What It Took to Enact Banking Reform

FOR years you've cashed your checks at a bank with the proper kind of name for a financial institution, such as ``Redoubtable Interest & Trust.'' But last week you went to cash a check and encountered a nasty surprise: the place had a new sign.

Suddenly it was ``MeriBanc,'' or some other modern bank holding-company name.

After decades of struggle, Congress this year finally passed legislation allowing big chains to engage in overt interstate banking.

While President Clinton's showpiece legislative initiatives, including an overhaul of health care and telecommunications, foundered this session, the big Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 glided through with barely a ripple.

Smaller banks and the insurance industry had opposed such a move for years, but in the early months of the Clinton administration, this coalition collapsed. The reasons why provide a case study in breaking congressional gridlock.

``Branch banking has been an issue in Congress since the 1930s,'' says Chris Rieck of the American Bankers Association. ``It was only this year that a compromise was worked out.''

For the largest banks in the nation, the passage of the Riegle-Neal Act was a top legislative priority. The bill provides that after one year, bank holding companies may acquire or establish a bank anywhere in the country, regardless of state law. In addition, banks can consolidate their multistate operations, provided states do not ``opt out'' by the June 1, 1997 trigger date.

``It is quite clear that the banking industry has recovered, but that recovery is spotty and we should do whatever it takes to allow the continued consolidation of the industry and let the strong take over the weak so that we can go forward,'' NationsBank president Hugh McColl told the Clinton-Gore Economic Conference in Little Rock, Ark., on Dec. 14, 1992.

Smaller banks not eager to be taken over opposed interstate banking bills, as did the American Association of Retired Persons, the Consumer Federation of America, and an insurance industry with the financial clout to match bankers dollar for dollar in PAC money to key legislators.

Presidents Reagan and Bush both tried to pass branch banking legislation, but ran up against strong opposition from the insurance industry, which saw interstate branch banking as a vehicle to strengthen banks' incursions into insurance sales. Sen. Christopher Dodd (D) of Connecticut consistently linked provisions protecting the insurance industry to interstate banking bills.

``Senator Dodd was the key swing person in [the] transition,'' says Gerard Cassidy, senior vice president of equity research at Hancock Institutional Equity services.

``It also didn't hurt that NationsBank president Hugh McColl has a working relationship with President Clinton or that the comptroller of the currency, Eugene Ludwig, was a successful lawyer at Covington & Burling and NationsBank had been a major client,'' he adds.

In signing interstate banking legislation on Sept. 29, the president credited NationsBank's McColl with helping him understand the issue.

``I made over 150 calls to members of Congress to explain what it was all about,'' says Mark Leggett, a lobbyist for NationsBank.

After the 1991 Bank Efficiency Act foundered, six bank-holding companies sat down with congressional staffers and independent insurance agents to work out a compromise. The group met steadily through 1992 and into 1993, but failed to agree on a new approach.

A July 1993 decision by the US Court of Appeals in Independent Insurance Agents of America v. Ludwig changed calculations for the insurance industry, says Phil Anderson, spokesman for the Independent Insurance Agents of America.

The court ruled that banks can use towns of 5,000 to launch statewide insurance sales. ``Banks have taken this ruling and been bolstered by it to more aggressively market sales,'' says Mr. Anderson. Splits developed within the insurance industry itself over how to cope with the situation, he adds.

In February 1994, Senator Dodd agreed to decouple insurance and branch banking. ``He recognized the futility of going forward in having two colossal industries doing battle with one another,'' says Mr. Leggett.

The nature of the banking and insurance industries had also changed, says Cortney Ward, a member of Dodd's staff on the Senate Banking Committee. ``More banks have gotten into insurance and insurance companies are moving into other areas, so the issues weren't quite as stark. The whole dynamics of the issue had changed from previous years.

As insurers fell out, some small and medium-size banks that had historically opposed interstate banking backed the bill. The American Bankers Association brokered a compromise among 100 different bankers. ``That compromise, which gives states the capacity to opt out and protect state laws governing initial entry, became the basis of the bill,'' says ABA spokesman Rieck.

The Independent Bankers Association of America, which had always looked to the insurance industry to kill the bill, was stunned by how quickly it passed.

``Big banks are not good for small business. This bill will further accelerate an ongoing trend. It will create a limited number of national banking entities,'' says spokesman Kenneth Guenther.

``My reading is that a lot of money flowed,'' he adds. ``Banking committees were enormously well-lubricated.''

The Banking Industry contributed more than $2 million to members of the Banking Committees since Jan. 1, 1993, according to the latest data available from the Federal Elections Commission and the Washington-based Center for Responsive Politics.

All but five of the 70 lawmakers serving on banking committees accepted contributions from the industry.

``What I find interesting is that so many members of banking committees are getting contributions of $30,000 plus from the industry they are supposed to be regulating,'' says Joshua Goldstein of the Center for Responsive Politics.