Members of the House and Senate Banking committees yesterday agreed to close the legal loophole that permitted the creation of so-called nonbank banks and to impose a nine-month freeze on banks' expansion into the securities and insurance industries.
In the fourth days of talks to reconcile banking bills passed by the two chambers of Congress, House and Senate conferees agreed to at least temporarily maintain some of the barriers that for 50 years have separated banking from the securities business and other types of commerce.
The committee decided to ban nonbank banks formed after March 5 of this year. Nonbank banks are institutions that offer checking accounts or make commercial loans, but not both, and thus are not considered banks as defined by federal law. The loophole banks are not covered by federal limits on who can own banks and where banks can operate.
The conferees decided to change the legal definition of bank to include any institution that offers either of the two banking services.
The provision would allow companies that owned nonbank banks prior to March 5 to keep them, but would limit their growth to 7 percent a year and would prevent them from expanding into new product lines. Nonbank banks owned by Sears Roebuck & Co., Merrill Lynch and Prudential Bache are among 168 institutions that were formed before the cutoff date.
The conferees also prohibited federal regulators from giving banks new powers to underwrite securities or to create new kinds of investments, such as securities that use a pool of car loans as collateral.
If that restriction becomes law, it would effectively overturn recent decisions by the Federal Reserve Board that permitted Bankers Trust, Citicorp and several other large New York banks to get into the securities business.
The conferees put off until today a decision on whether to pump $7.5 billion into the insolvent Federal Savings and Loan Insurance Corp., the federal fund that insures deposits at savings an loan institutions.
Sen. Phil Gramm (R-Tex.) has proposed a plan to increase the amount to $8.5 billion in return for concessions that would benefit failing savings associations in Texas.
When the conferees agree on a final banking bill, it will go to the full House and Senate.
The conference committee's actions yesterday were considered a victory for the securities industry and smaller, rural banks. It is considered a setback for large banks and for the White House, which favors banking deregulation and has threatened to veto any bill that curtails banks' powers.
Big banks worry -- and the securities industry hopes -- that Congress will extend the moratorium on new bank powers when the nine-month provision expires next March. In the meantime, the bankers argue, the securities and insurance industries will continue to invade the banking industry's turf.
Senate Banking Committee Chairman William Proxmire (D-Wis.), who wrote most of provisions adopted yesterday, has promised not to extend the moratorium. He sees the March expiration date as a deadline for Congress to hammer out legislation detailing what new powers banks should have, rather than leave it to the courts and regulators to decide.
Proxmire has said that closing the nonbank bank loophole and placing a moratorium on bank powers was essential to get lobby groups from a variety of industries to agree on how much the financial service markets should be deregulated.
"This lets the securities industry off the hook," said Sen. Jake Garn (R-Utah) of the provisions passed yesterday. He warned against the possibility that Congress will keep extending the moratorium on banks.