Emergency legislation to facilitate takeovers of failing financial institutions will be sent to Congress this week, regulatory officials said yesterday.
The officials, who declined to be identified, added that although the banking industry isn't yet in a crisis, the legislation would serve as an insurance policy during a recession that is expected to cause a number of failures.
Still in the draft stage, the Depository Institutions Protection Act of 1980 would assure a continuity of services and allow large U.S. financial institutions to take over other large failing ones regardless of their location or type of charter. It would permit interstate takeovers and acquistions of one type of institution by another under "extraordinary circumstances."
These can occur when four out of five federal regulators decide that an institution has failed. Only the largest banks are involved -- those with assets of $1.5 billion or more -- or banks that are among the three largest in any given state. In such cases antitrust rules would be waived automatically. a
Bank holding companies may take over mutual or stock savings banks, but not savings and loan associations. Thrifts may acquire each other, as may credit unions.
The legislation was requested by Rep Henry Heuss (D-Wis.) in an April 2 leter to John G. Heimann, comptroller of the currency, who serves as chairman of the Federal Financial Institutions Examination Council. The council consists of representatives of the Federal Reserve, Federal Home Loan Bank Board, Federal Deposit Insurance Corp. and National Credit Union Administration as well as the comptroller's office. The draft is being circulated by the council. It applies to bank holding companies, commercial and savings banks, savings and loans and credit unions.
Under the McFadden Act, banks and thrift institutions are prohibited from establishing branches in other staes. More than a year ago, ydistrict savings and loan associations petitioned the bank board to let them branch into suburban Maryland and Virginia. The decision has been deferred until the White House releases its long-awaited study on possible revisions of the McFadden Act. The release now is set for late this month. r
Regulators said yesterday they aren't trying to get the takeover bill in through the back door.However, they conceded that Congress, having just passed a milestone banking deregulation bill, might not be inclined to undertake more controversial banking legislation before the election. But they, along with Reuss, believe the current financial situation necessitates passage of an emergency rescue plan.
The proposal would permit large financial institutions to take over others out of state when all efforts to arrange an acquisition within the same state have failed.The bill also is designed to deter takeovers by foreign banks, a recent trend.
In addition, different types of financial institutions would be able to acquire others that are failing. In New York State, for example, where the plight of mutual savings banks is most acute, takeovers might be arranged with some of the larger banks. (Cross acquisitions among small institutions have been permitted before, but this legislation would permit them on a large scale.) Credit unions would be allowed to expand their common bond definitions, such as occupation or locale, to facilitate acquisitions.
In related news, officials also are preparing regulations to permit banks to offer renegotiated-rate mortgages, a power granted to S&Ls last week. On these mortgages, the interest rate, which is renegotiated every three to five years, varies with current market rates.
Banks already have the legal authority to make this and other types of alternative mortgages; inded, a number of area banks regularly make balloon-payment mortgages in which the entire loan is due after a few years or even months. The regulations would create a uniformity for the renegotiated-rate, or rollover, mortgage, allowing it to be sold more easily in the secondary market.