The banking industry appears universally opposed to an initiative by the Federal Reserve Board to reduce the availability time on nonlocal checks to four days from five.

While all comments had not been processed by the agency by press-time, many trade groups and banks commenting said the agency should drop the idea. The comment period closed March 15.

Mandates on how long banks can hold up payment of checks were imposed by law in 1987, but the agency does have some discretion in extending or restricting the hold periods. In an advanced notice of proposed rulemaking published Dec. 14, the Fed said it is thinking of shortening the availability schedule for nonlocal checks from five to four business days, with institutions given the option of retaining the five-day schedule for some nonlocal checks. For those categories of checks, a bank must certify that it does not receive a sufficient proportion of returned checks within four days. The Fed also asked institutions to comment on the benefits and drawbacks to amending Reg CC, which governs the availability of funds and the collection of checks.

"Bank of America believes that regulatory and industry focus should continue to be on reducing or eliminating the delay of return information to depositing banks. This, in turn, would allow holds to be more closely tied to actual forward collection times," said Patrick Frawley, director of the bank’s regulatory relations department.

Sharon Royal, a lawyer for First Tennessee Bank, wrote: "The first thing for the Board to consider is simply the cost and disruption associated with requiring thousands of institutions to retrain their employees; to revise and replace hold notices to be furnished to customers; to revise documentation in which the institution’s Reg CC availability policy is explained; and reprogram computer systems "

"The congressional standard for determining whether to shorten the availability schedule–that two-thirds of the checks can successfully be returned within four days–has not been met, based on the Fed’s own survey," said Charlotte M. Bahin, regulatory counsel for America’s Communtiy Bankers. Moreover, she said, "Shortening the availability schedule would increase the probability of check fraud." That is because the Fed has suggested in its request for comments that banks would be required to make funds available even if they cannot determine whether sufficient funds exist to cover the uncollected balance of these checks, she said.

The Commerce Committee, the next stop for financial services modernization legislation in the House, is likely to change the bill to require banks to conduct securities activities in holding company affiliates under total Securities and Exchange Commission oversight, according to officials and lobbyists.

And, in the Senate, where the Senate Banking Committee passed a similar bill, but without bipartisan support, Sen. Phil Gramm, R-Texas, the panel chairman, said he also hopes to put the bill on the Senate floor in early May.

However, big obstacles remain for passage this year. For example, the Commerce panel is seen as likely–under pressure from the securities industry–to toughen privacy provisions now contained in the bill that would limit banks’ ability to use their existing customer database to market investment products. Representatives of major money-center banks made clear last week at a meeting of banking industry lobbyists in Washington that if the privacy provisions are toughened they will drop support of the entire bill. And unitary thrift holding company provisions in both the House and Senate bills are under heavy fire from bank trade groups and the Federal Reserve Board.

Both changes, plus amendments to the bill passed by the House Banking Committee March 11, are likely to reduce banking industry support for the measure, which is already eroding.

The bill that passed the House Banking Committee by a huge margin repeals the Glass-Steagall Act and allows banks to conduct most non-banking activities in either an affiliate of the bank or an operating subsidiary. In general, both bills allow banks to conduct insurance, securities underwriting and merchant banking activities, but only under the oversight of existing regulators.

However, the bills differ in the areas of permissible operating subsidiary activities and Community Reinvestment Act requirements.

The Commerce panel has oversight over the SEC and is seen as unwilling to give up oversight of securities activities.

Congressional work on bankruptcy reform is intensifying, with Senate and House panels planning markups this week on legislation similar to that which failed to pass Congress last year.

But the bills are different, with the Senate’s more bipartisan bill substantively diluting the "means test" provision in last year’s bill which was very strongly opposed by consumer groups, Democratic members of the Senate and the Clinton Administration. That opposition is what killed the bill, which is supported by the credit card industry.

Rep. George Gekas, R-Penn., head of the commercial and administrative law subcommittee of the House Judiciary Committee, has scheduled a markup on his more restrictive bill for March 24-25. In the Senate, Sen. Charles Grassley, R-Iowa, chairman of the Judiciary Subcommittee on Administrative Oversight and the Courts, scheduled a markup of his bill March 25. The Senate Republican leadership is indicating it wants the bill on the floor in April, with or without Democratic support. But Grassley does have Sens. Robert Torricelli, N.J., and Joe Biden, Del., as Democratic co-sponsors.

Even though House Republicans have been able to win significant Democrat support for their bill, it is still likely to face opposition if the means-test provision is included.

