Senate Bank Committee Endorses Rigorous Auditing Requirement

WASHINGTON -- Above the objections of bank lobbyists, the Senate Banking Committee approved a tough new auditing requirement on Thursday as it began an exhaustive, section-by-section review of the comprehensive banking reform bill.

By a 15-to-6 vote, the panel endorsed a requirement that institutions commission annual audits of internal management controls, with the results sent to the primary supervisory agency. Banks with less than $150 million in assets would be exempt.

Resembles House Provision

The measure, sponsored by Sen. Timothy Wirth, D-Colo., is similar to a provision in the legislation that the House Banking Committee passed in June. Therefore, it is likely to be included in any final bill that President Bush would sign into law.

Edward L. Yingling, chief lobbyist for the American Bankers Association, said the audit requirement would greatly increase the cost of accounting services for banks, and would give accountants an incentive to be more critical of the banks they audit.

Sen. Jake Garn of Utah, the Senate committee's ranking Republican and an opponent of the auditing measure, labeled it "overkill." He noted that most banks already undergo annual audits and the bill under consideration would require all institutions covered by the Federal Deposit Insurance Corp. to be examined annually by their primary regulators.

Sen. Paul Sarbanes, D-Md., said he regarded it as "an ounce of prevention."

Theodore C. Barreaux, counselor to Comptroller General Charles Bowsher, who recommended the measure, said it would require auditors to work harder and accept more responsibility for their actions.

Bankers See Increased Expense

But the ABA's Mr. Yingling said it would lead to auditors' paying more for their insurance - a cost that would be passed on to banks. "So they will bend over backwards to over-audit a bank," he warned.

The audit vote was among the first few steps taken by the Senate Banking Committee as it began the markup on the bill assembled by its chairman, Sen. Donald W. Riegle, D-Mich.

The panel is under time pressure, since the Senate is scheduled to adjourn at the end of this week for a month-long break and has only 11 legislative days set for September.

$70 Billion to the FDIC

The bill would give the Federal Deposit Insurance Corp. $70 billion in new borrowing authority for its beleaguered Bank Insurance Fund, overhaul the deposit insurance system, and permit banks to branch nationwide and underwrite securities through affiliates.

The Bush administration is prodding the Senate panel to go even further and permit commercial and industrial firms to own banks, a step Sen. Riegle adamantly opposes.

The panel postponed action on a number of controversial issues, including the question of whether to restrict the Federal Reserve's use of the discount window.

Proposed Change in Fed Risk

Mr. Riegle's draft bill would require that the Fed assume risk for repayment when it loans money to undercapitalized banks. Under current practice, such loans are fully collateralized and the Fed is paid off first if the institution fails.

Mr. Riegle and others have charged that the Fed has used its secured position to keep failing banks alive while uninsured depositors bail out.

Sen. Phil Gramm, R-Tex., argued that the Riegle proposal would inhibit the Fed from fulfilling its role as the industry's liquidity provider.

Moreover, he said, any losses assumed by the Fed are ultimately borne by the taxpayer, since the central bank's profits revert to the Treasury at yearend.

"We are not disciplining Mr. Greenspan," he said, alluding to Fed chairman Alan Greenspan. "We are disciplining Joe SixPack."

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