Glass-Steagall needs to be reexamined, Treasury official asserts.

WASHINGTON -- The Glass-Steagall Act's separation of commercial from investment banking is based on outmoded economic theories and should be reexamined, a top Treasury official said yesterday.

The 1933 act "is breaking down in practice" because "you see commercial and investment banking converging" in the marketplace as a result of judicial, regulatory, and technological changes, said Richard Carnell, the Treasury's assistant secretary for financial institutions.

When the act was passed, members of Congress believed that the interconnection of banks and commerce violated a then-popular theory of money growth, and created a "speculative bubble" in the financial markets that helped cause the Great Depression, Carnell told a Washington financial services conference sponsored by the Consumer Federation of America.

But "the evidence does not indicate that bank securities activities led to the failure of any institution, large or small," during the Depression, Carnell said.

The Clinton Administration has not taken a formal position on legislation to reform the act. Such legislation would let banks underwrite municipal revenue bonds and other securities and sell insurance products.

While banks generally can underwrite general obligation bonds under the act, most cannot underwrite lucrative revenue bonds under Federal Reserve Board regulations.

Carnell said he could not comment on whether the administration would propose its own reform bill, saying it first must consult with members of the next Republican-controlled Congress.

Carnell also said he could not comment on the administration's specific banking agenda.

But he warned special interests against "scorched earth" lobbying tactics, and said he did not see immediate movement on banking issues in the next Congress because Republicans will be focused on pushing through their "Contract with America" agenda in the first several months.

The Treasury Department will conduct a comprehensive study of the changing financial services industry in the next year under a congressional mandate contained in a new interstate bank branching law, Carnell said.

To help with the study, Treasury Secretary Lloyd Bentsen will rely on a new advisory commission, which will consist of nine to 14 members representing various financial sectors who will be appointed early next year, Carnell said. The study will be submitted to Congress in December 1995, he said.

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