When executives of the third-largest bank in El Salvador decided to open an office in Adams-Morgan, they thought it would be at least as difficult as it was in New York, where they filled out dozens of applications, underwent a detailed investigation and put up a hefty bond before getting permission to open.

But they were wrong.

A letter from the D.C. Office of Banking and Financial Institutions said that Banco de Cuscatlan could transmit millions of dollars from Adams-Morgan to Central America simply by paying a small fee and incorporating in the city.

"You should know, however, that this office expects to exercise jurisdiction over the types of activities described, once our statutory authority in this area has been clarified," the letter stated. "Until that time, {you} need not obtain approval from our office before engaging in" business.

A year and a half later, the D.C. banking office is still awaiting the clarification of its statutory authority. In the meantime, Banco de Cuscatlan has served hundreds of Salvadoran immigrants who have sent more than $2 million to their homeland through its office at 18th Street and Columbia Road NW.

The limited authority that keeps the District's banking office from overseeing the operations of Banco de Cuscatlan and similar businesses is the same limited authority that kept the office from closing down the now-bankrupt Latin Investment Corp., which was offering banking services without a charter and without federal deposit insurance.

The law that established the D.C. Banking Office, spearheaded by D.C. Council member Charlene Drew Jarvis (D-Ward 4), says little about protection of depositors or ensuring the safety and soundness of the District's banking system.

Instead, the D.C. banking superintendent's main responsibility, according to the law, is to "promote a climate in which financial institutions will organize to do business in the District and contribute to the economic development of the District through the increased availability of capital and credit."

When the banking office discovered in 1987 that Latin Investment was offering banking services, it urged the firm's president, Fernando Leonzo, to obtain a banking charter. But under the law, it had no power to enforce its request, and Leonzo never complied. On Nov. 29, his business ran out of cash and closed its doors, leaving more than 2,000 depositors with no assurance they would ever get their money back.

"It was an accident waiting to happen," said Joseph Lopes, deputy general counsel for the banking office. "If we're going to tell Latin Investment, 'You just need a license,' and we're going to tell {Banco de Cuscatlan}, 'Nope, you don't need anything,' then we're going to get into trouble."

The Latin Investment debacle has prompted Mayor Marion Barry to forward to the D.C. Council the long-awaited revision and expansion of District banking laws, which would clarify the banking superintendent's role and give the banking office some enforcement power.

But even that bill falls short of establishing a full-fledged regulatory agency, according to Lopes. Lopes said he is scrambling to draft emergency legislation that would empower his office to shut down a business that is offering banking services without permission. He said he hopes the council will consider the legislation at its Tuesday meeting.

The last time the city's banking laws were amended was in 1985, when the council passed the bill that created the banking office and allowed banks from outside the District to acquire local institutions. Although the bill established for the first time that the District, like all 50 states, would have jurisdiction over banking in the city, it was designed largely to bring money into the city's depressed neighborhoods, by requiring these "foreign" banks to make substantial investments in low-income areas.

Jarvis, who sponsored the bill as chairwoman of the council's Committee on Housing and Economic Development, said the legislation and the newly formed D.C. banking office would transform the District into an international center of finance.

But state banking regulators sharply criticized the bill, saying it lacked essential enforcement provisions. Moreover, they said, the bill's dual purpose, to promote economic development and to regulate banking, was unworkable.

"How can you be a booster for economic development and be a policeman on the beat at the same time?" asked James B. Watt, president of the Conference of State Banking Supervisors. "It's impossible. The goal of a state banking office should be sound banking practice. Then, everything else should fall into place."

According to Watt, the District's banking superintendent is the only banking regulator in the nation who is part of the executive branch of government but essentially is controlled by a legislative body -- Jarvis's committee.

Before the establishment of the banking office, Jarvis had sole responsibility for banking legislation and regulation. According to banking industry sources and community groups, Jarvis has fought hard to keep control over local banking issues.

Jarvis has said she never blocked attempts by the office to broaden its authority. She blamed the executive branch for not drafting new legislation faster.

"The minute we receive the bill, we will gladly look at it," Jarvis said last week. "But there is nothing I can do until I get it."

The new banking bill, which took two years to draft, was written by Causton Toney, who worked for Jarvis before being appointed general counsel of the banking office. Toney has blamed the bill's complicated nature for the lengthy writing process. But about 85 percent of the bill is taken directly from other state banking manuals. Only one chapter out of more than 150 pages is entirely new.

The new banking bill would give the office complete authority over the District's financial services industry, cutting Jarvis and the council almost completely out of the picture. It would give the superintendent the usual cease-and-desist orders and the right to fine banks. And it would greatly expand the scope of the office's power to include almost every sector of the local financial community.

Jarvis's committee is expected to begin reviewing the bill this week. Lopes said he plans to offer amendments that would further define his office and ensure beyond a doubt that another Latin Investment Corp. won't be able to flourish in the future. "I think there's a lot that D.C. has to do in order to properly regulate the banking business," he said. "Whether the new bill captures enough entities to be effective is a major-league issue. I don't think it does."