WASHINGTON -- The House Banking Committee yesterday tentatively approved a plan to allow the Federal Deposit Insurance Corp. to issue bonds to help replenish the diminishing fund used to rescue failing banks.
The panel's action came as the committee began several days of debate on sweeping financial reform legislation that, among other things, would allow bank affiliates to underwrite municipal revenue bonds and other securities.
The FDIC bond proposal, offered by Rep. John Cox, Jr., D-Ill., was billed as a means of ensuring that the banking industry contributes to the recapitalization effort.
But in practice, the bond issue would have no more impact on the banking industry than a direct Treasury borrowing. The legislation currently calls for increasing the FDIC's line of credit at the Treasury Department to $30 billion from $5 billion, with the stipulation that any borrowings would have to be repaid by the banking industry through higher deposit insurance assessments.
Rep. Cox's amendment was offered as a complement to the recapitalization plan, and merely authorizes the FDIC to issue the bonds. The amendment does not increase the amount of money being dedicated to the recapitalization task. So if the FDIC borrowed $20 billion from the Treasury, for example, it could issue only $10 billion of bonds because the FDIC's total borrowings to cover losses are not to exceed $30 billion.
Earlier this year, the nation's major bank trade groups proposed recapitalizing the insurance fund through bonds issued by the FDIC.
But when the House Banking Committee's financial institutions subcommittee debated the issue last month, it defeated an amendment by Rep. Cox that would have mandated use of such bonds. Opponents said an FDIC borrowing would cost more than a Treasury issue, adding needlessly to the cost of repairing the fund.
Committee Chairman Henry B. Gonzalez, D-Tex., reiterated those arguments yesterday. "It's another smoke and mirror operation," he said.
But Rep. Cox said he believes the FDIC will be able to set the interest rate on the bonds, which will be marketed to banks, so they would not necessarily be more costly than Treasury borrowings.
And when asked why banks would be willing to buy low-yield securities, Rep. Cox noted that the lower the interest rate, the lower the assessment on the industry to pay off the bonds.
In the end, the panel approved the amendment on a voice vote.
The committee's progress on the bill was hampered by a steady stream of votes on the House floor. The panel plans to try to finish work on the legislation next week.
The bill then would have to go before the House Energy and Commerce Committee, where a chilly reception is expected.
Prospects for passage of financial reform legislation, already sketchy, diminished further yesterday when Senate Banking Committee Chairman Donald W. Riegle, D-Mich., raised serious concerns about a plan offered by the Treasury Department. He said that because of the stresses facing the industry, now may not be the time to break down all the Depression-era laws that govern banking.