Mergers between banks and nonfinancial firms would subject the financial system to a "variety of risks," the General Accounting Office warned in a report released Thursday.

In a study prepared for House Banking Committee Chairman Jim Leach, the congressional watchdog agency said allowing banks to affiliate with commercial firms would widen the risks covered by the federal safety net.

Cross-industry mergers would lead to "inappropriate risk taking, misallocation of resources, and uneven competitive playing fields," according to the GAO.

Though firewalls between banks and commercial affiliates may reduce the risks, those protections may not be adequate to withstand financial troubles, according to the report. "Our work has shown that such firewalls may not work in times of stress, or where managers are determined to evade them."

Other threats detailed in the report include conflicts of interest between banks and their nonfinancial affiliates and concentration of economic power.

The GAO report comes as the White House puts the finishing touches on its financial reform plan. Treasury Department officials have indicated they will propose letting banks invest in a limited amount of commercial business.

Rep. Leach, who opposes any mixing of banking and commerce, said he hopes the GAO report will convince lawmakers to scale back pending plans.

"I recognize that the administration and perhaps a majority of my committee may push for some breaches in this fragile wall," the Iowa Republican said early last week. "I would hope to keep them to a minimum."

The GAO predicted that few benefits would result from mixing banking and commerce. Mergers with nonfinancial firms would not lower banks' costs or diversify their risks, the report said.

The agency based the new 11-page report on its own prior studies and "existing literature."

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