It's Time to Start Lobbying for the Next Banking Bill
The history of banking legislation has been one of knee-jerk reactions to problems already wreaking havoc upon the industry. But the Treasury proposal currently being dissected by Congress takes a broader approach, addressing problems of the past, present, and future.
Unfortunately, the bill has little chance of becoming law in its original form.
There are more than enough provisions to offend everyone involved. Over 100 amendments were considered by the House Banking subcommittee, and more will surely follow as the bill plods its way through other congressional committees.
This reaction has been the financial services version of the "not in my backyard" argument against toxic waste dumps. Everyone agrees with the overall theme, but specific provisions that cross formerly separated financial sectors are being stiffly opposed.
Lobbying will intensify as the bill moves closer to becoming law. Retirement groups, real estate brokers, and consumer activists are among those fighting specific parts of the bill.
In short, establishing a modern banking system will be an uphill fight.
A Shift of Power
The Treasury bill's provisions for regulatory restructuring would mean major shifts in power and responsibilities for both state and federal regulators.
* The Federal Reserve would regulate state-chartered banks and their holding companies.
* A new Treasury-controlled agency called the Federal Banking Agency would do the same for national banks and thrifts as well as their holding companies.
* The Office of the Comptroller of the Currency and the Office of Thrift Supervision would be merged into FBA, leaving the Federal Deposit Insurance Corp. as nothing more than an insurer.
As should have been expected, these proposals were dead on arrival.
The Fed, which would lose control over regulating all holding company activity, opposed the measure. The FDIC would lose much power and gain nothing in return. And state banking agencies see a continuation of the administration's attack on the dual banking system - an attack begun under the thrift bailout law.
Given such powerful opposition and the proposed domination of banking regulation by the very department that drafted the legislation (the Treasury), it should surprise no one that these provisions fell into a congressional black hole.
This is not to say that the provisions are without merit.
Congress has discussed regulatory reform periodically since the 1958 Commission on Money and Credit suggested similar changes. But though eliminating conflicts and overlaps of authority are clearly in order, these changes will undoubtedly have to wait until the next round of banking reform.
Opposition to changes in deposit insurance coverage is coming from a variety of groups. Small banks are worried about reduced coverage per account. Investment companies are concerned with brokered deposit coverage. And larger banks wish to retain insurance on bank contracts.
The narrow defeat of the proposal to reduce the number of insured accounts per depositor probably means that the Treasury will attempt to push this provision again in the full House. Continued lobbying on behalf of small banks, retirees, and home builders will ensure that changes to the existing deposit insurance system will be opposed.
The wavering health of the FDIC was the major reason for the initial Treasury proposal. It is therefor ironic that significant changes to make the FDIC more viable look remote. The government's blood-from-a-turnip approach - continually increasing bank premiums - cannot be sustained against demands for continual increases in capital. Failure to address this issue during the current debates would indefinitely defer continued expansion of bank powers, just as the insolvency of the Federal Savings and Loan Insurance Corp. stopped further deregulation after 1982.
A Side Issue
Much of the rest of the Treasury's proposal has a reasonable chance of becoming law.
An exception is the provision to let commercial corporations buy financial enterprises.
This issue sidetracks Congress from needed banking reforms. Even if the other proposals passed, nonfinancial firms would probably hesitate to jump into the regulatory straitjacket binding the commercial banking system.
As it is obvious that the Treasury proposal will not survive its journey through Congress intact, the banking industry would do well to start lobbying now for the next banking bill.
Setting the agenda is crucial. Since all branches of government realize that the current regulatory system is stifling the banking industry, any proposed changes get serious consideration.
By lobbying hard to set the agenda, the industry could come out the big winner in the next banking bill.