WASHINGTON - Watershed legislation that would allow banks and nonfinancial companies to affiliate could be introduced in both chambers of Congress this week.

In the House, Rep. Richard Baker, R-La., is readying a bill that would create a new type of "financial services holding company." Such companies could own commercial banks, securities firms, insurance companies, and nonfinancial enterprises as well.

"I can't overemphasize how big this is," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America. "This is a bill that changes the existing financial and economic structure of the United States."

Senate Banking Committee Chairman Alfonse M. D'Amato is expected to introduce similar legislation as early as Wednesday, according to legislative sources. Both measures are expected to include some "firewalls," or safeguards designed to shield the insured bank from risks undertaken by affiliates.

For example, the measures are expected to limit how much a bank can lend to a securities affiliate.

Those protections don't allay the fears of the critics, including Mr. Guenther, who argue that it is impossible to erect firewalls that are sufficiently strong to protect insured institutions from losses suffered by a nonbank parent.

"If a commercial firm goes down, or an insurance agent or bank goes down, there is a legitimate intellectual argument that the firewalls won't work, and flames will rush through the whole structure," Mr. Guenther said.

But the bill's supporters say only a broad measure that includes financial and nonfinancial companies alike has a chance of passing Congress.

"It goes beyond the traditional debate on banking industry reform and looks at it as a structure governing the whole financial industry," said Sam Baptista, president of the Financial Services Council.

"This way no industry members can come to the table and complain that they were being treated unfairly," he added.

Edward L. Yingling, executive director for government relations at the American Bankers Association, agreed that a unified approach is necessary to achieve any broad reform of the industry.

"You have securities, banking, insurance, and even real estate going at each other - historically that is what has cut this to shreds," Mr. Yingling said.

"We think it is very important that we reach agreement with some of these groups, so that it is not everybody against the banks. A common approach would smooth the way," Mr. Yingling added.

While the ABA has traditionally not supported the mingling of commerce and banking, the trade group has been instructed by its board not to lock into a specific position on the measures, Mr. Yingling said. This is to avoid immediately drawing battle lines between the various industries interested in the bills, he said.

The expansive nature of the bill, coupled with other attention-absorbing issues facing the House Banking Committee, may push any action on the measures well into next year, according to Karen Shaw, president of ISD/Shaw Inc.

"I expect a vigorous debate this year, and action even next year may be unlikely," said Ms. Shaw, whose firm tracks bank legislation and regulation. "There are a lot of unanswered questions about all these bills."

The debate is certain to be all the more spirited because House Banking Committee Chairman Jim Leach, R-Iowa, has drawn a strict line between financial services and commerce. However, an aide to Rep. Baker said that the "free-market" attitude of much of the sprawling group of GOP freshmen on House Banking will aid in the measure's success.

"We've pretty much said to them, 'Take this bill and improve on it,'" he said. "If all we can get is Glass-Steagall reform at the end of the day, that's OK, but we really think we're going to get more than that."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.