Dodd Introduces Banking Reform Bill
WASHINGTON (AP) _ Saying the nation’s banking industry has weakened to the point where it’s dragging down the economy, Sen. Christopher Dodd, D-Conn., proposed legislation Wednesday to let banks expand without risking deposits.
Dodd, a member of the Senate Banking Committee proposed legislation allowing banks to compete with brokerage firms and insurance companies in providing a range of financial services.
The bill would isolate insured deposits to protect them from risky lending. Dodd also proposed a second bill to remove barriers to interstate banking, a move designed to protect banks in a particular region from a localized recession.
The proposals are similar to legislation Dodd filed last year. But a new urgency surrounds the bills this year in the aftermath of the collapse of the Bank of New England and the spread of a recession and credit shortage in the Northeast.
″Some contend that now is not the time to take action that would let banks into new areas,″ Dodd said. ″However, I believe it is far riskier to do nothing and let the banking system weaken to the point where it can’t provide credit to fuel our economy and will assuredly require a bailout of the bank insurance fund.″
The Financial Modernization and Safe Bank Act proposed by Dodd would allow banks to expand into forms of financial service from which they are currently barred, such as mutual funds and insurance securities. Non-banking companies, in turn, would be allowed to purchase banks, something they are currently prohibited from doing.
In either case, the legislation would require a ″safe bank″ arrangement in which government-insured deposits could be used only for conservative, relatively risk-free investments such as government securities.
Despite the potential the legislation poses to allow banks to compete with other financial services industries, the insurance industry praised aspects of the Dodd legislation.
Robert Rusbuldt, vice president of the Independent Insurance Agents of America Inc., said that federal deposit insurance gives banks a competitive advantage over insurance companies offering pension fund management and other financial services. With Federal Deposit Insurance Corp. protection limited to only the most conservative deposits under the Dodd bill, Rusbuldt said, the playing field between banks and the insurance industry would be leveled.
American Bankers Association Spokesman Mark Burneko called the Dodd proposals ″timely″ and agreed that ″the focus should be on broadening the scope of banking but bringing adequate protection to insured deposits.″ Burneko also said the FDIC insurance fund would not be in danger of running dry had banks been allowed to expand their services years ago.
Dodd’s interstate banking bill would allow the Federal Reserve to approve applications by bank holding companies to acquire banks across state lines. But full interstate banking would be delayed until July 1, 1993 to give states time to prepare for new entrants in their local banking markets.
A key benefit of interstate banking would be to separate economic conditions in a region from the health of its banks. A regional recession in the Northeast, for example, would no longer mean that weakened banks would be as reluctant to lend. Interstate banks making profits in one section of the country would be able to seek investment opportunities in slumping regions.
″As has been driven home very clearly by the credit crunch of New England, full interstate banking will permit swifter movement of funds to credit-worthy borrowers in areas that are starving for credit,″ Dodd said.
Dodd’s bills become the latest of several banking reform proposals Congress will consider this year.
House Banking Committee Chairman Henry Gonzales, D-Texas, has proposed dramatically curbing federal deposit insurance from the current $100,000 per deposit level.
The Bush administration, meanwhile, is expected to propose within a month legislation similar to Dodd’s that would lift restrictions on the financial services banks can offer and allow interstate banking. Dodd said he believes his proposal is close to what the Bush administration is drafting.