Hanging Tough: A battle over banking reform

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A battle over banking reform

Since becoming Federal Reserve Board chairman in 1979, Paul Volcker has built a daunting political power base. When his term was running out last summer, Volcker's clout in Congress and the financial community helped him survive a campaign by Treasury Secretary Donald Regan to prevent his reappointment. Now the Federal Reserve chairman has again shown his strength. In a battle among top Government officials, Volcker has blocked a plan that would have diminished the Federal Reserve's powers over U.S. banks as part of an effort to centralize the regulation of financial institutions in a new federal banking agency.

The latest challenge to Volcker stemmed from a debate over who should rule U.S. banking. Authority over some 4,700 national banks is shared by the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC). In addition, Volcker's board regulates about 1,000 state-chartered banks that are members of the Federal Reserve System, while the FDIC supervises nearly 8,800 state banks that do not belong to the Fed.

The potential for conflict among the bank regulators has grown enormously in recent years because of the rapid proliferation of financial services. Disputes have arisen about what businesses banks should be permitted to handle. The FDIC, for example, wants the banks it oversees to be able to offer brokerage services, insurance and travel assistance, but the Federal Reserve Board generally opposes such diversification.

In December 1982, the White House set up a task force to draft a plan to overhaul bank regulation. Headed by Vice President George Bush and Regan, the group includes Volcker, FDIC Chairman William Isaac and C.T. Conover, the Comptroller of the Currency. After a year of study, the task force reached a general consensus that the power to examine and regulate banks should be consolidated in a new federal banking agency, with the Office of the Comptroller of the Currency forming its nucleus. Under this proposal, the FDIC would concentrate on insuring bank deposits, while the Federal Reserve would focus on controlling the U.S. money supply and acting as a central bank for its members.

Before the plan got very far, Volcker torpedoed it. He pointed to the key role that the Federal Reserve has played in dealing with such crises as the Hunt brothers' silver scare in 1980 and the continuing foreign-loan problems of developing nations. Stripping the Reserve Board of its regulatory powers, Volcker contended, would cripple the agency. Said the chairman: "It would indeed be dangerous to look to the Federal Reserve to pick up the pieces in a financial crisis without also providing it with the tools to do the job."

Realizing that no reform bill is likely to pass Congress without Volcker's support, the task force worked on a compromise. By last week, the group's staff had fashioned a plan in which the Federal Reserve Board would have control over the 20 biggest U.S.