The D.C. Council faces a showdown with Congress over who has authority to set powers for locally chartered banks in the District.

One section of a federal law passed in 1901 when Congress ran the District gives the Comptroller of the Currency, who charters national banks, authority to charter local banks in the District.

Another section gives locally chartered banks the right to sell a broader range of financial services, including insurance and securities, than federal or most state banking regulators allow.

When the District's recently passed interstate banking law takes effect on Tuesday, the power to charter banks will be transferred to the District. But the new law leaves untouched the 1901 statute allowing local banks to offer services that others cannot. That's the problem.

This week, Chemical New York Corp. and two securities firms -- Cranston Securities Co. of D.C. and Prescott, Ball & Turben of Cleveland -- asked the Comptroller of the Currency for charters to open banks in the District. Cranston's operations are mostly in Columbus, Ohio, but a spokesman said yesterday its headquarters was recently moved to the District.

The applications were filed now to avoid provisions of the new D.C. banking law that require banks moving into the District to make major investments in the city. The three firms said they also hope to benefit from the expanded powers in the 1901 law.

Eighty percent of Prescott is owned by the Kemper Corp., a major insurance and financial services company based in the Chicago suburb of Long Grove. Kemper earned $93.3 million on revenue of $2.5 billion in 1985.

Cranston Securities is a private firm that sells government securities. One executive, who asked not to be named, said that the firm plans to open a bank here and transfer its securities business into a subsidiary of the bank.

Securities firms are prohibited by law from owning banks, but banks are allowed to own government securities firms. By making the bank the owner, Cranston would get around the restrictions on who can own banks and would also avoid being classified as a bank holding company, subject to regulation by the Federal Reserve Board.

The Industrial Bank of Washington, established in 1934, is the only D.C. bank with a local charter. Industrial Chairman and Chief Executive B. Doyle Mitchell said the bank operates as though it were a national bank and has no plans to take advantage of D.C. law and expand into other businesses.

Fernand St Germain (D-R.I.), chairman of House Banking Committee, and the securities industry want the 1901 statue amended to curtail the services locally chartered banks can sell. The House Committee on the District of Columbia, which oversees federal law in the District, is studying whether to amend the 1901 law.

D.C. Councilwoman Charlene Drew Jarvis said yesterday the congressional committees should mind their own business. Unless Congress passes laws that affect all local governments equally, it has no more right to tinker with District banking laws than it does with state banking laws, she said. "This is a home rule question," said Jarvis, who sponsored the D.C. interstate banking bill that takes effect on Tuesday. "If the Congress wants to restrict a state charter, of which this is one variety, they must do it in federal law that affects all states ."

Jarvis said that when Congress granted the District home rule in 1974, it gave the city broad powers for self government, including the power to regulate local banks. She said that means only the District can change the 1901 law.

"We have reviewed the 1901 law. The District does give banks broader authority than the federal system gives them," Jarvis said. "There's nothing wrong with that."