The financial reform package approved by the House Banking Committee contains both good and bad news for banks.
The most important good news is that it's now generally accepted that the remaining barriers to competition erected during the Great Depression should be dismantled.
By the 1970s technological advances had rendered unworkable the Depression-era restraints, but eliminating them has been exceedingly difficult. Special-interest groups resisted reform at every turn, delaying the process by more than two decades. The delay was a major factor in the savings and loan debacle that cost taxpayers some $140 billion.
Not too long ago, conventional wisdom held that reform legislation couldn't be enacted without curtailing the ability of banks to offer insurance products. Interstate banking legislation, for example, was held hostage by the insurance agents for years.
The American Bankers Association took a principled stand. It refused to accept an interstate banking bill that imposed new restrictions on banks. The banks-to the surprise of many-won that confrontation, setting the stage for further reforms.
The current reform bill would authorize banks to offer all financial services, most of them in the bank itself or an operating subsidiary. Banks could only dream about this result just a few years ago. The bill also creates a unified charter for banks and thrifts.
Regrettably, the bill contains far more negatives than positives. The most egregious provisions are:
A holding company engaged predominantly in banking is subject to more stringent regulation than a company that owns a bank but isn't predominantly engaged in banking.
Direct bank subsidiaries aren't allowed to engage in insurance underwriting or merchant banking activities, even though nonbanking companies engaged in these activities are allowed to own bank subsidiaries.
A convoluted regulatory structure (the National Council on Financial Services) is superimposed on an industry already laboring under the most complex and expensive bank regulatory regime in the world.
Bank subsidiaries of holding companies offering the newly approved services are required to offer "lifeline" banking services to all comers.
The existing powers of national banks are diminished in several important respects, particularly in the insurance arena.
The question for banks isn't whether the existing bill is acceptable- it's clearly not. It's anti-competitive, anti-bank, and anti-consumer. Even the bill's original sponsor, Congressman Leach, admitted he nearly voted against the bill in its current form.
The question is whether the industry should wage an all-out effort to kill the bill or should work to improve it. My guess is that the industry will conclude, in the not-too-distant future, that the odds against improving the bill are too high, so it should be killed.
It's difficult to see how the bill could, as a practical matter, be improved. Its next stop is the House Commerce Committee, which traditionally has carried water for the insurance and securities industries. While it's conceivable that the House leadership, when confronted with strong bank opposition, will assert itself to make the bill less objectionable, I wouldn't bet on it.
Bankers have little reason to feel any better about the Senate Banking Committee, chaired by Sen. D'Amato. The good senator has been busy proposing restrictions on user fees for automated teller machines.
It's disheartening to see this bill get so fouled up in a Republican Congress. A Democratic administration, which received little support from bankers, proposed a decent reform package. It was emasculated by Republicans whom bankers helped to elect.
In their zeal to try not to offend anyone-banks, insurance companies, and securities firms-Republicans have forgotten their principles. They were elected to get government off peoples' backs and to promote free markets.
No objective observer could review the proposed bill and fairly conclude that it accomplishes the Republican mandate. It wouldn't eliminate all unnecessary restrictions on free markets, and it would increase the bureaucracy.
The banks should just say no to a bill that is, on balance, very bad.
