Senate Banking Committee Chairman Alfonse M. D'Amato introduced legislation Tuesday that would remove all barriers preventing banks from affiliating with other types of companies.

After nearly two years on the sidelines of the debate, Sen. D'Amato, R- N.Y., said the "time was right" to replace the "patchwork of laws and allow the market to operate freely within the financial system."

Rep. Richard Baker, R-La., introduced an identical measure in the House. Theirs is the third financial reform proposal introduced this year, and is by far the most sweeping.

"Our laws must be updated to reflect modern times, where nonbank firms such as cable and software companies are designing and delivering banklike services," Sen. D'Amato said in a prepared statement.

The D'Amato/Baker proposals would:

Allow financial services holding companies to own any type of company, ranging from insured depositories to nonfinancials.

Require these holding companies to house most securities, insurance underwriting, and real estate activities in separate nonbank affiliates.

Create a National Financial Services Committee to draft regulations for financial services holding companies. The committee would consist of the U.S. attorney general, the secretaries of the Treasury and Commerce departments, banking regulators, and the chairmen of the SEC and the Commodities Futures Trading Commission.

Regulate by product rather than by institution. For instance, securities sales by any type of company would be regulated by the Securities and Exchange Commission.

The financial services industry is still waiting for the Clinton administration to weigh in.

Administration officials promised to deliver a sweeping reform of the financial laws early this year. But Treasury officials seem to be unsure about whether to break down the barriers separating banking and commerce.

The administration's plan is not due to Congress until March 31, and pressure is mounting on the administration to be less expansive. In addition to opposition from community banks, Treasury Secretary Robert E. Rubin is hearing from labor unions.

Richard L. Trumka, secretary-treasurer of the AFL-CIO, told Mr. Rubin in a Feb. 7 letter that workers at companies merging under the new laws could be harmed.

"It is reasonable to expect these new financial/commercial companies ... to crowd out competition resulting in downsizing and layoffs for working Americans," he wrote.

In a Feb. 4 letter, Sen. John D. Rockefeller IV, D-W.Va., advised Mr. Rubin to proceed "cautiously and deliberately."

The senator warned that mixing banks with nonfinancial companies could threaten the deposit insurance system or lead to loan decisions based on corporate affiliations rather than creditworthiness. "I am skeptical that large conglomerates will focus their attention on small, rural markets," he added.

In an interview Tuesday, Treasury Under Secretary John D. Hawke Jr. said critics should "wait and see the final proposal before they jump to any conclusions." Treasury is aiming to unveil its plan in early March, he said.

Rep. Baker, in an interview Tuesday, said banks must be allowed to affiliate with nonfinancial companies.

"I see many firms in the private market engaging in every service that banks can offer, but at a lower cost of doing business," he said. "If we are to maintain a deposit insurance system, I think it's important to allow banks to engage in acts that don't represent unreasonable risks."

The D'Amato-Baker plan is almost identical to legislation they introduced two years ago. It contrasts starkly with the separate proposals of House Banking Committee Chairman Jim Leach, R-Iowa, and Rep. Marge Roukema, R-N.J.

Rep. Leach's plan prohibits any mixing of banking and commerce. Rep. Roukema's bill would allow bank holding companies to earn up to 25% of their income from nonfinancial operations.

House Banking's financial institutions and consumer credit subcommittee, led by Rep. Roukema, kicked off the debate Tuesday with the year's first hearing on financial modernization. Two more sessions will follow, as industry regulators testify Thursday and outside experts sound on Feb. 25.

Representative of bank, insurance, and securities groups said Tuesday they are still far apart on financial reform legislation.

The American Bankers Association opposed unlimited mixing of banks and nonfinancial firms, and the Independent Bankers Association of America opposes any such change. Other trade groups, however, strongly endorsed the idea.

Marc E. Lackritz, president of the Securities Industry Association, called the D'Amato-Baker bill "an excellent model."

Congress should "provide true freedom of choice by not restricting the level of nonfinancial activities in which a holding company may engage," he said.

The American Council of Life Insurance also endorsed unlimited affiliations. "Insurers have a long history of owning and being owned by commercial enterprises without adverse consequences," said Roy C. Albertalli, vice president and associate general counsel at Metropolitan Life Insurance Co.

Matthew P. Fink, president of the Investment Company Institute, warned the benefits of functional regulation could be wiped out if the National Financial Services Committee gained too much power.

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