Senate Banking Reform Clears Key Committee

The Senate Banking Committee on Friday approved a wide-ranging reform of the nation’s Depression-era financial laws, approving interstate branching, giving banks expanded powers to affiliate with securities firms and ordering a basic, low-cost bank account for people earning less than $20,000 a year.

The bill was approved by a 12-9 vote, and will go to the floor of the Senate--where it faces an uncertain future--when it convenes next month after a summer recess. The House Banking Committee adopted a different version of the legislation last month that would allow big industrial and commercial firms to buy banks.

Senate Banking Committee Chairman Donald W. Riegle (D-Mich.) was adamantly opposed to removing the traditional barriers between banking and commerce, and he persuaded his colleagues to accept his view.

With the taxpayers facing a bill of $300 billion or more to pay off deposits at failed savings and loan associations, and the prospect of a bailout at banks, Riegle was fearful that big corporations buying banks might get into financial trouble and then drag the banks down with them. “The separation of banking and commerce was my chief concern,” said Riegle after the final vote, which climaxed three days of public debate and private negotiations. Riegle also prevailed in efforts to keep the banking industry fully responsible for repaying $70 billion that will be borrowed from the Treasury and other federal sources to bolster the deposit insurance fund.

The close committee vote, and the lukewarm response of the banking industry, signal the likelihood of a vigorous Senate debate amid extensive efforts to change the bill.

The measure approved Friday “contains within it the seeds of its own destruction,” warned Sen. Paul Sarbanes (D-Md.), who voted against the bill because, he said, it weakened the “fire walls” that will keep banks separate from their new securities affiliates. The bill, if approved by Congress, could “come back to haunt us in years to come.” The Bush Administration expressed lukewarm approval of the bill and vowed efforts to try to reshape it on the Senate floor.

“Our strategy remains to work for comprehensive banking reform legislation that will attract voluntary capital into the banking industry,” Treasury Secretary Nicholas F. Brady said after the committee vote. He expressed concern that the bill does not allow industrial firms and others to buy banks.

“We are disappointed that the bill does not adopt provisions which permit private capital to flow freely into the banking industry,” he said.

The bill is a “mixed bag, and we have to look through it and see if it will make us stronger and more competitive, or weaker,” said Edward Yingling, government relations director for the American Bankers Assn. The bankers are happy with the repeal of the laws barring them from the securities and insurance business.

But they are upset with the prospect of the new so-called “lifeline banking” provision. Banks would be forced to offer a choice of services to people earning less than $20,000 a year. Consumers could choose a low-cost check-cashing service, covering government checks up to $1,500. The other option would be a basic checking account. Banks could not require an average balance over $750, or a minimum balance of more than $25. And the account would have 10 withdrawals a month.

“I don’t think the little people dealing with the banking system have caused these problems we have,” said Riegle, a strong backer of the provisions. “These are protections for them.”

The bill gives the banking industry the unfettered right to move across state lines in search of efficiencies and new markets. Banks already owning subsidiaries in other states, firms that are now separate enterprises, could combine them. Banks could move across state lines and buy other banks in two years. And banks could move into any state in three years to open new branches, unless a state voted to impose restrictions on entry.

The committee changed its policy from the original version of the bill and decided to restore the Federal Reserve’s unquestioned ability to loan funds to ailing banks and S&Ls; without fear of suffering financial loss. The Fed’s loans to troubled institutions will continue to be secured by the assets of these banks and S&Ls.; However, if the institution fails, the Fed may suffer the loss of the profits it would have otherwise earned on the loan. But it will get back the money from the loan itself.

The insurance industry won a major victory with adoption by an 18-3 vote of an amendment saying that an insurance company owned by a bank can market insurance in other states only if those states pass a law allowing this activity.

This would sharply restrict banks’ ability to move into the insurance business.

Banking Reform: The Different Bills

Both the Senate and House banking committees have approved banking reform legislation. This is how the bills compare:

Interstate activity

* House: A bank can buy another bank in any state in three years. Nationwide branching--any bank can open branches anywhere--allowed in three years.

* Senate: Banks can buy another bank in a state in two years. Nationwide branching allowed in three years, but state can elect to opt out.

Bank deposit insurance fund

* House: Borrows $70 billion to be repaid by premiums from banks. Federal regulators consult with Congress on repayment schedule.

* Senate: Borrows $70 billion, with 15-year repayment.

Insurance on individual accounts

* House: No change in current law. Individuals can have multiple accounts insured up to $100,000 each.

* Senate: No change in current law.

Banking and commerce

* House: Big industrial and commercial firms can buy banks.

* Senate: No change in current law keeping banks and commerce separate.

Expanded powers

* House: New financial holding companies can own banks and securities firms. Insurance companies can affiliate with banks indirectly.

* Senate: Financial holding companies can own banks and securities firms. Current restrictions on insurance activity largely retained.

Basic banking service

* House: No provision

* Senate: For consumers with incomes below $20,000 a year, banks must offer choices of services. Low-cost cashing of government checks up to $1,500. Or basic checking account with no required minimum balance over $25, and 10 withdrawals a month.