The Clinton Administration on Wednesday emphasized broad areas of agreement it shares with House Republicans on proposals to allow banks to expand into the securities and insurance businesses.
Treasury Secretary Robert E. Rubin, appearing before the House Banking Committee, elaborated on the Administration’s proposal for reforming banking law.
Rubin stressed that banks will be allowed to underwrite corporate stock and bonds or sell insurance only if they have sufficient reserves to guard against potential losses and strict internal controls to detect losses early.
However, the Administration plan would not permit industrial firms to own banks and it would proceed cautiously on whether banks should get into the property and casualty insurance underwriting business.
“It is absolutely essential that we maintain safety and soundness” of the nation’s banks, Rubin said.
The secretary is the of several powerful figures in Washington to speak in favor of expanding bank powers. They would repeal major provisions of the Glass-Steagall Act, which bars banks from dealing in securities. House Banking Chairman Jim Leach (R-Iowa) has sponsored a bill to revise Glass-Steagall. The measure gained support from Federal Reserve Board Chairman Alan Greenspan on Tuesday.
Rubin also praised Leach’s bill.
“We believe the Financial Services Modernization Act of 1995 will serve as an important catalyst for addressing financial modernization,” he said.
Leach and Rep. Charles E. Schumer (D-N.Y.) on Tuesday sharply criticized an element of the Administration plan that would allow banks to have securities affiliates.
The two said such an arrangement would not insulate banks from losses in the securities business, and would expose the federal deposit insurance fund to needless risk.
Rubin disagreed. “We believe the private sector should be able to decide itself how to structure its own business,” he said.
Rubin emphasized establishing “proper safeguards in the first place” to limit any such losses in the securities and insurance arms of the banks. He said the different approach shouldn’t cloud the broader agreement the Administration shares with Leach and a competing proposal sponsored by Rep. Richard H. Baker (R-La.).
“While there are differences, they are differences we can work on together,” Rubin said.
Other elements of the Administration plan would require proper disclosure by banks so consumers don’t confuse insured deposit accounts with mutual funds and securities, which aren’t federally insured.