Three giants of the financial services industry - banking, securities, and insurance - are squaring off for the next major battle over the laws that separate them. As these groups struggle to expand their support in Congress, consumers have seized the opportunity, winning a voice in the unfolding legislative debate. To the chagrin of insurers and brokerage firms, a bill giving commercial banks the right to operate securities affiliates and sell certain insurance policies passed the Senate Banking Committee earlier this month and is headed for a floor vote this week.
Although the Senate seems eager to give bankers a green light into the securities market, and a yellow into insurance, the House has drafted a more cautious measure that would leave most of the barriers between the three in place. Bankers argue that such blockades are anti-competitive and anti-consumer, while brokerage houses and insurance firms insist that banks already dominate financial services, and easing restrictions would give them an unfair edge.
The stock market's plunge last October only fed opponents' concerns about letting banks enter the higher-risk securities arena.
But the Senate compromise, drafted by Sen. William Proxmire (D) of Wisconsin, reflects the strong support that exists for modernizing banking regulation and removing most of the Glass-Steagall restrictions that have kept banks out of securities underwriting since the depression.
Although several senators have reserved the right to amend Mr. Proxmire's compromise on the floor, the measure is expected to pass without much ado, since ``support is fairly complete,'' a Banking Committee aide says. As it is, Proxmire dropped several provisions in order to achieve consensus and included another to keep banks out of one of the more profitable and controversial underwriting areas: corporate equities.
``We would like to go further and faster in this area,'' says Edward Yingling, executive director for government relations at the American Bankers Association. ``But we're satisfied that this is the best we can probably do in the Senate.'' And the measure does require Congress to vote on the corporate equities issue in April 1991, and if it gives banks the go-ahead, brokerages would also be allowed to own or operate banks.
Consumer advocates support the bill's ``home equity'' and ``truth in savings'' provisions, which will give mostly middle-income Americans greater access to competitively priced loans and more disclosure from banks, says Peggy Miller, legislative representative on banking at the Consumer Federation of America.
The CFA is also pleased with several items in a House Banking Committee report, introduced last Wednesday by chairman Fernand J. St Germain (D) of Rhode Island, which would benefit low-income citizens, and which the Senate version did not accept.
Representative St Germain ``is pushing the consumer section very, very hard,'' a committee staff member says.
While his proposal would allow banks to underwrite asset-backed securities, municipal-revenue bonds, and commercial paper, it would not let them underwrite corporate debt or mutual funds. And in order for a securities affiliate to underwrite asset-backed securities, the bank would first have to show that it was serving its local community - by making loans available to depressed neighborhoods, by keeping branches open, and by providing low-income customers with low-cost checking accounts.
It would also require banks to cash all federal, state, and local government checks for customers and non-customers alike, and the latter would be given a bank ID card for a small fee.
Bankers are not happy with the House committee version.
The ABA has called it both ``anti-competitive and anti-consumer,'' and opposes its inclusion of more regulation for bank activity as well as its stiffening of barriers between banks and securities affiliates.
``The ability of money-center banks to compete internationally is tied to allowing them into securities underwriting,'' says Herman Greene, a partner at Mayer, Brown & Platt, one of the major law firms representing banking interests.
``Banks will oppose the emphasis on community reinvestment in both bills, as well as the measure of commitment to the local community,'' Mr. Greene says. ``Their problem is maintaining their profitability, and they should be able to close branches in places where cash machines now provide the same services.''
While the CFA is pleased with the items the bankers dislike, it ``is very upset about the basic lifeline banking provisions,'' which have not defined what minimal fees should be, or eliminated requirements that are prohibitive to many low-income applicants, Ms. Miller says.
A study commissioned by the Alliance for the Separation of Banking and Insurance, a consortium of insurance companies and agents, which was released last week at a briefing by the House Committee on Banking, Finance, and Urban Affairs, reports that ``expanded bank powers would decrease the competitiveness of financial markets, imposing costs on consumers and increasing banking system risks.'' The report contends that banks entering the insurance market are likely to acquire existing insurance operations rather than establish new ones, thereby decreasing competition and letting prices go up.
Countering the report's statement that ``the cost of life insurance is generally higher than when purchased through insurance agents,'' Mr. Yingling at the ABA says the opposite is true in states where banks are allowed into insurance selling.
In fact, says Robert Litan, a senior fellow at the Brookings Institution, ``banks that sell insurance in New York and Massachusetts are the lowest-cost providers of insurance.'' The Consumer Federation agrees, saying that banks tend also to provide consumers with complete information about policy rates, which insurance companies do not.
Indeed, ``competition has forced banks to become more customer responsive,'' says Michael Warner, vice-president of advertising at the Bank Marketing Association in Chicago.
Since most of the United States' 14,000 banking institutions are small community banks, ``a structural requirement that precludes them from providing [mutual funds and other asset-backed securities] would be wrong and unnecessary,'' said Martha Seger, a Federal Reserve Board governor.
Such a restriction, Ms. Seger told the press last week, prevents local banks from serving the specific needs of their communities, and prevents those in economically distressed regions from nursing themselves back to health.