Rep. Henry B. Gonzalez has ordered a comprehensive probe into the impact of the mutual fund boom on the banking system.

"The money going into these funds represents a massive financial hemorrhage from traditional accounts at banks and thrifts," the House Banking Committee chairman said. "Congress needs to know what this trend means to consumers, the banking industry, and our nation's economy."

Rep. Gonzalez's call for a study by the General Accounting Office represents an escalation of government interest in a $1.7 trillion business that banks increasingly regard as a promising source of fee income.

Scrutiny of Sales Practices

The Texas Democrat added his voice to that of House Energy and Commerce Committee Chairman John D. Dingell, D-Mich., who has asked the agency to review the sales practices of banks in the fund business.

Rep. Gonzalez's order went beyond Rep. Dingell's, which focused on disclosures to consumers. Rep. Gonzalez asked whether the flight of consumers' money to uninsured investments could hurt the Federal Deposit Insurance Corp.

The FDIC, which has projected it will return to health after being depleted by the real estate downturn, charges premiums to banks based on the amount of deposits they hold.

Rep. Gonzalez also raised concern that the movement of consumer money to uninsured funds could be worsening the so-called credit crunch. Money market funds, whose assets exceed $500 billion, invest in government securities and other short-term investments rather than in loans, he said.

Rep. Gonzalez said he was interested in the results of the study ordered by Rep. Dingell with respect to bank sales practices. Both congressmen want to ensure that consumers are warned that mutual funds purchased in bank branches don't carry federal deposit insurance.

Rep. Gonzalez went so far as to raise the specter of the thrift crisis, referring to unsuspecting investors who, thinking their investments were insured, bought junk bonds through the savings and loan run by convicted felon Charles H. Keating Jr.

Industry experts have said that the concerns over disclosure are unwarranted, and that the mutual fund business is adequately regulated.

These experts have said any proposal by Rep. Dingell, whose committee has jurisdiction over the Investment Company Act of 1940, would likely be delayed in the House Banking Committee.

His panel already has a full plate of legislation, but Rep. Gonzalez's letter signaled that the committee could well decide to take up legislation, depending on what the probe uncovers.

A spokesman for the GAO said it is too early to say how long the probes might take.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.