Banking Reform

The alarm over potential bank runs in Greece and Spain this week has highlighted an often-overlooked fact: Europe's debt crisis is also, in many ways, a major banking crisis. In capitals such as Athens, Madrid and Rome, large portions of the sovereign debt racked up by spendthrift governments are owed to the countries' own banks, locking governments and the banks in an embrace so tight that disaster for one would almost certainly spell doom for the other. International bailouts for Greece, Ireland and Portugal have helped to keep not just their governments but also their banks afloat, as well as financial institutions in other parts of Europe with large exposure to those nations' debts.

Securities and Exchange Commission Chairwoman Mary Schapiro warned that her agency doesn't have enough money to police Wall Street adequately, let alone draft dozens of new regulations required under the financial reform law. And that's before congressional Republicans look to cut the SEC's budget further. "It is a strain that is already having an impact on our core mission ? separate and apart from the new responsibilities that Congress gave us to regulate derivatives, hedge fund advisors and credit-rating agencies," Schapiro said at a conference Friday in Washington.

The Bush Administration has sharply reduced its lobbying on behalf of its own banking reform legislation, thus increasing the chances that the sweeping effort is doomed this year, key lawmakers complained Monday. Two Democratic leaders in Congress who support the Bush banking plan said Monday that they have written to President Bush to urge the White House to take a more active role in pushing bank legislation.

With President Obama ready to sign the historic healthcare reform bill, the White House and its Democratic allies in Congress aggressively pressed forward Monday on their next major legislative priority -- a sweeping overhaul of financial regulations. Treasury Secretary Timothy F. Geithner declared that the debate had reached "a defining moment" as the Senate Banking Committee moved quickly to approve the legislation on a 13-10 party-line vote. The bill, based on a proposal by the Obama administration, is similar to one the House passed in December without a single Republican vote.

The proposed banking reforms unveiled Tuesday--which would result in the first major overhaul of the U.S. financial system in 50 years--pose dramatic changes for both bank depositors dependent on insured accounts and consumers accustomed to clear separations between the myriad of available financial services. But while the sweeping proposals--if enacted--are sure to have widespread effect, experts advise depositors and consumers not to be immediately alarmed.

The Senate Banking Committee on Friday approved a wide-ranging reform of the nation's Depression-era financial laws, approving interstate branching, giving banks expanded powers to affiliate with securities firms and ordering a basic, low-cost bank account for people earning less than $20,000 a year. The bill was approved by a 12-9 vote, and will go to the floor of the Senate--where it faces an uncertain future--when it convenes next month after a summer recess.

Bank reform, which began the year as one of the Bush Administration's top domestic priorities, is proving to be a much tougher sell in Congress than the White House had expected. Despite months of debate and a last-minute personal lobbying campaign by Treasury Secretary Nicholas F. Brady, the Bush banking package has already suffered a series of sharp setbacks in a key House subcommittee during the first round of congressional review.

Attempts to sweep away a Depression-era law that restricts banking activities collapsed in Congress on Tuesday, ending any hope for major reform before the November elections. House Banking Committee Chairman Jim Leach (R-Iowa) pulled the plug on the Glass-Steagall reform bill, acknowledging that opposition was too great for it to move ahead this year. "In this setting, it would appear that comprehensive bank modernization legislation cannot move forward this year," he said.

The Japanese government and an increasingly emboldened opposition agreed late Friday on a long-awaited plan to sort out the nation's crippled financial system in advance of Tuesday's summit between President Clinton and Prime Minister Keizo Obuchi in New York. The stakes are considerable, given that fixing Japan's bad-debt problem--estimated at between $650 billion and $1 trillion--is an essential step in turning around the world's second-largest economy.

Change comes hard in a country where after-hours entertainment has long been considered part of the job. At the august Bank of Japan, an institution so mysterious and prestigious it was nicknamed "The Vatican," regulators once thought nothing of accepting golfing excursions, gifts and $800 geisha dinners from the banks they supervised. This wasn't considered corruption; it was how Japan Inc. did business.

