Treasury Under Secretary John D. Hawke Jr. on Thursday slammed the House Commerce Committee's version of the financial modernization bill, saying it would hamper banks trying to compete with other financial firms.

"This is a very bad approach to legislation," Mr. Hawke said at a joint conference of America's Community Bankers and KPMG Peat Marwick.

To begin insurance operations in a new state, a bank would have to buy an insurance agency in existence for two years or more. Mr. Hawke described this provision as "highly protectionist."

"This essentially protects insurance agents yet unborn," Mr. Hawke said. "That is an approach really inconsistent with modernization."

Mr. Hawke also complained that securities and insurance companies would be allowed to own nonfinancial firms, while banks could not. Also, he said the bill fails to cap adequately the amount of nonfinancial business that securities and insurance firms could conduct after acquiring a bank.

Nonbank financial firms like Merrill Lynch & Co. would be allowed to buy a bank and still do as much as 15% of their business in nonfinancial, commercial activities.

However, after the bank is bought, the firm could expand its nonfinancial activities by "internal growth without any limitations at all," he said.

"It creates a totally inexplicable disparity between banking organizations and nonbank financial holding companies with respect to the banking and commerce issue," Mr. Hawke said.

Mr. Hawke also objected to proposed restrictions on operating subsidiaries. He said this provision would deprive bankers of the flexibility to decide which corporate structure is best.

"Much to our disappointment, the draft ... completely obliterates the ability of national banks to conduct financial activities through direct subsidiaries," he said.

Despite criticism from the Treasury, Rep. Michael G. Oxley, author of the Commerce committee bill, said Thursday that he expects the panel to approve it.

"When you take a nontraditional position around here, you expect to catch a few bullets, but that's part of the process," the chairman of the committee's finance and hazardous materials subcommittee told a Women in Housing and Finance luncheon. "This is going to be a long, difficult process ... but our committee is up to the challenge."

The Ohio Republican said he was unsure when his panel would vote on the measure.

Despite his objections, Mr. Hawke said he was hopeful the House would approve financial modernization this year. If no bill is passed by this Congress, banks would end up "the big losers," he said.

Securities and insurance firms would continue to enter the banking business by opening or acquiring thrifts, while banks would be extremely limited in their ability to expand the services they offer, he said.

Also, Mr. Hawke warned that passing comprehensive financial modernization legislation after 1998 would be substantially more difficult. Securities firms and insurance companies, armed with thrift charters, would have little incentive to support such legislation, he said. The chance for reform "will have diminished exponentially at that point," he said.

Commercial banks "will limp along with those restrictions, while their competitors are acquiring thrifts and engaging in the retail banking business, as well as in the insurance and securities businesses," Mr. Hawke said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.