The economic expansion in the US should moderate during 1995 to a more sustainable pace, a convention of US bankers heard yesterday at the Southampton Princess Hotel.

Mr. Edward C. Boehne, president and CEO of the Federal Reserve Bank of Philadelphia told the Pennsylvania Bankers Association (PBA) that the US economic growth last year was stronger than the economy's long term ability to expand the production of goods and services.

As a result, a slowing of the pace of growth this year should help contain inflation.

Mr. Boehne was speaking at the PBA's annual convention that included its 100th anniversary celebration. The four day convention, which wound up yesterday, attracted some 600 people that included Pennsylvania bankers and their guests.

He also addressed the most radical proposals proposed by Congress to eliminate the laws separating banking and commerce.

He said: "I have serious concerns about breaking down the wall between banking and commerce -- especially if it occurs without strong firewalls (between sister bank and non-bank companies) and strong capital requirements.

"I would be concerned about the exposure of the federal deposit insurance fund and also about the widening of the federal safety net to include firms in the non-financial sector, including manufacturing firms.

"Strong firewalls would be necessary to help keep the problems of a parent company or its manufacturing subsidiary from becoming the problems of its affiliated bank or thrift. Strong capital requirements would be needed to protect the federal safety net and the taxpayer if the firewall fails.'' Congress is also considering reducing the burden of some regulations on banks, including consumer regulations. There is also expected to be some reform of the financial regulatory structure. He anticipates legislative action to restructure the bank regulatory agencies.

Delivering his address in the Atlantic Room, Mr. Boehne forecast that US consumer spending is likely to be more restrained this year, and, housing activity and auto sales will not show the kind of growth they exhibited last year.

He declined to say whether action taken by the Federal Reserve Board over the last year to stymie inflation was enough. The Fed is concerned about promoting a sustainable growth in jobs and economic output. Keeping inflation in check is a key.

Fed chairman, Mr. Alan Greenspan, last week hinted that interest rates may again be raised in the US if the dollar's decline added to inflation through higher prices for imports.

And Mr. Boehne agreed that there was a possibility of some changes to bank powers and the structure and burden of the regulatory system this year.

He called such deregulation "long overdue'' and said that many of the laws restricting the powers of financial firms were written in the 1930s. But he cautioned that such major changes should have bipartisan support so that the financial industry's powers do not "wax and wane with every change in political leadership in Washington''.

He warned too, that banking deregulation was not without its risks. "If Congress expands bank powers, and if Pennsylvania goes along with interstate branching, banks will have the opportunity to diversify in both product mix and geography.

"The potential downside, however, is that some banks will exercise the new powers without understanding the risks they can pose to their earnings and capital if poorly managed.

"Underwriting securities, for example, might turn out to be a way to increase banks' profits, so long as the associated risks are understood and contained.

"Without careful risk management, banks can get into trouble, even though diversification should help them in principle. Furthermore, I certainly would resist changes that diminish our ability to ensure bank's safety and soundness.'' Mr. Boehne said that a sudden expansion of the services a financial institution could offer, combined with inexperienced management and lax regulatory supervision is a potentially volatile mix.

Mr. Boehne advocated timely and thorough bank examinations by outside regulators and sound internal controls and policies by the banks. Consistent regulatory principles across the country were essential and there were important roles for banks of all sizes, including smaller ones.

Congress this year will study the issue of bank powers. Banks want more leeway to deal in securities and offer insurance products.

Mr. Boehne said: "If any banking reform passes this year, the wall most likely to be eliminated is that between commercial banking and investment banking. Banks may also see some expansion of insurance powers.'' He favours a system that will enhance commercial banks' competitiveness with financial service firms and foreign banks and one that will increase the efficiency with which financial services are delivered to the public.

He supports an expansion of bank powers to other financial activities, including securities and mutual funds, insurance and annuities and real estate agency and brokerage.

He does not, however, want insurance underwriting and real estate investment or development included in the list.

Regulatory safe-guards that he suggested would avoid stretching the Federal safety net include a holding company structure for financial services firms that would be similar to bank holding companies. Non-bank affiliates would be sisters to a commercial bank, and all would be subsidiaries of the holding company.

He wants capital requirements imposed on both the bank and the holding company and umbrella supervision at the holding company level.