Legislative Update

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Action on Legislation Financial Modernization

The Senate Banking Committee approved financial reform legislation March 4 on an 11-to-9 party-line vote. The bill, already beset by controversy, was complicated further when the panel agreed to exempt small, rural banks from the Community Reinvestment Act. Committee Chairman Phil Gramm has admitted he will have to compromise with Democrats to win Senate approval.

The legislation would repeal the separation of commercial and investment banking and let banks and insurance companies own each other. It would shield merging banks from CRA protests, provided they had a "satisfactory" or better community reinvestment rating for the previous three years.

Banks could not enter nonfinancial businesses but could engage in broad merchant banking activities. Commercial companies could not form new unitary thrifts but could purchase existing ones. National banks under $1 billion of assets could underwrite securities and insurance in operating subsidiaries. It also includes restrictions on bank sales of insurance that banking and insurance industry groups had agreed to last fall.

The House Banking Committee entered its second day of debate on financial reform Wednesday. (See story page 1).

On March 4 the committee began considering a bill that blends proposals by House Banking Chairman Jim Leach and ranking Democrat John J. LaFalce. Like the Senate Banking bill, it would let banks, insurance companies, and securities firms own each other and would ban the mixing of banking and commerce. However, it includes tougher CRA requirements, stricter limits on unitary thrift holding companies and operating subsidiaries, and more restraints on merchant banking.

House Banking defeated amendments last week that would have required banks to offer affordable accounts to low-income customers and extended CRA to nonbanks.

Regulatory Relief

The Senate Banking Committee on Feb. 11 unanimously approved a bill offered by Sens. Richard C. Shelby, R-Ala., and Connie Mack, R-Fla., that would let banks earn interest on reserves held at the Federal Reserve. Also, banks and thrifts could pay interest on business checking accounts starting Jan. 1, 2001; in the interim, the legislation would expand the number of withdrawals that commercial customers could make from money market deposit accounts, to 24 per month from the current limit of six.

The Financial Regulatory Relief and Economic Efficiency Act also would roll back 37 reporting and other minor rules, including the requirement that thrifts keep 4% to 6% of total demand deposits in liquid assets. It would eliminate the special reserve account of the Savings Association Insurance Fund.

Year-2000 Problem

The Senate on March 2 voted 99-to-0 for legislation that would let the Small Business Administration guarantee loans financial institutions make to small businesses to fix-or recover from-year-2000 computer glitches. The House Small Business Committee has scheduled a hearing on the bill for March 12. …