House Panel OKs Bush’s Plan for Banking Reform : * Deregulation: The bill endorses powerful new interstate companies, $70 billion more for failures.

The House Banking Committee on Friday endorsed the most far-reaching reform of banking laws since the Great Depression by approving an Administration plan to replenish the cash-starved deposit insurance fund and give bank firms greater powers.

The bill, approved 31-20, largely mirrors the package submitted by the Bush Administration. Treasury Secretary Nicholas F. Brady applauded the panel for moving the bill expeditiously.

“We look forward to final action in the House, and I hope the Senate will promptly begin debate on comprehensive banking reform,” Brady said in a statement issued after the vote.

Now that the banking committee has completed its work, the bill is expected to be referred to the House Energy and Commerce Committee, which also has jurisdiction over portions of the bill. It probably will be presented to the full House next month.

The Senate is drafting its own version of the legislation.

The proposal would break down barriers that prohibit banks from marketing securities and insurance, and give them the power to move unhindered across state lines. In addition, the bill provides borrowing authority of $70 billion to bolster the ailing deposit insurance fund. Regulators expect 400 banks to fail this year and next, and the deposit fund faces a potential deficit of $11 billion or more.

Banks would pay premiums to repay the insurance fund’s borrowings of $70 billion. But if the industry becomes too weak because of additional failures and the deepening real estate slump, a taxpayer bailout could become inevitable.

On its last day of work, the banking committee voted to leave unchanged the current broad reach of federal insurance, which protects deposits up to $100,000.

The Treasury wanted coverage for depositors limited to $100,000 per bank for regular accounts and $100,000 for retirement funds. But the thousands of smaller banks among the nation’s 12,000 lobbied successfully against any change in the system. They argued that restrictions on insurance would send savings flooding out of small local banks into a small group of big institutions.

Committee Chairman Henry B. Gonzalez (D-Tex.) expressed disappointment that “we really didn’t get reform of deposit insurance.”

“America has become addicted as a deposit insurance junkie. People want the taxpayers to insure every aspect of their activity,” he said. However, Gonzalez declared himself generally satisfied with the bill, saying the committee “really rose to the occasion.”

He said the measure has vital provisions allowing regulators to take early action against a troubled bank long before the bank is in imminent danger of failing and costing the insurance fund substantial amounts of money.

The banking industry, which has been pushing for expanded powers, was generally pleased with the banking committee bill.

“From our point of view it was positive,” said Edward Yingling, director of government affairs for the American Bankers Assn. However, the banking industry is divided about the bill’s move to allow complete freedom of movement across state lines three years after the final passage of the legislation. Bank holding companies, owning financial institutions in several states, could immediately convert these banks into branches of a single system, saving millions of dollars now spent to maintain separate accounting and management structures.

The holding companies are forceful supporters of this provision, while smaller local banks are fearful about the powerful new competitors that could move into their states.

Some consumer groups were critical of the committee action, especially the provisions allowing banks to underwrite securities and permitting big industrial corporations to own banks.

“It’s insane even to consider deregulation of taxpayer-insured banks when abuses of our current banking laws have plunged us into a commercial banking crisis that’s beginning to rival the S&L; fiasco,” said Jim Hightower, head of the Financial Democracy Campaign, representing a group of labor unions and community organizations.

Proposed Bank Reform

The House Banking Committee on Friday approved a bill to reform the banking industry. Here are highlights:

* Securities powers: New holding companies could own banks and securities firms, repealing the 1933 law that erected walls to separate the two industries.

* Commercial ownership: Big commercial firms would be permitted to own banks for the first time.

* Interstate banking: Banks would be able to cross all state borders to set up operations in three years. Current holding companies with bank subsidiaries in several states could immediately change these costly separate units into individual branches of the main bank.

* Insurance fund: The Federal Deposit Insurance Corp. would receive $70 billion in new borrowing authority to provide financial backing for the insurance fund, which protects deposits up to $100,000 and needs the money to cope with the increasing wave of bank failures.

* Deposit insurance: Deposit insurance would remain unchanged at $100,000, without limits on the number of insured accounts for an individual in the banking system. Pension funds, which are now covered by deposit insurance at all banks, would receive protection only at the strongest banks.

* Uninsured deposits: Starting in 1995, the FDIC would be barred from protecting uninsured deposits. Federal regulators could decide to protect such deposits, but taxpayers, rather than the industry-financed FDIC, would bear the additional cost.

* Early intervention: Regulators would be required to seize weak banks before they became insolvent. The “drop-dead date” would occur 10 months after bank owners’ capital investment fell below 2% of assets.

Source: House Banking Committee