This year in Congress, efforts to pass legislation modernizing banking laws repeatedly ran into a wall of insurance industry opposition.

Insurance agents got most of the spotlight, but Washington insiders knew that the real power shaping the industry's strategy was the American Council of Life Insurance.

When the 104th Congress called it quits this month, the ACLI was the only insurance trade group to see part of its bank-related legislative program - language stripping the Retirement CD of FDIC insurance - enacted into law. The agents, meanwhile, left the battlefield empty-handed.

Given this demonstrated clout, ACLI's Sept. 20 decision to abandon its opposition to bank-insurer affiliations greatly improves the probability that financial modernization legislation can be enacted in the next Congress. However, before popping the champagne corks, bankers should examine the underlying facts.

ACLI will support affiliations between insurers and depository institutions only if 10 principles are satisfied.

*All insurance underwriting must be conducted in an entity separate and distinct from the depository institution. This should prove no problem, as establishing a legally distinct and separately capitalized underwriting unit can be accommodated by any of the modernization blueprints.

*All entities acting as insurance underwriters, agents, or brokers must be subject to all relevant requirements of the state-administered and enforced insurance regulatory system. Again, this should prove no problem for bankers to accept, so long as the "relevant requirements" do not single out banks for discriminatory treatment.

*Both stock and mutual insurance companies must be given reciprocal authority to engage in banking activities. This objective is not insurmountable from a technical legal perspective, although mutuals may want to reconsider their exile from capital markets.

*No bank regulator may broaden the insurance powers of banks or circumvent the regulatory structure for affiliated entities by administrative action. This is ACLI's call for closing the back door in exchange for its assistance in building a front door. Banks may be asked to concede elimination of some regulatory leeway in exchange for explicit authority to engage in insurance sales under nondiscriminatory rules. But defining "insurance" to accommodate hybrid, functionally equivalent financial products will be challenging.

*No bank regulatory requirements, including solvency standards, should materially affect an insurer's operations. This proviso is aimed at the Federal Reserve's "source of strength" doctrine. Insurers are concerned that this could impinge on an underwriter's credit rating as well as its ability to meet its obligations to a state guarantee fund.

Diversification should provide for an overall strengthening of the entire financial structure. But the degree to which affiliated financial entities can be compelled to support one another, as well as the proper role - if any - of an umbrella regulator like the Fed will be a hotly debated question.

*Banking's cost-of-funds advantage due to deposit insurance and the overall bank safety net must be minimized. This concern may well be directed at a mythical target. While deposit insurance may permit banks to acquire liabilities at a slightly lower cost than nonbank competitors, they seem more than offset by regulatory and other constraints. Cheaper funds have not prevented banks from losing overall market share to nonbanks. In any event, the use of separately capitalized entities to carry out banking and insurance should address the problem, if it exists.

*Affiliations between insurance companies and nonfinancial companies must continue to be permitted. Many insurers have long been owned by commercial firms with no adverse results. If those insurers are barred from affiliating with banks then financial modernization will provide them with no benefits, only strengthened competitors.

The question of whether banking and commerce should remain legally separated could well be the thorniest in the coming debate. Rather than a clean decision, Congress may well try to finesse the question through a combination of broad grandfathering and a generous basket of commercial activities permitted within a diversified financial company.

*All state anti-affiliation laws - including those which severely restrict rather than prohibit - must be preempted. The banking industry will heartily endorse this principle.

*State laws prohibiting cross-marketing between affiliated banks and insurers must be preempted but with the states retaining their ability to impose "reasonable regulations." Again, banks will be foursquare in favor of preempting bars to financial synergy but will be concerned about the reasonableness of other restrictions.

*Stringent consumer safeguards must address potential problems raised by bank-insurer affiliations. A review of existing law will reveal that plenty of safeguards already exist. And a review of bank insurance sales in permissive states will document that problems have been few and far between. Here, as in the preceding principle, the ACLI must decide how far it is willing to agree to forgo distribution efficiencies to satisfy agent groups.

A review of the ACLI's Ten Commandments reveals a set of principles that are to some extent contradictory and which reflect the lack of insurance industry consensus. But no matter how rough the negotiations among bankers, insurers, and others next year, the ACLI has come down on the side of progress, and that is welcome.

Mr. Corwin is a principal at Federal Legislative Associates in Washington.

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