Treasury Hits Regulated-Rates Plan

Says |Core Banks' Proposal Could Be Destabilizing

WASHINGTON -- The Bush administration warned on Tuesday that a proposal to establish "core banks" with regulated interest rates is an "untried theory" that could place the entire financial system in jeopardy.

The core banking proposal "would fundamentally alter the traditional business of banking in the United States in ways that are difficult to forecast, but that are potentially destabilizing," Assistant Treasury Secretary Jerome H. Powell told the House Banking Committee.

The plan, promoted by Rep. Charles Schumer, D-N.Y., "could create or aggravate future credit crunches," Mr. Powell warned.

Limits on Rates and Loans

Rep. Schumer would peg core banks' deposit rates to Treasury securities and restrict their lending to individual borrowers. Depositors seeking higher interest rates would have to go to a separate, uninsured bank that presumably would be making more risky investments.

Treasury's strong opposition, along with doubts voiced by other members of the banking committee, suggested that core banking may not survive committee votes this week and next.

But some observers believe Rep. Schumer is gaining ground with his proposal, which was unveiled just as the panel prepared to consider the Bush administration's bank reform package.

|A Golden Opportunity'

Rep. Schumer has held out the prospect of bringing it up on the House floor if it fails in committee.

"We have a real opportunity -- a golden opportunity -- for reform now," he said. "If we miss the opportunity, we will surely be back again considering reform after another banking crisis."

Rep. Schumer would cap core banks' deposit rates at 105% of the yield on Treasury securities with comparable maturities. The plan would also sharply reduce the amount a bank with deposit insurance could lend to any one borrower.

Banks would be permitted, however, to establish separate affiliates that could bid for funds without restriction and make loans of any amount. The affiliates would not be insured but would have access to the Federal Reserve discount window.

A number of Rep. Schumer's Democratic colleagues expressed strong support for the proposal, including Rep. Jim Slattery, D-Okla. He also sits on the House Energy and Commerce Committee, where support for the core banking idea is likely to be strong.

Some supporters of Rep. Schumer's proposal voiced objections to one aspect or another of it. Wells Fargo & Co. submitted a statement endorsing the deposit curbs but expressing concern about the loan limits.

L. William Seidman, chairman of the Federal Deposit Insurance Corp., backed core banking but said price restrictions do not work. House Banking Committee Chairman Henry B. Gonzalez, D-Tex., spoke warmly of the concept but expressed concern about opening the discount window to more borrowers.

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