Congress Begins Work on Reform of Banking System

Congress began work on a massive plan to overhaul the nation’s ailing banking industry Tuesday, with a House subcommittee quickly approving a taxpayer-financed infusion of $25 billion into the depleted government fund that insures the bank deposits of millions of Americans.

Subcommittee leaders and banking lobbyists agreed that Tuesday’s action was just the opening salvo in what is likely to turn into a bitter, yearlong debate in Congress over how best to deal with the worsening banking crisis.

“This is just the first inning of what is going to be an absolutely incredible process,” said Ed Yingling, chief lobbyist for the American Banking Assn., the major banking trade group.

“We’re going to look back and say this was the kickoff of the big taxpayers’ bank bailout,” said Rep. Gerald Kleczka (D.-Wis.), who opposed the bill Tuesday.

The House Banking subcommittee on financial institutions took the first legislative step in the debate over banking reform when it voted overwhelmingly for a proposal calling for the U.S. Treasury to inject the funds into the federal deposit insurance fund.

The proposal would increase the Federal Deposit Insurance Corp.’s line of credit at the Treasury from $5 billion to $30 billion, for use only if the deposit fund should be unable to cover the losses from a major bank failure.

The deposit insurance fund had just over $8 billion left at the end of 1990, and FDIC Chairman L. William Seidman has warned it will probably be insolvent by the end of the year. “There are many experts who believe that the fund is insolvent now,” Rep. Frank Annunzio (D.-Ill.), chairman of the financial institutions subcommittee, added Tuesday.

If the FDIC is forced to draw on the credit line, commercial banks would repay the money through higher insurance premiums, but taxpayers would have to provide a bailout if the banking industry was unable to pay the money back.

The subcommittee rejected a Bush Administration proposal that would have required the Federal Reserve Board to provide the money.

Congressional leaders had charged that the Administration plan represented an effort to hide a government bailout for the banking industry and also feared it would have set a dangerous precedent by opening the Fed’s lending window to troubled federal agencies.

Federal Reserve Chairman Alan Greenspan also publicly opposed the plan to borrow from the central bank, and Fed officials lobbied effectively against the plan in Congress.

But despite the setback on its proposal to borrow from the Fed, the Bush Administration has apparently won a larger fight with Congress on how far to push banking reform this spring. Democratic leaders in Congress said Tuesday that they have agreed to an Administration demand to consider a wide array of banking reform measures over the coming weeks, including controversial proposals that would allow for full interstate branch banking and give banks broad new powers to trade stocks and sell insurance.

That agreement represents a reversal for the Democratic leadership. Earlier, House Banking Committee Chairman Henry B. Gonzalez (D.-Tex.), along with Annunzio, had argued that Washington shouldn’t provide the banking industry broad new powers in the midst of a worsening banking crisis and said he feared that such action might lead banks down the same disastrous path of deregulation that eventually ruined the savings and loans.

But other influential Democrats on the Banking Committee, including Rep. Doug Barnard (D-Ga.), chairman of the committee’s Democratic caucus, pushed for a broader legislative package, arguing that taxpayer money shouldn’t be poured into the banking crisis without some deeper reforms of the system. Treasury Secretary Nicholas F. Brady also intervened last week, winning an agreement from House Republicans that they would push for broader legislation. Gonzalez finally agreed to a compromise under which the narrower issue of recapitalizing the deposit insurance fund would be handled first this week, with the Bush Administration’s broad reform proposals to be voted on next week.

Meanwhile, the bill passed Tuesday calls for the government to end by 1995 its controversial practice of paying off uninsured deposits during the collapse of a large bank.

That policy, called “too big to fail,” has allowed federal banking regulators to cover all of the deposits in large banks that fail, even those that exceed the legal insurance limit of $100,000 per account. Regulators have argued that by paying off all of the deposits when a big bank collapses, they can avoid a panic that could disrupt the entire financial system. But many in Congress argue that the “too big to fail” doctrine is unfair to smaller banks, which don’t receive such treatment.