Shortening The Tether on Bankers

By Richard Hornik/Washington

Ronald Reagan's dream of carrying out a sweeping deregulation of the U.S. economy has stirred a powerful backlash on Capitol Hill. Never has that been more apparent than last week, when Congress passed its first comprehensive piece of banking legislation since 1982. The White House had hoped the bill would remove many of the governmental shackles that inhibit competition between banks, securities firms and other institutions in the burgeoning field of financial services. In fact, it does just the opposite.

The new legislation reinforces restrictions on the financial industry and adds some new regulatory safeguards to protect the rights of the consumer. The bill also strengthens the Government's role in lifting the struggling savings and loan industry out of its troubles. Said New York Democrat Charles Schumer, a member of the House Banking Committee: "There is one major message in this bill -- the rapid roll toward deregulation has ceased."

Despite his reservations about many of the provisions, the President is expected to sign the bill into law soon. At one point the White House threatened to veto the legislation, but the Administration realized that a rescue of the savings and loan business could no longer be postponed. The White House agreed to put aside its demands for banking deregulation in exchange for passage by Congress of a $10.8 billion bailout for the S and Ls.

That money will go to the embattled Federal Savings and Loan Insurance Corporation. Last year, as the FSLIC drained its coffers to prop up ailing S and Ls, the agency wound up with a $6.3 billion deficit. At the moment, 460 thrift institutions, primarily in the depressed Southwest, are insolvent. Some industry experts estimate that the FSLIC's liabilities could ultimately reach $40 billion.

The $10.8 billion rescue package is the first step toward paying that bill. The funds will not come directly from the Treasury but will be raised through the issuance of special Government bonds. Interest on those bonds will be paid with additional insurance premiums that the FSLIC will levy on the savings and loans. The bolstering of the FSLIC should provide reassurance to depositors, many of whom have been concerned that the federal insurance funds could run out of money.

, Depositors also had reason to cheer a provision in the new law that would speed up check clearing. For years, customers at many banks have complained that when they deposit checks, those funds may not become available for two weeks or more. Meanwhile, depositors are often unable to pay bills on time, or the checks that they write bounce because of "insufficient funds." The Consumer Federation of America estimates that Americans pay as much as $300 million a year in fees for bounced checks or finance charges for late payments as a result of slow check clearing. But beginning Sept. 1, 1988, banks will have to clear checks drawn on local institutions within two working days, while out-of-state checks must clear after six business days. In 1990 those intervals will be further reduced, to one and four days respectively.

Another consumer-protection measure in the banking bill involves adjustable- rate mortgages and other home loans. On these loans, the interest charged can go up and down along with the general level of interest rates in the economy. The new law requires that banks put a cap on how high the rate can rise. Lenders can choose whatever upper limit they want, as long as the customer knows in advance what it is. This regulation could be helpful to borrowers who are taking out increasingly popular home-equity loans. Many such customers may not realize that they could lose their houses if they are unable to keep up with their payments.

The legislation will halt, at least for now, moves by banks to diversify into several new areas. Though existing law tries to draw a distinct line between banking and other forms of commerce, loopholes have allowed banks to dabble in real estate and insurance, and many institutions want to start underwriting securities. Unsure how to react, Congress decided to prohibit banks from starting new ventures in these fields until next March. By that time, the lawmakers will have had more opportunity to consider whether to make the ban permanent.

In fairness, Congress decided to give the banks new protection from invasions of their turf by outsiders. Present law roughly defines a bank as an institution that makes commercial loans to businesses and offers checking accounts or other so-called demand deposits. But in recent years, many companies, such as Sears and Merrill Lynch, have established quasi banks that either make commercial loans or take deposits, but not both. Because they are not technically banks, these companies avoid many Government regulations, including the restrictions against interstate banking. As of last March, there were 168 of these entities, which have come to be known as nonbank banks. The banking bill bars the creation of new nonbank banks and, beginning a year from now, will put a 7% annual growth limit on those already in existence.

Many banks would not mind the competition if they were given freedom to diversify. In that respect, the industry was sorely disappointed with the bill. Says Marcia Sullivan, senior legislative counsel of the Consumer Bankers Association: "We are hoping that we have not seen the end of deregulation." Opponents of deregulation point out that the easing of restrictions on S and Ls in the early 1980s, which allowed them to venture into commercial loans and other new investments, was what got many of the thrift institutions into trouble. In the future, Congress will continue to face the challenge of how to enhance competition in banking without threatening the safety of the financial system.