Bank Legislation/Regulation

[Chris Bohner <cbohner@xxxxxxxxxxx>]

I originally posted this overview of current bank legislation and
regulation on the Progressive Economists Network.  Ric Holt suggested
that subscribers to PKT may also be interested.  I apologize in advance
for those who receive it twice.

COMMUNITY DEVELOPMENT BANKS
Clinton campaigned on the promise to fund 100 "community development
banks" based on the model of Chicago's South Shore Bank.  To date, the
House and Senate have each passed bills (H.R.3474  & S.1275) that would
provide funding and technical assistance to what are now called "community
development financial institutions" (CDFIs).  CDFIs include community
development banks, community development credit unions, community
development loan funds, micro-enterprise funds, and community development
corporations (CDCs).

Community, consumer, and civil right groups generally support the bills
(with qualifications), including the CDFI Coalition and the organization I
work for -- the National Community Reinvestment Coalition.  While the two
bills appropriate only $382 million over four years for CDFIs, this is an
important first step towards creating an alternative financial sector.

However there are a number of provisions in the two bills that community
groups are pushing to get changed in conference.  Most importantly,
the House bill would take one third of the $382 million appropriated over
four years for CDFIs to fund the 1991 Bank Enterprise Act (BEA).  The BEA
basically pays banks (through deposit insurance rebates) to invest in low
and moderate income communities.  This is outrageous given that banks are
already legally required under the Community Reinvestment Act (CRA) to
meet the credit needs of low and moderate income communities in their
service areas.

(The CDFI Coalition has prepared two useful documents on the CDFI
legislation: A Statement of CDFI Principles, and a legislative summary of
the two bills with the Coalition's preferred language and provisions.  You
can get free copies by calling Mark Pinsky at 215-736-1644; or write the
CDFI Coalition, 213 West Ferry Rd, Yardley PA, 19067; or e-mail me for
copies.  If you contact the CDFI Coalition, I'd appreciate it if you'd let
them know I referred you.)

The Community Reinvestment Act, passed in 1977, requires that depository
institutions affirmatively meet the credit needs of the entire community,
including low and moderate income areas.  Under the current regulations,
banks receive one of four ratings assessing their compliance with the law.
In rare instances, banks with low CRA ratings face the possibility of
having their merger or acquisition applications nixed by the regulatory
agencies.  Besides bad publicity over a poor rating, this is the only
negative sanction a bank with a failing rating faces.

While community groups have used the law with moderate success in
brokering investment agreements with lenders (over $30 billion), there is
a widespread consensus among community organizations that the law is
poorly enforced, the rating system highly inflated (over 90% of lenders
receive a passing rating), and the regulations too concerned with process
rather than performance (i.e. actual lending in low income areas).

To Clinton's credit, reform of CRA was the first banking-related
initiative of the administration.  After holding public hearings across
the country, the four bank regulatory agencies -- the Federal Reserve,
Office of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, and the Office of Thrift Supervision -- released on December
21 new CRA regulations for public comment.  The new (highly complex)
regulations 1) establish semi-quantifiable lending, service, and
investment tests for large banks as the basis for CRA ratings, 2) mandate
public disclosure of small business, small farm, and consumer lending by
banks, 3) allow the regulatory agancies to use their full enforcement
powers against banks that are not in compliance with the law,
4) encourage investments in CDFIs, 5) exempt small banks (under $250
million of assets) from many of the regulations, and 6) encourage lenders
and community groups to create "strategic plans" setting specific lending
goals.

(If you want a summary of the regulations, position papers from the
National Community Reinvestment Coalition and Center for Community Change,
and any other information on CRA, e-mail me a note with your name
and address.)

BANK REGULATORY CONSOLIDATION
The fate of the CRA reform regulations is closely linked with a number of
other bank initiatives of the administration.  The Administration has
proposed that the four bank regulatory agencies be consolidated into one
super-regulator, stripping the Federal Reserve of its supervisory and
regulatory powers.  The Fed, predictably, is not supporting the plan.
Having recently made strong comments against the new CRA regulations, it
appears that the Fed might hold CRA reform hostage in exchange for
modifying the consolidation plan to keep Fed powers intact.  Naturally,
the Fed has strong allies in the banking industry who prefer the
pick-and-choose nature of bank regulation to a unified and powerful
agency.  Recently, William Guenther the head of the powerful American
Bankers Association said unequivocally that he has the support in
Congress to block consolidation.  Nevertheless, the Administration --
intent on "reinventing government" -- has publicly said that it will not
compromise on the consolidation plan and will continue to push for its
passage.

FED REFORM
While the Fed battles the consolidation proposal, it also is involved in a
public dispute with House Banking Committee Chairman Henry Gonzalez.
Gonzalez -- the heroic, populist critic of the Fed -- is pushing for
earlier disclosure of monetary policy decisions, greater diversity on the
Federal Reserve Board, and presidential appointment of district bank
presidents.  In September, the Administration refused to back Gonzalez's
legislative initiative to overhaul the Fed, arguing that it would
undermine "market confidence" (when the Fed tightens, Clinton may change
his mind).  This effectively killed any prospects for Fed reform.
Nevertheless subsequent hearings on Gonzalez's bill led to the revelation
that the Federal Open Market Committee has kept secret transcripts of its
deliberations dating from 1976 onward.  Greenspan, however, was less than
forthcoming with this information during his testimony, prompting angry
accusations from Gonzalez.  A recent American Banker headline sums it up:
"Now You Can Upgrade It to `Fued' - Gonzalez calls Greenspan a Liar"

INTERSTATE BRANCHING
The Administration has also endorsed legislative efforts to lift state
impediments to full interstate branching.  A long sought goal of larger
regional banks seeking to expand, interstate branching may be the quid pro
quo for acceptance of CRA reform.  However, small banks oppose interstate
branching -- as do many consumer and community organizations -- and the
insurance industry has been successful in derailing interstate branching
by linking it to limitations on bank expansion into insurance.
Nevertheless, the banking industry has strong support in Congress and it
is likely that with Administration support legislation will pass in the
upcoming session.

I hope this information has been useful.

Chris Bohner
E-mail: cbohner@xxxxxxxxxxx
1875 Connecticut Avenue
Suite 1010
Washington DC  20009
Phone: 202-986-7898
FAX: 202-986-7475