Bill to Aid S&L; Insurance Fund Clears Senate Panel

The Senate Banking Committee approved legislation Tuesday to pump $7.5 billion into the government’s troubled fund that insures savings bank deposits, but critics said other provisions of the bill could sink it.

The measure, passed on a 12-6 vote, would authorize borrowing to recapitalize the Federal Savings and Loan Insurance Corp., which, because of the troubled condition of the savings and loan industry, is in dire need of more money.

But the bill--drafted by Sen. William Proxmire (D-Wis.), the committee chairman--also contains other more controversial provisions, including new restrictions on “non-bank banks.” It also would place a one-year moratorium on allowing regular banks to engage in non-banking activities such as securities and real estate.

The measure also would require the Federal Reserve Board to write new regulations so that banks could not hold customers’ deposited checks for more than six days.

Critics of the bill, led by Sen. Jake Garn (R-Utah), the panel’s ranking Republican, argued that the money for the insurance fund, known as FSLIC, was desperately needed, but that the other provisions would cause problems in the full Senate and with the House.

Congress has tried for several years to draft major banking legislation, but has hit snags.

Garn warned the committee that the best way to help the troubled savings and loan institutions would be to “forget all the special interests. To be blunt about it, tell them all to go to hell today and pass a clean FSLIC bill.”

However, on a 12-6 vote, the committee rejected Garn’s attempt to strip the other provisions from the legislation.

Under the bill, only half of the $7.5 billion for the insurance fund could be spent in the first year.

One of the most controversial sections of the bill deals with the “non-bank banks,” which are hybrid financial institutions that exist because of a loophole in the current banking law.

Because they offer either checking services or loans, but not both, the institutions do not fit the legal definition of a bank and therefore do not fall under banking regulations. As a result, they are viewed as a threat to regular banks.

Under the bill, those institutions would be restricted, but those in existence before March 5 of this year could continue.

Several senators agreed with Garn that tying the FSLIC money to the other issues would hurt overall chances for the bill. The House has begun considering some of the same matters, but has taken different approaches and has kept them as separate bills.

Also, under an amendment added to the Senate bill, the salaries paid to federal financial regulators would not fall under Gramm-Rudman budget cuts. Sponsors argued that that was fair because the money came from targeted funds and not from general taxpayer dollars.

However, critics argued that it was another reason the bill would face trouble.

“If we adopt this amendment on this bill, this bill is going to fall like a rock,” said Sen. Christopher Dodd (D-Conn.)

Earlier in the day, Treasury Secretary James A. Baker III urged Congress in its rewrite of banking laws to focus on consumer needs rather than pleas by special interests to reduce competition.