permit banks to have branches in more than one state? A I think we have kind of a de facto interstate banking in the United States today anyway. Citibank, for example, has more credit card customers in the state of Washington, where my bank is, than my own bank has. And they're beginning to take deposits from our state. We have various forms of interstate banking, but we don't have branches across state lines.

I can't tell you where we're going to land. There are many factors to be considered on both sides of that discussion, and it's just too soon for me to be able to respond at this time whether we should stay where we are or whether there should be some change. Q The average bank customer has been finding out in the last couple of years is that it's beginning to cost more and more money to bank. Why? A We need to look at the bank's profit-and-loss statement. We have on the income side two sources of revenue: interest and fees for services we provide. Affecting our interest income is a demand from everyone to keep interest rates as low as we possibly can. And we the bankers who meet the public every day really feel that pressure.

On the expense side, we have our interest costs increasing all the time. We're paying full market rates now for all of our dollars. We see all the pressures that every other business faces: inflationary costs, more money for taxes, people, everything that has to do with business. We have higher costs and no place to turn. That is why banks are charging more for services. In the past, before deregulation, we in effect were subsidizing many of the services that we offered because we didn't pay full market rates, and therefore we had a different cost structure.

The deregulation of interest rates has been a bonanza for the public. I read an estimate the other day that says since we did that in December of '82, we've paid out to consumers $32 billion more than we would have paid. Q Can the small, low-balance customer find banking services at a reasonable price? A Yes. It may not be exactly the same kind of service as we used to have. One of the things we're trying to do is keep the costs down. And one of the ways you keep the cost down is to take advantage of technology. Automated teller machines are available and they're very convenient. They're sometimes more convenient than normal traditional banking services for cashing checks or getting cash. We're seeing efforts to try and acquaint the public with those conveniences and make them available to them. Q What about so-called lifeline account laws that guarantee free or low-cost minimum banking services? A There's one state that's passed a law that says anyone over 65 and anyone under 18 is entitled to free banking services. Some of the most wealthy people I know are over 65 years of age. Why they should enjoy free banking services is a little hard for me to understand. And I also know some that are under 18 that are quite wealthy, who inherit it.

The banker has the opportunity to serve that customer. If his capital is depleted because his earnings are not there, because he's having to give away services that he can't afford to give away and isn't offered the opportunity to expand the product mix that he has so he can't look to other sources of revenue to make up for his losses, then he's not in a very good position to go along with that customer's needs.

I think it's important that we keep a good income stream, we keep building our capital, we keep building our reserves to reasonable levels, so that we can remain strong and serve the communities and continue to, through that method, grow our system.

Lifeline accounts for people have been talked about a great deal. But I don't think we've talked enough about the fact that there are all kinds of sources to obtain the financial services we need. I don't know a community that doesn't have a good value as far as basic banking services for the public. Q Can a bank make money without charging fees to a person with, say, a $200 or $300 a month average balance, who writes 10 checks a month? A I certainly think some banks can, if they have enough of that kind of business. It's a question of concentration. It's a question of picking out your market. It's a question of becoming very good and very experienced in that kind of business. Not every bank can. . . . You have to plan for that, and you have to have enough volume and enough dedication to it in order to make it work out. Q That may work in the big cities where there are dozens of banks. But what about small communities across the country where there may be only one bank and a relatively small base of customers? A Even more important to make sure that that bank has the opportunity to do the best job it can in serving the community fully, and by that I mean be able to respond to its borrowing customers and to opportunities of growing in that community as well. And if they are not able to offer a free service along the lines that you described, then I think they shouldn't be forced to do that; because the expense of that may be too great for the community. Q You're saying, then, that banking isn't a public utility, as some people are contending. A Not at all. It's a business, and it has to be profitable or it isn't going to be able to do what it's set out to do in the first place.