WASHINGTON - The 7,200 state-chartered banks not belonging to the Federal Reserve System would face serious restrictions under House Banking Committee Chairman Jim Leach's Glass-Steagall bill, warned the chairman of the state bank supervisors group.
James A. Hansen, who heads the Conference of State Bank Supervisors, told the panel on Wednesday that the Iowa Republican's measure would create a system in which federal law is the only avenue for innovation in the banking system.
The measure would require state banks to form holding companies in order to continue engaging in certain activities that are currently authorized by state legislatures.
"This requirement strikes at the heart of the dual banking system," said Mr. Hansen, Nebraska's director of banking and finance. "Requiring this additional structure is unnecessary. It centralizes power in the federal government, and moves regulatory authority away from the states which developed these innovative activities."
Banks not belonging to the Federal Reserve system are not subject to the restrictions contained in Section 20 of the Glass-Steagall Act. State legislatures allow many such banks to participate directly in insurance sales, real estate and travel agencies, and sales of uninsured investment products.
Mr. Hansen argued that the flexibility afforded state banks has spurred many of the major advances in bank products and services.
"Everything from checking accounts to adjustable-rate mortgages, from electronic funds transfers to interstate branching, originated at the state level," Mr. Hansen said. "When new activities emerge one state at a time, systemic risk is minimized.
"If an activity proves too risky, unprofitable, or harmful to consumers, it is much easier for a single state to change its law than for the federal government to reverse itself," Mr. Hansen added.
The Independent Insurance Agents of America also presented their views on Glass-Steagall reform at Wednesday's hearing. As expected, a representative of the group's government affairs committee, Bob Fulwider, told lawmakers that the separation between banks and insurance sales should be rigidly maintained.
The main argument forwarded by Mr. Fulwider centered on "tie-ins" - the suggestion by a lender to a borrower that chances for loan approval may be enhanced if the borrower also buys insurance from the bank.
"Especially in hard economic times, when credit is tight, what borrower will fail to buy insurance if there is any possibility that the purchase might improve the chance for a loan?" said Mr. Fulwider. "The potential for and existence of tie-ins creates a grossly uneven playing field," said Mr. Fulwider.
However, Rep. John J. LaFalce warned Mr. Fulwider that taking the position of simply trying to maintain insurance agents' market share did not hold much water.
"I want to see more-valid positions than ones of turf protection," said the New York Democrat.