House Banking Committee Chairman Jim Leach was wise to pull the plug on his comprehensive banking bill. The bill had generated much opposition and little support.
Mr. Leach will pursue what he hopes will be a less contentious course in the time remaining this year. He will attempt to pass a stripped-down version of the regulatory relief bill, without any major reforms to the Community Reinvestment Act.
He will also attempt to make it easier for the Federal Reserve to approve new bank holding company activities by modifying the "closely related to banking" test. The Glass-Steagall reforms are dead, but Mr. Leach wrote the Fed encouraging it to liberalize its rules on holding company securities activities.
Mr. Leach remains committed to modernizing the financial system. He intends to push a comprehensive bill again next year. The outcome will depend largely on whether he and his colleagues will learn the lessons underlying their failure to enact a comprehensive bill this time around.
Mr. Leach had wanted his legislation to be "neutral" on insurance. The independent insurance agents were not willing to accept a neutral bill.
They insisted that the bill roll back bank insurance powers. They argued the Comptroller of the Currency was making a mockery of existing statutes, if not the Constitution, by ruling that national banks have limited authority to sell insurance.
It mattered little that the agents' arguments about the state of existing law were twice rejected by a unanimous Supreme Court in the space of a year. Nor did it count for much that the agents' position was clearly contrary to the public interest. The House leadership, including Gerald Solomon, a former insurance agent who serves as chairman of the House Rules Committee, did the agents' bidding.
The agents and their friends in Congress calculated that banks were so thirsty for Glass-Steagall reform and regulatory relief they would swallow the bitter pill of a roll-back of their insurance authorities. Their calculation was monumentally wrong.
The first lesson to be absorbed is that Glass-Steagall and regulatory reforms are not sufficiently important to most banks to cause them to trade away their rights to sell insurance. As the saying goes in the South, "That dog don't hunt."
Chairman Leach believes expanded powers should be carried out in holding companies regulated by the Fed rather than in banks or their subsidiaries. His decision to put this requirement in his Glass-Steagall reform bill engendered antipathy toward the bill from many banks and hostility from the Clinton administration.
The holding company device was conceived by banks, not the government, as a means to circumvent deleterious restraints on branch banking. Now that branch banking is the law of the land, holding companies serve little purpose.
The financial services industry has become intensely competitive. Banks want and need the freedom to choose the most efficient form of organization.
Banks also need the ability to select the most enlightened regulatory forum. Nearly every freedom to compete that banks have achieved has come from actions by state and federal regulators. Congress has in almost every instance impeded reform.
The second lesson to be absorbed is that banks are loathe to relinquish their freedom to choose their regulator. They want regulators to feel pressure to become more efficient and progressive. Mr. Leach needs to recognize there's far more at stake here than a regulatory turf war about which most banks couldn't care less.
A comprehensive bill might have been enacted this year but for some serious miscalculations about the mood of bankers. They face an intense battle in the marketplace. They know that only the fittest will survive.
Less-regulated competitors are poaching banks' best customers. Banks' market share in their traditional products has plummeted continuously for two decades.
Bankers can't and won't tolerate politics as usual. If political leaders don't learn from this year's legislative fiasco, the outlook for reform next year is bleak.
Mr. Isaac, former chairman of the Federal Deposit Insurance Corp., is chairman and CEO of Washington-based Secura.
