Federal Reserve Board Chairman Alan Greenspan rejected a compromise on financial reform Thursday.

After other regulators had endorsed the deal Wednesday, Mr. Greenspan dashed hopes for a breakthrough by blasting Rep. John J. LaFalce's plan to limit new activities conducted in bank subsidiaries to securities underwriting and merchant banking.

"The consequence of doing that is so thoroughly negative ... that (it) is much too high a price to pay for an issue, which, in our judgment, probably could be resolved by different means," Mr. Greenspan told the House Banking Committee.

He added that the deal would give banks an unfair competitive advantage over insurance and securities companies.

Yet Rep. LaFalce's bill got a boost from a powerful Republican Thursday as House Rules Committee Chairman David Dreier signed on as a co-sponsor. Treasury Secretary Robert E. Rubin endorsed it Wednesday, including provisions that would force banks to house insurance underwriting and real estate development in holding company units.

More concessions to the Fed emerged during the committee hearing. Treasury would have to share rulemaking authority with the central bank when defining new powers for bank subsidiaries. What's more, the Fed would have sole authority to define merchant banking.

Treasury is making "a tremendous outreach to the Fed," Rep. LaFalce, D- N.Y., told Mr. Greenspan.

But that did not resolve Mr. Greenspan's principal complaints about granting broad powers to bank operating subsidiaries. The LaFalce bill, he said, would expand the subsidy banks get from deposit insurance, emergency loans by the Fed, and other government support. Risky bank operations could also prompt more taxpayer bailouts.

"You can give us all the authority of everything with respect to operating subs, and we would oppose putting the powers in there," Mr. Greenspan told House Banking's ranking Democrat. "It's not a turf question. It's an issue of structure."

Mr. Greenspan said he wants new powers to be exclusively in holding company units, which the Fed oversees, because then they would not protected by the government safety net. He also disputed Treasury's argument that greater powers for holding company affiliates would weaken the national bank charter and thus curb the administration's influence on the economy.

The legislation "would not diminish the ability of the executive branch to continue to play its meaningful role in the development of banking or economic policy," he said, noting that the number of national banks has climbed since 1996.

Mr. Greenspan said he would grudgingly agree to broader powers for subsidiaries of banks with less than $1 billion of assets because they represent a small economic threat. However, Treasury opposes that idea, a spokesman said Thursday.

In response to questioning by Rep. Jim Leach, the Banking Committee chairman, Mr. Greenspan agreed to meet with lawmakers and Mr. Rubin to hammer out a deal.

Criticizing two other parts of the LaFalce plan, the Fed chairman said commercial firms should be barred from owning thrifts and Congress should delay a decision on mixing banking and commerce.

"Nothing is lost, in my judgment, by making this a two-stage process," he said. "The Asian crisis last year highlighted some of the risks that can arise if relationships between banks and commercial firms are too close."

Senate Banking Committee Chairman Phil Gramm's reform bill will not be released until Feb. 16. Hearings are scheduled for Feb. 23-25, with a committee vote in early March.

On Thursday, Senate Banking unanimously passed the Financial Regulatory Relief and Economic Efficiency Act, which contains 37 provisions designed to make life easier for banks.

Banks could pay interest on corporate checking accounts and earn interest on reserves held at the Fed. Another provision would eliminate a requirement that thrifts keep 4% to 6% of total demand deposits in liquid assets.

To help credit card banks comply with the Community Reinvestment Act, Sen. Richard H. Bryan, D-Nev., added an amendment that would allow them to originate mortgages and make small-business loans. But such activity would be limited to 1% of assets.

Sen. Wayne Allard, R-Colo., threatened to prevent bank regulators from implementing the know-your-customer proposal, designed to thwart money laundering. "I'm going to be prepared to offer an amendment on the floor of the Senate," he said.

While it would be the first in the Senate, four such bills are pending in the House. "I think putting a little pressure on them is probably good," Sen. Gramm said.

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