A Campaign for More Competition

A consumer who wants a checking account must now go to a commercial bank, which cannot pay him interest on the money he keeps in the account. But if congressional reformers get their way, consumers will soon be able to open interest-bearing checking accounts not only at commercial banks, but also at mutual savings banks, savings and loan associations or even credit unions. Further, consumers could turn to an S and L for a car or boat loan, to a mutual savings bank for a credit card, or to a credit union for a trust account--all services that these "thrift institutions" are now legally forbidden to offer.

These are among the major provisions of the proposed Financial Institutions Act of 1976, a bill that would force the most sweeping changes in the nation's financial system since the Depression. The bill would wipe away many of the present distinctions between commercial banks and thrift institutions (though not all; the thrifts would still be forbidden to make business loans). It would also concentrate the regulation of banks in a single new federal agency.

More Interest. The net result, say backers of the legislation, would be sharper competition among banks and thrift institutions. That would bring consumers better and cheaper financial services and offer small savers more interest on their money. The housing industry and would-be home buyers would be less vulnerable to recurrent squeezes on credit, because mutual savings banks and S and Ls, the prime sources of mortgage loans, would be better able to compete for savings during tight-money periods. And tighter regulation of banks could help ensure the continued soundness of the whole U.S. financial system.

A bill aimed at achieving some of these results passed the Senate last December. The Financial Institutions Act, on which the House Banking Committee will wind up hearings this week, is more comprehensive. Its most important provisions:

P: All types of financial institutions, not just commercial banks, could offer checking accounts.

P: As of January 1978, the present law prohibiting payment of interest on checking accounts would be repealed. A new federal coordinating committee would determine how much interest could be paid.

P: Five and a half years after enactment, Regulation Q, which limits the amount of interest that can be paid on small savings deposits, would be abolished. Banks and thrifts thereafter could pay any rate they thought desirable to attract deposits.

P: In addition to offering checking accounts, Mutual savings banks would get new power to make consumer loans, provide credit cards and trust services.

P: Savings and loan associations, now largely limited to making mortgage and construction loans, could make all types of consumer loans, invest in corporate bonds and other types of debt securities, and offer trust services.

P: Credit unions would be allowed to make larger loans for longer periods, to issue share certificates with varying interest rates and maturities (similar to bank certificates of deposit) and to offer trust services.

P: A new Federal Banking Commission would be created to take over regulatory responsibilities now divided between the Comptroller of the Currency and the Federal Reserve Board. Banks and thrift institutions would have to make much fuller disclosures about many aspects of their operations, including "inside" loans to their officers and directors, and regulators would get new powers to make the banks and thrifts heed their advice.

The bill would also tighten up regulation of bank holding companies and require all financial institutions offering checking accounts to keep reserves at levels set by the Federal Reserve Board. That would make easier the board's task of setting and carrying out a monetary policy to influence the course of the economy. The bill would make foreign banks operating in the U.S. subject to the same restrictions as domestic banks. That provision would stop the foreign banks from operating in several states at the same time, as some now do, to the dismay of domestic banks, which are confined to one state.

None of the ideas in the bill are new.

Most have been floated by study group after study group for 15 years, only to be sunk repeatedly by opposition from politically powerful commercial banks. The American Bankers Association has vowed "total, all-out opposition" to the Financial Institutions Act too, as had to be expected: its members would get little out of the bill except stronger competition and closer supervision.

The A.B.A. has begun a fierce, nationwide lobbying effort to defeat the bill, and will try to persuade the House Rules Committee not to report it out for a floor vote. A.B.A. President J. Rex Duwe, who will testify before the House Banking Committee this week, calls the bill "a totally abhorrent attempt to disguise a laundry list of new powers for thrift institutions and credit unions under the label of financial reform."

Even so, the bill or something close to it now seems to have a genuine chance of enactment. The Ford Administration, though it has qualms about the regulatory provisions, supports the idea of allowing thrift institutions to offer services now reserved to commercial banks.

Deputy Treasury Secretary George Dixon last week told the House Banking Committee: "The time to act on this legislation has come." He added: "If we increase competition among financial institutions, we will enhance the quality and reduce the cost of financial services to consumers and at the same time strengthen the institutions themselves."

The biggest reasons behind the new pressure for financial reform are the highly publicized troubles that banks are having with bad loans (TIME, Jan. 26) and the failures that those troubles have sometimes caused. Latest example: the $400 million-deposit Hamilton National Bank of Chattanooga fell victim last month to uncollectible real estate loans and its parent holding company, which once owned 17 banks with assets of $1.1 billion, followed it into bankruptcy a few days later. Rightly or wrongly, many Congressmen believe that closer regulation would have kept the banks from overextending themselves. So the creation of a new Federal Banking Commission seems almost certain, and the drive to tighten regulation has aroused new interest in much broader financial reform.

Sensible Package. A good thing too. On the whole, the bill is a sensible package of changes that should be enacted; all financial institutions ought to be free to compete in providing services to the consumer. What the bill could mean to depositors can be seen in New England right now. A separate piece of legislation that President Ford signed last month removed federal restrictions on NOW (Negotiable Order of Withdrawal) accounts in the six New England states. Essentially, these are interest-bearing checking accounts. After they sprang up among thrifts in Massachusetts and New Hampshire 3% years ago, Congress blocked their spread, responding to a strong lobbying effort by bankers. State banking authorities will still not allow them in Vermont, but they are popping up rapidly in the other five states.

Providence's Industrial National Bank, for instance, last week began advertising "free checking, plus 5% interest." There is a catch: unless there is an average balance of $800 or a minimum balance of $500 during a month, no interest, is paid and each check processed costs 25-c-. Such accounts are obviously not for everyone. But who knows what other types of services may be offered if some of the antiquated restrictions on competition among financial institutions are largely eliminated?

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