after more than two decades of struggle. But if I had to wager on an outcome right now, I would bet against passage this year.

There are two major roadblocks. The first is the question of what activities can be conducted in subsidiaries of banks versus holding company affiliates. The issue pits the secretary of the Treasury (with support from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency) against the chairman of the Federal Reserve.

As contentious as this issue has been, I believe it can be resolved. Industry groups overwhelmingly support the compromise offered by the Treasury and adopted by the House. It allows bank subsidiaries to conduct all activities except merchant banking and insurance underwriting. The Fed wants even more activities forced into holding company affiliates, which the Fed regulates.

Though Senate Banking Committee Chairman Phil Gramm supports the Federal Reserve position, his words ring hollow and his arguments are unconvincing. I surmise he doesn't really care about this issue. He wants to make the Comptroller's Office independent from the Treasury, but I doubt he will kill the bill over that item.

What he does care about passionately is the Community Reinvestment Act. He doesn't like the law in principle and is clearly disturbed by the ways in which he thinks it's being abused.

Sen. Gramm believes CRA has become a very big business that's allocating enormous resources without oversight. He notes that CRA lending commitments amounted to $694 billion in 1998 -- more than the gross domestic product of Canada and well in excess of the discretionary budget of the U.S. government.

He contends that community groups have been using the threat of CRA protests of mergers to extort huge payments from banks. More than $9 billion has been pledged to community groups protesting mergers, with no oversight of their use of the money.

Sen. Gramm is demanding that the financial modernization bill require that CRA agreements -- and the performance under them -- be disclosed publicly. He has said plainly that there will be no legislation without this provision.

He also seeks to create a "rebuttable presumption" that a bank is in compliance with CRA if it has three consecutive years of satisfactory CRA ratings. Community groups desiring to protest a merger application by the bank would have to offer "substantial verifiable evidence" to support charges that the bank is not properly serving its community. This would reduce the ability of community groups to misuse the merger application process to wring out contributions from banks.

The third item on Sen. Gramm's CRA list is an exemption for banks in rural areas that are smaller than $100 million. He says the small-bank exemption would lift the administrative burden of CRA from about 4,000 banks and S&Ls (about 38% of all institutions) that hold just 2.8% of all bank and thrift assets.

These small banks and S&Ls have undergone more than 16,000 CRA examinations since 1990, and only three were found to be substantially out of compliance. One has to question the value of devoting extensive time, money, and energy to banks that hold such a negligible share of the industry's assets.

Sen. Gramm has done his homework and has crafted narrow proposals to deal with what appear to be serious shortcomings in the application of CRA. I sense he's willing to sacrifice the reform bill if he doesn't get most of what he wants on CRA, and I cannot fault that position.

The Clinton administration holds a view of CRA that is diametrically opposed to Sen. Gramm's. The administration also appears willing to sacrifice the reform bill over the issue. Without movement from either or both sides, financial modernization is dead.

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