House and Senate conferees yesterday approved legislation to aid troubled savings and loan associations and to allow banks and savings institutions to compete more directly with money market funds.
The conference report, which Congress is expected to pass before it recesses, was hailed by trade organizations for both big banks and savings institutions. The Reagan administration issued its qualified support, while small bankers remained steadfast in their opposition.
The negotiators adopted most provisions of the Senate version of two similar bills. While the House had voted to prop up all savings institutions until interest rates subside, the Senate -- on the recommendation of federal regulators -- decided on partial assistance.
In a key compromise, conferees agreed to sweeten provisions giving aid to troubled savings and loans and mutual savings banks, based on a sliding scale. The bill does not give government cash to troubled institutions, but allows them to swap their own promisory notes for more valuable government IOUs.
Those with net worth of less than 3 percent of their insured liabilities would be eligible to receive assistance equal to half their losses in the previous six months. The aid increases to 60 percent of the semiannual loss for institutions with a net-worth ratio of less than 2 percent and jumps to 70 percent when the net worth dips below 1 percent.
U.S. League of Savings Association representative William B. O'Connell said this more liberal policy would qualify 400 more S&Ls for assistance. By making more institutions eligible, the bill would drastically reduce the number of forced mergers of savings associations.
Another provision would forbid federal regulators from forcing the merger of S&Ls that have 1/2 of 1 percent net worth left.
In addition to short-term aid, thrifts would receive many new powers. The most important -- and most controversial -- is the authority to make commercial loans. The conferees said thrifts can put 10 percent of assets in commercial loans, but added flexibility. Thrifts could have 40 percent of their assets in nonresidential mortgage loans and 30 percent in consumer loans.
The Independent Bankers Association of America, representing smaller commercial banks, denounced the bill as virtually turning savings associations into banks. This bill, together with Federal Reserve approval this week of Citicorp's acquisition of an S&L, represents "a dangerous restructuring of financial institutions," according to IBAA.
Both commercial banks and savings institutions won the right to offer insured market-rate accounts with a low minimum deposit to compete with money-market mutual funds. The American Bankers Association called this provision "a great victory for the public."
The bankers were also happy about the elimination by 1984 of the quarter-point difference between the interest rate paid on certain savings deposits in banks and savings associations.
Treasury Secretary Donald T. Regan urged passage of the bill despite disagreement with some provisions for bank holding companies.