Regional banking is the dubious practice in which a legislature allows banks from certain neighboring states, but not from others, to expand into its own state. The leaders have been Massachusetts and Connecticut, responding to banks located there that wanted it both ways. They wanted to grow by expanding across state lines, but they also wanted to be protected from competition by the big New York banks. The result has been that these two states have adopted interstate banking, but only within New England.

That raised two questions. First, is it constitutional? And second, is it good public policy? The Supreme Court has now answered the first question: yes, it's constitutional. The court acknowledged t at these laws discriminate against some states' banks in favor of others'. But, it concluded, Congress has authorized the states to set their own rules for interstate banking and they are entitled to protect the independence of their local banks.

But a law can be constitutional and yet be wrong- headed as well. The survival of small local banks is not at stake. It's the profitability of the bigger regional banks that is at the center of this quarrel. For a small country bank in Massachusetts, the arrival of the giant banks from New York would hardly add to the competition that it already gets from the Boston banks. But for the Boston banks, direct competition on their home turf from the New York banks might mean slightly lower interest rates paid by borrowers, and slightly higher rates paid to depositors. Increased competition across state lines is very much in the interest of consumers.

Fortunately, increased competition is inevitably coming. Citicorp, based in Manhattan, is the biggest banking company in the country and one of the plaintiffs in this case; it now operates in three other states -- California, Illinois and Florida -- into which it was invited to rescue savings and loan associations in distress. Next year it will go into business in Maryland. Other major banks throughout the country are following similar strategies. But the discriminatory character of these regional laws is not going to be cured by a proliferation of loopholes and special exceptions. They only erode the rationale for the discrimination.

Congress is now considering federal legislation to permit regional banking only as a temporary stage in a transition to unrestricted interstate competition. The Federal Reserve Board has recommended a short transition period of no more than three years. Otherwise the banking system will become a hodgepodge of anomalies and preferences, at the expense of the banks' customers. A lot of people in Congress were hoping that the Supreme Court would make their job easier by declaring all regional restrictions unconstitutional. The court has declined to oblige them, and has passed the responsibility back to Congress -- where it belongs.