The House Banking Committee offered a compromise bill Monday with a novel solution to the regulatory dispute that has been stalling financial reform legislation.
To encourage the Treasury Department and Federal Reserve Board to cooperate on granting new bank powers, the plan would let each agency override the other's decisions.
"This agreement potentially clears the way for enactment by this Congress of financial services modernization," House Banking Chairman Jim Leach and ranking Democrat John J. LaFalce said in a joint statement. "It represents a fair and equitable compromise."
But as important votes loom, others predicted stalemate.
"Those types of agreements are ... unworkable," said Stephen A. Blumenthal, vice president of Schwab Washington Research Group. "This kind of veto ... produces nothing but gridlock."
The Senate Banking Committee planned to issue its final version of the bill late Monday. The panel's chairman, Phil Gramm, is expected to seek a ban on new unitary thrift companies unless applications were filed by March 1, but he would allow the sale of existing unitaries to commercial firms.
Both committees are scheduled to begin voting on the legislation Thursday. But as the lawmakers forge ahead, the House and Senate bills are going in opposite directions on many key questions.
House Banking's 327-page bill blends proposals by Rep. Leach and Rep. LaFalce, D-N.Y. As expected, it would prevent commercial companies from buying or forming unitary thrifts, ban the mixing of banking and commerce, impose community reinvestment requirements on banks that merge with securities or insurance firms, and preserve some state limits on bank sales of insurance.
It also includes the compromise endorsed by Treasury Secretary Robert E. Rubin that would let national banks underwrite securities and conduct merchant banking activities in operating subsidiaries. Insurance underwriting and real estate development would be limited exclusively to holding company affiliates.
Banks with more than $10 billion of assets that conduct new powers through an operating subsidiary would have to have a holding company. That requirement is intended to assuage the Fed's concern that banks would abandon use of holding companies-which the central bank oversees-for high- powered operating subsidiaries and thereby rob the agency of insight into the banking industry.
In the new wrinkle, Treasury and Fed officials would have to consult with each other before approving new powers for banks and holding companies, respectively. If one of the agencies objected, it would be able to veto the other's decision.
However, the Fed would have sole power to regulate merchant banking whether conducted in a bank subsidiary or holding company affiliate.
"While it is logically imperfect, it was the only approach the Fed and Treasury could accept," Rep. Leach said in an interview. "The alternative, which was joint rulemaking, was rejected by the Fed but the preferred approach of Treasury."
The Fed is expected to balk, but Treasury Assistant Secretary for Financial Institutions Richard S. Carnell said Monday that the House Banking bill "is moving in the right direction."
Rep. Marge Roukema, R-N.J., said in an interview Monday that she is "deeply concerned" about letting operating subsidiaries underwrite securities or conduct merchant banking. She vowed to fight the proposal in committee and predicted that the House Commerce Committee, the bill's next stop, will curb operating subsidiaries if House Banking does not.
Although the bill bans the mixing of banking and commerce, holding companies would have the latitude to engage in activities that the Fed or Treasury deem "incidental" or "complementary" to financial activities- provided these complementary activities remain "small." Again, the agencies would have to agree on these definitions and each could veto decisions by the other.
On the Community Reinvestment Act, House Banking's bill would require banks to have ratings of "satisfactory" or better to merge with insurance or securities companies. Banks would also have to keep that rating or face various penalties including divestiture of assets.
During voting Thursday, Rep. Leach plans to offer an amendment to ease the penalties. The Iowa Republican would require any bank that falls below "satisfactory" to file a corrective plan and get clearance from regulators before embarking on additional activities.
Fights over proposed limits on unitary thrifts are also expected in House Banking.
Finally, the committee's bill would permit a limited number of uninsured wholesale financial institutions, which could not accept deposits below $100,000. Only 10 of these "woofies," which could join the Fed and use the agency's payment system and discount window, would be allowed.
Sen. Gramm's bill is expected to differ from House Banking's in many areas, including tougher restrictions on bank operating subsidiaries, softer CRA requirements, and fewer restrictions on bank insurance sales.
The Independent Insurance Agents of America and Consumers Union have scheduled a news conference today to oppose the Gramm bill, and other consumer groups plan to attack the Gramm plan Wednesday.