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Alarms Are Going Off At The Banks



Don't be surprised if bank officers cast a gimlet eye at their customers this fall. Just as banks are making serious inroads into a new business--mutual funds--government regulators are preparing to send undercover shoppers into bank lobbies. The mystery shoppers, under contract to the Federal Deposit Insurance Corp., will fan out across the country to unearth any unsavory marketing practices banks may be using to lure customers into investing in uninsured products.

And that's not the only place bankers will feel sharper scrutiny. After win-ning congressional approval for interstate banking and a bit of regulatory relief, bankers are finding the going in Washington tougher. Banks' dealings in derivatives are getting increasingly intense oversight. Regulators are investigating reports that Citibank and NationsBank Corp. have illegally tied the extension of bank credit to other services. The Clinton Administration is cracking down on banks that neglect low-income borrowers. And the industry is bracing for a brawl with less prosperous thrifts, which want to tap into the flush bank-deposit-insurance fund. "It was a helluva year," says banking lobbyist James J. Butera, who represents more than a dozen financial institutions. "But next year, banks will be back on the defensive."

At least their position will be familiar. Except for interstate banking--which congressional staffers say was less a vote of confidence in the industry than a nod to a de facto trend--bankers have rarely cheered congressional action. The FDIC Improvement Act of 1991, which started out as a bill to overhaul the financial-service business, produced a law that bankers say has burdened them with red tape. And last year, Congress passed a bill at the Administration's urging that is taking away a large chunk of the profitable student-loan business.

Congress started focusing on the biggest potential financial time bomb--derivatives--earlier this year. It's kicking around five bills to regulate these complex financial instruments. One measure, sponsored by House Banking Committee Chairman Henry B. Gonzalez (D-Tex.), includes a thorny provision bankers say will make them responsible for determining if derivatives are "suitable" for customers. Despite a recent plea from the Treasury Dept. to back off, Gonzalez will likely make his bill a top priority in 1995, congressional staffers say.

"FALSE IMPRESSION." Some derivative players are starting to mobilize. Dennis Weatherstone, chairman of J.P. Morgan & Co., visited Capitol Hill last June to teach a group of financially uninitiated members of Congress the virtues of derivatives. And the International Swaps & Derivatives Assn. is sending people to Washington to lobby. But some bankers--and their supporters in Congress--contend the industry hasn't done enough. It's "laboring under the false impression that nothing will be done," says Representative Rick A. Lazio (R-N.Y.), a freshman House Banking Committee member who says legislation isn't necessary.

Even if Congress doesn't act, however, regulators are making bankers sweat. This summer, the Treasury Dept. and the FDIC warned examiners about the riskiness of structured notes--debt instruments with derivatives built in. And by the end of October, the Office of the Comptroller of the Currency (OCC), which oversees national banks, will issue new guidelines for determining if banks have adequate controls over their derivative businesses. Bankers grouse that stricter supervision is unnecessary and that the added regulatory burden will give rivals--securities firms and international competitors--an edge. "We can't afford to lose this business," says one banker.

That's especially true with regulators zeroing in on the fast-growing mutual-fund businesses. While the FDIC prepares to send out those mystery shoppers, OCC regulators are conducting detailed examinations of bank mutual-fund activities. They're also investigating charges that NationsBank engaged in deceptive sales practices in its brokerage business.

Meanwhile, banks are also edgy as Clintonites look over their shoulders in traditional lending. A rule proposed last year to clarify bank requirements under the Community Reinvestment Act of 1977 (CRA) set off a firestorm of protest within the industry. The Administration wanted to make sure lenders weren't discriminating, but banks howled that the rule amounted to credit allocation. It's now being rewritten to respond to industry confusion over what it requires, but OCC head Eugene A. Ludwig vows regulators are not backing off. "Institutions that would like us to eliminate CRA won't like it," he says.

FANTASY SCENARIO? The Justice Dept., too, is cracking down on lending bias. The recent $11 million settlement of redlining charges with Maryland's Chevy Chase Federal Savings Bank, among others, has sent bankers scrambling to see if they're exposed to a similar action. "Somebody needs to challenge Justice in court," says former FDIC Chairman William M. Isaac. "They went well beyond the law here."

So far, bankers are negotiating with Justice. But they're arming for battle with savings and loan associations over a proposal to merge their deposit-insurance funds. The once withered bank fund should be replenished by mid-1995, allowing the premiums banks pay to be slashed. The thrifts' fund, though, will take eight years to recover. The FDIC and the Office of Thrift Supervision worry that high premiums will shrink the thrift industry and require a federal bailout of the S&L fund.

The American Bankers Assn., which dismisses that scenario as fantasy, estimates that a fund merger would cost banks $10 billion. Yet some bankers whisper that they may have no choice but to go along. In return, they hope, they'll win expanded rights to sell securities and insurance.

That may be too much to expect. Even though 1994 was an uncommonly good year, banks know it's always an uphill battle to wrest new powers from Congress. In 1995, they'll probably have to settle simply for not losing big.



Clintonites are moving on several fronts:


As Treasury investigates mutual-fund sales practices at NationsBank, other lenders brace for undercover FDIC visits to find marketing abuses; Congress may strictly oversee sales practices.


Bank regulators are stepping up scrutiny of bank derivative activities; Congress may weigh in with new restrictions on these financial instruments.


A Justice Dept. lending-bias settlement with a

Maryland thrift has banks scrambling to determine if they'll be targets of similar aggressive enforcement.


Banks are fighting a thrift industry plan to merge their weak federal deposit insurance fund with the banks' healthy fund.

It could cost banksAmy Barrett in Washington, with bureau reports

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