Two top banking regulators on Wednesday attempted to quash the notion that deposit insurance gives direct bank subsidiaries an unfair advantage over nonbank competitors.

"Allowing banks to conduct financial activities in a bank subsidiary does not represent an undue expansion of the federal safety net," Federal Deposit Insurance Corp. Chairman Ricki Helfer said. "The subsidy argument should not drive financial reform."

Testifying before House Banking's capital markets subcommittee, Ms. Helfer and Comptroller of the Currency Eugene A. Ludwig each attacked an argument repeatedly made by Federal Reserve Board officials.

The Fed has claimed deposit insurance and access to the central bank's discount window and payments system provide banks with funding advantages that are passed down to their direct subsidiaries. New nonbanking activities should be conducted through holding company units not bank subsidiaries, according to the Fed.

Mr. Ludwig and Ms. Helfer conceded banks receive an estimated benefit of 4 to 10 basis points from the "federal safety net," but noted that banks spend three times that on regulatory compliance.

If direct subsidiaries were cheaper to operate, Mr. Ludwig argued that banks would not conduct any activities through holding company units. Yet OCC research shows consumer finance, data processing, and commercial finance are more often done through holding company units, while leasing, mortgage banking, and insurance are more frequently offered directly by bank subsidiaries.

"There is no clear pattern," Mr. Ludwig said. "Bank behavior is consistent with the economic analyses that show no net subsidy."

In addition, direct subsidiaries may be more beneficial to a bank than holding company units because they allow an institution to diversify its income stream, Ms. Helfer said.

While Ms. Helfer advocated letting banks invest in nonbanking companies, she strongly warned lawmakers against eliminating the barrier between banking and commerce.

Banks have little experience managing commercial firms, she said. In addition, in times of economic stress a bank may be tempted to make risky loans to shore up an affiliated commercial company.

"Full-scale elimination of the barriers between banking and commerce should not be undertaken at this time," she said.

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