WASHINGTON - The Office of the Comptroller of the Currency is not prepared to oversee the boom in national bank insurance sales that last year's financial reform law is expected to spark, according to the Treasury Department's inspector general.

"It is uncertain whether OCC is ready to respond to any major stress on the national banking system as a result of a rapid expansion into insurance activities," Dennis S. Schindel, assistant inspector general for audit, wrote in a June 27 report that was released late last week.

"OCC will need to better prepare for these impending changes and address the expected increase in national bank insurance activities."

The Gramm-Leach-Bliley Act of 1999 removed numerous regulatory barriers between banking and insurance, making way for banks to significantly expand the insurance side of their business with less interference from state laws.

The report said that such growth could pose systemic risks and raise consumer protection concerns.

Though Gramm-Leach-Bliley puts state insurance regulators in charge of supervising bank insurance activities, the report warned that it remains the responsibility of the comptroller's office to examine insurance sales that threaten a bank's safety and soundness.

The report recommended that the comptroller's office determine how heavily it can depend on each state regulator's findings to conduct its own supervisory duties.

"To accept state regulators' work without determining its reliability would be tantamount to abdicating OCC's responsibilities as the primary supervisor over the national banking system," the report said.

Comptroller of the Currency John D. Hawke Jr. said he will not implement the report's recommendations, saying it defies Gramm-Leach-Bliley's establishment of a system of functional regulation.

Gramm-Leach-Bliley "unequivocally restricts the ability of the OCC to examine or regulate insurance entities," Mr. Hawke wrote in a response included in the report. "Because there are no provisions for federal supervision of insurance activities or for federal oversight of state insurance regulators, and Congress has specifically directed the bank and thrift regulators to defer to state insurance regulators, the OCC will not implement this recommendation."

In addition to suggesting that the comptroller's office evaluate state regulators' work, the report recommended that the agency take these steps: create a data bank of national banks that sell insurance activities; teach supervisors more about regulating bank insurance activity; and develop a supervisory strategy that addresses consumer protection and safety and soundness issues.

The comptroller's office plans to establish the database by yearend, and says that recently issued as well as upcoming guidelines will ensure the health of national banks along with their customers' rights.

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