Treasury Urges Drastic Overhaul of Bank Laws : Finance: Institutions could market insurance and securities. U.S. protection of deposits would be curtailed.

The Bush Administration on Tuesday proposed the most drastic overhaul of financial laws since the Great Depression, giving banks complete freedom to move across state lines and to enter fully into the business of marketing insurance and securities.

The plan, aimed at reviving the ailing banking industry, also calls for limiting government protection of deposits for an individual to $200,000 in each bank. After five years, a more stringent ceiling would be adopted, restricting an individual’s protection to $200,000 total--$100,000 in savings and $100,000 in retirement accounts.

Now, although every account is insured for a maximum of $100,000, there are no formal limits on the number of insured accounts, so the total amount insured can be many times higher.

The President’s plan would shatter a longstanding separation of banking and commerce and permit big companies--such as Sears, Ford, or IBM--to own banks as part of an effort to bring badly needed new capital to the financial world.

“The laws that govern financial services should deal with the real world in which banks and other financial institutions operate,” Treasury Secretary Nicholas F. Brady told a news conference.

For the first time since the Depression, a company engaged in banking could also operate insurance companies and securities firms. Walls against such mixed functions were created more than 50 years ago by an angry Congress after the stock market crash destroyed the value of shares in risky investment syndicates created by the banks. The banks had reaped profits twice, issuing the shares and providing loans to people to buy the stock.

The proposed reforms would require action by Congress, where the road to legislative success is long and uncertain. The two men who will lead the debates--House Banking, Finance and Urban Affairs Committee Chairman Henry B. Gonzalez (D-Tex.) and Senate Banking, Housing and Urban Affairs Chairman Donald W. Riegle Jr. (D-Mich.)--expressed serious doubts Tuesday about giving banks entree into new lines of business.

“The Administration makes a mistake in proposing new and risky activities for banks before the supervisory and insurance reforms are in place and working,” Gonzalez said.

“This is the same cart-before-the-horse mentality which plagued the deregulation of the savings and loan industry in the early 1980s. Let’s set the speed limits and train the policemen before we open a super new expressway for financial institutions.”

Riegle said the proposal to expand bank powers “will require more examination. The barriers between banking and commerce have served the nation well. I personally am inclined to think it may be better to wait to consider these portions of the Administration’s proposal until we actually have reformed the deposit insurance system and improved the way we supervise the nation’s banks.”

The Treasury report argued that banks are facing a swarm of hungry competitors and the loss of much of their traditional business, and thus desperately need new outlets to make money. Under the Administration proposal, banks would be permitted to expand across state lines without hindrance within three years.

Bank of America, which is now forced to have separate corporations and computer systems for operations based in California and the state of Washington, would save $50 million under a liberalized system of interstate banking, Brady said.

Laws restricting bank expansion are simply outdated, Brady said. “A California bank can open a branch in Birmingham, England, but not in Birmingham, Ala.,” he noted.

Bigger banks welcomed the Treasury plan, but many smaller community institutions are expected to fight hard to block it. “The Treasury proposal remains a prescription for massive financial and economic concentration,” the Independent Bankers Assn. said.

Conspicuously missing from the 1 1/2-inch-thick Treasury report was any detailed plan for bolstering the deposit insurance fund, which is expected to be insolvent by year’s end. The report said only that the rescue should “provide sufficient resources” and “rely on industry funds.”

Brady said he awaits an industry proposal to rescue the fund using money collected from the banks themselves without depending on a taxpayer bailout.

The Treasury has ceded to the banking industry, represented by trade associations based here, the task of devising a detailed plan for the insurance fund. The task is delicate: extracting enough money in the form of premiums from the healthy portion of the industry to fatten the fund used to pay off the customers of failed banks.

The bankers and Administration officials adamantly insist that the industry can supply the money needed to keep the insurance fund solvent. To admit otherwise--that the taxpayers might be forced to come to the rescue of the insurance fund--would imperil the opportunities for persuading Congress to give the banks new business powers.

Although the banking industry is far stronger than the S&Ls; and has more than $200 billion in capital, fearful members of Congress worry about the possibility of another huge financial bailout. The Senate Banking Committee voted Tuesday to spend another $30 billion to cover losses this year from the shutdown of failed thrifts. The total price tag is now estimated at $130 billion, without counting the future cost of interest on bonds.

The massive failure of S&Ls; has been widely attributed to deregulation, notably in California and Texas, where thrifts were allowed to expand their business well beyond traditional home mortgage lending. Billions of dollars subsequently were lost in risky investments in real estate and land speculation.

The Administration argues that a banking bailout will never be necessary if bankers are given additional opportunities to make money.

“Today our banking system is under stress,” Brady told the news conference. “Technology is changing the way financial institutions do business, but our banks are hampered by out-of-date laws.

“Bank credit cards, (automated teller machine) cards and the 800 number allow people to access banking services across state lines and around the world, but banks themselves are constrained by outmoded rules. Bank competitors can offer innovations, such as money market funds and commercial paper, that put banks at a competitive disadvantage at home and abroad.”

Brady was especially alarmed by the shrinking competitive position of American banks, referring three times to a chart showing that only one of the 30 largest banks is a U.S.-based financial institution. In 1969, by contrast, the United States could boast the three largest banks in the world and 9 of the top 30 financial institutions.

Part of the Administration plan is designed to restrict the widespread use of deposit insurance, in which individuals avoid the $100,000-per-account limit by opening numerous accounts.

One Washington bank recently advertised a method for a family of three to safeguard $1.2 million in insured deposits through individual and joint accounts.

The average household has about $10,000 in insured savings.

The initial limit of deposit protection to $200,000 in each institution would take effect two years after congressional passage of a banking reform package.

Moreover, federal insurance coverage would be eliminated entirely for:

--Brokered deposits. Securities firms collect money from wealthy individuals or families and deposit it in institutions paying high interest rates, packaging the money in amounts less than the $100,000 limit.

--Bank investment contracts. These are offered to pension funds with huge amounts of money to invest. The $100,000 coverage is “passed through” to each person enrolled in the pension fund.

The plan also suggests that regulators be given the power to charge higher insurance fund premiums for banks involved in risky investments.

It suggests that banks be grouped into “zones,” depending on their fiscal muscle, and advocates quicker intervention by regulators to rescue a troubled bank long before it nears insolvency.

Well-run, financially sound banks would be given a high degree of regulatory freedom, whereas weaker banks would be closely watched, “subject to dividend restrictions, growth restraints and other supervisory actions,” the Treasury report said.

Regulators under the Treasury plan would attempt to cut back the use of the “too big to fail” doctrine, under which all depositors at large institutions--even those with individual accounts of more than $100,000--are safeguarded in the event of failure.

Under the plan, the Administration also seeks to boost the Treasury’s powers, giving it unfettered responsibility to regulate federally chartered banks and S&Ls.; The Office of the Comptroller of the Currency, which now regulates banks, and the Office of Thrift Supervision, which oversees S&Ls;, would be submerged in the Treasury Department.

The Federal Reserve Board would oversee state-chartered financial institutions and their holding companies.