Bank Reform Bill May Hurt Investors, SEC’s Levitt Says

A major bank reform bill encountered an obstacle Tuesday when the Securities and Exchange Commission said the proposal may hurt investors and impede businesses’ ability to raise money in financial markets.

SEC Chairman Arthur Levitt Jr. supported the broad outlines of a proposal to let commercial banks and Wall Street firms combine. But he told a House Commerce Committee that the bill “falls somewhat short” of balancing interests of investors and the market.

Levitt was among a panel of top federal regulators, including Federal Reserve Board Chairman Alan Greenspan, called to testify on the Financial Services Modernization Act sponsored by House Banking Committee Chairman Jim Leach (R-Iowa).

In addition to repealing major portions of a decades-old banking bill called the Glass Steagall Act, the Leach bill would streamline regulation so that securities regulators would primarily look after Wall Street activities while banking regulators tended primarily to banking functions.

Levitt took issue with a proposal to let banks conduct some securities activities, such as government bond dealings or private placement of securities, within a separate department, technically not within the bank itself.

Levitt worried that banks would have an incentive to move all of their securities business into so-called separately identifiable departments, which would complicate the SEC’s examinations of a bank’s stock and bond dealings.

By contrast, Greenspan repeated strong support of the Leach bill, saying the removal of banking and brokerage restrictions wouldn’t subject banks to undue risks.

“To be sure, with the benefits of expanded powers comes some risk, but I read the evidence as saying that the risks in securities underwriting and dealing are manageable,” he said.

The banking regulators did not address the major controversy surrounding the bill: whether banks would win expanded powers to sell insurance.