A few weeks ago in American Banker, Rep. Henry Gonzalez, the colorful chairman of the House Banking Committee, offered up a pithy quote in the context of swaps activities by banks:
"I am absolutely opposed to banks using deposit insurance to support massive speculation. I don't care if they want to go into the brothel business, so long as they don't use taxpayer money."
I took heart from his comments, although I do not expect banks to rush headlong into the brothel business, even if the legal obstacles can be surmounted.
It's kind of fun, though, to speculate about the field day lawyers and community groups would have arguing about the convenience and needs of the community, the Community Reinvestment Act, and redlining.
If the chairman means what he says and can back it up with legislation, there are many other, albeit less flamboyant, ways for banks to serve the public. For example, how about repealing the Glass-Steagall Act, which prevents banks from affiliating with investment banking firms?
Securities activities could easily be conducted in a separate subsidiary of the bank or its holding company, with the use of insured deposits to fund the subsidiary prohibited.
Glass-Steagall stifles competition in the financial markets and impedes capital flows. It has fostered a Wall Street oligopoly, with its excessive compensation packages, at great expense to the American public and business community.
How about eliminating the restrictions on banks affiliating with insurance companies? Agency activities, which entail virtually no risk and require little funding, could be allowed in the bank itself. Underwriting activities could be placed in a separate subsidiary, which would not be allowed to draw on an affiliate bank's deposits to fund its operations.
The life insurance industry, in particular, has an extraordinarily inefficient delivery system. Banks have a tremendous delivery system through their branches that is underutilized.
If banks were allowed to offer the full range of insurance products, the American consumer without question would be the big winner. I am aware of one bank that has developed, in conjuction with an insurance underwriter, a term life insurance policy that the bank plans to sell at a price 50% below traditional policies.
Less than Radical
Special-interest politics aside, neither repeal of Glass-Steagall nor elimination of the insurance restrictions is radical, or even controversial. Certainly, neither is in the same league as banks operating brothels.
Neither change would require a revamping of the deposit insurance system (though one is long overdue) or of the regulatory system. Congress could simply authorize commercial banks, investment banks, and insurance companies to affiliate, as they already do in other countries.
An affiliate would be prohibited from drawing on the financial resources of an insured bank to support its activities. Each affiliate would be subject to the same type or types of functional regulation applicable to it today.
The case for allowing affiliations among commercial banks, investment banks, and insurance companies is overpowering. The notion may not be as sexy as banks operating brothels, but it can be argued it offers more public benefits.
Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is chairman and chief executive officer of Secura Group, a financial services consulting firm based in Washington.
