Financial Fire Walls Set to Crumble in Congress

One stop financial shopping - banking, insurance, investing - seems to be approaching rapidly in the US.

That convenience is commonplace in other countries but prohibited here because of a law widely considered impractical and obsolete.

Congress, along with regulators and industry, seems determined to change that.

The United States alone separates banks, insurance companies, and stock and bond dealers. The Glass-Steagall Act of 1933, built that wall after the stock crash of 1929 triggered a wave of bank failures.

The law and its successors prohibit banks from selling securities, securities firms from banking, and nonfinancial firms from owning banks.

Congress, federal regulators, and technology have all chipped away at such divisions, mostly in favor of banks, prompting a call for consolidation.

"The financial world has changed," said Rep. Marge Roukema (R) of New Jersey at recent hearings by the House Financial Institutions Subcommittee, which she chairs. "We do not want another savings-and-loan debacle, and we do not want another Depression. But we must have a financial system ... able to compete in the modern world."

The changes have been debated for years, opposed vigorously by the insurance industry.

That resistance collapsed this year, however, after a 1996 Supreme Court decision upholding the Office of the Comptroller of the Currency (OCC), which had ruled that national banks in towns with less than 5,000 residents could sell insurance.

At recent hearings, insurance industry spokesmen announced conditional support for ties among the banking, insurance, and securities industries.

The shift means Congress has the best opportunity in years to pass reform legislation.

Two sticking points remain: how to regulate financial services, and who can own a bank.

The industry generally wants the current approach:

* The Federal Reserve Board and the OCC to watch banking.

* The Securities and Exchange Commission to monitor stocks and bonds.

* States to regulate insurance.

Fed chairman Alan Greenspan and House Banking Committee chairman Jim Leach (R) of Iowa, however, call for federal "umbrella" regulation of any holding company that does significant banking. They note that banks benefit from a special government subsidy: deposit insurance.

"It seems a bit stretched to suggest that private institutions should have access to the payments system and discount window - access which carries a government subsidy as well as sovereign credit risk - without oversight by the governmental body that is responsible for these services..." Leach said in a Washington speech last month.

Adds Mr. Greenspan: "Our experience has been that a problem in one legal entity can [affect] other entities."

Leach also worries about mixing banking and commerce, warning that large companies will buy banks, not vice versa. "In embracing too extensively banking and commerce today, banks may jeopardize the likelihood of their own existence tomorrow."

Such a mix is also opposed by small bankers, small businesses, and farm, labor, and consumer groups. But proponents say adequate safeguards can protect the public interest.

While counseling Congress to proceed cautiously, Greenspan points out that events are rapidly overtaking legislation. "Newer technologies," he says, "will make it highly unlikely that the walling off of any ownership of financial institutions by nonfinancial businesses ... can be continued very far into the 21st century."

Three Proposals: Who Can Bank on It?

The issue of who may own a bank - whether "finance" and "commerce" should mix - is the key consideration in Congress's three reform bills:

* A bill sponsored by House Banking Committee chairman Jim Leach (R) of Iowa would allow an "investment-bank holding company" owning a bank to invest up to 7.5 percent of its assets in nonfinancial activities.

* Rep. Richard Baker (R) of Louisiana supports a bill that would allow commercial firms into banking, much as they now sell insurance and stocks. Sen. Alfonse D'Amato (R) of New York is sponsoring a similar measure in the Senate. A spokesman for the securities industry endorsed this approach at the recent hearings.

* Rep. Marge Roukema (R) of New Jersey and Rep. Bruce Vento (D) of Minnesota have introduced a compromise supported by an alliance of banking, insurance, and securities interests that would allow a bank holding company to do 25 percent of its business outside of finance.

The Treasury Department is also reportedly preparing a proposal that might allow commercial firms to own banks.

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