WASHINGTON - The administration pressed its case Wednesday for maintaining the legal barriers between banking and commerce, warning of financial conflicts of interest and even money laundering if banks are allowed to affiliate with commercial enterprises.
Deputy Treasury Secretary Frank Newman told the House Banking Committee that a bank owned by a nonfinancial company could be pressed to make loans against its better judgment.
"I have even heard of situations in other countries where industrial espionage was an issue," he said, suggesting a bank could use its knowledge of one company's financial affairs to benefit another.
The banking and commerce question is shaping up as the major issue in the legislative battle over repeal of the Glass-Steagall Act, the Depression-era law that separates the commercial and investment banking industries.
House Banking Committee Chairman Jim Leach, who has introduced Glass- Steagall legislation, is adamantly opposed to the idea of affiliations between banks and nonfinancial companies. However, his Senate counterpart, Sen. Alfonse M. D'Amato, R-N.Y., is taking the opposite tack and would allow any company to merge with a bank.
The administration is trying to stake out a middle ground. It would repeal the Glass-Steagall Act, bar affiliations between banking and commerce, but permit banks to own insurance companies.
The securities industry's main trade group warned that both the administration approach and the Leach bill would let banks into the business of Wall Street while keeping its members out of commercial banking.
"A lot of our members would not be able to affiliate with banks" unless the barriers to banking and commerce were relaxed, said Steve Judge, chief lobbyist for the Securities Industry Association.
In an interview following the hearing, Mr. Judge noted that many Wall Street firms hold investment positions in nonfinancial companies that would disqualify them from owning a bank.
Although the administration is willing to make an exception for securities companies whose holdings in nonfinancial companies amount to less than 5% of total assets, Mr. Judge said that is not enough.
"We don't see why there should be limits," he said.
Meanwhile, Treasury Secretary Robert E. Rubin warned that a number of "firewalls" included in the Leach bill may be too rigid.
"We believe that it is appropriate and even beneficial to have some directors of the holding company and/or bank on the board of an affiliate," Mr. Rubin said. "Employees should be allowed to cross-function."
This drew fire from Rep. Charles E. Schumer, D-N.Y., who referred to employee sharing between affiliates as "a close step to unstated tying," or the linking of two product lines.
The Leach and administration plans also differ in the area of how insured institutions and financial corporations affiliate.
The committee chairman's bill allows for common ownership of a bank and securities affiliate under a holding company.