Banks Play to a Tie on Reform Bill

WASHINGTON - In the end, the banking industry fought Congress to a standstill.

On the one hand, the omnibus bill approved last week was stripped bare of key measures aimed at boosting bank profits - including interstate branching authority and new consumer and securities powers.

But the industry did manage to fend off the most-feared proposals: caps on credit card interest rates, reduced levels of deposit insurance coverage, and restrictions on existing authority to sell stocks, bonds, and insurance.

A Costly Stalemate

Yet with the industry under more stress than at any time since the Great Depression, the banking industry could ill afford to finish the legislative year with just a tie. What was needed, say many bankers, was a fundamental overhaul of the financial system.

"The disappointment is that what started out as an attempt to reform becomes sort of a negative - nothing happened," said John B. McCoy, chairman of Banc One Corp., Columbus, Ohio.

That disappointment was heightened by two factors.

First, because Congress is likely to be embroiled in the politics of a presidential election next year, the prospect is dim for soon getting the right to branch across state lines or to sell insurance and mutual funds nationwide.

Second, the bill that was approved could prove to be far more burdensome than anticipated, possibly being a drag on the industry well into the next century.

"This is going to be an extremely costly bill for the industry," said Karen Shaw, president of the Institute for Strategy Development.

The industry was so focused on the "big issues," such as interstate branching, that it didn't contest some of the bill's most burdensome requirements.

Capital-Based Regulation

The legislation, for example, imposes a system of capital-based regulation that many banks will find difficult to deal with.

"Banks are going to have to redefine their asset-liability management system," said Ms. Shaw. "They'll be forced either to raise capital, which is hard, or sell assets, which is expensive."

The bill could be a death knell for marginally capitalized banks, which face tougher regulation, said Keith Stock, a partner and bank specialist at Andersen Consulting. "These banks need to raise money, but no investor is going to be attracted to a bank on the bubble."

Even more ominous is the tab banks are running up with the government. The industry must repay within 15 years the $70 billion or more expected to be borrowed to shore up the Bank Insurance Fund. That requirement would be difficult to meet all by itself, Ms. Shaw said.

Onerous Reserve Requirement

What's more, the bill requires that the nearly broke Federal Deposit Insurance Corp. build reserves of at least $1.25 for each $100 of deposits.

To repay the loans and rebuild reserves at the same time, insurance premiums might have to rise well beyond the back-breaking level of 30 cents for each $100 of deposits that the FDIC is expected to begin levying next July. And the alternative - taxpayer assistance - is unpalatable to an industry desperate to avoid further governmental intrusion.

The package includes other costs as well. Banks will be subject to new audit and reporting requirements, more frequent examinations - which they will pay for - and additional requirements to disclose consumer fees and rates.

The bill also includes disciplinary measures the industry had long sought, including limits on application of the "too-big-to-fail" doctrine and a mandate for the FDIC to base insurance premiums on the riskiness of a bank's activities.

|Nothing to Help Us'

In sum, for many banks the bill was a disappointment.

"As far as our bank is concerned, there is nothing in the bill to help us," said John C. Medlin, chairman of Wachovia Corp., Winston-Salem, N.C. "The only help we could get is that the bill may make other banks more responsible, and we wouldn't lose business to irresponsible competition."

The administration had proposed a broad overhaul of the financial services industry that would have repealed barriers to interstate branching and would have permitted banks to affiliate with nonfinancial corporations like General Motors Co.

Treasury Secretary Nicholas Brady last week called the bill "a pale shadow of the fundamental reforms" that the nation's banking system "so badly needs." But he said he would recommend that President Bush sign the measure to provide needed funds to the Bank Insurance Fund.

Trade Groups Relieved

The Washington-based trade groups that fought on the front lines of this year's legislative battle were clearly relieved at the package that emerged last week.

As the congressional session was coming to a close, the insurance and securities industries were fiercely trying to roll back existing bank powers in their fields.

"A reasonable, narrow bill is far better than an unreasonable, broad bill filled with new restrictions on bank activities and costly new regulatory burdens," said Alan Tubbs, president of the American Bankers Association.

Kenneth Guenther, executive vice president of the Independent Bankers Association of America, wrote to members saying that the group "met all of its major policy objectives."

Damage Control Achieved

"We managed to limit the damage," said Joseph Belew, president of the Consumer Bankers Association of America. "But we still didn't do anything to help the industry."

Reform-minded lawmakers echoed Mr. Belew's assessment.

"If anyone had told me six months ago I would be satisfied with what we passed, I wouldn't have believed it," said Rep. Thomas R. Carper, D-Del., who expressed relief that he was able to protect the right of banks in his state to sell insurance nationwide.

"My hope is, we will come back next year," said Rep. Carper, citing interstate branching authority in particular as an issue that "enjoys widespread support" among lawmakers.

Riegle Pessimistic on '92

But Senate Banking Committee Chairman Donald W. Riegle, D-Mich., said the prospect for renewing the legislative process next year is dim.

"We're getting into the presidential election year, and the economy is obviously in trouble," Sen. Riegle said. "So it's not exactly clear where the administration will put its focus."

Moreover, this year's bruising battles over bank legislation left lawmakers and bankers alike with little stomach for a new fight next year, particularly if President Bush is unwilling - as he apparently was this year - to become personally involved.

The lack of enthusiasm displayed by the president is only one reason more comprehensive legislation failed.

Industry at Cross Purposes

The banking industry itself was badly divided over what it wanted. The Independent Bankers Association, which opposed interstate branching, the ownership of banks by nonfinancial corporations, and the mixing of banking and commerce, mostly wanted to preserve the status quo.

Citicorp, Chase Manhattan Corp., and other money-center institutions wanted securities powers and interstate branching but refused to yield ground on existing insurance powers to get it. BankAmerica Corp. and NCNB Corp. wanted interstate branching above all and were willing to compromise in other areas to obtain that goal.

The American Bankers Association, with a membership that includes all of the industry's diverse elements, tried to walk the middle ground. It endorsed new securities powers and was neutral on the Treasury's proposal to permit nonfinancial companies to own banks.

It stayed out of the debate over interstate branching but signed on to a compromise that developed late in the process that would have allowed states a greater role in setting the terms for branching. At the same time, the ABA steadfastly opposed linking restrictions on securities and insurance powers to branching.

No Constituency for Bill

As a result, said the IBAA's Mr. Guenther, "this bill never had a constituency." He helped organize a variety of interest groups against the Bush administration package, under the banner of the "Main Street Coalition."

The alliance included organizations representing the nation's governors and state legislators, farm groups, small business trade associations, and a variety of others.

Sen. Riegle and others laid much of the blame for failure of the broad bill at the administration's doorstep. "If the President had gotten involved, we could have worked it out," the senator said.

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