Intense competition from institutions outside metropolitan Washington and regulatory reform are weakening the area's financial services industry, according to a study by the Greater Washington Research Center.

"I think there is a case to be made that the financial services industry is in tremendous transition. The economics of the industry are being fundamentally transformed," said the study's author, Thierry J. Noyelle, during a briefing over the weekend.

At issue, Noyelle noted in the study, is the future configuration of the local financial industry, with implications for both local employment and the flow of funds in the area.

Long-term changes in the financial services industry and the 1980-'82 recession have "devastated" the area's savings and loan industry, according to the study, which was to be made public today. Meanwhile, local banks are under heavy pressure from competition by institutions from outside the area, noted Noyelle, a researcher at Columbia University's Conservation of Human Resources Project. This competition, he added, is intensifying in corporate and retail (or consumer) banking. In the meantime, local financial institutions apparently "are not sufficiently aware of what has been happening to them and why it has been happening to them," Noyelle said.

The study, commissioned by the research center, not only examines the changes that have occurred in what is described as a weak local financial sector, but also suggests some reasons why they did.

Development of the area's financial industries has been slowed in part by the dominance of the federal government and the segmentation of banking and regulatory authority among the District and two neighboring states, said the center's vice president, Philip M. Dearborn.

The local financial services sector provided 95,000 jobs in 1982, but Noyelle's research strongly suggests that technology, regulatory changes and market forces may be shrinking that sector's labor force.

The problems encountered by local banks, savings institutions and other financial firms are primarily long-term structural rather than managerial ones, Noyelle concluded. And although the transformation in the financial services industry is occurring nationwide, it is particularly intense in Washington, for two principal reasons, Noyelle concluded in the study, titled "Competition Comes to Town: Financial Services in the Washington Economy."

In the first place, Noyelle said, the Washington area is developing as a high-technology and advanced services industries growth center. "Competition between regional and money-center financial institutions is sharpest in this type of regional market center, because such an area offers many new market opportunities in the form of new firms, new employment and a growing class of well-to-do urban professionals," Noyelle said.

Second, competition from outside financial institutions tends to be strongest in regional markets "where circumstances peculiar to the area make local institutions traditionally weak," Noyelle added. Thus, outside institutions typically try to penetrate that kind of area, he implied.

Money-center banks and other large financial institutions already are playing a prominent role locally in residential mortgage lending and in several areas of consumer banking, the study found. Those institutions have not yet penetrated the area's corporate, or wholesale, banking market to any great extent, however, Noyelle said. Washington-area institutions have encountered their sharpest competition in corporate banking from the big Richmond and Baltimore banks, he noted.

The weaknesses of Washington-area banks in wholesale banking apparently lie in their inability to keep small corporate customers as they grow to mid-size firms, Noyelle found. Except for Riggs National Bank -- the District's largest -- which appears to have held on to its market share of wholesale customers, local banks "seemed to be losing ground to outsiders" during the 1979-'83 period. During that same period, the study shows, two Baltimore banks -- Maryland National and First National of Maryland -- were making major inroads into the Washington-area market.

Indeed, an analysis of a 1983 sampling of 242 area firms showed that nearly 50 percent used one of five institutions as their lead bank. Only two of the five banks have their headquarters in Washington.

Consumer banking in the Washington area, meanwhile, continues to be stifled by the division of the market among three jurisdictions, each with its own regulatory system, the study emphasizes.

"This segmentation restricts the capacity of local banks to compete areawide for consumer dollars, exposing the market's southern and northern flanks to competition from Richmond and Norfolk banks and the Baltimore banks," the study's author concluded.

The Washington area's financial sector, in effect, is being "shaken up" by forces of change unfolding nationally and regionally, the latest study done for the research center shows. National forces -- principally inflation, introduction of new technology and economic structural changes -- have toppled the old financial structure, Noyelle explained. Economic structural changes nationwide and abroad, he continued, sent many large financial firms "scurrying" for new markets, and those forces of change reached the Washington area at the same time that the local economy "was undergoing a major structural shift."

The local financial industry, meanwhile, apparently didn't know how to react to changes in the area's economy, Noyelle said, and was caught unaware of the transformation that was taking place in its own backyard.

Although Noyelle emphasized there is an urgent need to strengthen the local financial services sector, he declined to offer any suggestions on how local industry officials might become more competitive. The purpose of the study, he indicated, is to draw attention to weaknesses in the local financial services industry, which have serious implications for the area's economy.

The center commissioned the report largely as a result of its concern about the results of a previous study on employment trends in the area. It is the fourth in a series of reports prepared for the center as part of a comprehensive review of the area's economy.

"We have been concerned that the local financial services sector was not doing as well as we would like," said the center's chairman, R. Robert Linowes.

As a result of changes that began to affect the market during the 1970s and early 1980s, employment in Washington-area financial institutions grew slower than total area employment and slower than employment in financial institutions in the Baltimore and Richmond areas, according to the study. Among the three cities, Washington had the largest share of private-sector employment in the finance, insurance and real estate sector in 1970, but it trailed both Richmond and Baltimore in 1981.

A sizable part of the decline in employment can be traced to a major contraction in the local savings and loan industry, which, like S&Ls nationally, was devastated in the early 1980s by high interest rates. In the District, for example, regulatory and financial pressures resulted in a series of mergers that reduced the number of S&Ls from 18 in 1979 to only seven in 1983. This and other developments have made it easier for outside lenders to infiltrate the area's residential mortgage market, the study of local financial services shows.

While there are those who suggest that the market might be better served by competition from outside institutions, Noyelle strongly disagrees.

"What I'm concerned about is trying to preserve the local financial services industry structure," said Noyelle, who argues for a strategy that would help area institutions fend off competition from money-center banks and other outside competitors. "I'm not sure that many money-center banks will serve the small and middle market and, in the end, that would be detrimental to the local economy. In the Washington market, you have to be concerned about serving an emerging middle market."

Noyelle agreed with research center Chairman Linowes that forging ties between the local community and the banking industry is vitally important to the area's economy.