Statement of Administration Policy: S. 543 - Comprehensive Deposit Insurance Reform and Taxpayer Protection Act of 1991

(Senate)
(Riegle (D) Michigan and 2 others)

The Administration supports S. 543, as reported by the Senate Committee on Banking, Housing, and Urban Affairs, with the amendments described below. However, the Administration strongly opposes the bill's restrictions on existing insurance activities by banks. If (1) significant additional restrictions are placed on the ability of banking organizations to diversify safely into new financial activities, (2) the interstate branching provisions are substantially weakened, or (3) deposit insurance losses are required to be financed in a way that violates last year's budget agreement, the President's senior advisers would recommend a veto.

S. 543, as reported by the Banking Committee, is comprehensive legislation designed to create a safer, more competitive banking system. S. 543 recapitalizes the bank deposit insurance fund, sets clear standards for prompt corrective action by regulators to resolve troubled banks, permits banks to reduce risk by diversifying safely into new securities activities and across more geographic areas, and addresses in the lender liability title an important element of the credit crunch by encouraging lenders to become willing partners in environmental cleanup efforts. The Administration strongly supports all of these efforts, but believes that certain modifications would make S. 543 even more effective in strengthening the banking system and reducing taxpayer risk.

Amendments Supported by the Administration

The Administration believes that the following amendments would substantially strengthen the bill:

—   Eliminating the restrictions on the sale of insurance by interstate branches of banks where such insurance activities are permitted by State law for State banks.

—   Modifying the provision that limits all insurance sales authority of national banks to that provided by State law. The provision rolls back current law in the majority of States and undermines the dual banking system.

—   Allowing commercial firms to affiliate with banks, subject to strict firewalls. Commercial firms will be an important source of much-needed capital for the banking industry and should at least be able to purchase failing banks, where the benefit to the taxpayer is substantial and immediate.

—   Limiting deposit insurance coverage to $100,000 per person per bank, with a separate $100,000 in coverage for certain retirement accounts. This will reduce taxpayer exposure by limiting insurance coverage to protection of the average depositor.

—   Treating interstate branches of national banks the same as separately chartered national banks, not the same as State bank branches. This preserves current law and the dual banking system.

—   Eliminating provisions that discriminate against foreign banks with respect to interstate branching or banking.

—   Eliminating the arbitrary concentration limitations on mergers and acquisitions. Mergers and acquisitions involving depository institutions are fully subject to antitrust review, and arbitrary limitations may prevent efficient or procompetitive transactions.

—   Eliminating the requirement that banks provide Government check cashing or basic banking accounts and produce unnecessary additional reports. These provisions impose burdensome regulatory costs on banks without demonstrating sufficient public benefit.

—   Making important technical and clarifying amendments to the lender liability title.

—   Providing somewhat greater flexibility for bank regulators to avoid the premature shutdown of a weak bank that has significant prospects for recovery.

—   Eliminating provisions that reduce the regulatory authority of the Office of the Comptroller of the Currency in certain areas (e.g., enforcement, supervision, and the resolution of troubled institutions).

—   Including provisions that, when combined with the extension of the statute of limitations for securities lawsuits now in the bill, would help curtail meritless litigation. The Administration would oppose an extension of the statute of limitations without such reforms.

—   Deleting the proposed exclusion of the employees of the Securities and Exchange Commission from the normal Federal employee compensation provisions. The Federal Employees Pay Comparability Act of 1990 provides sufficient pay flexibility to enable the Commission to recruit and retain the caliber of employees it needs.

—   Allowing Federal banking regulators to conduct litigation on their own behalf, but only with the prior consent of the Attorney General and subject to the Attorney General's direction and control.

—   Deleting provisions requiring production of a one dollar gold coin honoring Christopher Columbus.

Amendments Opposed by the Administration

The Administration would strongly oppose any amendment to S. 543 that would:

—   Move bank and thrift regulation from the Treasury Department to an independent agency.

—   Impose new, unworkable "firewalls" on bank securities activities or further limit the ability of regulators to make technical modifications to the firewalls in light of developing banking practice.

—   Substantially weaken the interstate banking provisions, especially any amendment that would only authorize interstate branching if each State "opted in" by a new State statute, which would virtually eliminate benefits from interstate activity.

—   Establish inflexibly high capital standards in statute as a precondition for banks to engage in interstate branching. Such a requirement would deter regional diversification and increase the likelihood of bank failures.

—   Expand the Community Reinvestment Act and other consumer protection laws to impose burdensome new requirements that would impede interstate branching and new financial activities for banks.

—   Require deposit insurance losses not paid for by the industry to be funded in a deficit neutral manner. This amendment violates last year's budget agreement, which recognized that currently outstanding deposit insurance liabilities should not be subject to pay-as-you-go offsets.

—   Expand pass-through insurance coverage for pension plans or other large depositors.

—   Limit the flexibility of regulators, in consultation with the Administration, to protect against systemic risk in the banking system, with costs borne by the banking industry.

Other Matters

The Department of State and the Office of the United States Trade Representative have testified regarding very serious objections our trading partners are likely to raise about the effect of the Fair Trade in Financial Services Act (contained in S. 543 as Subtitle VI-C) on U.S. treaty obligations, the possibility of uncoordinated and inconsistent measures imposed by independent regulatory agencies, and the importance of "grandfathering" current foreign participants in the United States financial sector. In addition, the provisions requiring negotiations with foreign governments and reports on current negotiations intrude on the President's authority over the conduct of foreign affairs and raise serious constitutional concerns.

However, the Treasury Department has testified that the subtitle provides sufficient discretion to the Secretary to meet treaty obligations, to provide satisfactory coordination with regulators, and to provide grandfathering where appropriate.

Scoring for Purposes of Pay-As-You-Go

OMB's preliminary scoring estimate of this bill is that its net effect for pay-as-you-go purposes would be zero. Final scoring of this legislation may deviate from this estimate. If S. 543 were enacted, final OMB scoring estimates would be published within five days of enactment, as required by the Omnibus Budget Reconciliation Act of 1990. The cumulative effects of all enacted legislation on direct spending will be issued in monthly reports transmitted to the Congress.

The impact of the requirement that banks and thrifts register their securities with the SEC would result in a negligible increase in registration fees and decrease outlays. The change in the definition of bank holding companies would have a negligible effect on tax receipts.

The following provisions are scored at zero for pay-as-you-go purposes: lender liability; Rhode Island loan guarantees; establishment of "lifeline banking accounts"; the Fair Lending Enforcement Act; the Truth in Savings Act; the new $1 coin; new penalties for illegal money transmission; and the removal of cost limitations on the construction of Federal Reserve Bank buildings.

The bill's "too big to fail" provisions would decrease outlays, but it is not possible to estimate the size of the decrease. Similarly, estimates of the pay-as-you-go impact of the bill's provisions on pass-through insurance are not available at this time.