Congress, White House Forge Bank Reform Deal

After decades of debate, Congress reached an agreement Friday to radically overhaul the nation’s banking laws so that banks, securities firms and insurance companies can move into one another’s lines of business and create one-stop financial shopping centers.

House and Senate conferees and the Clinton administration reached a compromise to repeal Depression-era legislation that erected barriers between banking and other financial activities. The agreement was announced after hours of closed-door meetings involving key members of the House and Senate banking committees, and it appears headed for easy passage.

Under the compromise, banks large and small will be able to offer customers the opportunity to trade stocks and buy insurance, something that only big banking chains have managed to do under existing law. Conversely, brokerages and insurers will be able to offer a full range of banking services.

Thus, consumers who now conduct their business separately at banks, insurance firms and brokerages will be able to do it all at one place--and theoretically at a lower cost because it will be more efficient.

Among other things, the plan removes remaining obstacles to the merger of Citicorp’s banking operations with Travelers Group’s insurance activities and Salomon Smith Barney’s brokerage business. The combination was approved by the Federal Reserve Board a year ago, but the combined firm probably would have to divest some of its businesses under current law.

The compromise would repeal the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act, which kept financial businesses separate. It would let securities and insurance firms purchase banks, which is prohibited under existing statutes. Banks could underwrite securities and operate brokerage units without having to create nonbanking “affiliates,” as they must now.

The Glass-Steagall Act was intended to reduce the potential conflicts of interest between investment banking and commercial banking and to provide a safe harbor for the money of ordinary Americans by enabling them to put their money in accounts that were protected by deposit insurance and insulated from more speculative investments, such as stocks.

The new legislation would bring “a major improvement in our financial services,” said a spokesman for House Banking Committee Chairman James A. Leach (R-Iowa). “This will be good for consumers and will help American firms remain competitive abroad.” U.S. officials have worried that the “mega-banks” created by mergers of foreign financial giants would make it hard for American banks to compete internationally.

The bill maintains some barriers. While it allows mergers among banks, brokerages and insurers, all of which are defined as financial firms, it would prohibit nonfinancial companies from buying banks.

For example, Wal-Mart has applied for a charter to operate a thrift holding company. Under the legislation, no such charters would be issued. (Nonfinancial companies that received charters in the past would be allowed to keep them.)

Congress has been actively debating financial modernization for 20 years but has been unable to pass comprehensive legislation that satisfied all three of the powerful industries involved.

But advances in the marketplace, including heightened competition for business on the Internet, made a compromise possible.

In a key concession, existing regulatory authorities would continue to oversee their respective areas of financial activity.

State insurance regulators, for example, would still supervise the issuance of insurance policies, even by banks and securities firms. This was a big issue for the insurance industry.

Similarly, security oversight would remain with the Securities and Exchange Commission, and banking regulation with the Federal Reserve Board and comptroller of the currency. The agreement still must be approved by House and Senate conferees in its final version, win final passage by the full House and Senate, and be signed by President Clinton. But those objectives seem easily within reach, and the measure appears almost certain to take effect next year.

“I am optimistic that we will pass, after a long time, financial services legislation,” said Sen. Charles E. Schumer (D-N.Y.), one of the Senate negotiators. “In 19 years, we are the closest we have ever been to actually achieving a bill.”

The banking industry is eager for the agreement to become federal law. “This is a bill that brings the laws governing the financial services industry into the competitive, dynamic, electronic and consumer-savvy age in which we live today, said Hjalma E. Johnson, president of the American Bankers Assn.

The biggest stumbling block had been a veto threat by the White House, which was concerned about weakening laws requiring banks to invest in low-income neighborhoods.

“We believe the concerns we had were completely met,” White House Press Secretary Joe Lockhart said.

On the ticklish issue of consumer privacy, the proposed bill would forbid banks from selling information about their customers to general marketing firms. They could sell the information to firms specializing in financial marketing, but bank customers would be given the chance to refuse to let them do so.