YOU ARE HERE: LAT HomeCollections

Congress Wary of White House Plan for Banks

AMERICA'S FRAGILE BANKING SYSTEM: Second in a four-part series. Next: Declining public confidence in banks.


WASHINGTON — The nation's banking system may be in the midst of its biggest crisis since the Great Depression, but the odds are that Washington won't do much about it this year.

Apart from some stop-gap measures to ensure that the federal fund protecting bank deposits doesn't go broke, Congress seems bent on postponing major banking reform until another day.

But the White House doesn't think the banking crisis will go away quite so easily. And so the Bush Administration will be pushing hard this spring for its sweeping reform package that would tear down 50-year-old legal barriers that have limited the scope of traditional banks and made it impossible for them to compete in a wide array of modern financial markets.

"We have stopped banks from going to the next generation of services, because we have a set of archaic laws that look back to the 1920s and 1930s," Treasury Secretary Nicholas F. Brady insists.

Yet Congress, still smarting from the hail of criticism it received for its handling of the savings and loan debacle, is clearly reluctant to take on another big headache in yet another financial industry gone sour. Many congressional leaders believe that the Bush plan to give banks more freedom sounds suspiciously similar to the disastrous campaign in the early 1980s to deregulate the S&Ls.

"We will have to move cautiously to avoid mistakes that could prove very costly," warns Senate Banking Committee Chairman Donald W. Riegle Jr. (D-Mich.). "And we need to make sure we have reformed the deposit insurance system and the supervisory system in ways that guarantee new powers do not mean new risk to the taxpayers."

Expanding Services

To rescue the industry, the Bush Administration proposes a dramatic restructuring of the banking industry designed to let the banks grow their way out of their troubles.

Banks would be permitted to move across state lines and open new branches without restrictions, and enter fully into the businesses of trading and underwriting stocks and bonds, and selling and writing insurance.

Big industrial companies such as IBM and DuPont would also be permitted to buy banks.

The White House also wants to reform the deposit insurance system that backs the deposits of bank customers up to $100,000 per account, while providing more money to keep the fund that backs deposits solvent.

In addition, the Bush plan would streamline the federal regulatory process, reducing the number of agencies involved in bank examinations, but would also give regulators new authority to intervene earlier when banks appear to be getting into trouble.

However, the banking industry itself is increasingly divided over banking reform, reducing the effectiveness of the industry's lobbying campaign as the banking package moves through Congress.

Bigger banks, notably some of the most powerful international institutions in New York and Los Angeles, want an unfettered hand to move across state lines, and also to market insurance and securities.

But community bankers, representing the vast majority of the nation's 12,000 commercial banks, don't want their turf invaded by outsiders from the big cities.

So a cautious Congress is likely to confine its efforts this year to the rescue of the federal insurance fund for bank deposits, which is virtually exhausted, and to the creation of an early warning system to prevent a future wave of bank failures.

"I think we're looking at a core package this year, something for Congress to say we've improved the system this year and made the system safer," notes Alfred A. Pollard, Washington lobbyist for Los Angeles-based Security Pacific Corp.

"What we ought to do is pass sweeping reform that allows the selling of different products by banks, but Congress is likely to take a go-slow attitude," says Joseph Belew, president of the Consumer Bankers Assn.

Fears of Bailout

Clearly the most pressing issue, government officials and industry lobbyists agree, is the refinancing of the depleted insurance fund, which is run by the Federal Deposit Insurance Corp. and protects deposits up to $100,000.

The banking industry and federal regulators insist the fund can be bolstered by additional premium payments from the banks themselves, without resorting to a painful taxpayer bailout.

But Congress is fearful that a taxpayer bailout is becoming ever more likely; that's a key reason congressional leaders believe this isn't the time to deregulate the banking industry.

Their fears were heightened in March when Federal Deposit Insurance Corp. Chairman L. William Seidman revealed that the deposit insurance system may need as much as $70 billion in new resources and borrowing authority from the government--including both the U.S. Treasury and the Federal Reserve--to avoid becoming insolvent.

And if the FDIC can't repay the loans from those government agencies from insurance premiums paid by commercial banks, the taxpayers will be on the hook.

Los Angeles Times Articles