Business Notes Finance

Federal law technically forbids banks to branch across state lines. But the rules have not stopped the interstate spread of financial institutions that function very much as real banks do. These companies have been able to circumvent the law because they do not fit the legal definition of a bank: an institution that takes deposits that can be withdrawn on demand and makes commercial loans. Known as "nonbank banks," the newcomers generally take deposits or make loans, but do not do both. About 80 of these limited-service banks have sprung up across the U.S.

In 1984 the Federal Reserve Board moved to halt such interstate branching by expanding the definition of a bank to include the non-bank banks. The action was challenged in court by Dimension Financial Corp. of Kansas, which plans to set up limited-service banks in 25 states. The U.S. Supreme Court last week decided the case in Dimension's favor, ruling 8 to 0 that only Congress has the authority to change the rules of the game.

The decision permits companies like Sears to become interstate bankers despite a long-standing ban on the mixing of commercial and banking activities. That prospect dismays traditional bankers, who will appeal to Congress to protect their turf.