A compromise reached Wednesday between bankers and insurers over state regulation of financial products could break the logjam blocking a sweeping reform bill.

The plan-supported by Banc One Corp., Nationwide Insurance Co., the American Council of Life Insurers, and the American Insurance Association- would force states to permit national banks to offer any product they were authorized to underwrite as of Jan. 1, 1997.

However, banks would be forbidden to underwrite any new product that qualifies for tax breaks specifically granted to insurance companies. For instance, the Internal Revenue Service has ruled that the investment earnings generated by term and whole life insurance premiums are tax- exempt. The agreement would not affect bank sales of insurance.

The agreement was brokered by Rep. Michael Oxley, R-Ohio, who chairs House Commerce's finance and hazardous materials subcommittee. Rep. Oxley is expected to tell GOP leaders today that the deal demonstrates that financial reform legislation can be passed before the House adjourns Nov. 7. The meeting is expected to include House Republican Conference Chairman John Boehner and senior members of the Banking and Commerce committees.

Quick passage of financial reform by the House is widely considered crucial to enacting a financial modernization bill before the 1998 election. Though Senate Banking Committee Chairman Alfonse M. D'Amato has introduced reform legislation, he has refused to debate the proposal until the House passes a bill.

Wednesday's deal makes clear that states may not interfere with bank sales of new products that involve deposit taking, making loans, issuing letters of credit, offering trust and fiduciary services, or dealing in derivatives.

Also, disputes between the Office of the Comptroller of the Currency and state insurance regulators would be resolved in court, although judges no longer would be required to give deference to the OCC's actions.

"We are behind this agreement and we hope other banks will be as well," said Annie Hall, lobbyist for Columbus, Ohio-based Banc One Corp. "No solution is perfect, but this is an objective solution and does not tilt the legislation toward one industry or another."

"This removes a major stumbling block," said David J. Pratt, lobbyist for the American Insurance Association, which represents property and casualty insurance companies.

The banking industry opposed legislation passed by the House Banking Committee in June, in part because of fears that state regulators would be able to forbid national banks to underwrite traditional products such as credit life and letters of credit.

Rep. Oxley has asked NationsBank Corp. to endorse the deal, sources said. House Banking Committee Chairman Jim Leach also was reviewing the plan Wednesday afternoon and had no comment, a spokesman said.

Even if Wednesday's plan were accepted by other lawmakers, a final package would face some big hurdles. Important disputes remain over consumer protection rules and bank securities sales.

Meanwhile a congressional watchdog told lawmakers on Wednesday that regulators must tighten bank supervision if financial reform passes.

"There is no doubt that this is going to require enhanced monitoring, especially in the initial years," said Thomas McCool, director of financial institutions and market issues for the General Accounting Office.

Mr. McCool also endorsed umbrella regulation, saying a single agency must be in charge of each financial company.

"In any kind of financial services holding company there should be somebody looking at the whole firm," he said. "Whether that should be the Federal Reserve or someone else, we haven't taken position on that."

The testimony came at a hearing called by Rep. Marge Roukema, R-N.J., who said she was concerned regulators were not prepared for the onset of cross-industry mergers.

Comptroller of the Currency Eugene A. Ludwig said his agency's risk management program will allow it to effectively monitor large, multinational financial institutions.

"I am committed to making certain that our supervision and our policies can meet new challenges that the future will bring," Mr. Ludwig said.

Federal Reserve Board Gov. Susan M. Phillips said the financial markets complement traditional supervision. "The scrutiny among counterparties in the global marketplace has contributed to improvements in capital positions and in overall risk management practices," she said.

The Fed is trying to expedite its loan file reviews so it may conclude exams quicker and devote more time to other business lines at the bank, she said, noting that a 15% to 30% reduction in on-site exam times is possible.

Nicolas Retsinas, acting director of the Office of Thrift Supervision, said his agency is most worried about the impact technology is having on banking. "OTS must ensure that thrifts have the proper infrastructures in place for using these systems, including adequate controls, safeguards, and contingency plans," he said. "Examiners must also understand these technologies and attendant issues going forward."

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