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Bank Reform Passage Hinges On Insurance Question

May 8, 1995

WASHINGTON (AP) _ Prospects for a bill to let banks and securities firms combine remained in doubt Monday due to a longstanding turf war with the insurance industry.

``There is some chance for a compromise, but it looks like it’s going to be very, very difficult,″ said Sam Leaman, banking expert for Natwest Washington Analysis, the research arm of Natwest Securities.

The House Banking Committee was scheduled to take up a major reform bill Tuesday morning sponsored by the panel’s chairman, Rep. James Leach, R-Iowa. Rep. Richard Baker, R-La., sponsor of a broader bill, was trying to craft a compromise Monday that would permit banks greater entry into the insurance business.

The heart of Leach’s bill, called the Financial Services Competitiveness Act, would loosen the 60-year-old Glass-Steagall Act which forbids banks from engaging in investment banking.

Congress erected the barrier between Wall Street and commercial banking following bank failures in the Depression, reasoning that the securities business was too risky for banks entrusted with federally insured deposits. That view now is widely challenged by banking experts and academics.

The Leach bill also would greatly simplify the approval process a healthy, well-capitalized bank would have to undergo to expand into riskier, non-banking activities.

And it would create new financial services holding companies which could own a bank, brokerage firm and insurance company. Financial regulation would be changed, with the Securities and Exchange Commission supervising the securities dealings of these companies while banking regulators oversaw bank activities.

The Republican takeover of Congress, coupled with the Clinton Administration’s support for expanded banking powers, led to considerable optimism earlier this year that major bank reform could win passage.

Little was said at the time about the battle by banks to sell insurance, a dispute largely blamed for killing the last bank reform measure in 1991.

Insurance agents, led by the politically powerful Independent Insurance Agents of America, have fiercely opposed banks entering their business, saying banks would gain an unfair advantage that would harm both consumers and small businesses.

Banks want to sell insurance as part of an overall effort to diversify their revenues into other financial services businesses, such as mutual fund sales. Banks won a major victory in January, when the Supreme Court ruled that banks should be allowed to sell annuities because the investment products are incidental to banking and not a type of insurance.

Rep. Baker was drafting an amendment to Leach’s bill that would permit nationally chartered banks to sell insurance products, other than annuities, but not in bank lobbies. Another provision would permit financial service holding companies to own commercial banks, securities firms and insurance companies, but it wouldn’t permit industrial firms such as General Motors to own banks, a Baker spokesman said.

Bob Rusbuldt, a lobbyist for Independent Insurance Agents of America, applauded Baker’s amendment, which was in tentative form Monday.

``We have not reached a deal with anybody yet but we do believe that Richard Baker has advanced the ball and that he’s going in the right direction,″ Rusbuldt said.

But Edward Yingling, a banking industry lobbyist, said bankers would appose Rusbuldt’s proposal because it could be used to repeal the power that thousands of banks already have for selling insurance through technical exemptions in state and federal laws.