Greenspan Backs Two-Stage Reform of U.S. Banking Laws

Federal Reserve Chairman Alan Greenspan said Thursday that Congress should consider a “two-stage process” of banking law reform that begins with legislation to allow banks, insurance and securities firms to combine.

The second stage would allow a nonfinancial service firm, such as General Motors Corp. or Microsoft Corp., to buy a commercial bank, or allow banks to buy commercial firms. Both actions are now prohibited by law.

“We cannot rule out whether sometime in our future full integration may occur, potentially with increased efficiencies,” Greenspan told the House Banking Committee.

The Fed chief appeared on the second day of hearings on how to update U.S. laws to allow companies such as Citigroup to fully integrate insurance, securities and banking.

Opponents of mixing commerce and banking, including Treasury Secretary Robert E. Rubin and House Banking Committee Chairman James A. Leach, say it could lead to the same kind of problems that damaged the Asian economy, while proponents say the Internet and electronic commerce have already blurred the two industries.

Greenspan, in a March 1997 speech in Phoenix, said Congress should move slowly in granting banks authority to enter new commercial areas. But he pushed the issue forward with his remarks Thursday.

Greenspan repeated support of legislation, such as that sponsored by Leach, to allow integration of banking, insurance and securities. After that is achieved, policymakers should “employ the lessons we learn from that important step before we consider whether and under what conditions it would be desirable to move to the second stage of the full integration of commerce and banking.”

A key obstacle to a banking bill has been a dispute between Greenspan and Rubin over whether the Fed or the Treasury would be the primary regulator of the new generation of banks that would emerge from the legislation.

At issue is whether the new securities and insurance activities would be conducted at the holding company level, which the Fed regulates, or within an operating subsidiary of a national bank, which the Treasury’s comptroller of the currency regulates.

The holding company is preferable, Greenspan said, because it doesn’t allow these securities and insurance activities to benefit from federal subsidies from deposit insurance, the discount window and the Fedwire payments settlement service.

Greenspan rebutted Rubin’s argument that putting the new activities in a holding company would deny the Treasury valuable authority over national banks. The Leach bill “would not alter the executive branch’s supervisory authority for national banks or federal savings associations,” he said.

Leach, in questioning Greenspan, drew a promise that the Fed chairman will meet face to face with Rubin to work on a compromise if lawmakers are unable to mediate one. Leach said he will ask Rubin for the same pledge when he testifies today.