The Federal Reserve Board has given state-chartered savings banks permission to sell annuities and other insurance products.

In a letter sent Monday to People's Bank of Bridgeport, Conn., the Fed said a law that bars most insurance sales by savings banks owned by bank holding companies does not apply if the sales occur in bank subsidiaries and are authorized by state law.

"This is definitely a step in the right direction," said Charlotte Bahin, regulatory counsel to America's Community Bankers, the thrift trade group. "This interpretive letter expands the ability of savings banks in a bank holding company to broaden the products and services they can offer their customers."

The ruling affects 134 savings banks, which have $109 billion in assets.

After receiving the Fed's letter Tuesday, People's chairman and chief executive David E.A. Carson said the bank purchased the R.C. Knox insurance agency. The bank's new subsidiary offers property and casualty and business insurance. "We are obviously pleased that the Fed agreed with our interpretation of the law," he said.

Richard M. Whiting, general counsel at the Bankers Roundtable, said the ruling is consistent with prior court decisions, which have found that the Fed may not bar a subsidiary of a state bank from selling insurance under state law.

"The courts have said that whatever the bank can do respective to state law it may do in a subsidiary, despite holding company act restrictions," Mr. Whiting said. "This is a very consistent decision."

David W. Roderer, a partner in the Washington office of the Goodwin, Procter & Hoar law firm, said the Fed essentially has created an operating- subsidiary option for savings banks.

"This is unusual because the Fed's line is usually that an institution should not be allowed to engage in activities precluded to the bank itself," he said. "The Fed is showing substantially more flexibility."

State savings banks, which are primarily located in the northeast, have traditionally sold so-called savings bank life insurance, a product created in the early 1900s to cover the cost of the policyholder's funeral.

Congress confirmed the power of savings banks to sell this insurance in a 1987 amendment to the Bank Holding Company Act. However, that amendment also barred savings banks from selling other insurance products. This restriction has prevented savings banks from competing in the broader insurance market with national banks and thrifts, which over the past several years have won the right to sell annuities and life insurance.

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