Banking Law Modernization: Again and Again

Impeachment is history, and the Congress is energized to get back to the old, dull work of passing new legislation, High on the list of “must do, must pass” is its perennial favorite: bank modernization.

Every year since I’ve been around Washington, D.C., some type of banking restructuring has been in the works, and at its core has always been repeal of the depression-era legislation, Glass-Steagall, which separates the regulation of banking from other financial services such as securities.

Last year a bill almost made it, but Phil Gramm of Texas, today the chairman of the Senate Banking Committee, sandbagged it at the last minute over CRA issues. This year, no one opposes the repeal of Glass-Steagall, and as this magazine went to press in mid-March, the House Banking Committee had just approved a version of the bill with several amendments. But as the battle shapes up in the Senate, there are at least five big issues that will set the rules for banking for years to come that are still undecided.

In my travels around the country, I find that bankers have little interest in this legislation. What bankers truly care about is getting the credit unions’ newest innovationu00e2u20ac”namely, that if you have a relative in a credit union, you are eligible to joinu00e2u20ac”under control.

But despite the seeming lack of interest from bankers I talk to, there is much in the banking modernization legislation that is of great interest to the future of the industry and its regulators. So on to the five important issues, which the Senate will be debating in the weeks ahead.

Curtailing the creation of unitary thrift holding companiesu00e2u20ac”In the last few months, most large insurance companies have obtained thrift charters. These new charters give insurance companies broad banking powers, essentially putting the insurers in the banking business and tearing down more once-sacred barriers between commerce and finance. Many bankers see this as a real threat to the industry and the Federal Reserve agrees. The battle on this bill could sink the banking modernization ship.

Insurance provisions and the battle over how banks can sell insuranceu00e2u20ac”I thought the insurance agents had given up this effortu00e2u20ac”and many haveu00e2u20ac”but their trade association is still trying to limit banks’ abilities to compete. While this one is something to watch, I don’t think it will be a make-or-break issue, since the insurance agents themselves are split on it.

CRA and the ability of public interest groups to hold up a merger by protesting the merging bank’s CRA recordu00e2u20ac”This is a make-or-break issue, because the president says he will veto a bill that limits CRA rights. In the end, I would guess he will get his way, since bankers are not providing a lot of support to Senator Gramm’s effort to help them. In my view, though, all bankers should be in loud support of the senator’s efforts toward modernization.

Securities sales and who will regulate themu00e2u20ac”In this confrontation, the SEC is in one corner and the bank regulators are in the other. The SEC wants all securities operations in separate subsidiaries regulated by the SEC in the same way it oversees nonbank securities operations. It argues that SEC oversight is based on full disclosure to the marketplace, while bank regulation is based on safety and soundnessu00e2u20ac”which are very different standards. While bankers generally favor the position of the bank regulators, I believe this issue will be decided in favor of the SEC, and it should be no great problem for the banks.

What the structure of the new expanded world of finance will look likeu00e2u20ac”This issue involves the fight between the Clinton Administration and the Federal Reserve about which I’ve written here in the past: The Fed wants new financial operations carried on through holding companies (their turf) while the Treasury wants the banks to have the right to choose whether the operations are carried on in a bank’s subsidiary (their turf) or the holding company. The president says he will veto the bill if it gives the Fed the decision. Bankers generally have favored the Treasury’s view, as it allows them to choose the most efficient form of operation. As we go to press, the Fedu00e2u20ac”which has been the winner so far in proposed legislationu00e2u20ac”is stating to lose ground. As I’ve said before, rightly so. The likely result: a compromise.

If and when both houses of Congress passes new legislation, banking will be a changed industry. But will it finally pass a bank modernization bill? The odds are not much better than 50-50.