Plan to Overhaul Banking Gets Cool Reception in Senate

The Bush Administration’s sweeping plan to overhaul the nation’s banking system received a decidedly cool reception Tuesday in the Senate Banking Committee, raising serious doubts that the full proposal can win congressional approval this year.

At a hearing, both Democrats and Republicans expressed concern over President Bush’s proposals to give big commercial businesses the power to buy banks, to allow banks to move fully into the business of securities and insurance and to permit unrestricted movement across state lines.

Congress wants a guarantee that “any new powers” for banks “do not bring new risks,” Sen. Donald W. Riegle Jr. (D-Mich.), the committee’s chairman, told Treasury Secretary Nicholas F. Brady, who appeared to plead the Administration’s case for the plan.

“We need to make sure we have learned the lessons of the savings and loan crisis,” Riegle said. He said S&Ls; had suffered billions of dollars in losses in the 1980s after moving into high-risk investments far removed from traditional home mortgages.

Riegle was far from alone in his opposition to the plan. Sen. Nancy Landon Kassebaum (R-Kan.), worrying about big banks moving into her state, expressed fears of a “greater concentration of our financial resources in a small number of undercapitalized institutions.”

And a skeptical Sen. Paul S. Sarbanes (D-Md.), concerned that corporations acquiring banks could dip into the banks for financial help, told Brady: “You recommend changes that will heighten risk.”

Riegle and several other committee members contended that the Administration’s top priority--before it gives banks any new powers--should be the rescue of the federal insurance fund that guarantees deposits up to $100,000.

It was not immediately clear how badly the panel’s misgivings might damage prospects for the legislation. The committee is expected to continue its consideration of the Administration’s plan, though insiders concede that chances for passage appear to be slim. Riegle said his committee will hold several months of hearings and that he hopes to begin writing the detailed bill sometime after the summer.

Brady will make his initial presentation on the bank reform plan today before the House Banking Committee, also scheduled to hold extensive hearings.

The Administration, regulators and the banking industry have been allied in insisting that the banks themselves can rebuild the fund without resorting to the kind of costly taxpayer bailout now under way for the S&L; insurance fund.

The Federal Deposit Insurance Corp. is scheduled to vote Thursday on plans for an increase in the annual premiums that banks pay into the insurance fund. But the industry wants to provide a onetime assessment of $10 billion in bonds, rather than face a permanent increase.

Despite the criticism from committee members, Brady remained undaunted, insisting that banks must be given new opportunities to make profits because they lost traditional customers to new markets such as commercial paper (short-term IOUs issued by corporations) and money market funds.

He also rejected comparisons to the S&L; crisis in which state-chartered Texas and California thrifts invested billions of dollars in real estate loans--for office buildings, shopping centers, condominiums and raw land--that later soured.

Brady was particularly enthusiastic about nationwide banking, permitting establishment of branches in any state.

He estimated that if the reforms are carried out, the banking industry could save at least $10 billion a year, compared to the current need for separate corporate and management structures at banks that have affiliates in more than one state.

The Treasury plan was endorsed by two strong supporters of the Administration, Sen. Jake Garn (R-Utah), the committee’s ranking Republican, and Sen. Phil Gramm (R-Tex.).

In striving to fix the banking system, “we’ve used Band-Aids, we’ve used tourniquets, we’ve used splints,” Garn said. “Now we need to push a bold legislative package through Congress this year.”