New Era for Financial Services
President Clinton signed a sweeping measure into law Friday that knocks down Depression-era barriers and lets banks, investment firms and insurance companies sell each other’s products and provide one-stop shopping for financial services.
“This is a day we can celebrate as an American day,” Clinton said at the White House signing ceremony.
Over time, the legislation is expected to create financial supermarkets that will allow consumers and businesses to satisfy all their needs in a single place. Once the barriers separating banks, insurers and securities firms are removed, analysts foresee a wave of mergers between large banks and other financial companies hoping to be the first to offer their customers “one-stop shopping.”
Many banks are expected to follow the lead of Citicorp, which merged last year with insurer Travelers Group to become Citigroup Inc., one of the first of these new financial supermarkets.
But consumers should not expect to notice big changes overnight, analysts say. In fact, many of the industry changes will be transparent to customers.
Already, most large banks offer investment and insurance services, though they have had to keep the units under a separate legal ownership because of the old law. Banks will soon be permitted to break down some of those internal walls, but it won’t necessarily result in new choices or products for customers, analysts say.
“There’s a lot of talk about how good this will be for consumers, but it’s better for banks,” said Norman Katz, managing partner at MCS Associates, an Irvine-based bank consulting firm. “I don’t see any obvious advantage to consumers, but I don’t think they will get hurt, either.”
In California, bank customers can expect to see a continuation of the mergers that have characterized the market in recent years. But rather than banks acquiring other banks, large institutions such as Bank of America Corp. and Wells Fargo Co. are expected to beef up their existing holdings in other businesses such as insurance and securities.
Wells Fargo, for example, plans to expand its insurance operation, the Norwest Insurance agency, to include underwriting policies as well as selling them, said company spokeswoman Kathleen Shilkret. That practice was prohibited under the old law.
Investment and securities businesses, from Charles Schwab Corp. to Merrill Lynch & Co., are expected to be at the top of banks’ shopping lists because they offer attractive profit margins and fit well with other bank products.
“There’s going to be a significant amount of jockeying for securities firms,” Katz said.
Liam McGee, president of Bank of America’s Southern California unit, said the bank is interested in boosting its investment banking and stock underwriting business, currently organized under Banc of America Securities. McGee said it was too soon to say whether the investment banking unit would be merged into the rest of the bank, but he said the new law would allow BofA to offer more seamless service to its Fortune 500 customers, from corporate lending to stock offerings.
“This is going to allow us to present our services in a less complicated way,” McGee said. For example, the current separation of business lines means BofA corporate customers must sometimes navigate their way through different divisions, employees and corporate names.
But BofA does not expect to follow the Citigroup model with a drive into insurance, McGee said. “We have no burning desire to get into insurance underwriting,” he said.
In fact, McGee predicted the new law would not serve as an immediate catalyst for acquisitions by BofA. “We have a lot on our plate,” McGee said, noting the bank’s recent merger with NationsBank. “We are focusing on what we have right now.”
For large California thrifts, such as Seattle-based Washington Mutual Inc., the new law won’t spur many changes because they are already permitted to offer securities and insurance, said Benson Porter, senior vice president of government relations. But the new law will likely increase the competition for customers, he said.
“It’s going to force everyone to be more creative” in their consumer product mix, Porter said.
Smaller California banks may find themselves the target of acquisition by out-of-state insurance companies or securities firms seeking a foothold on the West Coast, Katz said. But smaller banks are not as likely to expand into other businesses because they lack the size and expertise, he added.
Approval for the banking legislation was overwhelming, with the conference bill adopted Nov. 4 by a Senate vote of 90 to 8, and a House vote of 362 to 57.
The large majorities represented a victory for the financial services industries after 20 years of lobbying. Banks, insurers and securities firms had squabbled among themselves, fighting for advantage over the years. Meanwhile, the realities of markets were bypassing them as consumers demanded ease and speed in financial transactions. The barriers separating the businesses had begun eroding, but the legislation signed by the president dismantles them completely, paving the way for a wave of mergers and acquisitions among banks, insurers and brokerage firms.
The successful drive to create a workable bill was led by determined committee chairmen.
In the House, Rep. Jim Leach (R-Iowa) had a last opportunity to make a mark on financial history. Under party rules, he must give up his chairmanship in the next Congress. In the Senate, Phil Gramm (R-Texas) signaled his willingness to compromise on the issue of the Community Reinvestment Act, which requires banks to provide services in poor neighborhoods. Previously, his opposition to CRA had killed banking reform.
This time, Gramm and the Republican leadership agreed that a banking bill was a vital legislative priority. And the Clinton administration was equally determined that the time was right for a bill that would give U.S. financial institutions the opportunity to expand and compete more effectively against the banking giants of other nations. “This legislation is truly historic and it indicates what can happen when Republicans and Democrats work together in a spirit of genuine cooperation,” Clinton said.
He promised to offer a proposal next year to strengthen privacy protections for bank customers under the new bill. “Without restraining the economic potential of new business arrangements, I want to make sure every family has meaningful choices about how their personal information will be shared within corporate conglomerates,” he said. “We can’t allow new opportunities to erode old and fundamental rights.”
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Associated Press was used in compiling this report.
