A recent report describing increasing competition in metropolitan Washington's financial services industry is no signal to circle the wagons, but its findings are serious enough to suggest the need for restructuring some sectors.

The report's use of words such as "shaken," "weak" and "devastated" to describe various segments of the local financial services industry may overstate the case, which suggests the need for immediate changes. However, an unbiased look at the report's findings is likely to lead to the same conclusion: Current trends in the financial services industry, particularly in the banking sector, contain some worrisome portents for the local economy.

There is some evidence that suggests, in fact, that one of the District's bankers was probably correct a couple of years ago when he confided that the city is "overbanked." To say that Washington is overbanked in relation to the size of the market may seem odd, considering that more than 20 out-of-state institutions are seeking permission to open limited-service banking offices in the District.

Ironically, outside competitors are grabbing larger shares of the market by slicing the corporate and consumer banking pies into smaller pieces, through loan production offices, bank cards, consumer credit offices and the marvels of technology.

The Greater Washington Research Center's report on competition confirms what many observers of the local banking industry concluded some time ago: There is no apparent strength in numbers where the District's 19 banks are concerned. Assets have not increased appreciably, and competition from outsiders has stiffened.

Only two D.C. banks -- Riggs National and American Security, with $5.1 billion and $4 billion, respectively -- have assets exceeding $1.5 billion. The city's entire banking industry, in fact, has combined assets of less than $20 billion. None of the banks with headquarters in suburban Maryland and Northern Virginia comes close to the size of its counterparts in Baltimore, Richmond, Norfolk and Roanoke. And only two of the top 10 banks in the D.C.-Maryland-Virginia region are in metropolitan Washington.

One of the most telling facts in the research center's report is that the federal government's traditionally limited need for local financial services had "ill prepared" local institutions for the demand of new industries. At the same time, national and regional developments "brought about increased competition for a fairly weak Washington-area financial industry."

Washington-area bank executives apparently did not react in time to those developments. Meanwhile, outside competitors either took advantage of the local situation or moved expeditiously to strengthen their own market positions. The decision by two Virginia banks to merge in 1983, when the financial services industry was "undergoing significant change," is an excellent example.

First and Merchants Corp. of Richmond and Virginia National Bankshares of Norfolk merged to form a $7 billion institution, called Sovran Financial Corp., now the biggest in the region. Sovran officials said their decision was influenced by the need "to deal effectively with the pressures of a changing environment and, at the same time, to take advantage of the multitude of opportunities that change presents."

In the meantime, Maryland National Bank, that state's largest, was extending its reach in the region by acquiring a suburban Washington bank with offices in Montgomery and Prince George's counties. First Maryland Bancorp strengthened its market position not only by merging with a Prince George's County bank but also by selling a majority interest in the Baltimore banking firm to Allied Irish Banks Ltd. of Dublin.

In fairness, it should be noted that, with the dawn of the '80s and the advent of changes in the financial services industry, Washington banks were preoccupied with internal problems that probably were as challenging as outside competition. Riggs, for example, had to wrestle for at least two years with reorganzation in the wake of a bitter takeover fight. American Security's earnings have been buffeted by bad loans. National Bank of Washington, the District's third-largest bank, not only had to rebuild under a new management team, but recurring rumors of its imminent sale by the United Mine Workers clouded its future.

Meanwhile, First American Bank of Washington, the District's fourth-largest bank, was forced into a holding pattern during a four-year takeover battle, which management of the bank's former holding company eventually lost to foreign investors. And finally, NS&T Bank, fresh from a management shuffle last year, announced it would farm out its data-processing operations to Pittsburgh's Mellon Bank.

Now that most of those problems are resolved and the signals of change are much clearer, it's probably a good time for District banks to consider the merits of consolidation. Meeting the competition will require strength, greater efficiency and economies of scale, which can be accomplished through sizable mergers.