Turf War Likely to Block Bank Reform Bill

Prospects for a bill that would let banks and securities firms combine remained in doubt Monday due to a longstanding turf war with the insurance industry.

“There is some chance for a compromise, but it looks like it’s going to be very, very difficult,” said Sam Leaman, banking expert for Natwest Washington Analysis, the research arm of Natwest Securities.

The House Banking Committee was scheduled to take up a major reform bill this morning sponsored by the panel’s chairman, Rep. James Leach (R-Iowa). Rep. Richard Baker (R-La.), sponsor of a broader bill, was trying to craft a compromise Monday that would permit banks greater entry into the insurance business.

The heart of Leach’s bill, called the Financial Services Competitiveness Act, would loosen the 60-year-old Glass-Steagall Act, which forbids banks from engaging in investment banking.

Congress erected the barrier between Wall Street and commercial banking after the bank failures of the Depression, reasoning that the securities business was too risky for banks entrusted with federally insured deposits. That view is now widely challenged by banking experts and academics.

The Leach bill would also greatly simplify the approval process a healthy, well-capitalized bank would have to undergo to expand into riskier, non-banking activities.

It would also allow the creation of new financial services holding companies that could own a bank, brokerage firm and insurance company. Financial regulation would be changed, with the Securities and Exchange Commission supervising the securities dealings of these companies while banking regulators oversaw bank activities.

The Republican takeover of Congress, coupled with the Clinton Administration’s support for expanded banking powers, led to considerable optimism earlier this year that major bank reform could win passage.

Little was said at the time about the battle by banks to sell insurance, a dispute largely blamed for killing the previous bank reform measure in 1991.

Insurance agents, led by the politically powerful Independent Insurance Agents of America, have fiercely opposed banks’ entry into their industry, saying banks would gain an unfair advantage that would harm consumers and small businesses.

Banks want to sell insurance as part of an overall effort to diversify into other financial service businesses, such as mutual fund sales. Banks won a major victory in January, when the Supreme Court ruled that they should be allowed to sell annuities because the investment products are incidental to banking and not a type of insurance.

“Historically, it’s been impossible to close the gap between the two industries,” said Edward Yingling, chief lobbyist for the American Bankers Assn.