Front and center: That's exactly where Rep. Jim Leach is these days on banking legislation. The 10-term Iowa Republican was the ranking minority member on the House Banking Committee until the GOP sweep last November put him poised to take the chairmanship when the 104th Congress was sworn in January. Now Leach is involved in a seeming whirlwind of legislation, including his own bills on dismantling Glass-Steagall, controlling the use of derivatives and streamlining the bank regulatory structure. He has also been a leading critic of the Clinton Administration's White-water imbroglio.

[Expanded Picture]U.S. Banker recently interviewed Leach, 52, in his large Capitol Hill office, decorated with wide black leather sofas and modernistic portraits on the wall. Leach is soft-spoken and chooses his words carefully; his speech is relatively formal, befitting his academic training at Princeton and the London School of Economics. Slightly under medium height, he has blue eyes and a corona of white hair that he lets down, figuratively speaking, on occasion. Asked about the Republican "Contract With America," then hot and heavy during its 100-day target period, he observed that "it's been tough on the wives" and noted that some members add that it seemed to have included "100 nights." Excerpts from the interview follow:

USB: What's it like to move from the ranking minority member to chairman?

Leach: It was difficult to exactly envision because as a individual, you have a transfer of responsibility from minority from majority, but it's also within a setting in which everything else has also changed. And it's a remarkable transition. But in the final measure, speaking for the party, it has been rather successfully handled.

In terms of my own role, I never self-assess. That is a role I've maintained. That is for others to do.... Chairmanships are very different from the ranking member positions. And a legislative organization is very different from any other corporate or social organization in society.

In the case of the banking committee, there are a unique set of challenges that relate to the fact that in large part, it's a refereeing committee between interest groups rather than an authorizing committee... And it has a responsibility for ensuring accountability in macroeconomic areas such as Federal Reserve policy, which the country is finding is more central to American life, as well as international relations, than has ever been the case before. And so it's a committee of some substance.

USB: I noticed that you had introduced six bills the first day of the session. How many of those were carried over from the previous session?

Leach: Virtually all of our approaches have had historical antecedents. Intriguingly, in banking, we have a dual circumstance. There is no crisis in domestic banking. In fact, American commercial banking has never been stronger. And that is good news. But sometimes the periods in which there are no crises are the best times in which to evaluate changing directions.

There is enormous change in private-sector commerce in the financial arena, and so I think it's important to review when the laws should be modernized. And some of our initiatives are directly related to that precept, such as Glass-Steagall reform, such as derivatives legislation, and the whole area of oversight. Our approach goes beyond the first six bills that were introduced to (include) merging the CFTC and the SEC (Commodity Futures Trading Commission and the Securities and Exchange Commission) to which several industry groups have been very unsympathetic. I think personally it would be good public policy, and very synergistic public policy.

USB: Glass-Steagall seems to have become the issue of the moment.

Leach: Sometimes you can have a multiplicity of balls in the air. You always have to focus. I'm trying to put a very strong focus on Glass-Steagall. I'm trying to precipitate a markup as early as this May, with some possibility a bill might come to the floor by June.

USB: There are competing bills. You have one; Baker has one on the House side, Sen. D'Amato in the Senate. You mentioned Jackson and Jefferson in one interview I saw, so you have a view about collectivism that some of the other people may not have.

Leach: If you think of Glass-Steagall, it's really a matter of whether you reunite the House of Morgan in a symbolic sense. As we look back on the 1930s, it strikes me that in most of the reassessments, investment banking/commercial banking homogenization is not a critical part of what either led to or lengthened the Depression. But unrelated to that assessment, corporate finance has shifted dramatically, and large banks which historically rationalize their existence in terms of relating to large customers find their viability in doubt if they cannot offer the instruments of customer choice.

It strikes me as irrational for the consumer, as well as for the sake of the banking system, not to allow banks to participate in the normal finance which is clearly integral to banking today. So I am all for merging commercial and investment banking.

Now, others have taken on a different issue that I do not feel is fundamental to Glass-Steagall consideration, and as a side issue is actually more substantial by a quantum measure than Glass-Stegall, and that is the unification of commerce and banking itself. Partly because America has always been a land where citizens had a great antipathy to the concentration of capital, partly because I see no public purpose served by conglomeration, and partly because some of the other structures that have been formed, such as Germany's, do not seem to me to be particularly successful--nor, for that matter, Mexico's--I just think we ought to be very, very cautious.

USB: On a different subject, the Administration's plan to consolidate the banking agencies basically ran aground last year in large part because the Fed stood up and said, 'This is not what we want to do.' But now you've introduced a bill that would give the Fed primacy.

Leach: Let me give a little bit of background. I took a very significant role in sidetracking the approach last year... What the Administration had done in essence was propose techniques for consolidating bank regulation in a single place that was potentially under the White House--that is, a new banking regulator under the executive branch... And the implications of those techniques, coupled with the Administration's proposals for fee structures, would end the dual banking system.

I view the Fed as the most professional of the regulators, and the one that is the most insulated from the political process. It's also my view that the dual banking system should be maintained.

The approach that has developed (in my bill) is one that provides access by choice in most instances to a single regulator from the bottom up but not from the top down, and so you have a system in place in which... the principal regulator becomes the Federal Reserve Board for the largest banking institutions... And it's my view that this particular approach has a decent chance of prevailing.

USB: As FDICIA emerged, do you think it went too far? Have you been one who's argued for rolling back some regulation?

Leach: At the time it was passed, it was pretty hard not to demand greater sternness in the regulatory armament, based on the S&L debacle--which, after all, is the most expensive and in many ways, the worst domestic public policy mistake of this century... As a general rule of thumb, I have a personal bias in putting a great deal of emphasis on capital as the primary regulatory tool, partly because it provides a cushion and partly because it provides the greatest self-interest in prudential activity of a financial institution.

