Panel OKs Plan to Allow Firms to Buy Banks

The House Banking Committee on Wednesday voted to approve a controversial Bush Administration plan to allow commercial and industrial firms to buy and operate banks, beating back challenges from critics who charged that such radical restructuring would threaten the stability of the banking system.

The committee rejected, by a 32-2 vote, a proposal by Rep. Jim Leach (R-Iowa) that would have effectively retained the separation of industry and banking that has been a cornerstone of the nation’s banking laws since the Great Depression. In effect, the provision, if it became law, would allow companies such as General Motors Corp. or Sears, Roebuck & Co. to buy commercial banks.

But the plan to merge commerce and banking still faces major roadblocks later in the legislative process, congressional observers said Wednesday. Even banking industry officials said they doubt that the proposal will survive later challenges in the House and Senate.

“There are a lot of steps in the process, and we are still very early in what will probably be an extensive process,” said Ed Yingling, chief lobbyist for the American Bankers Assn.

The banking panel, in the midst of reviewing the Administration’s comprehensive plan to overhaul the nation’s antiquated banking laws, also approved a provision limiting the ability of the Federal Reserve Board to lend money to help prop up ailing banks.

The Fed can now make short-term loans to banks to help them through a financial crunch, but critics argue that such loans to weak banks often come just before they collapse and are seized by government regulators. As a result, the loans have only inflated the cost of the bank closures to the federal government’s deposit insurance fund, which insures bank deposits up to $100,000 per account.

The provision limiting the Fed’s lending to weak banks is designed to restrict the government’s policy of providing extra regulatory protection to the nation’s largest banks.

Under the provision passed Wednesday, the Fed could still lend to a weak bank, but if it extends credit for more than 60 days and the bank fails, then the Fed would have to absorb the losses that exceed the cost to the government of protecting the bank’s insured deposits.

The new limits on the Fed’s ability to lend to weak banks follows other provisions in the banking reform plan designed to restrict the ability of the Federal Deposit Insurance Corp. from paying off uninsured depositors in failed banks. In the past, the FDIC has paid off uninsured deposits, claiming that it would help avoid a financial panic and represented the least expensive way of cleaning up the banking mess.

But the committee defeated a controversial measure that would have imposed new interest rate ceilings on bank deposits, and also would have placed new restrictions on bank lending.

Many of the provisions approved Wednesday face stiff challenges later.

But a move Tuesday by the panel to approve full interstate branch banking is unlikely to be reversed, industry and congressional observers said. The committee approved the portion of the Bush plan that would eliminate most of the remaining obstacles to allow banks in any state to open branches in other states. Within three years, states would lose virtually all authority to prevent out-of-state financial institutions from operating banks and branch offices.

Yingling, the banking lobbyist, said the interstate branching provisions may be modified later on the House floor and in the Senate, but added that “some form of interstate banking should stay in if this bill becomes law.”

The committee is expected to complete work on the banking measure today, when it will vote on measures designed to reform the deposit insurance system by limiting the amount of deposit coverage available to individual bank customers.