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Fed Chief Wants Non-Bank Banks Banned Retransmitting a0757 to fix byline.

April 18, 1985

WASHINGTON (AP) _ Federal Reserve Chairman Paul A. Volcker urged a House panel Wednesday to put an end to non-bank banks - financial institutions which operate like banks but avoid federal regulations through a loophole in the law.

Non-bank banks ″skim off the most profitable portions″ of the banking industry, a problem ″that should be promptly resolved in the interest of a competitive, safe and healthy banking system,″ Volcker said.

House Banking Committee Chairman Fernand St Germain, D-R.I., promised speedy action in his panel to remove the non-bank bank loophole.

″In recent weeks, months and years, the financial community has been shaken by a number of unhappy events,″ St Germain said, referring to the recent closing of state-charters savings institutions in Ohio and last year’s bailout of Continental Illinois.

″The public’s confidence - the glue of our financial system - has eroded.″

Non-bank banks are able to avoid many federal restrictions by not meeting the federal law’s formal definition of a bank - which includes both accepting demand deposits and making commercial loans.

By avoiding the law, a commercial company normally banned from the banking business can set up a non-bank bank and accept deposits from the public - so long as it doesn’t make commercial loans with that money. Laws regulating interstate banking can also be avoided through the loophole.

Volcker told the committee he supported continuing the ″basic separation of banking and commerce″ to limit conflicts of interest that could weaken the financial system.

William Nodine of the U.S. League of Savings Institutions and Charles T. Doyle of the Independent Bankers Association both supported closing the loophole, as did a representative of the American Council of Life Insurance.

James G. Cairns Jr, president of the American Bankers Association, said his organization supported closing the loophole but also wanted Congress to expand the number of services banks are allowed to offer.

However, John Woods of the Association of Bank Holding Companies said the issue did not demand immediate attention. He urged the panel to keep separate the issues of interstate banking, which his group supports, and keeping banking apart from general commerce.

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