ECONOMIC SPOTLIGHT - U.S. BANKING REGULATION
U.S. banks are under pressure to
meet vigorous competition, but Congress continues to duck hard
choices on banking law reform that could benefit consumers.
    Supporters say deregulating banking will increase
competition, offer consumers more choices and bring lower fees
for financial services and home mortgage interest rates.
    But the Senate Banking Committee last week put off until
later in the year decisions on pressing issues such as whether
banks could enter new businesses like underwriting corporate
debt and selling insurance and real estate.
    The committee also reined in banks' competitors, the
so-called nonbank banks, which elude the technical definition
of a bank because they do not both accept deposits and make
loans. The committee meeting room became a battleground for
giants of the financial industry -- banks, brokerages,
insurance firms, retail and industrial corporations -- with but
little consideration given to the consumer.
    The lobbies backed various amendments to protect their turf
and a bill that rescues a federal deposit insurance fund for
thrift institutions and puts a moratorium on any changes in
banking law was passed and sent on to the full Senate.
    The House of Representatives has yet to act.
    Behind the political deals was the larger question whether
Congress would end or modify the half-century-old separation of
commercial and investment banking or leave it alone.
    One argument in support of change is that fees for
financial services would come down if Congress expands banks'
powers.
    Lower fees to underwrite mortgage-backed securities, for
example, could lead to lower interest rates on home mortgages,
supporters say.
    "A lot of nonbanking firms have used loopholes to get into
banking, but banks have not be allowed into any new businesses,"
says Robert Litan of the Brookings Institution.
    "We have been seeing a gigantic turf war," says Litan, who
favors new powers for banks if deposits are safeguarded.
    The swirl of corporate mergers and the financial
information explosion have blurred the distinction between the
activities of banks and security brokerages.
    On a wider horizon, U.S. financial institutions face
stepped-up competition from financial centers like London and
Tokyo in international transactions.
    West German and Japanese banking is more concentrated in a
few, large banks, while most European countries allow banking
and securities to be mixed.
    All these forces put pressure on U.S. financial firms to
adapt to change, but the congressional debate over reform drags
on. The committee's bill put a freeze on any changes and its
chairman, Senator William Proxmire, promised to return the
issues in October. If approved by Congress, the bill would
postpone applications before the Federal Reserve for new powers
to three of the largest banks -- Citicorp, J.P. Morgan and
Bankers Trust.
    Other industries where regulatory barriers have fallen have
experienced lower fees, the emergence of new players and
accelerated innovation.
    But these advances in airlines, trucking, and
telecommunications have not been without drawbacks. Companies
that were slow to adapt disappeared under the new competitive
regime, while the public faced a bewildering number of new
choices. The Reagan administration favors bank reform.
    The traditional method companies use to raise funds --
borrowing from banks -- has given way to selling corporate debt
and other new securities that are off limits to banks.
    But critics say the soundness of the banking system created
by such laws as the 1933 Glass-Steagall Act would be
undermined.
    Banks are treated as special and shielded from the
marketplace's vagaries by the Federal Deposit Insurance Corp.
The Federal Savings and Loan Insurance Corp (FSLIC) performs
the same function for thrifts.
    The one issue the committee did act on which benefits
consumers is new funding for the federal insurance fund for
deposits at savings and loan associations, which has fallen to
its lowest ratio of reserves to deposits in history.
    Despite efforts toward change in Congress, a ban on
interstate banking remains.
    The barriers are crumbling anyway because state
legislatures are agreeing to permit bank mergers across state
lines within a region.
    Congress is proceeding cautiously, having in mind the
banking industry's tribulations in the early 1930's.
    But some say it is moving too cautiously for banks to keep
pace with what is happening in business here and around the
world.
 Reuter
