Two weeks ago, Industrial Bank was the lone District bank to seek and get a local charter -- a corporate standing made possible under an obscure law Congress passed in 1901.
But, in the last few weeks, requests have been made by 11 companies that include four of the largest banks in the United States, a giant insurance company and a financing firm owned partly by one of Japan's biggest securities traders.
Even Greyhound Corp. has hopped aboard.
"These are the first applications from outside the District in 85 years, that's how I like to think of it," said Richard V. Fitzgerald, chief counsel in the Office of the Comptroller of the Currency, which is weighing the requests.
The sudden popularity of the ancient law has surprised and angered several lawmakers, who now realize it gives locally chartered banks the right to enter insurance and securities underwriting, powers that surpass those given to banks with national or most state charters.
The law has caught local bankers off guard, too. They worry because it lets financial giants enter the District by establishing new banks, rather than buying existing ones. Those bankers had counted on outside bidders to drive up the value of their banks.
"It's a big blow to the value of the franchise [of existing D.C. banks]," said Luther H. Hodges, chairman of the National Bank of Washington. "It shows that Congress is abdicating responsibility, and leaving it to the courts and regulators to determine the future of the banking business."
The idea of exploiting the 1901 law is the brainstorm of John M. Miller, a lawyer for Squire, Sanders & Dempsey in the Cleveland firm's District office.
But Miller didn't pluck the notion from thin air. He worked for 17 years as a regulator in the comptroller's office, most recently as acting chief counsel.
Regulators and bankers alike say Miller is fluent in the ins-and-outs of the agency reviewing the applications, all of which were prepared by Miller for his clients.
Regulators and industry analysts say the applications are a local version of a nationwide drama in which bankers, lawyers and increasingly sophisticated technology erode the teeth of federal law restricting where banks can do business and what products they can sell.
They say that the applicants -- who include banking giants Chase Manhattan, Morgan Guaranty, Chemical and Bankers Trust -- show the market has found yet another loophole to exploit. But they also say the District market is unique in at least one key respect: Exploitation of the 1901 law is pushing banking deregulation, as Fitzgerald puts it, "right under the nose of Congress."
The comptroller, who charters national banks, also chartered local banks here until April 11, when a newly adopted local banking law transferred to local officials the authority to grant local charters. The new law preserved the rest of the 1901 statute, however. Bypassing D.C. Regulation
By having applied for a local charter before April 11, applicants expect to bypass regulation by local District officials, while reaping the advantage of expanded power under the 1901 law. They also expect to transport their new powers to neighboring states under newly enacted laws allowing banks based in the District to cross state lines in the surrounding 11-state region.
If Chemical, Chase, Bankers Trust and Morgan get a local charter from the comptroller, for example, they hope to bypass the D.C. City Council's policy of allowing giant banks to enter the District only through acquisition. Local bankers lobbied hard for 18 months to get the council to adopt the policy.
By applying to the comptroller instead of the local government, the 11 applicants also have sidestepped council rules requiring financial giants entering the District to invest millions of dollars in the local community and create hundreds of new jobs. Miller and several of his peers at Squire Sanders say that no one in Congress or the local banking community should be surprised by the 1901 loophole. The lawyers say they have lobbied the D.C. Council since July to preserve most of the 1901 law, arguing that its liberal banking rules would entice financial service companies to the District. They say they also lobbied local bankers to assure them that locally chartered banks would not "threaten" the business of the 17 nationally chartered banks based here.
Local bankers said the business community knew about Squire Sanders legal strategy, but dismissed it as a theory that would not stand up in court. But Causton Toney, a lawyer and aide to Council member Charlene Drew Jarvis (D-Ward 4), who sponsored the District's newly enacted banking laws, said the applications rest on solid legal footing.
Local and federal authorities say the applicants have surfaced only in the last few weeks because it has taken a year for the companies to understand the loophole and decide to take advantage of it. They were not the only ones slow to discover the law's possibilities.
House Banking Committee Chairman Fernard J. St Germain (D-R.I.) learned about the loophole too late to dilute it by forcing the D.C. Council to amend new local laws. He now is seeking other ways to restrict it. But Jarvis has made it clear that if St Germain wants to restrict local law, he'll have to pass legislation that affects all local jurisdictions, not just the District.
St Germain also has asked the comptroller not to approve locally chartered banks until Congress decides whether banks may sell insurance and securities. The comptroller's office, however, rejected the request and said it must consider the applications in light of current banking law.
John V. Pollock, first vice president of the D.C. Bankers Association and president of the National Bank of Commerce, said that, if the comptroller grants any of the applications, a lawsuit would "very likely follow," although he would not say who might file it. The comptroller could begin ruling on the applications within weeks.
"We're aware of a lot of situtations where people try to drive a truck through a loophole, only to have the courts slam it shut," Pollock said.
Hodges, of the National Bank of Washington, said he, too, was aware of the "loophole," and said that local bankers underestimated the likelihood that banks from New York and other money centers would use the 1901 loophole as a shoehorn into the District market. Validity of Law Defended
Lawyers at Squire Sanders defend the validity of the 1901 law. "It is not a loophole," said Dennis M. Gingold, a lawyer in the comptroller's for 4 1/2 years until leaving in 1980 to join Squire Sanders. "It was legal 50 years ago. It's legal today."
"We're comfortable with our legal position," Miller said.
No one really knows how the courts will feel, however. Miller says that legal precedents back his position. But Industrial Bank is the only locally chartered bank that has operated in the District, and through the years it has chosen not to exploit the 1901 law.
A bank is defined by federal law as a financial institution that offers checking accounts and makes loans to businesses. A bank offering one or the other -- but not both -- is called a limited-service bank, or, more popularly, a nonbank bank.
Unlike a full-service bank, a limited-service institution is not regulated by the Federal Reserve Board, one of three federal bank regulators and the least likely to allow lines to be blurred among financial industries as diverse as insurance, securities underwriting and retail banking.
Of the 11 applicants, a government securities firm and a group of investors have each asked for permission to open a full-service bank. Chase has asked to open two institutions -- one a full-service bank and one a limited-service bank -- in the hope of increasing its chance of getting at least one approval.
The remaining eight applicants want to open limited-service banks that for now will not offer checking accounts. Many of the applicants may have been encouraged to seek charters here by a Supreme Court decision in January that confirmed that ownership of nonbank banks is not limited to bank holding companies.
Although a federal court in Florida has barred the comptroller from granting federal charters to nonbank banks, the applicants believe the ban does not apply to District charters.