It’s Not Over Yet : There still can be banking reform in Senate

Prospects for a major overhaul of the troubled banking industry are bleak after the House’s defeat of a comprehensive bank reform bill on Monday. But now the Senate has a chance to exert leadership when it considers its own reform measure over the next few days. Decisive action in the upper chamber could galvanize the House into commiting to reform.

The Bush Administration unveiled a plan earlier this year for banks to become more competitive by allowing them to diversify into new businesses, such as insurance and securities. The original House bank reform bill was on the right track but was overwhelmingly defeated primarily because of a last-minute amendment to appease House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) and House Energy and Commerce Committee Chairman John D. Dingell (D-Mich.). They put into the bill onerous “fire walls” between traditional bank activities and new businesses--a setback to reform.

The House Banking Committee is scheduled to vote today on a narrow bill to replenish the dwindling bank insurance fund of the Federal Deposit Insurance Corp. But providing money to the fund, which bails out troubled banks, does nothing to resolve the fundamental structural problem.

Even in the face of these problems, reform is not dead. The Senate bill would allow for interstate banking and for banks to diversify into securities and the insurance business with adequate capital safeguards to protect bank deposits. It would replenish the bank fund. The Senate would also require banks to provide both low-cost checking and services to cash government checks.

Senate passage could influence the House to compromise on a final reform bill. If the legislators fail to initiate the biggest changes in banking since the Depression, they will face a bigger and even more daunting problem later.