The seeds of a compromise on the House bill could be in the form of legislation recently introduced by Rep. John LaFalce, D-N.Y., ranking minority member of the House Banking Committee. LaFalce, who testified last week in support of his bill before Gekas’s panel, is calling for far greater disclosure by credit card companies of the potential pitfalls of credit card debt.

The bill requires a more complete disclosure of all credit card terms and costs, including "teaser rates." It also bans credit card issuers from canceling an account or imposing new fees on card holders who routinely pay off monthly card balances in full. The bill also prohibits credit card companies from issuing credit card accounts to people under 21 years of age, except with parental approval or evidence of means of payment.

There are four main differences between the two bills. First, the means test in the Senate version gives bankruptcy judges greater discretion in considering whether to transfer a debtor from Chapter 7, which means the debts are fully discharged, to Chapter 13, where the debtor needs to repay all or some of the debt. The Senate version also has greater consumer protections designed to lessen pressures from creditors for debtors to "reaffirm" debt that would normally be discharged in bankruptcy, plus greater protection for child support payments. Finally, it has a reduction in the amount of unsecured debt that would be made nondischargeable by the new law.

Privacy language unacceptable to the banking industry is emerging as a key issue in financial modernization legislation.

With signs arising that the legislation is stalling after passing the House and Senate Banking Committees, Senate Democrats are signaling that strong privacy protections will be one price they will insist on to support financial modernization legislation. And the securities industry is already asking the House Commerce Committee to insert strong privacy protections in the financial modernization bill when that panel considers it. Given that use of their customer databases to sell securities and insurance products is a key demand for the banking industry in the bill, such privacy protections could slow progress of the bill through the Congress–or serve as an excuse to kill the bill, industry lobbyists say.

Tepid privacy language the industry can live with was inserted in the bill by the House Banking Committee before it passed it March 11. But last week, Democratic Sens. Paul Sarbanes, Md., ranking minority member of the Senate Banking Committee, as well as Chris Dodd, Conn., and Richard Bryan, Nev., issued a statement repeating their demand for "individuals’ fundamental right to privacy."

The bill the Democrats have introduced, and which has been referred to the Senate Banking Committee, would give consumers rights of notice, consent and access when their confidential financial information is to be sold or shared.

Signs that momentum for financial modernization legislation is slowing stems from the decision of the House parliamentarian to give the Commerce Committee a 60-day referral on the bill passed by the House Banking Committee March 11.The reason for the lengthy referal, lobbyists said, is that the commerce committee is hesitant to act on the bill until the Senate does.

America’s Community Bankers say they will fight hard this year together with insurers to keep the proposed corporate-owned life insurance tax out of the budget.

Jim O’Connor, tax counsel with the ACB, said at the group’s annual legislation conference in Washington recently that most of the abuses that led to earlier legislation have been eliminated, and further restrictions on deductions for life insurance purchases are not needed.

"We want some closure on this," he said.

The Treasury has proposed this year a repeat of a $1.9 billion tax on corporate-owned and bank-owned life insurance by closing off deductions for employees, officers and directors of the company. The only eligible persons would be those who had a 20% stake or more in the company.

The law was changed in 1996 and 1997 as a result of companies like Wal-Mart using the provision to insure their employees and take large deductions, said O’Connor.

The changes eliminated the ability of companies to borrow against the policies and deduct the interest, he said. FAS 106, which was enacted by the Financial Accounting Standards Board in December 1990 requires financial institutions to estimate their future costs of providing employees health coverage. The COLI provision allows companies to offset some of that hit to capital, O’Connor said.

Last year a $500 million provision nearly made it into the IRS restructuring act but was pulled at the last minute after staffers found a more lucrative compromise. The ACB said they will "stay vigilant" to ensure it doesn’t return this year.

The House Banking Committee rejected a bid by banks to force the thrift industry to pay a deposit insurance differential for three more years, even though legislation was passed in 1996 that would end it at year-end.

A provision extending the differential was included in financial modernization legislation passed by the Senate Banking Committee March 4, but it failed to pass the House Banking Committee March 11 during its markup. A proposal by Rep. Richard Baker, R-La., would have exempted banks with less than $100 million in assets from paying the surcharge imposed on banks, but it was defeated. Under the bill passed in 1996, premiums would be equalized at 2.3 basis points effective Jan. 1, 2010.

