Bank Reform Issues Loom for Consumers

The proposed banking reforms unveiled Tuesday--which would result in the first major overhaul of the U.S. financial system in 50 years--pose dramatic changes for both bank depositors dependent on insured accounts and consumers accustomed to clear separations between the myriad of available financial services.

But while the sweeping proposals--if enacted--are sure to have widespread effect, experts advise depositors and consumers not to be immediately alarmed. “There is no need to panic now,” said Burt Ely, a banking industry analyst in Alexandria, Va. “This is still a proposal. There’s no guarantee that it will be approved by Congress in any form, let alone its present one.”

Still, the issues facing depositors and consumers are important. Here’s a quick rundown.

Will my bank accounts still be insured?

Yes, federal deposit insurance would still be available, but at greatly reduced levels at any single institution.

Under the current Treasury proposal, individual depositors would be covered, up to a maximum of $200,000 per institution: $100,000 for retirement accounts such as IRAs and Keoghs, and $100,000 for all other accounts. This proposal would eliminate the complicated insurance policies now in effect that, for example, allow a family of three to have a variety of accounts at a single institution insured up to a total of more than $1 million.

In addition, the proposal calls for Congress to study the possibility of further limiting insurance five years from now to a maximum of $200,000 per depositor in all institutions. At the same time, regulators would be discouraged from fully reimbursing uninsured deposits, which they have done so far in many bank failures.

What should I do?

Initially, there’s little or no reason for concern. If approved by Congress--a big if, experts say--the first wave of new insurance rules would not take effect for two years. In addition, analysts expect Congress to grant exemptions to time-account deposits that have not matured.

The time lag should allow depositors to do what the wealthy already do: Parcel out their money among many institutions to secure full insurance coverage. Experts say depositors should also begin paying closer attention to the financial health of their banks and to move their deposits to safer investments if they feel it’s necessary. Depositors seeking complete security, and willing to forgo top interest rates--might consider Treasury securities, which are backed by the “full faith and credit” of the U.S. government, experts note.

Any worry about the second step of the insurance reduction, analysts say, would be premature. They say the proposal is so radical that Congress is unlikely to approve it. Still, the message should be clear to depositors: Banking reform is likely to entail some form of reduction of depository insurance from its current levels.

What do I get in return? Will it be easier for me to conduct my financial affairs if restrictions on traditional bank services are lifted?

Bankers have long been frustrated over the restrictions imposed by the Glass-Steagall Act of 1933, the Depression-era law separating commercial from investment banking. The proposed overhaul would effectively dismantle that law by allowing certain banks to sell securities, such as stock and bonds, and insurance. Banks also eventually would be permitted to expand beyond state lines.

Consumer advocates--joined by complaining members of the securities and insurance industries--argue that bankers are the big winners in this proposal, and that consumers will ultimately lose.

“This is a minefield,” said Peg Miller, a banking lobbyist for Consumer Federation of America in Washington. “It’s going to be very difficult for consumers to discern what they are doing.”

Will it be any harder for me to have a relationship with a bank? For example, will I face more difficulty getting a business loan? Will I face higher fees for bank services?

Critics are already complaining that the proposed reforms will lead to a dangerous concentration of financial power, depriving local communities of control of their financial institutions and confusing customers with a dizzying array of interrelated services.

However, experts say California residents have already faced some of the issues raised by the prospects of interstate banking because the state has long allowed its banks to operate branches throughout the state. They argue that small communities are unlikely to notice the difference between a branch bank owned by a huge outfit based in San Francisco and one based in New York.

Critics also argue that consumers may not be able to accurately keep track of the fees banks charge for their services once they begin bundling them in packages linking their various products. And they note that customers refusing to accept these packages might be denied deals as attractive as those offered customers with all their financial business at a single institution.

“This is a proposal for Wall Street, not Main Street,” complained Diane Casey, director of the Independent Bankers Assn. of America, which represents small banks.