Banking Reform Passes One Hurdle : A House subcommittee gets serious about revamping the industry

A House subcommittee last week approved a reform proposal that would provide for the most significant restructuring of the banking industry since the New Deal. It was the first legislative endorsement of the President’s plan to modernize the nation’s banks and the best indication yet that Congress may be up to the challenge of taking on the arduous process of revamping the troubled industry.

The House financial institutions subcommittee moved quickly and boldly. The action came just a month after the House Banking, Finance and Urban Affairs Committee proposed only to focus on shoring up the bank insurance fund. That would have done nothing to resolve a fundamental problem for banks: the need to find new ways to raise money and cut costs.

Instead, the House subcommittee voted 36 to 0 in favor of some of the Administration’s most revolutionary and far-reaching proposals. The proposed changes are aimed at undoing outdated Depression-era laws, which put restrictions on banks that make them uncompetitive in today’s financial services supermarket.

The subcommittee voted to lift the ban on banking across state lines, which has been in place since 1927 with the McFadden Act. That would allow a California bank, for example, to open full-service branches in New York. The panel also approved a proposal that would permit banks to go into business with securities firms and insurance companies for the first time in nearly 60 years.

These are major and necessary steps needed to restructure the banking industry, which finds itself in its worst crisis since the Depression. Allowing bankers to expand across state lines would help cut costs and allow them to offer customers different types of financial services. That, in turn, would help them raise much needed new capital.

Unfortunately, the panel nixed two of the Administration’s proposals to reduce federal deposit insurance. However, it did adopt an amendment that would make branch expansion across state lines or affiliating with securities and insurance firms contingent upon banks meeting certain community investment standards.

Nevertheless, the panel endorsed a realistic bill. The full House Banking Committee will take up the measure in June, along with a separate bill already passed by the subcommittee that would shore up the dwindling insurance fund with another $25 billion in Treasury borrowings to be repaid by banks.

The House subcommittee has overcome its initial reluctance to tackle banking reform. Now it’s up to the full House, and the Senate, to do the same.