The Senate Banking Committee yesterday unanimously approved legislation to help financially troubled savings and loans and mutual savings banks.
The committee approved the legislation after stripping away many of its controversial provisions. The bill must be approved by the full Senate. The House earlier approved an even narrower version of the aid bill.
The legislation approved yesterday provides a formula for shoring up the net worth of savings institutions without a government cash outlay and gives federal regulators more flexibility in arranging supervisory mergers. It also permits savings and loans to have up to 15 percent of their assets in commercial loans and requires regulators to devise for banks and thrifts an insured account that can compete effectively with money market mutual funds.
The committee vote immediately was hailed by thrift institutions, while denounced by commercial banks. Roy G. Green, chairman of the U.S. League of Savings Associations, said the legislation "will aid depository institutions tremendously." The American Bankers Association attacked the bill as a "sweetheart savings and loan bill that leaves the commercial banking community at a greater competitive disadvantage than before. Little is left in this legislation which addresses the special needs of the banking industry."
The bankers' defection results mainly from an 11th-hour compromise needed to obtain committee acceptance: elimination of expanded securities powers for banks. The committee mark-up session originally scheduled for July 28 had to be canceled at the last minute when Chairman Jake Garn (R-Utah), sponsor of the bill, failed to get enough votes to push through legislation allowing banks to underwrite and deal in municipal revenue bonds and operate mutual funds, powers bitterly opposed by brokerage firms.
The Reagan administration, which had lobbied hard for securities powers for bank subsidiaries, termed the elimination "unfortunate" but issued its qualified support nevertheless. "Though we do not endorse every provision of the bill," said Treasury Secretary Donald T. Regan, "it is a sound package that will provide needed assistance to the thrift industry and advance the continuing process of financial institutions deregulation." Securities powers for banks will be debated next year in the context of a review of the Glass Steagall Act, which separates commercial from investment banking.
Also excluded from the final version as being too controversial was lifting of all interest rate ceilings that apply to business, agricultural and consumer credit. Following last-minute industry consent, the committee approved compromise language on federal preemption of due-on-sale clauses. Old loans in states that permit mortgage assumptions could be assumed for a three-year period. During that time, the states can act to extend assumability if they wish.
Other provisions would bar bank holding companies from providing insurance, although operations established before Oct. 7, 1981, would be allowed to continue. Government-guaranteed student loans and real estate brokers would be exempted from requirements of the Truth in Lending Act.
The difference between the House and Senate versions of aid to the thrift institutions is that whereas the House bill would permit every troubled thrift to have its net worth maintained at 2 percent of insured deposits, the Senate bill would allow regulators to grant partial assistance at their discretion and set terms.
If a savings institution had losses during the two previous quarters but could survive for at least six months, federal insurance agencies could provide notes in proportion to its losses and the amount of net worth left. For example, if an S&L's net worth were less than 3 percent of insured deposits, 30 percent of the loss could be made up.
The Senate's idea is to not reward inefficient management by a blanket bail out. However, Sen. William Armstrong (R-Colo.) expressed reservations about a program that puts the government in the position of protecting stockholders and uninsured depositors by saving failing institutions from liquidation.