Senate Banking Committee Chairman Jake Garn (R-Utah) yesterday said there is growing support on the committee for closing a loophole that is permitting securities firms and other non-bank companies to enter the banking business.
The banking committee is now making a comprehensive review of financial institution regulation but legislation isn't expected for several years.
Garn said, however, that "if any legislation is broken out, the non-bank issue is the most likely."
"There is a growing sentiment for closing the loophole," Garn said in an interview following a speech to the Independent Bankers Association of America yesterday. He added that there isn't any consensus on this question yet outside the committee because Congress is preoccupied with other issues.
At the heart of the rising number of bank takeovers is a technicality in the Bank Holding Company Act--the definition of a bank which requires it to offer checking accounts and make commercial loans.
Financial services firms like Merrill Lynch and Prudential Insurance Co., and other companies are manipulating this definition to carry out bank acquisitions. By making consumer but not commercial loans, banks can change their status to "non-bank" banks and escape regulation under the Bank Holding Company Act. As such they can become subsidiaries of non-bank companies.
The companies carrying out these takeovers "are violating the spirit if not the letter of the law," Garn said.
Closing the loophole might be accomplished by a one word change in the law to define a bank as an institution that takes deposits or makes loans. But the change is more difficult than it appears. Since national banks are insured by the federal government, a company that only makes loans--such as a consumer finance company--would thereby become theoretically eligible for federal insurance.
Concerned by the spate of applications to transform banks into non-bank banks, Comptroller of the Currency C.T. Conover a month ago imposed a moratorium on new applications through Jan. 1, 1984, while permitting pending applications to be processed.
Since then the other banking regulators have registered their disagreement over what the moratorium's duration should be and what institutions should be included. Federal Reserve Chairman Paul A. Volcker has taken the hardest line, calling for a temporary ban on takeovers by non-banks and savings institutions as well as banks, except in the case of failing thrifts. Volcker also said Conover's moratorium could not hold the status quo until the Congress gets around to comprehensive legislation sometime in the future.
Meanwhile Treasury Secretary Donald Regan supports Conover's limited version. Then-Federal Home Loan Bank Board Chairman Richard Pratt and FDIC Chairman William Isaac disputed extending the freeze to savings and loans.
Sen. Garn said yesterday he does not now favor a moratorium.