Don't Hold Your Breath Waiting For Bank Reform

When Nicholas F. Brady's effort to rewrite the nation's banking laws came to a crashing halt in the House of Representatives on Nov. 4, the ever-optimistic Treasury Secretary borrowed a line from Scarlett O'Hara: "Tomorrow is another day." After all, the Bush Administration won a tactical victory when the House resoundingly rejected a Democratic version of banking overhaul that would have sharply restricted banks' ability to diversify into other financial services. Despite the setbacks, Brady maintained that "true, comprehensive reform" was just around the corner.

But broad banking reform may be gone with the wind. Brady's victory over the Democrats soured on Nov. 6, when the House Banking Committee rejected Administration pleas to try again on a bill to expand banks' powers. Instead, the panel approved a "narrow" bill tying a must-pass $30 billion Treasury loan for the Federal Deposit Insurance Corp. to tight new regulations for banks (table). Even that may be in trouble. "The White House will have to hustle for votes just to pass a strict funding bill," says Rules Committee member Representative Martin Frost (D-Tex.).

SEE-SAW? Prospects aren't much brighter in the Senate, where leaders promptly postponed their planned debate on a pro-reform bill. Senate relations with the Administration took a turn for the worse on Nov. 6, when Banking Committee Democrats killed Comptroller of the Currency Robert L. Clarke's bid for a second term as the Treasury's top banking regulator. Committee members thought Clarke was too lax at the start of the banking crisis and subsequently too harsh in regulating the industry.

The turmoil reflects a clear rejection of the White House's strategy for breaking a decade-long stalemate and finally winning authority for banks to expand into securities and insurance and set up new nationwide branch networks. Brady hoped to couple those reforms with legislation to bolster the FDIC's failing Bank Insurance Fund. He argued that banks need to expand their franchise to cut costs, boost profits, and pull themselves out of their current woes.

But that plan backfired in the House. Members thought it sounded like a lethal combination of deregulation and bailout reminiscent of the 1980s savings-and-loan scandal. Powerful Democrats -- led by Banking Committee Chairman Henry B. Gonzalez (D-Tex.) and Energy & Commerce Committee Chairman John D. Dingell (D-Mich.) -- argued that banks and regulators couldn't be trusted with new powers unless they were hemmed in by tight controls.

The bill written by the two chairmen put such vigorous restrictions on banks' new roles -- for example, cutting back rights that some institutions already have to sell insurance and mutual funds -- that in the end, no one liked it. As Brady and the American Bankers Assn. joined forces against the Dingell-Gonzalez bill, House members "decided that the ultimate safe vote was 'no,' " says lobbyist Paul A. Equale of the Independent Insurance Agents of America. The measure died on a 324-89 vote.

'NAIVE.' Bank lobbyists still see some chance that they'll prevail. Republicans will press hard to bulk up the narrow refunding bill with interstate branching, which won a 374-20 vote on the House floor. And banks believe that the more reform-minded Senate will ultimately pass a wide-ranging bill, giving them a chance to win more powers in a House-Senate compromise. "Anything could happen," says Susan K. Gordy, who lobbies for First Chicago Corp. "I wouldn't even give up on securities powers yet."

But such hopes are "just naive," responds House Banking member Jim Leach (R-Iowa). Any provisions added to help banks would incite clamor by insurers and their agents to offset those gains. And House-Senate negotiation on a broad bill would give Dingell and Gonzalez another chance to roll back bank powers. Anything emerging from that caldron could end up being vetoed.

Instead, Congress will have its hands full just saving the FDIC fund between now and its planned Thanksgiving adjournment. Without new money, the FDIC has warned, it will have to curtail takeovers of failing banks by yearend -- fraying the safety net that protects every bank depositor. No one in Washington expects Congress to let bank depositors down. But in the capital's current sour mood, "at least 100 members of the House won't vote for any bill at all in this area," says Banking Committee member Jim Slattery (D-Kan.). So for Brady's vision of "true, comprehensive reform," tomorrow may never come.

      -- Recapitalization of the FDIC's Bank Insurance Fund. Most likely: A $30
      billion loan from the Treasury
      -- Tighter supervision for banks: Tougher exams, more independent audits,
      stricter accounting rules
      -- More power to the FDIC to close failing banks faster. Instead of waiting
      until it's insolvent, the FDIC could seize a bank when capital falls below
      2% of assets
      -- Limits on the 'too big to fail' loophole, under which regulators give
      more protection to big banks
      -- Tighter rules on foreign banks, including federal approval of
      applications to open state-chartered offices
      DATA: BW
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