The House banking panel voted 29-30 Thursday to reject an amendment that would have eliminated a provision now in the bill that bars chartering of new unitary thrifts and restricts sale of existing ones. An amendment to restore full grandfathering rights to existing institutions passed Thursday 29-26. That provision, proposed by Rep. Kent Bentsen, D-Texas, is comparable to the Senate bill and would allow acquirers of existing unitary thrifts to retain all powers associated with the current charter.

The issue deals with the interest payments on Financing Corporation (FICO) bonds. These were issued in 1987 to finance the bailout of insolvent thrifts. But, the funds provided through the bonds were not nearly enough to bail out the industry, and the whole thrift deposit system was revamped in 1989 when the government assumed the lion’s share of paying for the bailout. However, under the 1989 bill, nearly half of all SAIF premium assessments were diverted to pay the interest on the FICO bonds.

In 1996, given that 40% of thrift deposits were owned by banks, an agreement was reached to reduce the competitive disadvantage thrifts faced in paying premiums of 23 basis points while banks paid 1.25 basis points. The banks agreed to assume some of the burden as of Jan. 1, 2010. But to get banks to do this, thrifts agreed to make extraordinary, one-time payments totaling $4.5 billion, plus pay a disparate premium, albeit reduced, for three more years.

But the issue was reopened several months ago at the request of the American Bankers Association, which argued that under the current deal, Bank Insurance Fund members are being squeezed.

Large banks were able to whittle down a provision of financial modernization legislation being proposed in the House that would have required a public hearing in every city involved in a bank merger for most acquirers– but the victory came at the cost of the goodwill that had previously marked the proceedings.

The provision, approved on March 4 by a 22-21 vote, would have required that the Federal Reserve Board hold a public hearing in all affected cities for mergers involving institutions with $1 billion or more in assets. Steven Blumenthal, an analyst at Schwab Capital Markets and Trading Group in Washington, said virtually all bank mergers involve institutions of $1 billion or more. The amendment was introduced by Rep. Bruce Vento, D-Wis., and was supported by the Democratic members of the committee.

The large banks promoting the legislation "went ballistic," in the words of one lobbyist, and went to Rep. James A. Leach, R-Iowa, chairman of the House Banking Committee, to warn that if the amendment stayed they would back away from supporting the bill.

Their arguments galvanized Leach, who allowed two Republicans to introduce an amendment to give the Fed "discretion" to hold hearings, rather than mandate them. The amendment passed on a partisan vote late March 10, but the fact that the amendment was out of order under committee rules enraged Democratic members of the committee. The tenor of the proceedings grew so intense that Leach called a halt to the markup for the day at the request of Rep. John LaFalce, D-N.Y., ranking minority member of the panel and a key player in facilitating the bipartisanship that marked the proceedings.

Their argument, as explained by the lobbyists for several money center banks, is that holding public hearings adds to the already huge cost of consummating mergers. They said that when all costs are added up, it costs $1 million or more for the institutions involved to put on each hearing, even though they are held under the auspices of the Fed. At the same time, sources said, a merger-in-progress leaves both institutions vulnerable to takeover by other institutions. The longer the merger is in limbo, the greater the uncertainty and risk.

The legislation is called the Financial Services Act of 1999. The bill would make broad changes in banking regulation, including repeal of the Glass-Steagall Act, and would allow banks, securities firms and insurance companies to affiliate. However, the bill has many controversial components because it seeks to give all current players an equal voice in regulating the new institutions.

The House Banking Committee passed legislation March 11 that would repeal the Glass-Steagall Act and allow banks, insurance companies and securities firms to affiliate.

A similar bill was reported out March 4 by the Senate Banking Committee, but the Senate panel’s vote on the measure was more partisan because it would roll back commitments for banks under the Community Reinvestment Act. That bill was passed by an 11-9 vote and was believed to have an uncertain future.

The next step for the House bill is the House Commerce Committee, which is expected to impose much more restrictive rules on bank securities activities than that imposed in the banking panel version of the legislation. Specifically, the Commerce panel, which oversees the Securities and Exchange Commission and the activities of securities firms, is expected to revise the bill to require banks to "push out" their securities activities completely under SEC scrutiny. Commerce is expected to get a one-month referral on the legislation.

The House leadership wants to put the financial modernization bill on the floor the week of May 11. In comments several weeks ago, Rep. David Dreier, R-Calif., chairman of the House Rules Committee, said it is likely he would be in the unenviable position of refereeing between the Banking and Commerce panels’ versions of the bill.

