Financial Turf Wars

March 16, 1998

House Speaker New Gingrich says congressional leaders are "very, very close" to a deal on breaking down further the walls that block banks, securities firms, and insurers from invading each other's business turf.

Maybe.

But the struggle to come up with a comprehensive law re-regulating the financial industry has been under way for years with no apparent results. If a deal does emerge from the House, it will then face uncertain scrutiny in the Senate. A new law could touch on anyone with a bank account, insurance, mortgage, or stock investment.

One reason for inaction is that to a considerable extent the separation between the financial industries has already broken down. Even the line between banking and commerce is becoming fuzzy.

Why make concessions for a deal, reason lobbyists for banks, securities firms, or insurance companies, when you get what you want already from your own regulators or through small legislated changes.

Banks, for example, have moved, not entirely successfully, into the mutual fund business. They sell stock. They sell some types of insurance.

J. P. Morgan, famous as a commercial bank, now ranks No. 5 as an underwriter of initial public offerings of stock - a task once limited to investment banks such as Goldman Sachs. Investment banks offer some checking privileges in connection with investment accounts. Industrial companies, such as Ford Motor Co., have moved into the banking business by buying savings and loan associations.

In effect, a new broad bill would ratify and re-regulate what is rapidly becoming status quo - a complex and confusing system of "universal banking" with similarities to the financial architecture in Germany and Japan.

In Germany, banks own large chunks of big industrial corporations. They can engage in nearly any financial business. They underwrite, that is sell to the public, new issues of stock.

In Japan, where the occupation authorities after World War II imposed a separation of banking and investment banking, the Zaibatsu, with their interlocking directorates and other less formal ties, have flourished.

House leaders are considering allowing banks to derive as much as 5 percent of their revenue from businesses that have nothing to do with traditional banking. They could own a software company or a steel company.

What does America want in the way of a financial system?

There were reasons for the Glass-Steagall Act that passed in 1933 after the collapse of so many banks in the Great Depression. It divided commercial banks from investment banks and non-banking commerce, hoping to provide more stability to the system and avoid troubling conflicts of interest. And it largely succeeded.

Legislators should keep in mind that stability - though not rigidity - in finance has great merits.

Further, studies indicate that bigness, beyond a certain size, offers no greater economic efficiency in finance. We are always suspicious that too great financial power can be abused and unfair to non-banking commerce. If banks can enter commerce, maybe they should be subject to anti-trust laws and securities regulation.

We wish the legislators well in sorting out the complexities in the face of intense lobbying from dozens of different interests. Legislation could tidy up the regulatory system, boosting financial efficiency. But don't hold your breath that it will happen soon.