Although banks were frustrated by Washington politics in 1997, they came out of the year in pretty good shape. Next year probably will be more challenging.

The major disappointment in 1997 was, of course, the failure of Congress to enact financial modernization legislation. Financial institutions continue to operate under a 60-year-old statutory scheme that doesn't begin to reflect the reality of today's marketplace.

On the positive side, the banking industry was able to prevent some bad things from happening. The modernization legislation in the House was strewn with land mines.

The independent insurance agents were determined to undo the Supreme Court's decision in the Barnett case, which affirmed the right of national banks to sell insurance. The agents had friends in Congress who were willing to do their bidding-the public interest notwithstanding.

The comptroller of the currency had won four unanimous decisions from the Supreme Court affirming his broad authority to determine the permissible activities of national banks. The insurance agents and other special interests, including the Federal Reserve, were intent on overturning these decisions legislatively to prevent the comptroller from modernizing the national bank charter.

The banking industry was under considerable pressure from legislators to accept a deal. The deal the legislators had in mind would have served neither the banking industry nor the public.

Most banks united in opposition to any bill that would inhibit the industry's freedom to compete. No bill was clearly preferable to a bad one. They were able to stop the legislation dead in its tracks.

Though banks emerged unscathed from the battle in 1997, the war is far from over. Barring a miraculous change of heart, the special interests will resume their shenanigans in 1998.

The insurance agents will try to roll back the authority of banks to offer insurance products. They will join with other special interests in an attempt to curtail the rulemaking authority of the comptroller of the currency.

The legislative battle will be more complicated in 1998 than in 1997. For one thing, it's an election year, which always makes Capitol Hill volatile and unpredictable.

Moreover, the battle between credit unions and banks probably will be joined in 1998. Most observers believe the Supreme Court will rule in favor of the banking industry on the "common bond" case involving the AT&T credit union.

If the court rules as expected, credit unions will swarm the Hill seeking legislative relief. The banks will argue that if credit unions are going to operate without a common bond and behave like full-service banks, they should pay income taxes just like banks. It will be a ferocious battle.

Bankruptcy reform also will be teed up in 1998. The bankruptcy laws are being abused massively. The banking industry has rounded up over 140 co- sponsors for a bill to reform the system.

Add election-year politics, the battle between banks and credit unions, and bankruptcy reform to the financial-modernization broth, and the legislative stew could develop a very bitter taste. Banks may need to muster every ounce of political strength, skill, and determination they have just to avoid a disastrous outcome.

My sense is that bankers are so busy with industry consolidation and are so frustrated with Washington politics that they're tuning out. I hope I'm wrong about that-because if bankers tune out of politics in 1998, they could get their heads handed to them.

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