Congress narrows the differences among various financial institutions

After almost two years of just playing with the sledgehammer, Congress has finally knocked a few holes in the legal walls that separate various types of financial institutions.

A long-awaited banking reform bill, passed earlier this month, is intended to make banks and savings-and-loan associations competitive with money market funds. The bill also provides federal aid for shaky thrifts.

To ensure the legislation's passage, Sen. Jake Garn (R) of Utah, Senate Banking Committee chairman, was forced to eliminate some far-reaching provisions , such as a section that woyvrPtx- Z ooed'depository institutions to sell mutual funds and underwrite revenue bonds.

But in the next session, Senator Garn has vowed, legislators will consider further alterations in banking laws, as regulatory decisions increasingly allow banks and thryfts to simply run around these barriers.

''It seems to me there are developments taking place which will force Congress to act,'' says an aide to a congressional banking committee. ''The actions taken by regulatory agencies are half deciding the issue of financial deregulation.''

When Mr. Garn opened the issue 18 months ago, he intended to dismantle many barriers of legislation, erected by the Glass-Steagall Act in 1933, that currently separate financial institutions into such discrete units as commercial banks, investment banks, and savings-and-loans. But Garn's original bill quickly stalled as the intended beneficiaries squabbled among themselves. Banks objected to provisions that favored thrifts, while thrifts squawked about being pushed into the cold world of less-regulated financial competition.

Then, last summer, a faction of Banking Committee Republicans staged a minor palace revolt. Sens. H. John Heinz III of Pennsylvania and Alfonse D'Amato of New York began pushing for narrower legislation that would simply provide federal financial aid to the hard-pressed thrift industry. To get the bill out of committee, Garn was forced to dump the controversial section t(at would have allowed banks and thrifts to sell mutual funds and underwrite bonds.

The American Bankers Association - a Gucci-shod lobbying army as powerful as any in the capital - was furious over the loss of these promised powers. It started bending senatorial arms in an effort to stop the legislation, calling Garn's bill a ''sweetheart deal'' for the S&Ls.

Garn, moving fast lest his effort disappear into some musty file cabinet of history, promised the ABA he would reopen the issue of increased powers for banks at the beginning of the next Congress. He also sweetened this year's bill, adding amendments designed to appeal to banks, such as a provision eliminating the thrifts' ability to pay higher interest rates than banks on depository accounts.

These efforts produced, in Garn's words, ''a very fragile coalition.'' With all the Congress members and lobbyists concerned eyeing one another with suspicion, the bill finally passed the Senate. The House, which had earlier passed more-limited legislation, agreed to the bill with few changes.

Among other things, the Depository Institutions Amendments of 1982 will:

* Require bank regulators toauthorize, within 60 days of the bill's enactment , a new, shrt-term depository account attractive enough to compete effectively with money market funds.

* Authorize federal thrift insurance agencies to shore up the net worth of troubled thrifts through an exchange of capital notes. A Federal Home Loan Bank Board spokesman said government regulators had yet to estimate how many thrifts this provision would help - though an earlier, less-generous plan would have aided 1,400 thrifts over the next three years.

* Give federal regulators new powers for handling forced mergers among depository institutions, and explicitly allow interstate mergers as a last resort.

* Allow S&Ls to invest up to 10 percent of their assets in commercial loans, up to 40 percent of assets in nonresidential mortgages, and up to 30 percent in consumer loans.

* Restrict the transfer of low-interest mortgages, by preventing states from outlawing ''due-on-sale'' clauses in such loans.

* For the most part, prohibit bankers from selling property and casualty insurance.

The bill would, in effect, allow thrifts to act more like banks. While the ABA as a whole accepts this prospect with relative equanimity, preferring instead to gloat over obtaining an account competitive with money funds, small banks in particular aren't thrilled about competing with S&Ls.

''This bill turns thrifts into full-service banks with federal capital assistance,'' complains Phil Corwin of the Independent Bankers Association of America, a trade group representing small banks.

But thrift officials contend that S&Ls will still be specialized institutions.

''The bill does remove some barriers,'' says William O'Connell, president of the US League of Savings Institutions, ''but our business will remain primarily, overwhelmingly, housing finance. The new powers are simply a means of keeping profitable.''

S&Ls might not be able to compete with banks, even if they wanted to. ''The banks still have more expertise (in non-mortgage loans) and capital,'' says Michael Lewis, a thrift analyst with E. F. Hutton & Co.

The bill also rips down the legal barrier that has prevented depository institutions from offering an account with all the features of a money market fund.

The Depository Institutions Deregulation Committee, a panel of federal regulators, is charged under the bill with designing the new instrument - though the bill rules that the account's minimum balance can't be higher than $5,000. At the very least, bank officials say, such an account will replace the confusing array of 91-day certificates of deposit, ''sweep'' accounts, and retail repurchases which currently confuses customers.

''It certainly will be the most attractive product offered by banks,'' says Fritz Elmendorf, an ABA spokesman, although he declines to evaluate its effect on money funds.

Senator Garn has samd he is ''still smarting'' from his inability to pass a wider-ranging bill this year, and that new banking legislation ranks as the ''the highest priority that I have.''

Authority for banks to underwrite revenue bonds will almost certainly be considered early in the next Congress. Congressional sources say that both the Senate and the House will consider major changes in the Glass-Steagall Act.