Administration Loses Votes on Bank Reform : Congress: Two House panels snub elements of Bush’s overhaul proposal.

Two House committees disregarded President Bush’s wishes on Wednesday by adopting legislation that strikes at the heart of the Administration’s plans to overhaul the banking system.

The Agriculture Committee voted 11-10 in favor of provisions that the Administration believes would cripple its proposal to lift barriers to interstate banking.

And the Energy and Commerce Committee passed, 29-12, a bill that preserves the traditional ban on commercial corporations owning banks. It also takes away some of the insurance powers banks obtained under state laws.

Although the Energy and Commerce bill would, as the Administration wants, permit banks to enter the securities business, both the banking industry and the Bush Administration prefer a version of the legislation adopted in June by the House Banking Committee.

Not only does the banking panel version repeal the 1933 Glass-Steagall Act, which separated the banking and securities industries, it also opens the insurance business to banks and allows corporations such as Ford Motor Co. and Sears, Roebuck & Co. to own banks through holding companies.

The provision adopted by the agriculture panel would require branches established in rural areas by out-of-state banks to lend at least 50% of their deposits locally. If they do not, regulators would be required to close the branches.

The amendment’s sponsor, Rep. Glenn English (D-Okla.), said it was designed to prevent big city banks from siphoning deposits out of rural areas without investing in the local community.

Treasury Under Secretary Robert R. Glauber, in a letter to the chairman of the agriculture committee, Rep. Kika de la Garza, (D-Tex.), called the amendment “counterproductive, unworkable, and a serious threat to credit flows in the economy.”

“One of the reasons many banks are now under pressure is that their lending operations were tied to a limited region,” Glauber said.

“This amendment, however could actually increase such reliance, making banks less safe and increasing the ultimate risk to the taxpayer,” he said.

The Energy and Commerce bill also would impose strict legal “fire walls” policing relations between affiliated banks and securities firms to eliminate potential abuses and conflicts of interest.

However, by a voice vote, the panel somewhat relaxed one fire wall that would have flatly prohibited a bank from linking its lending to securities underwriting by an affiliated brokerage firm.

The goal is to prevent banks from making loans that would be used to purchase its affiliates’ securities and from pressuring a borrower to also use the services of an affiliated brokerage.

Instead of a flat prohibition on lending 60 days before and 90 days after an underwriting, the committee adopted a compromise.