By Kevin Drawbaugh
WASHINGTON (Reuters) - Banks faced intensified regulatory reform pressures as a special U.S. congressional panel prepared to hold its first public meeting on Thursday, forcing Democratic leaders to balance on a knife's edge.
A joint House of Representatives-Senate conference committee will convene at 2:15 p.m. to begin merging competing bills from each chamber into what will become the biggest overhaul of financial oversight since the 1930s.
Several parts of the bills directly threaten bank profits, while some initiatives could force structural changes at large institutions heavily involved in the over-the-counter derivatives markets and in trading for their own books.
An army of lobbyists for the industry was pushing to blunt the impact of these proposals, as well as one that would curb lucrative fees charged on debit card transactions.
"We expect some industry-friendly changes to be made during the conference process" to the card fee proposal, but that it will remain in the final bill, said policy analysts at investment firm FBR Capital Markets in a research note.
The House named its members to the conference committee on Wednesday, tapping some of the chamber's harshest critics of banks and the financial industry, which are deeply unpopular with Americans since the 2007-2009 financial crisis
The committee's meeting will come just two days after a handful of primary election elections showed U.S. voters supported candidates who were tough on Wall Street.
None was more so than Senator Blanche Lincoln, who overcame the odds to win a tough Arkansas Democratic primary contest, setting her up to compete in a final election in November.
Lincoln is the author of a hard-hitting proposal that would force banks to spin off their lucrative swap-trading desks.
SWAPS TARGETED FOR REFORM
Swaps are financial contracts tied to movements in commodity prices, interest rates or -- as in credit default swaps -- on the chance of a borrower defaulting on its debts.
Traded in a huge, off-exchange market presently unpoliced by the government, swaps were widely blamed for aggravating the crisis. The OTC swaps market is dominated by Wall Street giants such as Goldman Sachs, JPMorgan Chase and Citigroup, which derive substantial profits from it.
These and other major financial institutions were bailed out by taxpayers in 2008-2009, prompting public outrage and unleashing a wave of reform initiatives worldwide.
Analysts have long expected the Lincoln provision to be dropped from legislation in the conference. The Obama administration, which firmly backs other reforms, has made clear that the proposal is not a high priority for it.
But Lincoln has vowed to fight for her plan and her primary victory strengthens her hand, said Democratic Senator Christopher Dodd, head of the Senate conference delegation.
Democrats must support Lincoln going into her November contest, making it difficult for them to abandon her proposal.
At the same time, Dodd and Representative Barney Frank, the Democratic chairman of the conference, must shape final legislation that can win approval once more in the House and the Senate. Only then could it go to President Barack Obama to be signed into law. Democrats want that to happen by mid-year.
Republicans named to the panel generally oppose tighter regulations, but their influence is likely to be limited as Democrats easily have enough votes to overrule them.
VOLCKER UPBEAT
White House economic adviser Paul Volcker voiced optimism that sweeping legislation would be passed "in reasonable form" and provide a basis for global coordination that would prevent banks from shopping for the least strict national rulebook.
At a conference in Montreal, Volcker cautioned Congress against watering down his proposed "Volcker rule" contained in the Senate bill. It would ban proprietary trading unrelated to customers' needs at banks that get government backing; bar banks from sponsoring hedge funds and private equity funds, and limit big banks' future growth through a new market share cap.
"This is a battle. Make no mistake about it," said the former Federal Reserve chairman. "But I do think that if we can get this bill passed in a reasonable form ... we'll provide a basis for the other major countries to get together."
Nobel Prize-winning economist Joseph Stiglitz said on Wednesday that Lincoln's proposal would reduce risk in the over-the-counter derivatives market. He also urged approval of the Volcker rule, which some Democrats want to toughen.
"Both are needed and that is even true if the Volcker rule is strengthened," Stiglitz said on a call with reporters.
