WASHINGTON -- Although derivatives legislation still looks like a long shot this year, bank lobbyists expressed concern on Wednesday that a new government report on the controversial financial instruments could shorten the odds.

The General Accounting Office said Wednesday there are worrisome gaps in the regulation of the $12 trillion market, and warned that insured banks and the financial system as a whole could be imperiled if any of the major players either failed or stopped trading.

"There's kind of a small prairie fire burning out there now," said Edward L. Yingling, chief lobbyist for American Bankers Association, describing anxiety on Capitol Hill over derivatives.

Adding Fuel to the Fire

"The biggest concern we have with the GAO report is that it could add fuel to that fire," he said. "It could lead people to believe they have to act."

Echoing Mr. Yingling, Comptroller of the Currency Eugene A. Ludwig said the report should be kept in perspective.

"This deserves serious attention," he said. "But one thing that I become concerned about is public hysteria.

He said supervision of derivatives will evolve to keep pace with market developments, but insisted there are no new regulations under study.

"We are constantly looking at all of this very seriously," Mr. Ludwig said. "But there is nothing new in the works."

In Good Shape

For banks, the good news is that the GAO report made it clear their industry was in better shape on regulation than either the securities or insurance sectors.

Indeed, some industry sources wondered if one outcome of the legislative process might be to equalize regulation among industries. But bankers said they won't even suggest legislation for other industries, largely out of fear that they could get stung as well.

"You run the danger that once legislation starts, it could get out. of control," said a bank lobbyist who asked not to be named.

The GAO report got a quick boost when House Banking Committee Chairman Henry B. Gonzalez, D-Tex., said he would introduce legislation incorporating the congressional watchdog agency's recommendations.

Rep. Gonzalez said he would be joined by Rep. Jim Leach of Iowa, the banking committee's ranking Republican. Both men had previously introduced derivatives bills.

However, most observers said legislation is unlikely.

Gay Evans, managing director of Bankers Trust Co. and head of the International Swap Dealers Association, said Congress already has a full plate and may not want to deal with an issue as complex as derivatives.

"Once they have a better understanding, I think they're [lawmakers] going to realize that legislation is not necessary," she said.

Karen Shaw, president of the Institute for Strategy Development, said legislation is unlikely in the absence of a crisis.

"Take four more companies that lose meaningful amounts of money, add one bank and maybe a pension fund, and there will be a bill," Ms. Shaw said.

One key lawmaker, Rep. John D. Dingell, chairman of the House Energy and Commerce Committee, was reported by a number of observers to have said he doesn't believe there is time in the legislative session to deal with derivatives.

A spokesman for the lawmaker said Mr. Dingell would like to move legislation, but only if there is time.

The ABA joined five other securities and banking groups in criticizing the GAO report.

"If implemented, the GAO recommendations would increase the cost and reduce the availability of these essential transactions," the groups said. "We are convinced that any legislation having these effects will harm the American economy."

Jack Sandner, chairman of the Chicago Mercantile Exchange, warned in a statement that "harmful regulation will simply drive the business offshore."

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