As debate heats up over Glass-Steagall repeal, banks' future in the insurance business hangs in a delicate balance.

Both the Clinton administration and Senate Banking Committee Chairman Alfonse M. D'Amato want to open the door to expanded insurance activities for banks.

But House Commerce Committee Chairman Thomas J. Bliley and a handful of other key lawmakers are taking a different route.

They are set to introduce legislation that would give states the authority to limit bank insurance sales - power that could knock a number of banks out of the business. The courts are debating whether states now have the authority to limit insurance sales by national banks.

Bankers are watching all this with intense interest, because many have high hopes for the insurance business. They see it as a way to add significant momentum to a fee-income juggernaut that began in recent years with sales of mutual funds and annuities.

"Continued development in this area is in the cards," said Barbara Worthen, senior counsel with Fleet Financial Group.

Life insurance, in particular, is a product that more bank customers are demanding. Life insurance is "good for customers' financial health and ours," said Carmen Efforn, a vice president at Natwest Bank, Jersey City.

A bank's annual profits from life insurance sales could range from hundreds of thousands of dollars to millions, depending on the size of the institution and the structure of the program.

Currently, a combination of state and federal laws dictate what type of insurance operation a bank can run. The federal law - the National Bank Act - permits national banks to sell all types of insurance from branches in towns with fewer than 5,000 residents.

States, however, have challenged the act by passing laws preventing banks from affiliating with insurance agents. Bankers in a number of states, including Kentucky and Florida, are challenging these state restriction. Bankers expect these challenges to reach the Supreme Court within a year.

But in states - there may be as many as 33 of them - without antiaffiliation statutes, banks can offer life and casualty insurance. They must, however, base their operations in small towns.

Both the administration's and Sen. D'Amato's proposals would go a long way toward clearing away this intricate web of rules.

Both would permit banks to affiliate freely with insurance companies of all types, opening the door for both retail sales and underwriting.

The D'Amato plan would require use of the holding company structure so that the bank would be housed in a separate unit from the securities or insurance company. The administration would permit a bank to own the insurance company directly. In both cases, insurance and securities firms would be able to buy a bank.

Ultimately, bankers say, expanded insurance powers would help banks cement relations with consumers and make earnings less dependent on cyclical changes in credit demand.

For one thing, there would be significant sales fees. And, by owning insurance companies or becoming partners with them, banks could enjoy some of the spread income from insurance - the difference between what is earned on payments from policyholders and what insurers must pay out. Right now, such income totals about $100 million annually on insurance sold through banks, according to Kehrer Associates, Princeton, N.J.

But banks still have a long way to go to reach the promised land. Indeed, experts are divided on exactly how the industry should proceed with its lobbying.

Some suggest that the most sensible strategy is to wait for the courts to rule - and to hope for the best. To press for Glass-Steagall reform, this camp says, would be to run the risk of winding up with limits on insurance such as those contemplated by Rep. Bliley.

Others, however, are inclined to push for both securities and insurance powers through Glass-Steagall reform. This approach would require that bankers' allies on Capitol Hill take on the insurance industry - and win.

Independent insurance agents, "the traditional antagonists" against bank insurance powers, are likely to use all their might to block bank expansion into insurance, said Anita Bedelis, the Washington-based government relations counsel for Norwest Corp.

The agents, who consider themselves small businesses, see Glass-Steagall reform as a direct assault on their livelihood.

"I don't think any member of Congress would be shy in expressing his support for small business in America," said Phil Anderson, senior Washington representative to the Independent Insurance Agents of America.

The small business argument makes banking advocates nervous. Many freshman Republicans have small business backgrounds, making them susceptible to the insurance industry's view that bank sales will put agents out of business.

But freshmen lawmakers also are committed to eliminating impediments to competition, said Philip S. Corwin, director and counsel at the American Bankers Association.

"If they look at it this way, our argument should prevail easily," he said.

Despite the obstacles, bankers say they are primed for the fight. "A good effort on behalf of banks and their customers is worth the battle," said Ms. Worthen of Fleet.

And the banking industry may have an ace up its sleeve. The industry has won several major court victories, and appears poised to win even more, bank attorneys said.

If insurance agents or securities firms block Glass-Steagall reform, banks can continue to seek reform through the courts.

One big question was resolved in January, when the Supreme Court ruled that national banks can sell variable and fixed annuities, a market where banks already have captured a third of all sales.

The remaining question is whether states, using their regulatory authority, can prevent all banks from selling insurance.

Two federal appeals courts have split on the issue, with one court denying Barnett Banks' bid to run an insurance agency and the other giving Owensboro National Bank of Owensboro, Ky., permission to set up shop.

David Roderer, a law partner with Winston & Strawn in Washington, said the conflicting decisions from these courts should cause the Supreme Court to review the issue.

Mr. Roderer is so confident that the industry will win in the courts that he urges bankers to not opt for a legislative compromise.

"Should we lose in Owensboro or Barnett, we might have to reconsider," Mr. Roderer said. "But, for right now, the tide is with us. There is no need to take a compromise position.''

Next: CEOs speak out on Glass-Steagall reform.

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