Sweeping gust of change in FDIC law sends a chill through bankers.

Ask bankers how the latest sweeping banking legislation -- the Federal Deposit Insurance Corporation Improvement Act of 1991 -- will affect their industry, and you get a litany of doomsday predictions and sheer disgust.

The 500-page bill passed last December by Congress adds upward of 150 regulations to the banking industry -- an industry already governed by 500 regulations.

"The act was akin to nationalizing the banking industry," said Richard Dominguez, president of Industrial Bank, a small community bank ($80 million in assets) in Van Nuys. "Over the long run it will cause community banks to get out of the business or not be as active. . . . The general public will suffer because we are the direct provider of loans to small business."

Said another banker who asked to not be identified: "It's going to be a miracle if banks will ever make a real estate loan."

"It was fun being a banker when you didn't have to run to the rule book," said Jerry Loeser, senior vice president of downtown L.A.-based First Interstate Bancorp ($55 billion in assets). "Now the lawyers will be running the place."

"Congress took a good idea and ruined it," said Janet Lamkin, vice president of the California Bankers Association. "The act started as an effort to recapitalize funds and modernize the banking industry, but it totally failed on the second half. It set the industry back about 20 years in terms of competitiveness."

Some eight months after its passage into law, the act is going through a surge of regulation writing as federal banking agencies struggle to understand its mandates.

Most of the regulations, however, are still in the proposal stage, as the FDIC undergoes a 60-day public comment period before the regulations are set in stone. Final guidelines should appear this fall and go into effect in 1993.

Bankers plan a major lobbying effort to reverse many of the regulations, said Lamkin of the California Bankers Association. In the meantime, seminars on the act are popping up across the country, and the talk is dire.

At a seminar of 62 foreign banks held by an L.A. firm and entitled "Recent Changes in Regulations of Foreign Banks," banks were given a survey that asked them point blank: Do you think the new law will cause banks to leave the U.S.? Of the 33 who responded, 13 said yes, nine said they didn't know and 11 said no, according to Harold P. Reichwald, a partner with Manatt, Phelps, Phillips & Kantor.

Those nine are indicative of the uncertainty in the air about the effect of the new law, he said. "The new regulations changed the marketplace dramatically for foreign banks," he said. "Foreign banks are now asking themselves, 'Is it economically viable to stay in the U.S.?'"

Although it's not written in black and white, the new law will ultimately cause the Federal Reserve Board to treat foreign banks as U.S. domestic banks, said Reichwald -- whether or not they have deposits under $100,000.

Under the act, any foreign bank with deposits under $100,000 will have to open a separate capitalized subsidiary and apply for FDIC insurance.

"When the Federal Reserve Board walks in the door, they expect foreign banks to run as domestic banks, operationally," said Reichwald.

These new regulations will make it more expensive to be in the U.S., he said. He predicts that an exodus of foreign banks isn't likely for about one year, until the banks see how the Fed treats them in its annual examination of the banking community.

If the Bank of Seoul is any indication, the Fed won't hesitate to slap a bank with a consent order. In March that bank was ordered to improve its asset quality and it was fined $50,000 for regulatory reporting errors.

Reichwald said foreign banks' departure would reduce competition. Foreign banks have a history of providing loan products to companies that can't get them at domestic banks, and they are willing to lend at lower interest rates, he said.

Ethnic communities which have a strong bond with their respective ethnic bank would therefore need to look elsewhere if foreign banks pulled out. Reichwald said L.A. is home to 25 Japanese banks, the largest concentration of Japanese banks in the country.

Like much of the intent of the FDIC Improvement Act, the measures governing foreign banks were aimed at avoiding taxpayer bailouts and searing scandals.

As Henry B. Gonzales, D-Texas, chairman of the House Banking, Finance and Urban Affairs Committee testified to Congress: "Not only our domestic banks, but foreign banking entities in the U.S., must now operate under a new set of regulatory requirements. The rogue banks like Banca Nazionale del Lavora and the Bank of Credit & Commerce International will no longer escape scrutiny in our nation."

Gonzales and Sen. Donald Riegle, D-Mich., chairman of the Senate Banking, Housing and Urban Affairs Committee and one of the five legislators named in abetting Charles Keating's Lincoln Savings debacle, are from the camp that sees a dark clout ahead for the banking industry.

"They think the worst is yet to come," said a House banking committee spokeswoman. "You could call them a black cloud of pessimism."

The General Accounting Office told Congress at a June 30 hearing that regulators had identified 1,090 problem commercial and savings institutions ($610 billion in total assets) -- a 50 percent increase from a year ago.

