Improving financial reform's chances in Congress, the Clinton administration will recommend eliminating the barrier between banking and commerce, a senior Treasury official said Monday.
Treasury Under Secretary John D. Hawke Jr., speaking to the Institute of International Bankers, said financial reform cannot succeed without mixing banking and commerce.
This has long been the veteran banking lawyer's position, but it was unclear until Monday whether the Clinton administration's legislative proposal would go that far.
Due to Congress by March 31, the proposal could still change, but Mr. Hawke said in his speech that the key to overhauling financial laws is allowing banks to enter nonfinancial businesses.
With President Clinton's backing, Senate Banking Committee Chairman Alfonse M. D'Amato's plan to let banks and nonfinancial companies buy each other has a much better chance of enactment.
In the House, Banking Committee Chairman Jim Leach recently has backed off his absolute opposition and Rep. Marge Roukema, R-N.J., is pressing a compromise plan that would allow a bank to place 25% of its assets in nonfinancial firms.
Mr. Hawke said Rep. Roukema's approach "has much to recommend it." If Congress does not allow banks into nonfinancial businesses, Mr. Hawke said banks' competitors-securities firms and insurance companies-would simply enter the banking business by purchasing thrifts.
"Banks will be handicapped," Mr. Hawke said, noting bank securities underwriting is limited by section 20 of the Glass-Steagall Act. While the comptroller of the currency may allow bank subsidiaries wider powers, Mr. Hawke said "years of litigation" would delay progress.
The Clinton administration must protect the government's interests: a safe and sound banking system and solvent insurance funds, Mr. Hawke said. Without full-scale reform, banks will be less competitive, which in turn could hurt the insurance funds.
Mr. Hawke criticized opponents who claim mixing banking and commerce would lead to huge companies with too much concentration in the financial services market.
"The gloomy predictions seem to be vastly overrated," he said.
There is a national market for financial services with plenty of competition, he said. In fact, commercial and industrial companies may own thrifts today and that has not led to financial conglomeration, Mr. Hawke said.
Most everyone who addressed the institute's conference weighed in on the subject.
Neil D. Levin, New York's superintendent of banking, also urged comprehensive reform and warned the U.S. financial system is in danger of becoming uncompetitive with other countries.
"I do believe we can safely mix banking and commerce," Mr. Levin said.
But Frank N. Newman, chairman and chief executive of Bankers Trust New York Corp., argued for more limited changes.
Mr. Newman, who once held Mr. Hawke's job at Treasury, agreed the wall between commercial and investment banking should be torn down. He also agreed that banks should be able to invest in nonfinancial companies.
But Mr. Newman drew the line at outright common ownership of commercial and banking companies.
"It's a very different question whether Exxon or GM should own Chase (Manhattan Corp.) or Citi(corp.)," he said. "I see tremendous potential dangers," such as improper bank lending to a parent's customers or suppliers.
Mr. Hawke, who spoke before Mr. Newman, predicted few big nonfinancial companies would want to buy banks.
"There's no pressure coming from the marketplace," he said. "Microsoft has expressed no interest in buying a bank."
After his speech, J. Christopher Flowers, a managing director and head of the financial institutions group at Goldman, Sachs & Co., told reporters that, like Mr. Newman, he thinks commercial banks should be free to make venture capital investments.
Mr. Flowers predicted consolidation will continue in the banking industry for three to five years. After that, commercial banks will start buying securities firms, he said.
Noting the market capitalization of the top 25 commercial banks is $493 billion compared to $150 billion for the top 25 investment banks, Mr. Flowers said banks will drive the financial services business. "Banks are going to be the leaders in the future consolidations," he said.