Next Tuesday, Treasury Secretary Robert E. Rubin will deliver to Congress a detailed blueprint for financial reform. Major pieces of the Clinton administration's reform plan were reported last week when Mr. Rubin spoke to industry lobbyists.
What follows is some of the fine print from the Treasury's seven-page outline.
Bank powers. National banks-and state banks to the extent permitted by state law-would be authorized to conduct any financial activity through subsidiaries, except real estate development. These banks would be permitted to act as general agents for the sale of insurance. National banks would be prohibited from engaging directly in insurance underwriting other than what is currently permissible (e.g., credit-related insurance).
National banks would be permitted to underwrite and deal in municipal revenue bonds in addition to other securities activities currently permissible in the banks.
To gain these wider powers, a bank would have to be well managed and well capitalized. Any company controlling the bank would have to give an undertaking that if the bank's capital fell below the well-capitalized level, it would be promptly restored.
Any transactions between the bank and a subsidiary would have to be conducted at arm's length, could not exceed 10% of the bank's capital, and would have to be fully collateralized. In addition, the bank's transactions with all affiliates, including subsidiaries, could not exceed 20% of the bank's capital.
If Congress permits banks to affiliate with commercial companies, banks would be prohibited from extending any credit to, or for the benefit of, any nonfinancial affiliate.
Holding company supervision. The Federal Reserve Board would continue to oversee all bank holding companies. The Fed would be able to require financial reports from holding companies if they are not reasonably available from other sources. The Fed would have access to information that was provided by the holding company or any of its units to other regulatory organizations.
Fed exams of a bank holding company would be limited, to the fullest extent possible, to units that could have a materially adverse effect on the safety and soundness of a bank affiliate.
The Fed would be permitted to set consolidated capital requirements for a bank holding company if it and its bank fell into size categories (to be defined) that could raise questions about systemic risk if problems were to arise; its insured depository institutions account for a predominant percentage (to be defined) of the holding company's total assets; or its insured depository institution has been less than well capitalized for more than 90 days and the holding company engages in activities not permissible for a national bank to engage in directly.
Functional regulation. Insurance activities of banking organizations would be subject to state insurance regulations if they do not discriminate against financial institutions. States could not apply to national banks laws that had the purpose or effect of discriminating against, or had a disproportionately adverse effect on, financial institutions.
The Securities Exchange Act's exemption of banks from broker and dealer registration would be narrowed to permit SEC regulation of activities other than traditional banking activities.
The SEC would be required to amend its net capital rule to avoid a de facto pushing out of broker-dealer activities from the bank. SIPC insurance would not apply to broker-dealer activities conducted in the bank. Products traditionally provided by banks would not be subject to SEC broker-dealer regulation, and the primary banking regulator and the SEC could jointly exempt new banking activities.
The SEC, rather than the banking agencies, would handle registration of bank-issued securities and periodic reporting by banks having securities registered under the Securities Exchange Act of 1934.
The banking agencies, in consultation with the SEC, would be required to prescribe rules regarding banks' retail sales of nondeposit investment products, covering sales practices, qualifications of sales personnel, incentive compensation, and referrals. Customers could prevent sharing of confidential information between banks and their nonbank affiliates.
The National Council on Financial Services would be created to review the adequacy of consumer protections, impose additional firewall restrictions, and resolve differences among the agencies on such questions as whether an activity is "financial" or whether a particular product or activity is insurance, securities, or banking.
Banking and commerce. If Congress decides to mix them, there would be a two-year conversion period during which all federally chartered thrifts would convert to bank charters; the Office of Thrift Supervision and the Office of the Comptroller of the Currency would be merged; and the authority of existing unitary thrift holding companies to engage in nonfinancial activities would be grandfathered.
With the elimination of the OTS, the Federal Deposit Insurance Corp. board would be cut to three members. The Bank Insurance Fund and the Savings Association Insurance Fund would be merged.
If Congress does not mix banking and commerce, the insurance funds would still be merged; the thrift system would be left as it is today; and the OTS and OCC would be kept separate, although the prohibition against combining functions of the two agencies would be lifted.