Well-capitalized institutions should have very modest, or minimalist regulation. A very poorly capitalized institution probably has no choice but to submit to draconian regulation.

Interestingly, since the time of FDICIA, beginning literally around the time of the Bush accession to power and until the time he left office, the Bush years were really symbolized by the increasing inviability of financial intermediaries. Not only did we have the debacle in the S&L industry, but we had some real questions about some of the money center banks, as well as questions about the viability of some surviving thrifts and the costs of the S&L bailout...

The S&L bailout costs diminished, partly because the assets of failed thrifts appreciated, partly because the S&Ls on the cusp were righted. But in addition, the American commercial banking system is terrifically strong. So we've got very strong capital bases and a very strong base for the commercial banking fund, BIF (the Bank Insurance Fund).

USB: I'm going to get to SAIF a little later, but let me ask you about your derivatives legislation. I gather your bill would call for a commission to look at the issue and make some recommendations--

Leach: Not exactly. What our bill does is address the issues without providing the answers. What it puts in place is a regulatory structure for accountability, which is a commission and responsibility to level out standards so that you have an even, competitive playing field for all actors. Without any legislation, the insurance industry is outside the scope of federal regulation on derivatives. And it's my view that you ought to have regulation by product line instead of by industry.

Our approach is very unobtrusive in presuming that Congress knows best and what standards should be, but very demanding in terms of executive branch accountability.

The issue isn't legislation, it's the content of legislation. Our legislation is rooted in massive surveys of regulators and private-sector academia. And of our individual components, there is very little objection to anything. There is a great deal of objection to the precept of legislation, but surprisingly not to the individual components of that legislation... It's my view that derivatives, when properly used, are extremely healthy financial products.

USB: The Community Reinvestment Act has been going through an extremely long reform process on the regulatory side. Regardless of how that ends, do you think Congress should revisit CRA?

Leach: I think Congress will revisit the CRA. What the result will be is premature to suggest. In some settings, the area has been cumbersome, with the compliance costs well exceeding the (benefits). In a typical rural community, many of which I represent, there is no wrong side of the tracks. And so how are you going to define CRA?

It's very difficult when one gets good or bad ratings based on whether one bothers to make the criteria one has established and the records one keeps fit. That's not a terribly healthy rule... But as a general proposition, what America needs to be very careful of as we go through the '90s is that everybody has a chance... and one hopes that there will be economic vitality in some areas where it hasn't been evident.

USB: Let me ask you a little bit about BIF-SAIF. You represent a lot of small banks in Iowa, and I imagine you hear a lot from your constituents who are pretty much opposed to bailing out SAIF.

Leach: Well, you hear from both sides, strongly from both sides... (And it is a matter for government to decide), unless the industry takes action on its own, which is part of the Great Western-Home series of applications.

And then the question is how one can be fair to all the participants. And there are really three sets of participants: Commercial banks, who argue that they weren't part of the problem; surviving savings and loans, who suggest they're not accountable for their brother's problems; and you've got the United States taxpayer, who has put up $110 billion and (expects) that there won't be any more obligations. And so how you work these three competing interests together is difficult, with options ranging from inaction to (something sweeping). All in essence are on the table.

It's still unclear what the two seminal events will engender. I'm referring to Ricki Tigert's (Ricki Tigert Helfer, FDIC chairman) announcement that the BIF premium will drop to four cents in midsummer, which hardened commercial banker attitudes. And then the second was the Great Western announcement that it would do a transition to the BIF fund.

USB: Which we interpreted as an attempt to bring this situation to a head--

Leach: Which brings great pressure on governmental activists because it puts the taxpayer in jeopardy, as well as lengthens the period before which banks can reduce premiums, because as assets enter the system, the 1.25% (of assets, the stipulated reserve requirement) gets put off. The third ingredient that has yet to reach the table is what the executive branch reaction is to allowing the private sector to shift charters, and at what cost? Will these new institutions be forced to pay a premium to leave SAIF or a premium to enter BIF?

USB: Do you feel there's a necessity to retain a thrift charter?

Leach: I don't think there's any necessity to keep separate charters. I think it's healthy to have separate charters, but as a general rule I think a homogenization of the two industries is inevitable.

USB: The Federal Home Loan Bank System and its capital structure--is that an issue that you're looking at?

Leach: It's one of the issues that will be reviewed by the committee this year, as well as the powers of the system and the obligations.

USB: Is the Administration likely to send something up on this issue?

Leach: It's been long conjectured that they would. One of the interesting things about administrations and Congress at this time is that in terms of pendulum swings, not only has there been a pendulum swing from more liberal to more conservative, but there's been a pendulum swing toward initiative, which has swung more towards the Congress than the executive branch. I view many issues in banking to be professional rather than liberal or conservative.

In the majority of issues, the executive and the legislative branches listen and react to each other. In the executive branch today, I think there are very thoughtful and competent people, like Treasury Secretary (Robert) Rubin. I think Undersecretary (Frank) Newman is very knowledgable. And you have the regulators, and of course you have the Fed, which I hold in extremely high regard. In fact, I think it's perhaps the best-administered public body in the world today.

USB: What are your current plans for hearings on Whitewater?

Leach: I would expect a serious prospect of hearings on Whitewater, perhaps this summer. The timing is somewhat unclear, depending on when the independent counsel acts.

USB: He'll issue a report?

Leach: I hope it's more than that. In that regard, I hope I can have a hearing in which we'll wrap things up, rather than have a continuation of the water-torture approach.

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