Prediction: Foreign Banks Will Flee Unless Glass-Stegall Is Repealed

WASHINGTON - There's a new word making the rounds of international bankers in the United States.

It's "debanking," and it means shutting down one's U.S. bank branches in order to escape restrictions on selling insurance and underwriting securities here.

So far, this has happened only once. In 1993, ING Group - formed by the 1990 merger of a Dutch bank and insurance company - closed its U.S. commercial bank subsidiary in order to focus on other lines of business.

But in a much-talked-about speech at a recent foreign banking conference here, New York attorney H. Rodgin Cohen said ING may not be the last to debank as consolidation abroad creates more and more financial conglomerates that combine commercial banking with insurance and securities operations.

"I would suggest debanking could become a significant option for foreign banks in the U.S.," said Mr. Cohen, a partner with the law firm of Sullivan & Cromwell.

The only thing that could stop it, Mr. Cohen said, is repeal of the Glass-Steagall Act by Congress, which would allow banks to affiliate with securities and insurance firms.

Lawrence R. Uhlick, executive director of the Institute of International Bankers, a New York-based trade group, agreed with this assessment.

"The problem is caused by the disparity between permissible financial activities in the U.S. and the current systems in place in other major countries permitting a wide range of financial activities," Mr. Uhlick said.

"If the restructuring legislation passes, debanking is likely to be of only theoretical interest," he said. "To the extent that it breaks down, some banks are forced to face up to what do they do."

Regulatory proposals by the Office of the Comptroller of the Currency to give national banks more leeway to sell insurance and offer other services won't help most foreign banks, Mr. Cohen said.

"There are only a handful of foreign banks with national bank subsidiaries," he said in his speech. "Foreign banks can only rarely utilize the national bank route."

Foreign banking giants such as Bank of Tokyo Ltd. and ABN Amro Bank of Amsterdam are among this country's biggest commercial and industrial lenders. Mr. Cohen said a debanked foreign bank could continue to provide capital in the United States, but under a different guise.

"It would be regulated like a General Electric or Merrill Lynch," he said.

Such an entity would not be able to accept deposits or provide funds transfers - which Mr. Cohen said would be a loss both for foreign banks and the U.S. banking system.

"If our outmoded laws and regulations were to force foreign banks to abandon their banking licenses, they would lose," he said. "But so would this country."

Of the major industrialized nations, the United States and Japan have the tightest restrictions on affiliations between financial companies in different financial sectors, according to a recent report by the Tripartite Group of Bank, Securities, and Insurance Regulators.

One U.S. regulator said the financial conglomerates most likely to be put in a bind by this country's anti-affiliation laws are those based in France, Belgium, and the Netherlands.

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