The banking industry won tougher limits on thrift rivals and dodged onerous consumer privacy protections Thursday as a House subcommittee voted 26 to 1 for a financial reform bill.

However, as expected, the House Commerce finance subcommittee significantly changed the legislation that was passed by the House Banking Committee in March.

The Commerce panel agreed to bar direct subsidiaries of banks from all underwriting and merchant banking activities. It would also force banks to transfer some securities activities to holding company affiliates and tilt oversight of bank insurance sales back toward state regulators.

But the subcommittee also voted 15 to 13 for an amendment aggressively sought by the banking industry that would prevent commercial companies from buying grandfathered unitary thrifts. A similar prohibition is part of the Senate reform bill adopted May 6, but it is not in House Banking's version.

"We hope this finally puts this issue to rest," said Ronald K. Ence, legislative affairs director for the Independent Community Bankers of America.

Financial companies also staved off the consumer privacy protections pushed by Democrats that could have squelched cross-marketing efforts. With the backing of banks, insurance companies, and securities firms, the subcommittee approved an amendment by its chairman, Rep. Michael G. Oxley, that would require financial companies to establish detailed policies on the use of customer data and to disclose practices to consumers.

Despite these victories, American Bankers Association executive vice president Donald G. Ogilvie said the bill undermines deals already brokered on securities and insurance rules.

"What was a carefully balanced compromise has now been changed for the worse on almost every major issue of interest to the banking industry," he said. "Unless these changes are reversed, ABA will strongly oppose the bill."

Yet Rep. Oxley said making banks conduct risky activities in holding company units instead of subsidiaries would avoid a possible government bailout.

"For many banks, which already have securities affiliates, this means nothing more than business as usual," the Ohio Republican said. "For others, it means providing new services to customers through a tried-and- true corporate structure that also happens to protect the interest of American taxpayers."

Commerce Committee Chairman Thomas J. Bliley Jr., R-Va., strongly defended the changes to the securities and insurance provisions. "They are vitally important to protecting consumers and treating competitors fairly," he said. "They greatly strengthen the legislation."

The Commerce Committee is expected to approve the bill during the week of June 7. Banking lobbyists will try to reverse some of their losses when the Rules Committee takes up the bill and when the full House votes, which is expected by July 4.

Senior Commerce members from both parties fought the unitary thrift amendment, arguing that it is an unfair restriction on the market value of existing companies. "You downgrade the value of their assets, and their stock would take a hit," Rep. Bliley said.

They were outvoted by more junior members led by Rep. Steve Largent, R- Okla., who invoked the opposition of Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary Robert E. Rubin.

Rep. Largent said letting commercial firms own banking institutions could cause conflicts of interest in granting credit and could create financial crises akin to the one in Asia.

"Financial integrity in this country could be undermined," he warned.

On privacy, Rep. Oxley contended that he had produced a compromise that would "empower the consumer" while minimizing the compliance burden on financial companies.

Yet Democrats argued that the amendment, though an improvement over current law, did not go far enough. Rep. Edward J. Markey, D-Mass., proposed requiring financial companies to get customer permission before sharing information with outside entities. Companies could disclose information to affiliates, provided the customer could opt out.

"They don't want anyone to have the right to say 'no,'" Rep. Markey said of industry officials. His amendment lost by 19 to 8.

On insurance, the subcommittee virtually eliminated a key protection for bank sales of insurance. Under current law, rulings by federal regulators are given an advantage in court disputes with state insurance commissioners.

The bill would eliminate the so-called deference for federal regulators, except in fights over state laws that put heavy license requirements on banks. It would also limit business between a bank and affiliated agent, or require that banks set up in-state sales offices.

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