By Kevin Drawbaugh
WASHINGTON (Reuters) - Banks faced intense pressure as a congressional panel negotiating a final financial reform bill prepared to hold its first meeting on Thursday, forcing Democratic leaders to walk a knife's edge.
A joint Senate-House of Representatives conference committee will convene at 2:15 p.m. (1815 GMT) to begin merging competing bills from each chamber into what will be the biggest overhaul of the financial rules since the 1930s.
Some parts of the bills directly threaten bank profits, while other parts could force structural changes at large institutions deeply engaged in the risky over-the-counter derivatives markets and in trading for their own books.
Conference leaders must weigh demands for reshaping the industry against the need to retain some Republican support for a final bill -- a balancing act that analysts say points toward a more centrist outcome than public outrage might suggest.
An army of lobbyists for the industry is pushing to blunt the impact of reform proposals, including 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 Obama administration is pushing for tough reforms, which it hopes to hold out as an example to other nations. The United States is further along than the European Union in implementing changes pledged last year by the Group of 20 countries. The G20 holds a summit in Toronto in two weeks, just as the congressional panel is due to be winding up its work on financial reform.
The House conferees named on Wednesday include 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 that hammered the economy.
ELECTIONS ROUGH UP BANKS
Following days of talks behind closed doors, the conference's first public negotiations 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 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 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 financial 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.
"We believe it still will be dropped from the financial reform package," said Jaret Seiberg, policy analyst at investment firm Concept Capital in a research note.
Lincoln has vowed to fight for her plan, and Democratic Senator Christopher Dodd, head of the Senate conference delegation, said her primary victory strengthens her hand.
DEMS BACK CANDIDATE LINCOLN
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 in the House easily have enough votes to overrule them. Some Republican support in the Senate, however, is still needed.
Six House Democrats on Thursday called for inclusion in the final bill of a strong "Volcker rule" curbing risky businesses by banks, which was first proposed by Obama and White House economic adviser Paul Volcker.
A watered-down version of the rule is presently in the Senate bill. Some Senate Democrats also want it toughened.
The rule would ban proprietary trading unrelated to customers' needs at banks with government backing; get banks out of hedge funds and the private equity business, and limit banks' future growth through a new market share cap.
"The Volcker rule takes an important step in limiting bank depositors' exposure to Wall Street's risky proprietary trading," said Representative Maurice Hinchey, one of the six.
The House on Thursday released the text of the bill that will provide the basis for negotiations.
(For the full "base text" go to http://financialservices.house.gov/pdf/AYO10F74_xml.pdf )
Separately, the Center for Public Integrity, a nonpartisan watchdog group, said on Thursday that more than half of the roughly 3,000 lobbyists working to influence financial reform are former members of Congress, aides or agency staffers.
(Editing by Leslie Adler)
