Banking and Finance: Legislative Initiatives in the 105th Congress, Second Session

98-60 E

Updated August 10, 1998

CRS Report for Congress

Received through the CRS Web

Banking and Finance: Legislative Initiatives in the

105th Congress, Second Session

Gary Shorter

Specialist in Business and Government Relations

Economics Division

F. Jean Wells

Specialist in Economic Policy

Economics Division

Summary

This report reviews major banking and finance issues that are receiving

congressional attention in the 2nd session of the 105th Congress. It will be updated

periodically to reflect legislative developments. Relevant CRS products are referenced;

congressional offices may order these by calling (202) 707-1732. The contents of

specific bills, legislative histories and current status are available on the Legislative

Information System (LIS) at [http://www.congress.gov].

Overview

Financial services available to the public are changing significantly as are the

institutions providing such services. Changes reflect marketplace adaptation to

technological advances and rising global markets. Court and regulatory decisions are also

affecting competing components of the financial services industry. These developments

challenge existing laws defining institutional distinctions and regulatory structures.

Congress has the unique vantage point of considering the whole as well as the parts.

Pending legislation ranges from comprehensive financial modernization legislation to

legislation that affects specific industries and financial practices.

Financial Modernization

Legislation to commingle banking services with other forms of financial and

commercial enterprises includes H.R. 10 (Leach), H.R. 268 (Roukema), S. 298/H.R. 669

(D’Amato and Baker), and H.R. 2940 (Dreier). The Secretary of the Treasury outlined

the Administration’s plan for financial modernization in testimony before the House

Banking Committee in June 1997. Financial modernization proposals would amend the

Congressional Research Service ˜ The Library of Congress

CRS-2

Glass-Steagall Act, which separates banking and the securities business, and the Bank

Holding Company Act, which regulates companies controlling banks. They take different

approaches about how changes should occur. H.R. 10 (amended) passed the House by

one vote, May 13, 1998. It would allow banking, insurance, and securities affiliations in

a financial holding company (FHC), but limit banking and commerce. FHCs would be

regulated by the Federal Reserve. The bill provides for functional regulation and includes

a number of consumer protection provisions.

Selected CRS Products

CRS Issue Brief 97034. Financial Services Modernization: Legislation and Oversight

in the 105th Congress, by F. Jean Wells. (This issue brief lists other CRS products

related to financial modernization.)

CRS Report 98-550. Financial Modernization/Glass Steagall Act Issues and the

Financial Services Act of 1998, H.R. 10 as Passed in the House, by William

Jackson.

CRS Report 98-399. Banking Acquisition and Merger Procedures, by Maureen Murphy.

Merging the Thrift and Bank Charters

P.L. 104-208 anticipates the merger of the federal bank and thrift deposit insurance

funds by the end of the 105th Congress only if provisions have been made to merge the

thrift and bank charters. The lines of business in which banks and thrifts and their holding

companies can engage, as well as branching authorities, differ. To arrive at a common

charter, decisions would have to be made about how to handle such distinctions.

Determinations could have restrictive or expansive implications for financial

modernization more generally. Thus, some financial modernization proposals (see

above), incorporate provisions for thrift charter conversion.

Selected CRS Products

CRS Report 96-905. Banking Provisions in P.L. 104-208: Relevance for the 105th

Congress, by F. Jean Wells.

Redefining the Role of the Federal Home Loan Banks

The movement toward merging bank and thrift charters and regulation has

highlighted efforts to alter the role of the Federal Home Loan Bank System (FHLBS).

The Federal Home Loan Banks (FHLBs) were once part of the system that chartered and

regulated savings and loan associations. They now exist primarily to provide liquidity to

depository institutions to the extent that such institutions lend for residential finance. The

FHLBs also continue to generate funds to help pay for part of the savings and loan

cleanup. In the 104th Congress, the House Banking Committee considered H.R. 3167,

which addressed structure, mission, regulatory, and membership issues, in addition to

payment requirements for the savings and loan cleanup. The basic thrust of that

legislation was to broaden the role of the FHLBs. Reorganization of the Federal Home

CRS-3

Loan Bank System is included in H.R. 10 amended, passed by the House, May 13, 1998.

S. 1423 is pending in the Senate.

Selected CRS Products

CRS Report 97-993. The Federal Home Loan Bank System in H.R. 10, by Barbara Miles.

CRS Report 97-358. The Federal Home Loan Banks: Functions and Future, by Barbara

Miles.

