Banks Get OK on Entering New Businesses

Banks will be allowed on an individual basis to conduct financial activities that were previously off-limits under a new rule approved by federal regulators Wednesday.

Comptroller of the Currency Eugene Ludwig finalized a regulation mapping out the route banks can take to conduct new activities through subsidiaries.

Essentially, the agency could allow national banks to establish subsidiaries to market new products and services, including securities and insurance, as long as the subsidiaries’ capital and operations are separate from the banks’. Currently, national banks must create separate and cumbersome bank holding companies to operate many new divisions.

Insurance and securities industry groups opposed the rule, saying it would give banks access to their businesses without opening banking to their industries.

Ludwig was careful not to mention any specific businesses that might be opened up by banks under the new rule, saying he did not want to “prejudge” what the activities might be.

“If you take any industry and you lock it into one line of business forever . . . you guarantee that you’re going to have a significant safety and soundness problem, and we don’t have the right to stop that evolution,” Ludwig told reporters.

Applications from banks to enter businesses that were previously off-limits will be decided on a case-by-case basis and be put out for public comment before a decision is made, said the comptroller, whose office supervises national banks.

“We will carefully consider whether the activity could lower the bank’s safety and soundness,” Ludwig said. “And we will take a very cautious and judicious approach to reviewing and deciding any requests made through this new process.”

Treasury Secretary Robert Rubin supported the action. “Allowing banks to diversify their financial service activities will reduce risk and strengthen the banking system over the long term,” he said.

Senate Banking Committee Chairman Alfonse M. D’Amato (R-N.Y.), however, said he was “deeply troubled and concerned” over the new regulation.

D’Amato said the rule “may subject federally insured banks to excessive risks and expose the bank insurance funds and, therefore, taxpayers to unnecessary liability.”

A consumer group raised similar objections. The Consumers Union, which publishes Consumer Reports, called for a reversal of the new rule, saying it could expose taxpayers to situations similar to the savings and loan crisis.

Banks have been locked out of certain activities due to a Depression-era law aimed at shielding institutions that take customer deposits from risks associated with securities activities.

For decades, congressional efforts to lift those restrictions by repealing the Glass-Steagall Act have failed. Opponents of Ludwig’s action said the new rule could again hamper efforts in the next Congress to get rid of the law.

“The comptroller’s action is ill-timed,” D’Amato said. “The comptroller’s action detracts from the emerging consensus in favor of comprehensive reform and can only lead to controversy and protracted litigation.”

The American Council of Life Insurance said it would “mount a major effort” to block the comptroller’s action, and the Securities Industry Assn. said it was “reviewing a number of legal and legislative options to respond to the . . . decision.”

In a separate development Wednesday, the General Accounting Office recommended that the number of federal agencies responsible for banking oversight be reduced.

Specifically, it said that the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency could be combined.