Senate Bill Expands Banking Powers but Excludes Insurance

The Senate voted 94-2 on Wednesday to approve a bill granting bank holding companies broad new securities powers but limiting their ability to expand into insurance.

The vote came after nearly six hours of debate in which Senate Banking Committee Chairman William Proxmire (D-Wis.) warded off amendments that could have unraveled the delicate compromise crafted by the committee earlier this month.

The legislation would substantially revise the Glass-Steagall Act, which has separated investment and commercial banking since 1933. The debate now shifts to the House, where the Banking Committee is considering a proposal much more narrow in scope than the Senate bill.

The bill is seen as something of a swan song for Proxmire, who retires next year after more than 30 years in the Senate. Just before its adoption, the bill was named the Proxmire Financial Modernization Act of 1988.

It would permit bank holding companies to underwrite and sell mortgage-backed securities, commercial paper and municipal revenue bonds immediately after the bill is approved by Congress and signed by the President, who favors the bill.

Bank holding companies would be allowed to underwrite and sell corporate bonds and mutual funds six months after enactment. A vote by Congress would be required in 1991 before bank holding companies could underwrite corporate stock, the most lucrative securities activity.

If bank holding companies are granted stock underwriting power, then securities firms could buy and operate a commercial bank through a holding company.

The Senate-approved bill also closes loopholes that threatened to expand insurance activities for individual banks across state boundaries. States can permit free-standing state chartered banks to sell insurance, as well as banks owned by holding companies headquartered in the state.

Banks owned by out-of-state holding companies are barred from insurance. Sen. Bob Graham (D-Fla.) offered, but ultimately withdrew, an amendment that would have permitted states to agree among themselves to permit each other’s bank holding companies to sell insurance in each other’s jurisdiction.

But he withdrew the amendment, saying, “I know where the votes lie,” after Proxmire, ranking Banking Committee minority member Sen. Jake Garn (R-Utah) and other senators said they would oppose all amendments.

Sen. Christopher Dodd, a Democrat from Connecticut, where insurance companies are important employers, had threatened to introduce a series of amendments if the Banking Committee compromise had unraveled.

Sen. Alfonse D’Amato (R-N.Y.), who along with Sen. Phil Gramm (R-Tex.) cast the only no votes, has opposed the bill, seeking legislation that would be more favorable to securities firms.

According to staff members, he had been prepared to delay passage but decided against it after Proxmire agreed to increase penalties for violating provisions designed to insulate the securities affiliate of the bank holding company from the federally insured deposits of the bank affiliate.

Corporate fines for violating the so-called fire wall provision will be increased to $50,000 a day from $1,000 a day, and individual fines will be increased to a maximum of $100,000 from $10,000, Proxmire said.

Sen. Howard Metzenbaum, (D-Ohio), had sought an amendment requiring banks to cash at no charge Social Security, welfare and other government checks. He withdrew the amendment after Proxmire agreed his committee would consider such a measure by the end of June.

Not voting were Senators Joseph Biden (D-Del.), Albert Gore Jr. (D-Tenn.), Edward M. Kennedy (D-Mass.) and Paul Simon (D-Ill.).