Treasury Aims To Shield Banks From the States' Insurance Laws

The Clinton administration wants to give banks new protections from state insurance laws, a move sure to stoke the already hot debate over financial modernization.

Treasury Secretary Robert E. Rubin will unveil legislation today that goes beyond a March 1996 Supreme Court decision that said states may not "prevent or significantly interfere" with bank insurance sales from small towns.

Under the Treasury's plan, states could not enforce laws that are "disproportionately restrictive" or "discriminate against" banks. Experts said those standards would discourage states from limiting the types of bank employees that sell insurance or the places in branches where the sales may occur.

The insurance industry swiftly blasted the Treasury legislation after details surfaced on Monday.

"This would result in a massive rollback of state insurance laws and consumer protection laws," said Robert A. Rusbuldt, a lobbyist for the Independent Insurance Agents of America. "Why the Treasury Department has thrown dynamite into the mix is beyond my comprehension."

Bankers, however, were clearly pleased by the plan.

"The insurance provisions are terrific," said Annie Hall, lobbyist for Columbus, Ohio-based Banc One Corp.

Richard Whiting, general counsel for the Bankers Roundtable, said the Treasury's plan would give banks some much-needed protection.

"There was a great deal of satisfaction with the Supreme Court decision, but still there were some concern whether states could get around it," Mr. Whiting said. "This would close that concern."

In the wake of last year's Supreme Court decision, a number of states have proposed curbs on how banks sell insurance. Mr. Whiting said the Treasury plan would block many of those measures.

The insurance provisions are among a host of specifics in the administration plan that will be unveiled today before the Banking Committee. The legislation rounds out the details of a plan Mr. Rubin unveiled on May 21.

The committee is scheduled to vote on financial reform on June 11. A House Banking Committee spokesman said the panel is still working on its own plan. "Major parts" of the administration plan may be incorporated in the committee bill, he said, but declined to say which ones.

One of the biggest potential sticking points is the idea of allowing banks and nonfinancial firms to buy one another. House Banking Committee Chairman Jim Leach, for one, is expected to oppose any proposals that call for mixing banking and commerce. Rep. Leach , R-Iowa, plans to have his new plan ready Friday.

Treasury presented two options for mixing banking and commerce. One would let banks own a limited amount of nonfinancial businesses. The other would preserve the current system, which lets commercial firms enter banking only by owning a single thrift.

Today, Mr. Rubin will suggest some ground rules if Congress allows limited amount of cross-industry mergers. For instance, he wants banks to be prohibited from affiliating with nonfinancial companies with assets greater than $750 million. This would fulfill the Treasury's previously stated goal of blocking mergers between bank holding companies and the largest 1,000 commercial firms.

The administration, however, would leave lawmakers to decide the amount of nonfinancial business that would be permitted for bank holding companies.

Also in the plan:

*The Federal Reserve Board would supervise all holding companies and their nonbank subsidiaries. The Fed, however, would be required to limit exams to operations that could have a "materially adverse effect" on an insured depository institution.

*The Fed's ability to adopt capital-adequacy guidelines would be limited to two areas: holding companies with consolidated assets exceeding $75 billion, including bank subsidiary assets of at least $5 billion, or companies with banking assets equal to 75% or more of total assets.

*Banks could not be forced to provide capital to financially troubled nonbank affiliates.

Gary Hughes, chief counsel for the American Council of Life Insurance said the administration proposal would put insurance companies at a disadvantage when affiliating with banks.

"They're saying banks can't be tied to the liabilities of insurance companies, but insurance companies could be tagged with the liability of banks," he said.

Mr. Hughes said the administration has gone too far to get banks to support the legislation.

"We have to ask, 'Is this a financial modernization bill or a bank modernization bill?'" he said. "Let's make something that's fair to everybody."

Chrys D. Lemon, associate counsel to the Association of Banks in Insurance, said new insurance protections are necessary to protect banks. For instance, the administration proposal would preempt one state law that requires insurance agencies to be owned by a "natural person," thus prohibiting a bank from entering the business.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER