Financial Reform: Overdue

Last fall, congress came within a whisker of catching up to marketplace reality and passing a law to dismantle the decades-old walls dividing the banking, insurance, and securities sectors. The full House and the Senate banking committee, after difficult negotiations with the three sectors, passed bills to allow each to offer the others' products.

But modernization stalled in the Senate when Sen. Phil Gramm (R) of Texas and other conservatives demanded that new financial entities the bill would create be exempted from the Community Reinvestment Act (CRA). That law requires federal regulators to consider a bank's lending to minorities when approving a new branch or a bank merger. Those requirements serve an important purpose - equitable access to financial services - and should be preserved.

In addition, Treasury Secretary Robert Rubin threatened a presidential veto over organization of the new companies. He wants operating subsidiaries regulated by Treasury's Office of the Comptroller of the Currency.

Federal Reserve Chairman Alan Greenspan prefers bank holding-company affiliates regulated by the Fed.

Reformers started afresh in the current Congress. The House banking committee, chaired by Rep. Jim Leach (R) of Iowa, approved a bipartisan measure similar to last year's bill. (The Commerce Committee must still review it.)

But the Senate situation is another story. Banking Chairman Alfonse D'Amato (R) of New York lost his reelection bid and was replaced by - Senator Gramm. The Texan immediately announced his intention to craft a measure relaxing the CRA provisions. The committee passed a bill that did so on a party-line vote.

The House bill makes no changes in the CRA and allows banks with less than $10 billion in assets to organize nonbanking services as operating subsidiaries. Besides relaxing the CRA provisions, the Senate bill would create holding-company affiliates, although banks with less than $1 billion in assets could organize subsidiaries.

Senate Democrats have crafted a substitute that is close to the House version. President Clinton wrote Gramm threatening a veto unless CRA exemptions are removed, banks allowed to organize subsidiaries, and nonbanking firms barred from buying thrift institutions.

We agree with Mr. Greenspan that the holding-company approach better protects taxpayers and federal deposit-insurance funds and ensures a level playing field for all three sectors. That said, it's clear the House bill, with its strong CRA provisions, offers the best starting point for fruitful compromise between Congress and the president.

Above all, it's time to move.