With the House scheduled to vote on financial reform legislation Thursday, the main stumbling block continues to be where new bank activities would be housed.

On Monday Treasury Under Secretary John D. Hawke Jr. said the administration will not support any legislation requiring new bank products and services to be sold through a holding company subsidiary.

"What is really at stake here is whether the present balance between the Federal Reserve and the elected branch of government is going to be upset," Mr. Hawke said. "This legislation threatens to tip that balance away from elected government by shutting down innovation at the bank level."

While Mr. Hawke was addressing the annual meeting of the Pennsylvania Bankers Association here, Federal Reserve Board Chairman Alan Greenspan was making his case for the bill, known as HR 10.

The legislation would let banks, securities firms, and insurance companies affiliate "in a holding company framework with adequate supervisory safeguards by functional regulators, rather than in an operating subsidiary of an insured bank," Mr. Greenspan wrote House leaders from both parties. Securities and Exchange Commission Chairman Arthur Levitt Jr. co-signed the letter.

Mr. Hawke and Mr. Greenspan squared off on this debate over the weekend as well during the annual meeting of the Conference of State Bank Supervisors in Nashville. While the Senate is unlikely to vote on the bill this year, the House vote is important because it could set a starting point for the Senate next year.

Mr. Hawke told the state regulators that the reform bill represents "a frontal assault" on national bank powers. He said Congress would be giving the Fed "monopoly control" over new financial activities.

Speaking via satellite to the same group, Mr. Greenspan warned that the Fed would be seriously hindered from averting financial crises if Congress grants broad powers to bank operating subsidiaries.

He repeated the Fed's concern that operating subsidiaries have a lower cost of capital than holding company affiliates because of banks' access to federal deposit insurance and the Fed's emergency lending powers-the so- called "federal safety net."

As a result, he argued, banking executives would abandon the costlier bank holding company framework overseen by the Fed if lawmakers let them underwrite insurance and engage in other new powers through operating subsidiaries.

"If the op sub becomes generally available to all functions now currently available to a holding company, any sensible banking institution would move virtually all of their powers into the operating sub," Mr. Greenspan said.

"This would effectively create the disappearance of the bank holding company structure, which is so critical to the Fed ... in endeavoring to maintain oversight of potential systemic problems."

Because the Fed examines holding companies, "in the event of a crisis we know fairly quickly precisely where the weak links are and what type of actions are required," he said. If the Fed were relegated to reading reports on institutions instead of examining them, Mr. Greenspan said he would be "seriously concerned" that the central bank could not fulfill its statutory duty to protect the financial system.

"That would for all practical purposes remove us from a really sensitive degree of supervision and regulation where it is important to maintain the stability of the system," M. Greenspan said.

He added that the recent wave of merger deals among large financial institutions had heightened his concerns.

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