ATM Fees

In April 1996, Visa U.S.A. and MasterCard International began to permit ATM

owners or operators to charge a fee to ATM users accessing accounts in other banking

institutions. While account-holding institutions have always been able to charge their

customers for using the institutions’ own ATMs (and to charge their customer for using

another institution’s or a nonbank’s ATM to access their accounts), this new surcharge

fee was in addition to fees charged by the account-holding institution. The Federal

Reserve’s Regulation E spells out disclosure of fees for electronic banking services.

Some sentiment exists that these disclosure requirements must be expanded in light of the

new ATM surcharges or, alternatively, that the federal government should go beyond

disclosure to banning such fees. H.R. 264, H.R. 795, and S. 885 have been introduced in

the 105th Congress. The Senate Banking Committee voted not to include ATM

provisions in the regulatory relief bill it marked up July 30, 1998.

Selected CRS Products

CRS Report 97-157. Automated Teller Machine (ATM) Fees: An Update, by Pauline

Smale.

Credit Union Membership

President Clinton signed into law P.L. 105-219 (H.R. 1151), the Credit Union

Membership Access Act, on August 7, 1998. It sets membership standards for future

multi-group credit unions and grandfathers existing credit unions. The issue arose out of

a Supreme Court ruling February 25, 1998, that federal credit unions could not consist of

more than one occupational group having a common bond (“common bonds” may be by

occupation, association, or community). In 1982, the National Credit Union

Administration had begun approving credit union fields of membership that included

more than one distinct group. Banks challenged this expansion of membership. They saw

it as an encroachment by an industry they regard as tax-advantaged. Without legislation,

a district court order limiting credit union expansion was anticipated to implement the

Supreme Court ruling. The law also provides for stricter supervisory and commercial

lending requirements. Community Reinvestment Act-like requirements in the House

version of the bill were deleted in the Senate.

CRS-4

Selected CRS Products

CRS Report 98-162. NCUA v. First National Bank & Trust Co., __ U.S. __ (No. 96-843):

Credit Union Common Bond Ruling, by M. Maureen Murphy.

CRS Report 97-548. Should Credit Unions be Taxed?, by James Bickley.

CRS Report 97-267. Multiple-Group Federal Credit Unions, by Pauline Smale.

Depository Institution Regulatory Relief

Banks and thrifts are subject to numerous safety-and-soundness and consumer

protection laws. The depository institutions have sought regulatory relief from the

compliance costs that are not imposed on other financial institutions. Congress most

recently addressed regulatory relief in P.L. 104-208 (Title II). S. 1405, marked up by the

Senate Banking Committee, July 30, 1998, combines regulatory relief for banks with

provisions to permit the Federal Reserve to pay interest on reserve balances depository

institutions maintain with it and to allow banks to pay interest on business checking

accounts. The House Banking Committee’s Subcommittee on Financial Institutions

marked up its version of regulatory relief legislation, H.R. 4364, August 4. A

controversial amendment would exempt banks and thrifts with under $250 million in

assets from the Community Reinvestment Act. Interest on reserves was included in the

House Banking Committee version of credit union legislation (see above), but was not in

the version of H.R. 1151 voted by the House.

Selected CRS Products

CRS Report 98-474. Payment of Interest on Demand Deposits: An Economic Analysis,

by G. Thomas Woodward.

CRS Report 98-416. Payment of Interest by the Federal Reserve to Depository

Institutions: An Analysis, by G. Thomas Woodward.

Bankruptcy Reform

In 1996, and again in 1997, the number of personal bankruptcy petitions filed

exceeded one million, despite low unemployment, stable interest rates, and healthy

economic growth. The causes of the soaring bankruptcy rate are the subject of

controversy. Two bills before the 105th Congress — H.R. 3150 (passed by the House on

June 10, 1998) and S. 1301 (approved by the Judiciary Committee on June 4, 1998) —

seek to eliminate the abuse of the bankruptcy system by those who could afford to pay at

least part of their debts. Under these “needs-based” bankruptcy proposals, individuals

whose income exceeded certain thresholds could be required to file Chapter 13

bankruptcies (where debt is repaid over time out of future income) instead of Chapter 7

(where unsecured debt is immediately discharged, or wiped out, leaving future income

unencumbered).

CRS-5

Selected CRS Products

CRS Report 98-577. A The Consumer Bankruptcy Reform Act of 1998: S. 1301, 105th

Congress, 2nd session (1998), by Robin Jeweler.

CRS Report 98-517. Consumer Proposals in the Bankruptcy Reform Act of 1998: H.R.

3150, 105th Congress, 2nd session (1998), by Robin Jeweler.

