Brady Tells Top Bankers He Will Play Hardball on Bank Reform Bill

WASHINGTON - Treasury Secretary Nicholas Brady told leaders of the nation's banking industry Wednesday that the administration will play hardball to defend its bank reform bill.

In a closed-door appearance before the American Bankers Association's banking leadership conference, Mr. Brady said he doesn't intend to let the reform bill be turned into a vehicle to limit bank products and services.

Hint of a Veto

The Treasury "won't take reform at any price," he said. Reporters were barred from the session and had to rely on second-hand accounts from members of the audience.

Although Mr. Brady didn't use the term, his comment was taken by bankers at the meeting to mean that President Bush would veto legislation that resembles the drafts to be considered next week by two House subcommittees. Those measures would strictly limit bank activities in securities, insurance, and real estate.

Mr. Brady's words came as welcome news to the 400 or so bankers at the ABA-sponsored conference, in part because the remarks indicated the administration is prepared to get tough with interest groups opposed to new powers for banks.

But his comments also reaffirmed that, if things turn against the administration, a veto is possible.

"The threat of a veto will have an effect on the process," said a key industry figure who heard Mr. Brady. "It is important for the administration to indicate that they will play hardball."

ABA's Resolution

Bankers at the conference reiterated their misgivings about the direction the banking bill has begun to take in recent weeks. Efforts to water down the bill have been made not only in two subcommittees of the House Energy and Commerce Committee but also in the Senate, whose Banking Committee cleared legislation restricting insurance activities.

In a resolution, the ABA conference noted the industry's "deep concern that the trend in the pending legislation seems to be to add restrictions on bank activities.

"If the Congress is not going to adopt legislation making the industry more competitive in products and services, then under those circumstances, all provisions related to bank product and service authority should be removed from the legislation, and the ABA will work aggressively to have them removed," the resolution continued.

The battle will be joined next week when the two House subcommittees vote on their versions of the bank reform legislation. The telecommunications and finance panel has a bill that would roll back the limited underwriting powers the Federal Reserve Board has authorized for a handful of large banks.

Repeal, with a Catch-22

That bill would repeal the Glass-Steagall Act, which has barred banks from securities activities, but would restrict bank underwriting powers so as to place such activities off limits to most banks.

In addition, said Karen Shaw, president of the Institute for Strategy Development, the subcommittee version would limit new powers to so-called Level I banks. Level I banks have not been defined yet, but comments by Senate staff members during the banking panel's deliberations suggest that a bank would need a risk-based capital ratio of 11.2% to qualify.

The telecommunications subcommittee bill would sharply curtail the authority of state-chartered banks to engage in real estate management, development, or brokerage - a position considered but overwhelmingly rejected by the House Banking Committee.

Separately, the commerce, consumer protection, and competitiveness subcommittee will consider a bill that would sharply curtail bank insurance powers. In particular, it would preempt a Delaware law that permits Citicorp and other banks to market insurance nationwide. A similar provision was included in the Senate bill but rejected by the House Banking Committee.

IBAA's Position

This bill includes a measure aggressively sought by the Independent Bankers Association of America that would remove language approved by the House Banking Committee subjecting individuals to restrictions of the Bank Holding Company Act.

The banking committee measure would have meant that "individuals with an interest in a bank would not be able to own a farm or small business," said Kenneth Guenther, IBAA executive vice president.

Almost alone in the industry, his group is "comfortable" with the House Energy and Commerce subcommittee bills, said Mr. Guenther.

It will be up to the House leadership to decide which versions of bank reform are considered on the House floor, either as amendments or as an original text of the bill.

House May Take Narrow Path

A number of observers said the subcommittee bills make it more likely that the House will abandon efforts to craft comprehensive legislation and will instead deal with a few narrow issues, such as recapitalizing the Bank Insurance Fund.

"It adds so many controversies to the process that at some point the banking industry has to walk away" from the comprehensive bill, said Samuel Baptista, president of the Financial Services Council. "It plays to those who want a narrow bill."

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