Rubin Calls for Overhaul of Bank Laws : Reform: He proposes letting banks, brokers and insurers into each other's businesses through repeal of 1930s statute.


Treasury Secretary Robert E. Rubin called for an overhaul of the nation's banking laws, proposing Monday that banks, securities firms and insurance companies be allowed into each other's businesses, a highly controversial idea among consumer groups and small banks.

"The more diverse banks are by geography and by product, the better off the banking industry will be," Rubin told a savings bond luncheon in New York. "We must reform as we head into the 21st Century."

The lines are already blurring among the businesses, with many banks selling mutual funds and insurance through affiliates, while some brokerage firms have bank connections.

But the banking industry is still essentially limited to taking deposits and making loans--businesses with limited profit potential and intense competition.

Banks, backed by the Clinton Administration, would like to move into other lines of business in a major way, as underwriters of insurance and securities. This means putting together stock and bond issues and marketing them, and also acting as an insurer rather than simply as a vendor of policies.

"No other industrialized countries have the rules we have separating our commercial and investment banks, our insurance companies and our other financial industries," Rubin said.

The Clinton Administration plan was quickly attacked Monday by Consumers Union, which called it "similar to other proposals bandied about over the years . . . tying banks to the financial fortunes" of ventures in securities and insurance.

"We think those businesses are far too risky to allow banks to intertwine their finances with," said Michelle Meier, counsel for Consumers Union. "We are worried taxpayers will be exposed to the same kind of losses we saw in the savings and loan debacle in the 1980s," she said.

And the Independent Bankers Assn. of America said the timing of the Rubin speech was "ironic," coming after the failure of the Barings investment bank in Britain, which collapsed after suffering huge losses in trading of derivatives, the kind of complex instruments involved in the Orange County bankruptcy. The fear is that a common ownership of banks and securities could lead to bank sales of the "most speculative and profitable securities products," said Kenneth Guenther, executive vice president of the IBAA.

Unfettered movement of banks, insurers and securities firms into the same lines of business would "open the door to a concentration of capital (such as) this country has never seen before," Guenther said.

The basic law separating banking and securities is the Glass-Steagall Act, which dates to 1930s bank scandals and failures. "This law was passed when banks basically took deposits and made loans, instead of today's national and global business of facilitating capital formation through diverse products, services and markets," Rubin said.

Banks have been expanding their field of operations through court cases and administrative rulings by the comptroller of the currency, whose office regulates federally chartered institutions.

However, they hope to speed the process through a clear legislative repeal of Glass-Steagall. The heads of both congressional banking committees, Sen. Alfonse M. D'Amato (R-N.Y.) and Rep. Jim Leach (R-Iowa), have offered reform legislation, and Rubin praised their efforts as constructive.

Major differences, however, could bog down the legislation. Leach wants a narrow bill that would move the banks into securities but restrict their insurance expansion. D'Amato favors a more aggressive approach to allow a wide range of outside companies to enter financial services by acquiring banks, insurance firms or securities businesses.

Federal Reserve Board Chairman Alan Greenspan could become the most politically potent opponent of legislative action if he perceives that a bill would interfere with the Fed's ability to regulate the nation's money supply and oversee the soundness of the banking system. Greenspan and the other top financial regulators will testify today when the House Banking Committee begins consideration of the legislation.

Past efforts at reform often collapsed in disarray. At times, lobbyists for the insurance agents have killed a bill because they feared a loss of business to the banks. At other times, small and large banks fought to a standstill over legislation.

Rubin acknowledged that last year's approval of an interstate banking bill came only after campaigns by "five Treasury secretaries, three Presidents and six Congresses."

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