Administration Stands Pat on Issue of Subsidiaries

As behind-the-scenes negotiations on financial reform legislation pick up, the Clinton administration is standing firm in its demand that banks be permitted to enter new businesses directly.

"We shouldn't impose limitations on the way banks do business unless it is absolutely necessary to protect a clearly defined public interest, and we don't see one here," said Treasury Under Secretary John D. Hawke Jr.

For months, lawmakers stood solidly behind the Federal Reserve Board's position that all new activities should be housed in holding company affiliates. But after the reform bill collapsed on the House floor March 31, Republican leaders conceded they would have to bend. "We have to come back a little bit stronger on national banks," House Banking Committee Chairman Jim Leach said.

The reform debate took on a new sense of urgency this week after Citicorp and Travelers Group announced their $70 billion merger. Calling the deal "an earthquake shift," Rep. Leach on Wednesday said Congress must act quickly.

But to win the Clinton administration's support, Congress will have to back off its plans to clamp down on the Comptroller's Office, an agency Mr. Hawke credited with playing a key role in the evolution of the industry.

"Rigidly limiting the comptroller's ability to authorize new activities would stifle innovation," he said. "Historically, this office bears the largest responsibility for bringing the industry where it is today."

Banking industry officials say they are grateful that the administration has taken the lead on an issue that might otherwise be lost upon lawmakers as an arcane, technical debate.

"A lot banks, both large and small, don't want to form a holding company," said Donald G. Ogilvie, executive vice president of the American Bankers Association. "Banks should have the option to pick a structure that fits them best."

Mr. Hawke insists that the administration will not accept even a few limits on bank subsidiaries, such as prohibitions on insurance underwriting, real estate development, or merchant banking.

Banking industry officials agree, noting that the Comptroller's Office authorized the first branches, auto leases, and insurance sales.

"The financial industry is constantly evolving and for banks to remain vital, the comptroller must allow them to evolve with the times," said Karen M. Thomas, director of regulatory affairs for the Independent Bankers Association of America.

But, unlike the Treasury Department, the industry appears somewhat willing to compromise. "The ABA strongly supports having a comptroller without any restrictions, but we might accept limitations some activities," Mr. Oglivie said. "We would have to look at them in the context of the whole bill."

In taking such a hard line, the Treasury is taking on a tough rival in the Fed.

Fed Chairman Alan Greenspan has repeatedly warned that federal deposit insurance gives banks an unfair advantage over competitors by subsidizing investments in nonbank businesses.

Restricting new bank activities to holding company affiliates "would create a fair and equitable field of competition for all financial services providers," Mr. Greenspan wrote in a March 17 letter to Rep. Leach.

"To whatever degree the subsidy exists, it can be transmitted to a holding company affiliate, too," Mr. Hawke countered.

Many people say both sides are simply trying to preserve their turf. "This is fundamentally a debate between the Treasury (which oversees the Comptroller's Office) and the Federal Reserve over how rapidly banks will expand and which agency rules the day," said Edward Furash, chairman of Furash & Co., a Washington consulting firm.

But Mr. Hawke, who was once the Fed's general counsel, said he simply wants to make banks safer and stronger.

"Forcing a financial services company-as a prerequisite for engaging in new activities-to transfer resources from its bank to its holding company would deplete the bank's resources, leave the bank's earnings less diversified, thus increase risk to the deposit insurance fund," he said.

With additional income from subsidiaries, banks would gain a cushion against potential losses in traditional lines of businesses, he said.

Also, the operating subsidiary would provide another asset for the Federal Deposit Insurance Corp. to sell off in the event of a bank failure, he said. Any businesses conducted in a holding company affiliate would be off-limits to the FDIC, he said.

"Taxpayers would be better insulated from loss.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER