It may go down as the biggest irony of last year's legislative session. Bush Administration officials put together what they thought was a sure plan to cure the ills of the nation's banks. Although it seemed a long shot, they asked Congress to adopt a sweeping reform of the financial system that included expanded powers for banks and a huge $70 billion loan to shore up the depleted deposit insurance fund.
In the end, Administration officials received their loan. But they also got a lot they didn't bargain for. Terrified that the hemorrhaging banking industry might provide a slow-motion replay of the thrift fiasco, Democratic lawmakers balked at the reform proposals. Instead, they enacted one of the strictest and most sweeping pieces of financial regulation in decades.
PAYMASTERS. The so-called FDIC Improvement Act, whose provisions are now being implemented, will allow regulators to meddle in almost every aspect of bank management. At poorly capitalized banks, regulators will be able to decide how much executives should be paid. They'll even be allowed to determine what would be an acceptable stock price for an institution (table). The act could eventually have a far-reaching impact on the structure of the industry.
Proponents of the law say the new regulations will encourage better management because better-performing banks are exempt from many of the more onerous rules. But critics see it differently. "The nature of regulation has crossed the line," declares Edward L. Yingling, chief lobbyist for the American Bankers Assn. "It has become micromanagement."
Bankers, some members of Congress, and even some regulators say the new law will exacerbate, not solve, the industry's problems. Although most of the measures are aimed at troubled banks, critics contend that these are just the institutions that can ill afford a regulatory straitjacket.
Of immediate concern are new rules requiring early intervention by regulators when a bank is close to insolvency. Under current guidelines, regulators must wait for a bank to exhaust its net worth before they can close it. But starting in December, regulators will be required to act once a bank's tangible equity falls below 2% of its assets.
Regulators then have such forceful options as seizing the bank, ousting management, suspending dividends, and selling off operations. The Federal Deposit Insurance Corp. estimates that Congress' 2% solution could force regulators to shutter banks with upwards of $76 billion in assets, double what they initially expected for 1993. What's more, complying with the new regulations will only add to overhead at a time when most banks are trying to cut expenses. "It's like the old medical practice of bleeding the patient," says Federal Reserve Governor John P. LaWare.
The scope of the legislation's intrusion into banks' internal operations doesn't end there. Regulators themselves are uncomfortable with provisions that require them to set guidelines on acceptable earnings for a troubled bank. And when it comes to rules requiring them to devise parameters for an ailing institution's stock price, they admit they're somewhat bewildered.
Reacting to the criticism, the Bush Administration is acting to ease the burden on banks by proposing legislation to roll back some of the congressional mandates. What's more, regulators, wary of their new clout, say they intend to give banks as much flexibility as possible when they implement the regulations. They say they will come down hard only on the weakest banks.
Still, some banks are so upset that they may finally make good on a longstanding threat: Banking consultant Edward E. Furash says several large clients want him to study whether they can give up their charters. That would be a drastic step. But given Congress' mood, bank regulations stand a better chance of getting a lot tougher before they get any easier.
WHAT REGULATORS CAN DO EARLY INTERVENTION To forestall bank failures, regulators after Dec. 19 will be able to fire managers and directors of troubled banks and can force them to raise cash by cutting dividends and selling subsidiaries EXECUTIVE PAY Effective Dec. 1, 1993, regulators will have the power to set compensation standards for poorly capitalized banks, based largely on the size and performance of the institution. Pay levels could be cut if they're considered too generous PERFORMANCE In addition to capital requirements, ailing banks will have to adhere to regulatory guidelines on earnings after Dec. 1, 1993. Even a bank's share price will be subject to review by regulators. Banks that do not meet these standards may be fined or have constraints imposed on their growth LENDING In March, 1993, regulators will issue standards for making real estate loans, including limits on how much can be lent on various kinds of projects DATA: FDIC IMPROVEMENT ACT OF 1991 SUSAN MCDONNELL