April 1, 1998

Client Memo: Banking Legislation Still Pending in the House and Senate

Arnold & Porter Bulletin

Last week, the leadership of the House of Representatives failed in its attempt to bring to the House floor the Financial Services Act of 1998, legislation that, in certain respects, would have permitted greater affiliation of banking, securities and insurance activities. The bill was scheduled to be debated late on Tuesday, March 31, after consideration and approval of the House "Rule" that set forth the text of the bill and amendments to be considered.

The bill would have repealed the Glass-Steagall Act restrictions on banks affiliating with securities firms and repealed the Bank Holding Company Act restrictions on banks affiliating with insurance companies. It would have authorized the establishment of "financial holding companies" permitted to engage in activities determined by the Federal Reserve to be financial in nature, as well as certain nonfinancial activities not to exceed 5% of a company's total revenues. Activities statutorily deemed to be financial in nature included securities underwriting activities and the underwriting and sale of insurance and annuities. The bill also would have preserved the thrift charter but terminated the unitary thrift holding company form as of March 31, 1998, while giving existing unitary thrift holding companies and those which acquire such companies "grandfather" status. The bill would have limited the insurance activities of national banks, limited the ability of national banks to innovate through operating subsidiaries and limited the deference accorded the Comptroller of the Currency -- aspects of the bill strongly criticized by the Department of the Treasury, which hinted at a possible White House veto of the bill.

In an attempt to garner Democratic votes, the House Leadership added the popular credit union measure as a new Title V of the bill. However, the specter of a veto of the bill, which was being brought to the House floor with a limited number of amendments -- none of which addressed the Administration's articulated problems with the bill -- permitted Democrats to argue that the House Leadership was holding the credit union bill "hostage" to the broader banking bill. House Rules Committee Chairman Solomon withdrew the bill from consideration when it was clear there were insufficient votes to pass it. On April 1, the House passed the credit union measure as a separate bill.

The House Leadership has announced that it intends to return after the Easter recess and, once again, attempt to craft a financial modernization bill that can achieve broad bi-partisan support. While we have been skeptical that they will be successful, given the diverse interests that must be satisfied, interested organizations should continue to follow this legislation closely. We were encouraged that the drafters of the bill showed some flexibility in addressing concerns we and others raised as the bill moved through the House, although the final package fell short of what many hoped would be progressive bank modernization legislation. We will continue to follow the legislation and work with Members and staff if the effort to move the bill is, in fact, revived. In this connection, it is unclear how the recently proposed Citicorp-Travelers transaction will affect the legislative dynamic.

On the Senate side, Banking Committee Chairman D'Amato has refused to move financial modernization legislation until a bill is produced by the House, but his committee will likely take up bank regulatory reform legislation in late April or early May. Major provisions of the regulatory reform measure are provisions to permit interest-bearing business checking accounts and to permit interest payments on reserves, but past bank regulatory reform measures often have served as vehicles by which financial institutions have achieved legislative solutions to particular regulatory problems. We will continue to follow this measure closely and to work with Senators and staff as the Banking Committee shapes regulatory relief legislation for consideration by the full Senate.

If you have questions about the legislation or are interested in raising particular issues with the members of the House and Senate or their staffs, please contact any of the following: Pat Doyle at 202/942-5949 (; Bob Mannion at 202/942-5946 (Robert; Marti Cochran at 202/942-5228 (Martha; or David Freeman at 202/942-5745 (David
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