Schumer Plan Would Yank Deposit Insurance Of 'Universal' Banks

WASHINGTON - A key House Banking Committee Democrat is mulling a proposal that would require banks to drop federal deposit insurance before affiliating with nonfinancial companies.

Rep. Charles E. Schumer, D-N.Y., has not decided whether to offer the proposal as a stand-alone bill or as an amendment to House Banking Committee Chairman Jim Leach's Glass-Steagall reform measure.

Karen Shaw, president of ISD/Shaw Inc., called the proposal a "coherent, comprehensive, and significant alternative" to Rep. Leach's legislation.

However, industry sources said the current atmosphere on Capitol Hill does not bode well for the Schumer measure.

"If you look at the Glass-Steagall hearings, and where the various members and interest groups are, there is virtually no support for that sort of concept," said Edward L. Yingling, chief lobbyist for the American Bankers Association.

The Schumer proposal would create two different breeds of bank. The first would have federal deposit insurance but would be banned from engaging in nontraditional activities through affiliates. Glass-Steagall restrictions would actually be tightened under Rep. Schumer's proposal as insured national banks would have to give up their Section 20 affiliates.

The second kind of institution would be a "universal bank," which would be allowed to affiliate with both financial services providers and industrial and commercial companies through a holding company. While such banks would be ineligible for federal deposit insurance, they would be allowed to buy private insurance for both retail and wholesale depositors.

Retail banks wishing to become universal banks would be required to give customers access to a mutual fund of Treasury securities with full checking privileges. This would let depositors retain risk-free accounts in the new bank structure.

The Schumer measure also would bar bailouts of a large universal bank unless approved by Congress.

Industry consultant Bert Ely applauded the fact that Rep. Schumer's proposal highlights federal deposit insurance in the debate over expanding bank activities.

"This focuses attention on the issue that just about everybody else is ignoring, and that is deposit insurance," Mr. Ely said. "As the mark-up process moves along, federal safety net issues are going to become the biggest hitch."

Rep. Schumer's measure is similar in intent to the "core bank" proposal he put forward in 1991. That plan would have required an institution to tie its interest rates to U.S. Treasury instruments in exchange for the ability to accept insured deposits.

Both proposals were aimed at limiting the exposure of deposit insurance to risky new activities.

Ms. Shaw said a major problem with the latest Schumer proposal is the fact that it is surfacing so near the scheduled May 9 mark-up of the Leach bill.

"Members will be reluctant, even if they wanted to support it, until they understand it better, and that would take hearings," said Ms. Shaw, whose firm tracks bank regulation and legislation.

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