A D.C. City Council committee approved legislation yesterday to allow mergers and acquisitions between District banks and banks in an 11-state region, permitting creation of regional banks intended to compete better with other large financial institutions.

The bill, which follows adoption of similar legislation this year in Maryland and Virginia, would enable interstate banking regionally but would stop short of opening the way to national interstate banking.

The change would mean that out-of-state bank companies could buy or merge with District banks, provided their states give D.C. banks the same privilege, but they still could not just open branches in the District. The bill would not enable the country's largest banks, such as New York's giant Citicorp, to take over the local institutions, because these banks have headquarters in states outside the region.

While banks have been subject to strict federal limits on interstate banking, nonbank financial institutions have been able to provide various banking services without the same restrictions. This includes, for example, brokerage firms that allow customers to open "cash management accounts" and to withdraw money from them with checks.

But federal law allows the Federal Reserve Board to approve acquisitions and mergers across state lines if state law permits, and states have started developing regional reciprocal agreements.

Consumers would be unlikely to see immediate changes in services, which are still subject to federal regulation. The interstate banking lines have been blurred for average customers with the advent of electronic transfers and automatic teller machines that enable them to withdraw cash in different jurisdictions but which do not allow them to deposit funds outside the jurisdiction.

Those regulations would not change. But supporters say they would expect to see the increased regional competition result in more and better consumer services.

The Council Housing and Economic Development Committee, in approving the legislation yesterday, rejected the idea of allowing nationwide interstate banking after a period of two or four years as some other states have done.

Mayor Marion Barry's administration had proposed including a two-year trigger for nationwide interstate banking, and Citicorp had testified strongly for such a trigger.

Instead, the committee required a public hearing within three years to determine how the regional arrangement is working and to decide whether to continue it.

Committee Chairwoman Charlene Drew Jarvis (D-Ward 4) said the council will see if the new arrangement has the intended effect of increasing consumer banking services and creating more jobs, economic development and tax revenue.

Unlike all 50 states and some U.S. territories, the District has no state banking commission to supervise financial institutions. Jarvis said that, pending proposals to create such an agency, the interstate banking bill requires the council to review applications for mergers or acquisitions and make recommendations to the Federal Reserve Board.

The states in the region covered by the legislation are Maryland, Virginia, Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and West Virginia.