Republicans, assertive FDIC seen setting regulatory tone.

WASHINGTON -- Bank regulation in 1995 will be shaped in large part by the seating of a Republican-controlled Congress and the reemergence of the Federal Deposit Insurance Corp. as a force to be reckoned with.

The FDIC owes its return to prominence to the arrival of Ricki R. Tigert as chairman, ending a two-year period in which the agency lacked a permanent head.

And while Ms. Tigert has already begun to shake up the world of bank regulation, she acknowledged in an interview last week that her agency would be affected by the change in control of Congress.

"We have an obligation to pay attention to Congress, and we will of course pay heed to the direction we receive from Congress," she said.

Although Republicans had complained that Ms. Tigert was too close to the Clintons, she is emerging as an independentminded regulator who isn't afraid to stake out her own positions.

Already, she has spoken out against the kind of broad regulatory consolidation that the administration proposed last year, and she has said she will use her agency's backup authority when needed -- a view that puts her at odds with Comptroller of the Currency Eugene A. Ludwig.

Mr. Ludwig is already a known quantity among bankers. He said he plans to continue his four-part agenda of maintaining safety and soundness, reducing banks' regulatory burden, encouraging procompetitive activities, and ensuring access to credit and financial services for all Americans.

"It is really a steady-as-she-goes approach," he said.

Whatever their agendas, it is far from clear that regulators will drive banking issues next year. Instead, the Republican Congress will likely temper some administration initiatives the industry opposes.

"What you are going to see with all the agencies is a looking over their shoulder in terms of what Congress is going to do on consolidating the agencies," said James D. McLaughlin, director of agency relations at the American Bankers Association.

Congressional Republicans are keen on reducing regulation -- and regulators are likely to respond by intensifying their efforts to simplify rules, lower fees, and even reduce staffs.

Mr. Ludwig said his agency is "probably in the neighborhood of about E" in finalizing rule changes for its ongoing project of "revising the rule book A-to-Z so that it would be understandable for business people." That initiative should be finished by the end of 1995, he said.

Sometime next year, the Comptroller's office will also refine its large-bank compliance and exam procedures. The agency has already simplified its small-bank examination procedures.

Looking ahead to next year, regulators are likely to take action on dozens of issues -- from Community Reinvestment Act reform (see accompanying story) to capital rules.

INSURANCE PREMIUMS

The Bank Insurance Fund is expected to recapitalize next year, at $1.25 for each $100 of insured deposits, and that would trigger a regulatory sea change.

"We are going to be viewed by the Congress as a healthy, viable industry and not one that is in danger and needs additional restrictions on it or needs to be held in check," said the ABA's Mr. McLaughlin.

Banks will also receive a financial bonus: Insurance premiums will drop from the current average of 23 cents to as little as 5 cents.

But the banking industry's windfall could trigger a new political fight, as thrifts argue that their industry's higher premiums will put them at a competitive disadvantage. Thrift premiums are not expected to drop until well into the next century.

Congress is likely to hold hearings on this issue -- including the controversial suggestion, advanced by a number of thrifts, that the two insurance funds should be merged. But few expect a resolution next year.

CREDIT QUALITY

Next year will mark a milestone as the thrift bailout agency shuts its doors -- symbolically ending the savings and loan crisis. But regulators are expected to continue to focus attention next year on potential problems in the banking industry.

Both Federal Reserve Chairman Alan Greenspan and Mr. Ludwig have warned that banks have begun making loans they would not have made a year earlier. "We cannot be lulled into a false sense of security," by high profits and capital, Mr. Ludwig said.

Ms. Tigert struck a somewhat different stance, saying FDIC examiners have not yet found evidence of slipping credit standards. "But we want to watch," she added, noting that with the industry in good health circumstances are ideal for regulators to take a hard look at credit standards.

DERIVATIVES

Although the regulators have uniformly told Congress that new legislation is not needed, two events have raised the profile of derivatives activities: Bankers Trust New York Corp. being fined for allegedly deceiving its corporate customers on the risks of derivatives, and the bankruptcy filing by California's Orange County.

In part as an effort to ward off legislation, regulators will likely continue to ask their examiners to bird-dog banks' derivatives activities. "Right off the bat, derivatives are a very, very important area," said Kenneth A. Guenther, executive director of the Independent Bankers Association of America.

MUTUAL FUNDS

Bank mutual funds, a hot issue this year, are expected to assume a lower profile next year, in large part because the regulators have taken steps of their own to protect bank customers.

At the FDIC, Ms. Tigert has defused the issue for now by promising to send testers to check bank marketing efforts. And the Comptroller's office has reviewed marketing brochures to ensure banks were making clear that mutual funds are not insured.

"Hopefully, that will take some of the steam off attempts to legislate in this area," Mr. Guenther said. Essentially, the industry is being given a chance to police itself.

If banks are successful, they might avoid new legislation or regulations in the area.

Of course if Ms. Tigert's testers find widespread problems late next year, regulators could take strong action on bank-sold mutual funds.

INTEREST RATE RISK

In the first half of the year, bank regulators are likely to propose their long-awaited interest rate risk rules. Congress required all the agencies to add an interest rate risk component to capital requirements.

Federal Reserve Board Governor John LaWare said bank regulatory agencies want to be sure to move in step on their rules, and to stay in sync with international bank regulators as well.

So far, the OTS is the only agency which has already adopted rules. The capital consequences of its rules will kick in at the end of the first quarter.

Whatever shape the bank rules eventually take, they will likely differ from those for thrifts. The OTS rules follow "quite a complicated model, and we are trying to avoid that level of complication and that level of rigidity," Mr. LaWare said.

CAPITAL

The new year should also spell the end of the banking agencies' attempt to develop a consistent set of rules on the capital treatment of low-level recourse arrangements. Congress required final rules to be in place by March 22 for those arrangements, which occur when banks sell assets with limited exposure for later losses.

In recourse arrangements, a bank sells an asset but retains some risk of loss from it. Regulators now require banks to hold capital against the full value of that asset in some cases.

Congress required regulators to lighten the capital requirements for small business loans sold with recourse by March 22. The move was designed to spur a secondary market for small business loans.

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