For one who has been a participant in and an observer of the deregulation wars for almost 20 years, it is almost amusing to watch the course of the debate about whether deregulation should occur through subsidiaries of a bank holding company or through subsidiaries of the bank itself.
In the fall of 1981 the Treasury Department proposed that bank holding companies be permitted to engage through subsidiaries in insurance and securities underwriting. The proposal, first made by Secretary Donald Regan in testimony before the Senate Banking Committee, was a fairly radical idea at the time, since the big issue then before Congress was whether banks- which were permitted by the Glass-Steagall Act to engage in underwriting and dealing in municipal general obligation bonds-should also be permitted to underwrite and deal in municipal revenue bonds. It might seem a minor distinction now, but it kept a lot of smart people employed.
In any event, Congress did not take kindly to Treasury's proposal. Not only did it deny serious consideration to holding company deregulation; it amended the Bank Holding Company Act to prohibit the Fed from declaring that insurance underwriting might be closely related to banking and thus a permissible activity for holding companies.
Congress needn't have worried that the Fed would rush off and do Treasury's bidding. The Fed bitterly opposed the Treasury's proposal, insisting that permitting bank holding companies to get into all these new activities would threaten the safety and soundness of affiliated banks and spread the safety net over the nonbanking subsidiaries of the holding company. Exactly how this would occur was never described in detail, but the Fed's representatives were up on the Hill insisting that they foresaw great problems for the financial system if this idea was adopted. And of course, they were believed.
Now the worm has turned. Alan Greenspan, having succeeded Paul Volcker, is imploring Congress to recognize that only through subsidiaries of holding companies can safety and soundness be protected. Somehow, all the dangers foreseen in 1981 have been swept away. The Fed can now fully protect the banks and the safety net.
The Treasury Department has also changed its position. The Reagan Treasury was eager to give authority to the Fed. At the time, in early 1981, it was accepted wisdom in the banking world that if a bank did not bail out a subsidiary that was in financial trouble, the public would lose confidence in the bank and the public would run.
Long lines of frightened depositors were projected by banking regulators. Secretary Regan was willing to take risks, but he recognized hopelessness when he saw it. No proposal that permitted bank subsidiaries to engage in new activities could survive expressions of doubt by the comptroller of the currency and the chairman of the Federal Deposit Insurance Corp. Thus, deregulation through holding companies made political sense, because the underlying theory-that banks were insulated from the dangers of failure by holding company affiliates-was plausible and acceptable to the OCC and the FDIC.
After the experience of the last 18 years, including the S&L debacle and the changes in the market for financial services that the Treasury had predicted in 1981, Treasury's original proposal is now getting serious consideration in Congress. Both the House and Senate Banking committees have adopted bills that would permit bank holding companies to engage in insurance and securities underwriting.
The fact that the committees are doing this at the request of the Fed is only one of the ironies.
That, of course, doesn't mean any legislation will pass. Another of the ironies of bank deregulation history is that Congress never seems to get around to passing any deregulatory legislation. Instead, the bills it does not pass keep getting broader and broader. That the involvement of bank holding companies in insurance and securities underwriting is no longer even controversial is progress of a sort, and may be the only progress we'll see.
In effect, we have a kind of shadow Congress in this area. It doesn't actually pass legislation; it just keeps tracking the changes in conventional wisdom, and feinting about legislating, perhaps hoping one day that everyone will agree with everyone else and legislation can be passed without disappointing anyone important.
There are lessons in all of this for everyone, but primarily for Congress: First, don't automatically assume that the regulators are right, or that the risks they confidently cite are more than spin; they have institutional interests like anyone else.
Second, don't be taken in by shibboleths such as "a threat to the safety net" or "the separation of banking and commerce." Ask how this threat will actually occur, or how affiliation with a commercial company is actually different from affiliation with a securities firm or insurance company.
Third, create as much competition as you can. That was Don Regan's point in 1981, and apparently-by current common consent-he was right. Mr. Wallison is a resident fellow at the American Enterprise Institute. From 1981 to 1985 he was the Treasury Department's general counsel.