In an open letter to small banks Monday, House Banking Committee Chairman Jim Leach made his pitch for legislation allowing banks to merge with securities and insurance firms.
The Iowa Republican insisted that the bill approved by his committee June 20 would improve funding for community banks, allow them to offer new products, and even hem-in potential competitors.
"Community banks may be a greater beneficiary of this landmark legislation than any other segment of the financial community," Rep. Leach wrote.
For instance, by eliminating the thrift charter the legislation would stem the "proliferation" of unitary holding companies. An increasing number of commercial companies are using the unitary thrift charter to obtain broader preemption of state branching and consumer laws than banks are allowed, he warned.
"The unitary model will used by hundreds, probably thousands, of new commercial entrants into the field of banking" if the legislation fails, he said.
Also, the legislation would require that banks acquired by out-of-state securities and insurance companies continue to lend in local communities.
Small and rural banks would gain more funds for lending because the legislation would allow them to use Federal Home Loan Bank System advances for local economic development and agricultural loans.
"This bill provides community banks with a new pool of liquidity," Rep. Leach explained.
By expanding banks' securities and insurance sales powers, the legislation would improve their competitive position, he said. "Unless community banks can offer a full range of products, they will lose customers," Rep. Leach said.
Rep. Leach acknowledged that small banks have "much trepidation" about the legislation, which also would allow banks and nonfinancial firms to combine. Indeed, the Independent Bankers Association of America, the trade group representing community banks, has vigorously opposed the legislation.
But Rep. Leach argued that the industry will consolidate regardless of what happens on Capitol Hill.
"Changes in banking may not be liked by some," he said. "But without a change in law, community banks will be precluded from lending or participating in product offerings others will bring to their communities."
Kenneth A. Guenther, IBAA executive vice president, said the benefits of the legislation are not enough to sway his members.
"The massive industry consolidation that would occur is detrimental to consumers and to community banks," he said.