GAO estimated that the banking industry is expected to face aggregate losses of $15 billion to $72 billion over the next four years.

Although the Improvement Act allows the FDIC to borrow $30 billion from the U.S. Treasury to refinance the Bank Insurance Fund, Rep. Gonzales of the House banking committee doesn't think that figure is enough, according to a committee spokeswoman.

In seeking to avoid another S&L crisis, the act aims at speeding up regulators' process in closing down banks and eradicating the philosophy of "too big to fail" -- propping up the largest institutions and letting the small ones fail.

A House banking committee study found the Fed poured money into institutions by dispensing below-market interest-rate loans to banks, and 90 percent or more of these banks still would fail.

Bankers, however, think Congress is overreacting and they point to the last two quarters of record earnings in the banking community.

Dominguez of Industrial Bank thinks the act is especially unfair to community banks.

"The big loss in the S&L crisis was by 20 percent of the S&Ls," he said. "Now they are treating all banks equal when the risk to taxpayers of the collapse of a community bank is nominal. They are unfairly burdening independent and community banks."

Dominguez said hiring consultants to help him comply with the act would cost between $200,000 to $300,000 a year, or the equivalent of 10 percent of overhead.

Most bankers would agree requiring institutions to maintain capital exceeding 2 percent of assets is a smart provision; only about 79 banks in the country don't meet the 2 percent requirement, according to the FDIC. But bankers cited a long list of specific regulations they resented. Here's a rundown:

* Truth in Saving. Hailed by Congress as an end to deceptive advertising and confusing information about savings rates, the provision is considered unfair by bankers who say their competitors, like credit unions, don't have to comply with the same rules.

* Standards. Aside from scanning capital ratios as a signal of potentially sick institutions, the law requires a comprehensive system of internal standards and policies. Bank regulators require standards in a dozen different areas -- ones which haven't had guidelines before, such as compensation for all bank officers, directors and employees.

The law requires regulators to prohibit the payment of "excessive compensation" and mandates that regulators come up with a uniform standard for compensation. Bankers say compensation varies widely from region to region and has little relevance to a bank's soundness.

Other areas requiring standards include internal controls, information systems, audit systems, loan documentation, credit underwriting, interest rate exposure and asset growth. Banks must comply with these standards or else they will be required to file a compliance plan. Failure to file a plan would require regulators to take enforcement action.

* Prompt corrective action. A series of provisions in the law requires regulators to take corrective action against banks whose capital falls below certain levels. The sanctions begin with measures such as restrictions on dividends and management fees, and culminate in the closing of institutions that are critically undercapitalized (2 percent or less of total assets) for a prescribed period.

Once a bank becomes undercapitalized, it needs to file a capital plan within 45 days. And that plan must be guaranteed by the bank's holding company.

The problem, as one banker sees it, is that while the bank is waiting for its capital plan to be approved, 60 days could pass and the Fed's discount window could close.

Under another provision in the act, the Fed can loan ailing banks money only for 60 days. But banks need more than that to get stabilized, say bankers. Banks typically would raise cash by issuing stock but they wouldn't be able to accomplish that in 60 days, say bankers.

Some say this provision could severely accelerate bank failures, especially when a capital plan has to be guaranteed by the bank's holding company. One banker actually called this provision the "doomsday machine."

* Brokered deposits. Considered a red flag of bank woes and the mechanism that many say fueled the S&L crisis, brokered deposits are third-party deposits that are used to boost a bank's liquidity.

They involve a third-party broker placing his clients' deposits into financial institutions that pay interest rates higher than those of the competition. To offset that higher interest-rate expense, and brokers-commission expense, the financial institutions typically invest those brokered deposits in high-risk, high-yield investments.

Many sick thrifts seeking quick fixes sought an infusion of brokered deposits. But when those high-risk investments failed, the thrifts went under.

The FDIC Improvement Act requires that brokered deposits be limited to "well-capitalized institutions that exceed the minimum requirements."

Bankers say these third-party deposits are key to boosting a bank's liquidity. But many sick thrifts seeking quick fixes grasped for these straws before going under.

* ATMs. Banks are required to give 90 days' notice if they want to close a branch and they must state a reason. This includes automated teller machines, even if the ATM is in a grocery store and the grocery store shuts down, noted one banker.

* Reporting. Every bank must annually report its number of farm loans and Small Business Administration loans. They have to report fees, interest and loan-loss experience for the previous year. Bankers say they file hundreds of reports already.

* Real estate. Restrictions on real estate lending could force a number of banks to scrap their real estate loan portfolios and get out of real estate lending.