Broad reforms in the 62-year-old Glass-Steagall Act will pose new challenges for commercial banks, Standard & Poor's Ratings Group said.

In a report on proposed legislation to lower the barriers between banking and securities businesses, S&P concluded that "it seems to make sense to merge" the institutional structures of banks and securities firms.

But a wave of mergers between banks and brokerages would increase financial risk and could precipitate downgrades, S&P said.

Corporate culture would also be an issue, the report said.

Even though bank-owned retail brokerages would seem to be a natural extension of their mutual fund businesses, "banks face inevitable friction in managing such retail brokerage networks, because the incentives that make active sales networks thrive can be alien in bank cultures," said Tanya Azarchs, a financial institutions director at S&P.

Ms. Azarchs noted that commercial banks can already underwrite securities and offer insurance and mutual fund products. "Some banks probably will acquire regional brokerages for their expertise. Others probably will be attracted to the institutional brokers," she said.

S&P said a universal banking model applied in the U.S. markets would mirror the British approach of compartmentalizing activities into separate subsidiaries, in contrast with the German approach, under which commercial and investment banks are integrated.

The implications of reform could be even more troublesome for insurers, S&P said.

If insurance powers for banks remain on the reform agenda, insurance companies specializing in standardized products could face rating downgrades.

"Banks would present a formidable challenge to the insurance industry in the sale of commodity-like, low-value-added products such as single-premium deferred annuities, term life insurance, and, potentially, even such products as personal auto and homeowners insurance," said Mark Puccia, a director in S&P's Insurance Rating Services.

Insurers would benefit over the near term in situations where banks can sell insurance but not underwrite the policies themselves, Mr. Puccia said. In those circumstances, he said, insurers could take advantage of the banks' extensive, low-cost distribution channels.

But insurers face significant future risks if the bank distributor leaves and lapses increase.

"Some banks are exerting margin pressures on the insurers they do business with, asking for increased fees or commissions, seeking increased resources to service customers, and demanding competitive spreads," Mr. Puccia said.

The biggest risk for the insurance industry, S&P said, would come if banks were allowed to underwrite policies.

"The prospects for synergies among banks owning insurers are so attractive that consolidators that are looking for increased capital and distribution would find the prospect of a bank affiliation enticing.

"The risk comes when the new owner starts looking to increase market share," he said. "Inevitably, margin pressures will arise as banks begin to view insurance sales as a marginal cost activity and start pricing their products accordingly."

Nor does S&P expect that insurers would have an easy time owning banks. It found little evidence worldwide that they have been successful managing banks or brokerages.

"Canadian insurers have had a dismal record in acquiring and managing trust companies and several have had to take large writeoffs on these subsidiaries," Mr. Puccia said. "Likewise, there are few instances in Europe of insurance companies successfully managing bank operations."

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