Financial Reform: Bank on It

In a historic vote, the House recently overwhelmingly passed legislation that would permit banks, securities firms, and insurance companies to own one another. Consumers would benefit from financial "one-stop shopping," while American financial firms would be able to better compete with their foreign rivals.

The Senate passed a similar bill in early May. Last week's vote marked the first time in more than two decades of trying that both houses have voted to remove the Depression-era walls separating the sectors.

Now the bills go to a conference committee, which must iron out some important differences. The result could be a showdown between the administration - represented by new Treasury Secretary Lawrence Summers - and Senate Banking Committee Chairman Phil Gramm (R) of Texas over the details:

Community reinvestment. The Senate would exempt small rural banks from compliance with the Community Reinvestment Act, which aims to ensure lending in low-income areas. The White House threatens a veto over that. The House bill would extend CRA requirements to holding companies. That would open the door for extension of the CRA into insurance and securities. A better approach would be to leave the CRA as is.

Nonbank business. The Senate would prevent banks from entering nonfinancial businesses, while the House would allow it if the bank gets Fed approval. The Senate approach is sounder.

Privacy. The House version would allow customers to prevent their personal financial data from being shared with outside companies or criminals using false pretenses to gain someone's financial information from a bank. It would also require customer consent before personal medical information could be shared with company affiliates or outside firms.

The White House would go even further, but the financial industry is deeply opposed to that, and the Senate bill contains no such provisions. The best solution would be to go with the House's terms.

Oversight. The Senate bill would require firms to operate as affiliates in a holding company supervised by the Federal Reserve. The House would also allow them to operate as subsidiaries under the Treasury Department's Comptroller of the Currency. The White House favors the House version, but this turf fight should be decided in favor of the Fed. That would better protect taxpayers, who "subsidize" banks with federal deposit insurance, and help keep politics out of financial markets.

Spurred by new technology, the marketplace is fast overtaking the nation's out-of-date financial laws. It's high time for Washington to catch up.

(c) Copyright 1999. The Christian Science Publishing Society

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