NEW YORK — PICTURE the financial-services world of the 21st century:
Money from your account at Fleet Bank-Merrill Lynch, is used to buy life insurance.
Beg your pardon? A commercial bank linked with a big-name stock broker that sells insurance?
Current law forbids it. But the fictitious example is not far-fetched. Today, Treasury Secretary Robert Rubin will present to Congress the Clinton administration's plan for modernizing financial services. The key idea is to allow commercial banks to ''affiliate'' with other financial-service companies.
But opponents say if one of these bank combinations should collapse, it could shake the United States financial system. They point to Barings PLC, the British investment bank that foundered this week after a maverick trader in Singapore lost more than $1 billion betting on the direction of the Japanese stock market.
Mr. Rubin says the current regulatory system is adequate to prevent a similar collapse here.
''With the kind of controls we have in place, one would certainly know well in advance of any kind of activity of that size,'' Rubin says.
To prevent abuses, Rubin will propose that the new universal financial services companies will have to erect ''firewalls'' between sectors. The banking subsidiary, for example, will not be able to use the capital of the insurance company which owns it. Or, if a brokerage subsidiary gets into trouble, it cannot turn to the parent company for additional capital.
''Nothing should be done that does not address the proper safeguards and safety of the banking system,'' Rubin says.
If Congress deregulates the financial-services sector, that will bring an end to the Depression-era Glass-Steagall Act, which banned commercial banks from other activities such as investment banking. The ban was enacted in 1933 after thousands of banks failed and Congress believed there was a relationship between the bank failures and speculation in the stock market. The law is named after Sen. Carter Glass (D) of Virginia., and Rep. Henry Bascomb Steagall (D) of Alabama.
The 1930s were also a much simpler time in the banking world.
''This law was passed when banks basically took deposits and made loans,'' notes Rubin. By way of contrast, says the Treasury chief, ''Today, it is often difficult to distinguish the underlying nature of the products of an investment bank or brokerage firm from a commercial bank.''
Brokerage firms lend money against brokerage accounts, trade bank loans, and produce instruments that compete directly with banks. At the same time commercial banks, through their affiliates, produce products that act the same as stock investments. For example, Citibank depositors can invest in certificates of deposit that replicate the stock market. ''Walls that seemed to exist are breaking down anyway,'' explains Rubin.
Banking walls already crumbling
Last year, Congress helped to break down some of those walls when it permitted interstate banking. As a result of this change, banks are snaring other banks across state lines. Only last week, for example, Fleet Bank, based in Providence, R.I., cut a deal to buy Shawmut Bank in Boston.
Rubin announced the administration's support of banking reform on Monday at a New York savings-bond luncheon attended by some of the financial-services leaders. They were cautiously positive.
''I'm open-minded and interested in hearing more about the legislation,'' says Richard Fisher, chairman of Morgan Stanley Group Inc. His biggest concern: ''What kind of priority is it for the administration?''
Richard Syron, chairman of the American Stock Exchange, hedges his support as well. ''It depends on who is the regulator,'' he explains. The securities industry, fearing the competition, has been opposed to the entrance of banks in the securities markets.
The large banks are in favor of complete deregulation. But Michael Haggarty, senior executive vice president of Chemical Bank in New York, says, ''I think the smaller banks view deregulation with some trepidation.''
Insurance companies wary
The insurance industry is also not likely to support the effort, says Harry Kamen, chairman of Metropolitan Life Insurance Company. The industry has fought the entrance of non-insurance companies in the past, he states, ''because we were convinced other people wouldn't understand the business.''
Insurance sales agents have been particularly active in opposing the sales of insurance at banks and brokerages. Large commercial banks such as BankAmerica Corporation with an extensive retail network, would like to offer insurance products at its branches.
Although Republican presidents have talked about deregulating the banks before, the concept never made it past the democratic committee chairmen.
Now, the chairmen are Republicans: Sen. Alfonse D'Amato of New York and Rep. Jim Leach of Iowa. Both have proposed deregulation bills. Under Senator D'Amato's bill, nonfinancial institutions could own financial institutions. Representative Leach's bill would allow banks and securities companies to merge under holding companies. Rep. Richard Baker (R) of Louisiana is proposing a bill similar to D'Amato's. The legislators are not yet settled on who would regulate the proposed universal companies.
Rubin says the administration has not decided yet if it will present its own bill or work with the Senate and House in fashioning legislation. Rubin calls all the proposed legislation ''highly constructive,'' and, he adds, the administration and Republicans agree on many of the basic issues.