'89 Measure Still Sets The Legislative Agenda

WASHINGTON -- It's been five years since President Bush signed the Financial Institutions Reform Recovery and Enforcement Act, but the bailout law continues to shape the legislative environment for banks and thrifts to this day.

"FIRREA was a seminal piece of legislation and so many things flowed out of it that have to be dealt with now," said Patrick Forte, president of the Association of Financial Services Holding Companies.

For banks, the first FIRREA effect came in 1991, when Congress passed the much-reviled Federal Deposit Insurance Corp. Improvement Act. Bankers say that law punished their industry in much the way that the 1989 legislation disciplined thrifts.

"They took FIRREA, perfected it, and then inflicted it on the banking industry in 1991," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.

But that was only the beginning. Because of FIRREA, major industry trade groups ceased to exist, and the thrift industry began to be parcelled out among commercial banks.

Today, said Mr. Forte, fully 25% of the deposits covered by the Savings Association Insurance Fund are held in commercial banks.

The dual bank system also suffered from FIRREA's decree that states could not grant powers that exceeded the grant of the federal regulators, and many observers believe the mind set that resulted helped start the debate over agency consolidation.

"FIRREA did in the state bank system," said J. Denis O'Toole, a lobbyist for

Household International.

"What powers can you get now from the states? What's the advantage of a state charter?"

The bailout created an independent Federal Home Loan Bank System, setting the stage for a major overhaul of the system next year.

And if Congress takes up the question next year of whether to merge the bank and thrift insurance funds -- as many observers believe it will -- that issue, too, will owe its life to the 1989 law.

However, the Financial Institutions Reform Recovery and Enforcement Act did more than just set the legislative agenda for the bank and thrift industry. It also in many ways determined the outcome of the debate, especially for savings and loans.

"Even when we're fight, we're still the thrift industry," said industry lobbyist Jim Butera.

Tax Breaks Gone

Last year, for example, Congress stripped the industry of tax benefits that had specifically been granted years ago in an effort to stretch out the dwindling resources of the now-defunct Federal Savings and Loan Insurance Corp.

"Every time we met with somebody at the Joint Tax Committee, they'd say, 'You're right, this is a terrible policy, but we're going to do it anyway,'" Mr. Butera recalled.

The decision to terminate the tax benefits was only one of several promises that Congress failed to keep with the thrift industry in the eyes of Mr. Butera and other industry figures.

FIRREA itself forced thrifts to write off supervisory goodwill -- an intangible asset thrifts were permitted to count toward capital when they took over failed institutions without compensation.

And last year's ResOlution Trust Corp. Completion Act undid one more congressional promise: the pledge made in FIRREA that the federal government would help fund the fledgling Savings Association Insurance Fund.

In theory, the insurance fund could still qualify for taxpayer assistance.

But the conditions set last year are so tough that most observers believe Congress essentially barred Treasury aid.

"That was all repealed in the RTC Completion Act," noted a glum Mr. Forte.

The expected debate over merging the Bank Insurance Fund and the Savings Association Insurance Fund flows directly from FIRREA and last year's decision to put restrictions on Treasury assistance.

Bank Premiums to Fall

First, FIRREA decreed that both insurance funds would be required to build reserves equal to 1.25% of insured deposits.

As it turned out, the bank fund rebuilt much faster than the thrift fund.

Once the Bank Insurance Fund recapitalizes -- probably next year -- bank premiums will drop dramatically.

With no prospect for federal help, thrifts are unlikely to see premium reductions for years to come, leaving them at a competitive disadvantage.

Paul Schosberg, president of the Savings and Community Bankers of America, believes Congress will give serious consideration to merging the funds as a means of keeping both industries on competitive footing.

"I think the administration is already working on some kind of plan," said Mr. Schosberg. "They have to make some strategic and tactical decisions about what they want to do."

ABA Disagrees

But Mr. Schosberg concedes that a funds merger is still a long shot.

And one of his counterparts in the banking industry believes it is more than a long shot.

"The funds just ain't going to be merged next year," said Edward L. Yingling, executive director for government relations at the American Bankers Association.

Mr. Yingling argues that the "numbers just aren't there" to justify a merger. Perhaps more important, it is easier for one industry group to block legislation that it doesn't like than for another to pass something.

Long run, though, Mr. Yingling concedes that the problem could work itself out -- again for reasons that trace back to FIRREA.

Growing Together

The 1989 law lifted restrictions on bank purchases of thrifts, and commercial banks already control a quarter of the deposits insured by the Savings Association Insurance Fund.

"If the industries keep coming together, as a practical matter, that resolves the issue," he said.

Apart from specific issues, like the BIF-SAIF merger, FIRREA changed the mind set on Capitol Hill.

"From 1954 until 1989, the frame of reference for everyone was the Bank Holding Company Act," said Household International's Mr. O'Toole. "Everybody was familiar with it."

More than that, the Bank Holding Company Act was a "good" law, one that was passed in the usual low-key way to deal with a specific set of manageable problems.

FIRREA was a "bad" law, that drew massive press attention, soaked up gobs of taxpayer money, and poisoned long-established relationships between the industry and lawmakers.

And the effect has been magnified by the unusual turnover in Congress. "Half of Congress has been there four years or less," said Mr. O'Toole.

As a result, there are fewer lawmakers whose learning experiences developed in the aftermath of the Bank Holding Company Act and relatively more who entered Congress in the FIRREA era.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.