Fed Chief Doubts Curbs on Banks Will End This Year

Federal Reserve Board Chairman Alan Greenspan said Thursday that he doubts that Congress can agree on legislation this year to repeal the law that keeps banks out of the securities business.

However, Greenspan said, he remains hopeful that a bill similar to the one that cleared the Senate earlier this year can be approved by the House and signed into law in 1988.

“I really hope they make it,” Greenspan told an audience of about 500 bankers, regulators and academics attending a conference here on bank competition and restructuring.

On the hottest financial subject of the day, Greenspan declined to answer any questions about the prospects for higher interest rates, running past reporters and television cameras following his address and ignoring their shouted questions.

He did tell the audience that he is optimistic that there will not be a recession in the near future, saying: “Short of a really extraordinary set of unexpected events, it certainly does not appear to be in the period directly ahead.”

The Senate has overwhelmingly approved a bill that would repeal most sections of the Glass-Steagall Act of 1934 and allow banking companies to engage in a variety of securities businesses that are now closed to them.

The companies would be required to exercise the new powers through subsidiaries and within guidelines designed to protect the financial health of the banks themselves.

Progress of similar legislation in the House has been slowed partly by the diversity of interests at play there. Greenspan said the House Banking Committee has “51 members and 75 different opinions.”

Greenspan said expanding banks’ powers would result in stronger banks with minimal risks to the financial health of the institutions.

“It is important to underline that the Federal Reserve Board’s objective in its support of broader powers for bank holding companies is not to bail out banks, but rather to facilitate an efficient deployment of assets, capital and human resources to meet the public’s needs for financial services,” Greenspan said.

Consumers could expect to benefit from lower costs for financial services as a result of the increased competition, he added.

Greenspan and other top regulators of the financial industry have unanimously supported expanded powers for the banking industry, and Greenspan expressed the views held by most of them that if banks do not get broader powers their profitability will continue to decline.

Efforts to repeal the key sections of Glass-Steagall have gained momentum over the last year, partly as a result of a lobbying push by big banking companies and partly as a result of the efforts of Sen. William Proxmire (D-Wis.), the long-time chairman of the Senate Banking Committee.

Proxmire’s legislation cleared the Senate committee and the full Senate by wide margins, but efforts to get the companion bill through the House have been slowed by competing interests and legislative logistics.

In addition to approval by the House Banking Committee, a House bill must also gain the support of the House Energy and Commerce Committee before getting to the floor for a vote.

Greenspan seemed to confirm the speculation of industry insiders when he said that chances for approval this year seem slim because of the logistical problems. But he said he expects approval of the new powers within the next two years if there is no change in 1988.