CRS Report 97-637. One Million Personal Bankruptcies a Year: Economic Implications

and Policy Options, by Mark Jickling.

Regulation of Futures and Derivatives Markets

Current interest focuses on the existence of two competing markets: the

exchange-traded futures and options market, regulated by the Commodity Futures Trading

Commission (CFTC), and the over-the-counter (OTC) derivatives, or swaps market,

which is largely unregulated. The most popular contracts in both markets are financial

instruments that gain and lose value as interest rates change. Two paths are being

considered: to deregulate the exchange market, or to increase regulation of the OTC

market. H.R. 467 and S. 257 would permit the exchanges to create unregulated

“professional” markets, to allow them to compete with swaps on a level playing field. In

May 1998, the CFTC published a “concept release” exploring the possibility of bringing

the swaps market under its regulation. This initiative drew protests from other regulators:

H.R. 4062 directs the CFTC not to pursue its unilateral investigation of the market but to

cooperate with other regulators to study the adequacy of current supervision of the swaps

market.

Selected CRS Products

CRS Issue Brief 97040. Futures and Derivatives: Commodity Exchange Act

Amendments, by Mark Jickling.

CRS Report 98-52. Derivatives: A New Federal Accounting Standard, by Mark Jickling.

Securities Litigation Reform

Several bills were introduced in the 1st session of the 105th Congress that address

issues relating to private securities litigation reform. In December 1995, Congress

enacted H.R. 1058, the Private Securities Litigation Reform Act of 1995, as P.L. 104-67.

The law attempts to make it harder for unwarranted class-action securities suits to be filed

in federal courts. However, after the law’s enactment, concerns arose that state courts

were increasingly being used to circumvent P.L. 104-67. H.R. 1653 and H.R. 1689/S.

1260 address this perceived problem by essentially extending P.L. 104-67's reach to state

courts. Among other things, the bill’s opponents are concerned that extending P.L. 10467 to the states may abridge the opportunities that plaintiffs with meritorious cases have

for legal redress. This was a concern that was initially held by the Securities and

Exchange Commission. However, in late March, the agency voted to give its

(conditional) support to S. 1260, providing a boost to the bipartisan legislation, which

passed the Senate, May 13, 1998. On June 24, 1998, the House Commerce Committee

CRS-6

passed H.R. 1689. And on July 22, H.R. 1689 was passed by the House. Differences

between S. 1260 and H.R. 1689 will attempt to be worked out in conference.

Selected CRS Products

CRS Report 98-350. Securities Litigation Reform: Unfinished Business? by Gary

Shorter.

CRS Report 98-164. Uniform Standards in Private Litigation: Limitations on

Shareholder Lawsuit, by Michael V. Seitzinger.

Other Issues

Many other issues affecting financial institutions and the delivery of financial

services undoubtedly are receiving attention in the 105th Congress, 2nd session. Among

them are electronic issues and issues related to monetary policy and to financial problems

in Asia. P.L. 105-67 addresses year 2000 computer problems with regard to financial

institutions. Pending financial markets’ bills include S. 1518 and S. 2000. Besides broadreaching encryption legislation, legislation addressing “digital signatures” that would

apply specifically to financial institutions has been introduced (H.R. 2937, H.R. 3472, and

S. 1594).

The House and Senate Banking Committees have ongoing responsibility for

monetary policy oversight. By statutory mandate, the Federal Reserve Board reports to

the House and the Senate on the state of monetary policy twice a year, by February 20 and

July 20. The Congress is considering financial problems in Asia legislatively in the

context of funding for the International Monetary Fund; related questions include possible

effects on the United States economy and financial institutions that have extended credit

to these countries.

The House Banking and Commerce Committees and the Senate Banking Committee

have jurisdiction over many aspects of the banking and finance issues covered above. The

House and Senate Judiciary Committees address bankruptcy. The House and Senate

Agriculture Committees have primary jurisdiction over futures and the CFTC. This

listing is not comprehensive of all the issues handled by these committees or of all the

committees that may be involved in examining specific aspects of financial legislation.

Selected CRS Products

CRS Issue Brief 97036. The Year 2000 Computer Problem: Activity in the 105th

Congress, by Richard M. Nunno.

CRS Report 98-434. The Asian Financial Crisis, the IMF, and Japan: Economic Issues,

by Dick K. Nanto.

CRS Report 97-835. Encryption and Banking, by M. Maureen Murphy.

CRS Report 96-983. Monetary Policy: Current Policy and Conditions, by Gail Makinen.