Election year may put off new bank laws even further

The multibillion dollar US commercial banking industry and the smaller savings and loan industry are bringing a new David-and Goliath legislative battle to Capitol Hill.

But few lawmakers in this presidential election year have the inclination for the type of protracted battle that could spell a decisive victory for either side. The result, according to legislative analysis, is that the waning months of 1980 are not expected to lead to any significant new banking legislation.

That in itself is considered not totally undesirable, since Congress -- earlier this session -- enacted the landmark Monetary Control Act after years of debate. One effect of that legislation is to end eventually the quarter-point interest rate differential between commercial banks and thrifts (savings-and-loans and mutual savings banks). The law provides for a full lifting of the differential by 1986 but leaves the deregulation process to government agencies.

Now, lawmakers are facing some more "technical" legislation. Among issues now being considered here:

1. Should banks be prohibited from acquiring savings-and-loan associations?

The question, given the current cost-squeeze now faced by S&Ls, is hardly moot. In fact, this year is already expected to be one of the most active periods for mergers and consolidation within the thrift industry.

2. Should S&Ls be given added "insurance backing" to enable them to carry greater amounts of public deposits?

Currently, of a total of some $75 billion in public money placed by local government agencies in financial institutions, only $4 billion is in S&Ls.

The bulk of the remainder is deposited with commercial banks.

3. Should Congress systematically phase out the quarter-point differential now paid on passboo accounts by S&Ls vis-a-vis commercial banks?

Under the new Monetary Deregulation Act, enacted earlier this year, federal regulators can lift interest ceilings on passbook accounts by 1986.

4. Should commercial banks be allowed to participate in export trading companies that would be set up to help promote the overseas marketing of US goods?

According to sources within the Senate and House Banking Committees, the possibility is now considered fairly remote that Congress will resolve any of these issues before 1981. And since there could be a new administration in place next year -- assuming a Reagan victory -- that in itself would likely defer resolution of banking issues in the Congress.

Perhaps the most controversial of the various bank-related issues is the question of commercial bank acquisition of thrift institutions.

The Senate Banking Committee in late September quietly approved a measure that would bar acquisitions of S&Ls by commercial banks. Specifically, the ban would be extended to banks, or bank holding companies. The prohibition could be waived only if a federal regulatory agency found the acquisition necessary to ward off a possible default.

Some aides to the House Banking Committee are now saying that a more limited ban -- such as for a single period of two years rather than the flat ban propounded by the Senate -- might be more acceptable to the House.

More important, the explosive issue is believed far from enactment by either chamber.

The battle over public deposits is believed "equally far from enactment," according to one Senate Banking Committee source. But backers are working hard to get the measure through Congress this year.

At issue is a proposal by Sen. Richard G. Lugar (R) of Indiana to provide 100 percent insurance backing for public funds.As of this writing the plan has been approved by the Senate Banking Committee.

Currently, public deposits are federally insured only up to $100,000. For larger amounts the depository istitution must "back up" the deposit with government securities. But S&Ls carry only limited assets in that category. The result is that, as voted, only $4 billion of the $75 billion in total public deposits are now placed with thrift institutions.

According to Senator Lugar, the rationale for extending 100 percent insurance backing to public funds would be to help generate additional dollars (through S&L deposits) for the home mortgage market.

But banks, as well as the Federal Deposit Insurance Corporation, argue that since most public deposits are short term in nature, they are not practical for mortgage lending.

Still, S&L officials, from the highest levels of government -- at the Federal home Loan Bank Board, which regulates S&Ls -- to local thrift officers, are lobbying hard for 100 percent insurance backing."full public coverage" says Jay Janis, chairman of the board, would "open up a large pool of funds for use in housing finance when the need for such funds is becoming acute."

The proposed phase-out of the "thrift differential" has garnered some attention here during the past few months, but again, it is not making waves as a political issue. Sen. Robert Morgan (D) of North Carolina, for example, has introduced a bill to systematically phase out the one-quarter-point differential over a five-year period. As he sees it, this would be a "simple, across-the-board" approach that would be equitable for all financial institutions.

Senator Morgan would retain the present rate differential for the next 12 months. But then he would lower the rate by five basis points. Then at the end of each succeeding year, the rate would be dropped another five basis points until it was totally phased out.