A decision by the House Banking Committee to eliminate the federal thrift charter drew reactions ranging from outrage to acceptance.
"This will lead to a diminution in franchise value for hundreds of companies," said Paul A. Schosberg, president of America's Community Bankers. "These tentative half steps to modernization are wrong."
But others were less concerned.
"If you're the typical thrift, which does pretty much what a bank does, you won't feel a whole lot of impact from this vote," said William A. Cooper, chairman of TCF Financial Corp., Minneapolis. "We flipped our charter from a thrift to a bank, and you know how much effect it had on our operations? Zero."
The House Banking Committee wrapped up four days of work on a financial reform bill Friday, barely approving the measure 28-26. Committee Chairman Jim Leach, R-Iowa, voted yes even though the legislation-against his wishes-breaks down the legal barriers between banking and commerce.
Rep. Richard Baker, R-La., predicted the bill would pass the House before lawmakers leave for vacation in August. "Support for the bill is stronger than the committee vote indicated," he said. "With the House leadership's direction, this can move quickly."
The sweeping legislation would allow banks, securities, and insurance firms to own each other. The committee also agreed to let bank holding companies derive up to 15% of their revenues from nonfinancial businesses. Likewise, commercial firms would be permitted to earn up to 15% of their revenues from banking. Although these firms would be limited to buying banks with less than $500 million in assets and a five-year track record.
This two-way attack on the wall separating banking and commerce is the "functional substitute" to unitary thrift holding companies, according to J. Denis O'Toole, vice president of federal government relations at Household International Inc., the finance company that owns Household Bank FSB in Chicago.
"What's good about this bill is it gives you options," Mr. O'Toole said. "The bottom line, at this point, is we have an opportunity to switch to a bank charter or continue as a unitary thrift."
But the legislation approved Friday still has a long journey before enactment. The House Commerce Committee is expected to take up the measure after July 4 before it moves on to the House floor. The bill also must move through the Senate.
After heated debate late Thursday, House Banking voted to force thrifts to convert to national banks within two years of the bill's enactment. The Office of Thrift Supervision would be merged into the Comptroller of the Currency's Office within three years of enactment.
The plan, sponsored by Rep. Bill McCollum, R-Fla., passed easily, but only after the committee defeated by a narrow 26-23 margin a measure that would have left the federal thrift charter alone.
Federal thrifts could keep existing business that are not permitted to national banks, such as real estate development. However, a majority of the thrift's loans would have to remain in home loans.
S&L holding companies also would be allowed to continue all currently permitted activities, even affiliations with nonfinancial firms.
The bill would allow unitary thrift holding companies to sell depository institutions to each other without penalty. However, a sale to any other buyer would mean an end to "grandfathered" powers. The grandfathering permits thrifts to retain businesses that are not allowed under the national bank charter.
But many industry officials said thrifts will be hurt anyway.
"This immediately lowers the value of these thrifts because they won't retain the same powers if they are transferred," said Patrick Forte, president of the Association of Financial Services Holding Companies.
"It's the equivalent of completely taking it away," said Manuel J. Mehos, chairman and CEO of Coastal Bank SSB in Houston.
Under the plan, state-chartered thrifts could keep their charters, but would be bound by the same restrictions on powers and grandfathering rules as federal institutions.
While the thrift industry vigorously opposed his amendment, Rep. McCollum said financial reform would not move unless the thrift and bank charters are merged. "Without this provision, the bill would lose the support of the banking industry," he said.
He noted that bankers agreed to help bail out the Savings Association Insurance Fund on the condition that industry charters would be merged.
Supportive lawmakers pointed to the S&L crisis of the 1980s as proof that the charter is too risky. "The thrift industry has a sad history," said Rep. Marge Roukema, R-N.J. "With this agreement we can put this behind us."
By preserving their existing powers, thrifts have no reason to complain, she said. Rep. John LaFalce, however, complained there is no need to eliminate the thrift charter. "I am waiting to hear the compelling societal need."
The committee also approved a plan that would make membership in the Federal Home Loan Bank System voluntary, even for thrifts. Also, banks with less than $500 million in assets could use Home Loan Bank advances for small business, agriculture, rural development, and low-income community lending.
The plan, sponsored by Reps. Baker, Paul Kanjorski, D-Pa., and Rep. Leach, also would eliminate the existing 30% cap on advances to commercial banks.
The Home Loan bank changes are among few provisions being cheered by banking industry leaders.
"I don't want to be too negative, but I don't think I could sell this to our members," said Joe Belew, president of the Consumer Bankers Association. "The bill is rife with problems."
Mr. Belew called a plan to require banks to offer lifeline accounts "inconceivable" and noted that the bill does not ensure banks won't be discriminated against by state insurance commissioners.
Edward L. Yingling, chief lobbyist for the American Bankers Association, cited those two provisions among the three he said the industry will fight. The third is the amendment allowing nonfinancial companies to buy banks. Mr. Yingling said these companies would be regulated less rigorously than bank holding companies.
The Independent Bankers Association of America has opposed reform from the beginning and labeled the committee's bill "anti-consumer."
