It began as a bold congressional campaign to rip off the regulatory chains binding banks and savings-and-loan associations. Since then, it has become a meek move that will likely just loosen the shackles on the depository institutions.
Late last month, the Senate Banking Committee approved a long-awaited banking reform bill. The legislation would make banks and S&Ls more competitive with money market funds, and provide federal aid for shaky thrifts.
But to ensure passage, the committee chairman, Sen. Jake Garn (R) of Utah, was forced to cut some far-reaching provisions, such as a section that would have allowed depository institutions to sell mutual funds and underwrite revenue bonds.
''The people laughing about this are securities brokers,'' says Mark Serepca, spokesman for the American Bankers Association. ''While they're being allowed to run amok in banking, depository institutions won't be able to sell securities.''
Thrifts - whose lending powers would also be increased by the bill - are more sanguine. William O'Connell, president of the US League of Savings Associations, called the move ''a major step forward in preserving and strengthening the savings-and-loan system.''
The issue of deregulating financial institutions is being forced upon Congress by the pace of economic and technical change. Thrifts, battered by high interest rates, are watching net worth dwindle away. Networks of electronic tellers have introduced de facto interstate banking. Financial institutions are facing stiff competition from less regulated foes such as Merrill Lynch, Bache Halsey Stuart Shields, and Sears, Roebuck.
Last fall Senator Garn introduced legislation aimed at helping banks and thrifts adapt by giving them broad new powers. But the bill quickly stalled as the intended beneficiaries squabbled among themselves. Banks objected to provisions that would aid thrifts; thrifts squawked about the sections that would unleash banks.
Politics then entered the picture. Led by Sen. H. John Heinz III, another faction of the Banking Committee began pushing for narrower legislation that would aid just the hard-pressed thrift industry.
Confronted with this minor palace revolt, Garn was forced to dump the controversial section that would have allowed banks and thrifts to sell mutual funds and underwrite bonds. A provision overriding state usury ceilings was also pruned out.
Truncated by these and other cuts, the bill finally received committee approval last month.
''It's about time. It's been 11 months'' since the legislation was introduced , sighs an aide to Senator Garn.
In its current form, the bill would:
* Require bank regulators to authorize a new, short-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 estimates that 1,430 institutions would qualify for such help over the next three years, at a potential cost to the government of $1.4 billion.
* Give federal regulators new powers and priorities to handle forced mergers among depository institutions.
* Allow S&Ls to invest up to 15 percent of their assets in commercial loans. Limits on nonresidential real estate and consumer loans would also be raised for such associations.
* Further preempt state laws banning due-on-sale clauses in mortgages. In June, the Supreme Court struck down state laws that would prevent federally chartered S&Ls from enforcing such clauses. The banking bill extends this protection to commercial banks, mortgage banks, and state-chartered savings-and-loans.
The bill awaits action by the full Senate, which returns from recess Sept. 8 and plans to adjourn in early October. Will there be enough time for banking reform to pass both chambers and wend its way to the President's desk?
''We expect that this bill, with its compromises, faces smooth sailing,'' a Republican congressional aide says.
The House has passed two roughly similar bills: a net-worth-guarantee act to prop up shaky thrifts with federal funds, and the so-called ''Regulators'' bill, expanding federal regulatory powers.
So, if banking reform passes the Senate, the two chambers can go straight to conference. Likely areas of disagreement include the politically sensitive issue of due-on-sale clauses.
The Reagan administration backed Garn's original, sweeping bill. Treasury Secretary Donald Regan has indicated disappointment that the controversial provisions were dropped - but says the bill is still ''a sound package.''