Banking Reform Is Back On The Back Burner

When federal regulators allowed banks to acquire big brokerages starting this spring, it looked as if a Depression-era law limiting bank activities was in its death throes. Exhibit A: Bankers Trust New York Corp.'s bid for Alex. Brown & Sons Inc. on Apr. 7. The fatal blow to the Glass-Steagall Act was expected later this year with a push by the Clinton Administration to eliminate the last curbs on bank ownership so that in time, say, Microsoft could acquire BankAmerica or Chase Manhattan could buy Chrysler.

But the Administration is suddenly backing away from bold plans because of fierce opposition on Capitol Hill. As a result, the Clintonites are expected only to expand limits on mergers among financial institutions and provide limited entry for other companies into full-service banking.

What happened? Banks, which have been lobbying for decades for repeal of Glass-Steagall, realize they have the best of all worlds. Friendly regulators, such as Comptroller of the Currency Eugene A. Ludwig and Federal Reserve Chairman Alan Greenspan, are giving banks broader entree into other fields while insurers, brokerages, and nonfinancial companies are still largely barred from banking. Alex. Brown, for example, couldn't acquire a bank. That's why, chortles one lobbyist, "there aren't a lot of banks now dying for legislation."

TOO RISKY? Such sentiment is one reason another champion of dramatic reform--Senate Banking Committee Chairman Alfonse M. D'Amato (R-N.Y.)--fears the campaign to repeal Glass-Steagall is losing steam. D'Amato has introduced a bill similar to the Administration's expected proposal that would let banks buy--or be bought by--financial and nonfinancial companies. But Hill sources say he recently told Treasury Secretary Robert E. Rubin that there was scant support in the Senate for such sweeping changes.

The Administration hopes the Alex. Brown buyout will highlight the banks' current advantage. The Bankers Trust merger "emphasizes the need for financial modernization to create a two-way street," says Treasury Dept. Under Secretary John D. Hawke Jr. Beyond the fairness issue, the Clintonites also believe the reforms will lead to more competition.

But many in Congress fear a wide-open banking system is too great a risk for the economy and government-backed deposit-insurance funds. Says Senator Paul S. Sarbanes (D-Md.), ranking Democrat on the Banking Committee: "I feel very strongly that the line between commerce and banking ought not to be bridged." Similar concerns come from House Banking Committee Chairman James A. Leach (R-Iowa).

Treasury officials hint they will address these concerns by limiting the size of acquisitions. One possibility is to mirror a bill by House Banking subcommittee Chairman Marge Roukema (R-N.J.) to let banks conduct up to 25% of their "business" in nonfinancial activities. Leach argues that 25% of assets is too high--it could let Chase Manhattan, the largest bank, buy all but six of the nation's biggest companies.

With the Administration planning to unveil its revised proposal by May, bank lobbyists are betting the Clintonites can't get even a watered-down bill through Congress. After all, Rubin seems more interested in talks with lawmakers to balance the budget. And Ludwig, an outspoken reform advocate, has been keeping a low profile since the recent disclosure that he attended a 1996 White House coffee with bank chiefs, many of whom were hit up for Democratic Party campaign donations. Although Treasury officials insist they remain optimistic about the chances for some reform, history is on the side of the status quo--and for the 105th Congress, history may well repeat itself.

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