dramatically Thursday as the Treasury Department and Federal Reserve Board unveiled a deal on new bank powers.
Under the compromise, banks could underwrite securities and conduct low-risk business through direct subsidiaries but would be barred from underwriting insurance or developing real estate. Merchant banking could be done in direct subsidiaries, provided the Treasury and the Fed jointly approved it. However, the agencies would be barred from making that determination until five years after enactment of the bill.
A bank would have to be well managed, well capitalized, and conform to investment limits similar to those on bank holding companies. The assets of all the bank's subsidiaries could not exceed 45% of total assets, or $50 billion. The 50 largest banks would have to issue long-term debt that is highly rated by an independent agency before it could establish a direct subsidiary.
To further balance power between regulators, the compromise would let the Treasury and Fed "veto" each other's decisions to grant new powers for the banking entities under their respective jurisdictions.
"It's not perfect, but it's reasonable," said Steve Bartlett, president of the Financial Services Roundtable. "It looks very workable to me."
Mr. Bartlett joined other lobbyists on Capitol Hill Thursday as the House/Senate conference committee began debating the final version of financial reform, which both the House and Senate approved this year for the first time.
In the first showdown of the day, Democrats lost a bid to strengthen the community reinvestment requirements in the bill. The House members of the conference committee rejected the amendment 15 to 12, eliminating the need for a vote by Senate lawmakers. (The House and Senate delegations of a conference committee each vote on amendments; if either rejects them, the amendment fails.)
An amendment by Reps. John J. LaFalce, D-N.Y., and John D. Dingell, D-Mich., would have required banks to maintain a "satisfactory" or better CRA rating after merging with an insurance or securities company. As it stands, the bill would require that a bank only have at least a satisfactory score when filing its merger application.
In addition, the failed Democratic amendment would have eliminated a provision to lengthen to five years the time between CRA exams at small, urban banks and any rural bank. Current exams at these institutions are roughly 18 months apart. And it would have watered down a provision sought by Senate Banking Committee Chairman Phil Gramm that would require banks to disclose payments made to community groups as part of CRA commitments.
Backed by a letter from Federal Reserve Chairman Alan Greenspan, Sen. Gramm said regulators now can only enforce CRA when evaluating a merger. Sen. Gramm argued that it would be unfair to create a post-merger CRA requirement for bank combinations with nonbanks when it does not exist for mergers between banks today.
"What you have proposed is a massive extension of CRA which we will never accept," Sen. Gramm said. "Under current law there is no maintenance requirement."
But Democrats said that it would undermine the spirit of CRA to let banks get into new businesses and escape the reaches of the 1977 law.
CRA has been one of the four issues President Clinton has threatened to veto the bill over. But lawmakers from both parties praised the Fed/Treasury agreement as a major breakthrough and said they would approve it after legislative language had been drafted.
House Banking Committee Chairman Jim Leach thanked Treasury Secretary Lawrence H. Summers and Mr. Greenspan for "working constructively together" to overcome a seemingly intractable turf war that all year has threatened thwart enactment.
"That in effect resolves a major issue of tension," said Sen. Paul S. Sarbanes, ranking Democrat on the Senate Banking Committee.
Reaction was positive from industry lobbyists, who were less concerned with the details than the fact an agreement had finally been reached.
"We were just happy they were able to solve the problem and get the deal done," said Brian C. Conklin, acting president of the Financial Services Council. "It adds even more momentum to the bill. It looks like we are going to get this done."
But Sen. Sarbanes warned the conference committee's 66 members against celebrating too soon, saying many disputes remain. Debate was expected to resume Friday.