Legislation to be unveiled Monday by Senate Banking Committee Chairman Christopher J. Dodd to overhaul the financial regulatory system is likely to be more modest than either the Obama administration's proposal last summer or a plan Dodd pushed last fall. Dodd, a Connecticut Democrat, was set to release detailed legislation for the most sweeping overhaul of financial regulations since the Great Depression, which Democrats want to pass before the fall elections. Tightening federal oversight of the financial system is designed to prevent a repeat of the banking-system meltdown in 2008 and is a priority of President Obama.

Reporting from Los Angeles and Washington Walter Hamilton -- Culminating weeks of increasingly angry words and bolder action aimed at Wall Street, President Obama proposed the toughest new restrictions yet on the nation's largest banks in the aftermath of the financial crisis. The plan would reconstruct a barrier similar to one erected during the Great Depression, but repealed in 1999, to limit the risks that banks could take with federally insured deposits. Obama also wants to broaden restrictions on the growth of large banks so none would have too big a role in the U.S. financial system.

The Obama administration's overhaul of financial regulations took a big step forward Wednesday as a key House committee approved legislation that would give federal officials broad new powers to downsize and dismantle large financial firms whose failure would seriously damage the economy. The House Financial Services Committee voted 31-27 to pass the expanded ability to deal with teetering financial giants -- authority that was limited when investment banker Lehman Bros. and insurer American International Group Inc. neared bankruptcy last year.

Momentum is growing in the U.S. and abroad to deal with the problem of gigantic financial institutions deemed too big to fail by breaking them up before they can threaten the economy. Angered by bailouts that have kept corporate titans such as American International Group Inc. afloat, members of a key House committee last week voted to give the government vast new power to downsize private companies, something that happens now only in the most egregious antitrust cases. Instead of helping cushion the fall of Wall Street powerhouses through government aid or variations on traditional bankruptcy, there is growing momentum in Congress to cut those firms down to size before they start teetering to limit the damage if they do collapse.

Recently unveiled legislation that seeks to avert the risk created by complex financial firms that are too big to fail might itself be too broad and complicated to survive without significant changes. The 253-page bill is one of the most controversial provisions of the Obama administration's overhaul of financial regulations because it directly addresses the future of government bailouts. The legislation drafted by the Treasury Department and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, would give federal officials power to regulate, seize and dismantle large financial firms whose failure would pose a risk to the economy.

The Federal Reserve has dramatically expanded its role in the economy over the last 18 months, and the Obama administration has proposed enhancing that authority as part of an overhaul of financial regulations. But many members of Congress -- Democrats and Republicans -- are seeking to curtail the central bank's authority instead of expand it. Worried about the increased power of the complex and mysterious Fed, and upset it did not do more to prevent the deep recession, Capitol Hill has focused its anger over the financial crisis and its aftermath on the central bank.

Prospects for a bill that would let banks and securities firms combine remained in doubt Monday due to a longstanding turf war with the insurance industry. "There is some chance for a compromise, but it looks like it's going to be very, very difficult," said Sam Leaman, banking expert for Natwest Washington Analysis, the research arm of Natwest Securities. The House Banking Committee was scheduled to take up a major reform bill this morning sponsored by the panel's chairman, Rep.

Prospects for a major overhaul of the troubled banking industry are bleak after the House's defeat of a comprehensive bank reform bill on Monday. But now the Senate has a chance to exert leadership when it considers its own reform measure over the next few days. Decisive action in the upper chamber could galvanize the House into commiting to reform.

Acting in unison to prevent a repeat of the financial crisis, world leaders pledged Friday to undertake an ambitious and coordinated effort to overhaul banking practices and build a new global economic model. The plan, unveiled at the conclusion of the Group of 20 summit here, would set constraints on executive pay at financial firms, impose tougher standards on banks and launch a process aimed at correcting economic imbalances, such as China's large trade surpluses and the United States' huge deficits.

The road to reforming financial regulations winds through the cornfields, hog farms and cattle ranches of America's heartland, and that complicates the Obama administration's already arduous effort to revamp oversight of Wall Street. Lawmakers from Iowa, Minnesota, Oklahoma and other farm-belt states who sit on the congressional agriculture committees have a surprisingly influential role in the administration's proposed overhaul, which Congress resumes debating Tuesday after its summer recess.