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Bank Reform Passage Hinges on Insurance Question

May 9, 1995

WASHINGTON (AP) _ Once again, a longstanding turf war between banks and insurance companies is threatening passage of a major bank reform bill.

The House Banking Committee was scheduled today to take up a major reform bill sponsored by its chairman, Rep. Jim Leach, R-Iowa, that would repeal major aspects of a 60-year-old law that separates commercial banks from Wall Street firms.

Attempts were under way Monday to broaden Leach’s bill with a compromise that would permit banks greater entry into the insurance business. Few analysts expected Reps. Richard Baker, R-La. and Bill McCollum, R-Fla., to succeed with their insurance compromise.

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

The heart of Leach’s bill would loosen the Depression-era Glass-Steagall Act, which forbids banks from engaging in investment banking.

Congress erected the barrier between Wall Street and commercial banking after banks failed in the 1930s, reasoning that the securities business was too risky for banks entrusted with federally insured deposits. That view is now 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 banks, brokerage firms and insurance companies. Financial regulation would be changed, with the Securities and Exchange Commission supervising the securities dealings of these companies while banking regulators oversee 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 banks’ battle to sell insurance, which was 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’ entry into their business, saying banks would gain an unfair advantage that would harm 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 they should be allowed to sell annuities, because the investment products are incidental to banking and not a type of insurance.

``Historically, it’s been impossible to close the gap between the two industries,″ said Edward Yingling, chief lobbyist for the American Bankers Association.

Baker’s amendment to Leach’s bill would permit nationally chartered banks to sell insurance products other than annuities, but not in bank lobbies. Another key provision would permit financial services holding companies to own commercial banks, securities firms and insurance companies.

Bob Rusbuldt, a lobbyist for the Independent Insurance Agents of America, said Baker, whose amendment was in tentative form Monday, was ``going in the right direction.″

However, Yingling said the bankers group couldn’t support the amendment in its current form because it would threaten to repeal powers of thousands of banks that already sell insurance through technical exemptions in state and federal laws.