Overhaul of Banking Laws Hits New Snag

Legislation to overhaul Depression-era U.S. banking laws cleared one major hurdle Thursday, but congressional negotiators trying to hammer out a final version of the bill soon ran up against another.

For the first time in over two decades of trying, both the House and Senate this year passed bills to allow banks, brokers and insurers into each other’s businesses. A conference committee is trying to reconcile the two versions.

In a major boost for the effort, the Federal Reserve and Treasury said early Thursday that they had reached an agreement to end their dispute over which would regulate the new financial conglomerates that the bill would allow.

The committee, however, later deadlocked on another key issue, the scope of the Community Reinvestment Act, which makes banks lend in poor areas where they take deposits.

Republican leaders Tuesday unveiled a draft of the final legislation and said they hoped the committee could debate, amend and pass it by the end of this week. The administration said the proposal did not fully address any of its key concerns, including on the regulatory issue, and would be vetoed.

The Treasury had wanted to let banks enter new financial activities through their operating subsidiaries, which it oversees. The Fed wanted new businesses kept in affiliates of banks’ holding companies, which fall under its control.

In terms of their agreement, banks would be able to expand into some new financial activities such as securities underwriting through their operating subsidiaries. Insurance underwriting and real estate development activities would have to be kept in holding company affiliates, while a key disagreement over merchant banking was essentially postponed.

Regarding the CRA, Democrats said provisions in the draft bill would restrict the law, something the White House has repeatedly said it cannot accept. After an amendment to modify those provisions was defeated, they warned that the legislation was headed for trouble.

The conference committee is likely to revisit the question, with both sides acknowledging that it is vital to the bill’s prospects of becoming law.

Republicans said they hope to get a final bill back to the House and Senate by Wednesday.