Just When Bank Reform Seemed Almost In The Bag...

It has been a rough summer for the Treasury Dept. and its allies in their uphill fight to overhaul the nation's creaky banking laws. They had planned to spend August resting up for a tough but winnable battle to sweep away Depression-era restrictions on banks. Instead, reform forces watched as financial scandals and new warnings of costly bank failures have sapped Capitol Hill's already feeble interest in giving banks new powers. As Congress prepares to return on Sept. 11, some banking lobbyists are beginning to think that the legislation now taking shape may be worse than the status quo. Says one reform advocate: "Kill it before it multiplies."

The latest blow came on Aug. 23, when the General Accounting Office announced that the federal Bank Insurance Fund (BIF) is nearly out of money. Accounting changes pressed by the GAO cut the BIF's reported balance in half, setting the stage for insolvency sometime between Thanksgiving and Christmas.

The new BIF figures don't change the health of the banking industry--Congress already knew it had to pump money into the insurance fund this year. But the GAO report gives new ammunition to advocates of small-bore reform who would give the insurance fund new borrowing power, toughen bank regulation, and go home. House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) said the House might consider BIF funding ahead of the omnibus bill, which would mean certain death for the Treasury's plan to let banks merge with industrial companies as well as sell and underwrite securities and insurance.

SHAKEN FAITH. Banking legislation got off to a strong start last spring, when the committee adopted most of Treasury Secretary Nicholas F. Brady's pro-bank plan. Since then, the overhaul has been losing ground. The Senate Banking panel reined in banks' new securities powers and barred banks from exploiting state laws that let them into the insurance business.

Then came the scandals. The collapse of Bank of Commerce & Credit International, which hid its ownership of Washington's First American Bankshares for nine years, shook faith in the regulators, who are supposed to govern the expanded world of banking. Attempts by Salomon Brothers Inc. to corner the market in Treasury securities raised fears about letting banks expand their underwriting activities. And the recent wave of big-bank mergers fed lawmakers' fears that allowing interstate branching would create a handful of monopolistic megabanks.

Now, bank lobbyists face fights in both houses of Congress. House Energy & Commerce Committee Chairman John D. Dingell (D-Mich.) wants to maintain the barrier between banks and securities firms. A committee draft would let banks sell securities only if they adopt onerous accounting rules, accept the Securities & Exchange Commission as an extra regulator, and get out of such lucrative businesses as foreign-exchange trading.

The task of squaring different versions of the bill will fall to House Rules Committee Chairman John Joseph Moakley (D-Mass.), who foresees a strong chance of a deadlock. "It's possible we'd end up with just a funding mechanism for the BIF," he says.

The Treasury is standing firm behind its legislation, but some bank lobbyists are having second thoughts. They'd settle for a combination of BIF funding, deposit-insurance reform, and the interstate branching rights that banks have wanted for years. That would leave banks to fight for securities and insurance powers in the states, in courts, and in regulatory agencies--where they've done much better than in Congress.

"The situation is not out of control yet," says Samuel J. Baptista of the Financial Services Council, a supporter of broad reform. But if that's the best that advocates can say, bank reform may never recover its lost momentum.

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