Sen. Phil Gramm, R-Texas, chairman of the Senate panel, has said he hopes to have a bill on the floor the first week of April. However, Gramm appears committed to rolling back banks’ CRA responsibilities, so it is unlikely the bill will get to the floor under such a quick schedule. Indeed, there are doubts that the differences on the Senate bill can be reconciled by summer, at best.

The industry groups which put together the basics of the bill want it to be enacted by the July 4th congressional break. But congressional staffers and administration officials believe that such a fast track is unlikely.

The pattern in both the House and Senate banking proposals is to pass bills containing provisions sought by all lobbying groups, and to pay tribute to functional regulation, which calls for specific activities to be regulated by their current regulators. However, because of the compromises crafted to keep all special-interest groups happy, it is seen as unlikely that the bill will work in practice. Effectively, the bill is likely to lead to endless litigation and conflict between regulators seeking to protect their turf, and the turf of the industries they regulate, sources said.

The Obama Administration has already sent out a veto letter on the Gramm/Republican/Senate version of the bill. Besides CRA, it has controversial provisions such as safe harbors designed to protect current state laws restricting bank insurance sales; a definition of insurance; and the end of deference to federal regulators in determining whether a product is banking or insurance. All of these provisions could prompt a presidential veto.

Securities analysts and representatives of the banking and insurance underwriting industries are saying that the legislation pushed through by Senate Banking Committee Chairman Phil Gramm, R-Texas, is a positive despite the threat of a presidential veto. The bill was voted out of the committee last week under a narrow 11-9 final vote along party lines (see p. 6-7 to compare competing bills).

However, an analyst said that the banking industry must be concerned about a trend toward passage of legislation that reduces the industry’s powers, and, at the same time, the insurance agents industry says it is neutral at best over provisions that extend the "significantly prevent or interfere" standard established by the Supreme Court in the Barnett case in 1996. The insurance agency provisions in the Senate bill were taken at the last minute from those contained in last year’s H.R. 10 as it was re-drafted after being reported out by the Senate Banking Committee.

A bill generally supported by the banking industry and the Clinton administration is being marked up in the House Banking Committee. The panel dealt with Title 1, which concerns the rules for affiliations between insurance companies, securities firms and banks, last Thursday. The panel plans to renew work this Wednesday.

Steven Blumenthal, an analyst with Schwab Capital Markets & Trading Group in Washington, saw the Senate action as a positive. "To a degree that Schwab Washington Research Group has never seen, the elected representatives working on financial services reform legislation are trying to reach agreement and pass a bill," wrote Blumenthal in a memo to clients obtained by Financial Modernization Report.

But he called it a "measured step forward. The compromises reached in the Senate on insurance issues are almost certainly going to cost the bill some support in the banking industry." He added that the product of the House Banking panel is almost certainly going to be rewritten in the House Commerce Committee. "That is not likely to be a result that favors banks. Combined with the Senate developments on insurance, the reasons for the major portion of the banking industry to support the bill are disappearing."

Dean Sackett, vice president of government affairs for the Professional Insurance Agents of America, said the agents industry will be merely neutral to the Senate Banking bill and will seek changes.

The American Bankers Association voiced support for the Senate bill, which will allow banks to affiliate with securities and insurance companies, but does allow for a definition of insurance that would reduce the ability of banks to underwrite hybrid products, such as annuities. It does establish a system of functional regulation that will allow state regulators as well securities regulators to oversee those activities when conducted by banks.

Although the FDI Act and the Bankruptcy Code embody similar approaches to the insolvency treatment of derivatives, there are three major differences. First, while virtually any counterparty can contractually terminate and net its positions under the banking laws, the Bankruptcy Code limits those rights to specific counterparties for some contracts.

Second, the FDI Act and the Bankruptcy Code have slightly different definitions for the contracts that can be terminated and netted. Both statutes define five types of contracts that receive special treatment: repurchase agreements, securities contracts, commodity contracts, forward contracts, and swap agreements. But under the Bankruptcy Code, for example, it is unclear whether a repurchase agreement or securities contract including mortgage loans, interests in mortgage loans, and mortgage-related securities could be terminated and netted.

Third, while the FDI Act allows a receiver for a failed bank or thrift to transfer or terminate these five types of contracts–known legally as qualified financial contracts (QFCs)–in order to improve the financial condition of the receivership estate, the Bankruptcy Code does not provide similar rights to a bankruptcy trustee. These rights give bank receivers greater flexibility and also reduce systemic risks by providing a mechanism to maintain ongoing hedge transactions or other derivatives that continue to benefit the solvent counterparties.