The Office of the Comptroller of the Currency's scathing analysis of new insurance provisions included in House Banking Committee Chairman Jim Leach's Glass-Steagall reform bill prompted the panel's chief counsel, Joseph Seidel, to write the following memo.
By way of background, the new insurance proposals are designed to wrest Rep. Leach's bill free of the banking and insurance industry disputes now stalling it.
The insurance provisions are designed to codify the Supreme Court's March 26 Barnett Banks ruling, which confirmed banks' right to sell insurance from towns of 5,000 or fewer residents. Rep. Leach's new plan includes the so-called Baker amendment, which would allow common ownership of banks and insurance companies.
Rep. Leach is proposing to permanently limit the OCC's power to let banks conduct insurance activities that are "incidental" to banking. However, he has incorporated the so-called Castle amendment, which would let banks enter businesses that are "part of" banking.
Rep. Leach's plan would also affirm that state regulators can supervise insurance sales by national banks, while prohibiting those regulators from "preventing or significantly interfering" with a national bank's insurance activities.
In an April 8 analysis, OCC Chief Counsel Julie L. Williams derided Rep. Leach's new bill. First she criticized its plan to turn a five-year restriction on the agency into a permanent prohibition. She also complained that states could roll back banks' current powers and preempt the court's Barnett decision. Finally, she said that the "new" Baker amendment also would be preempted by state law.
Though Rep. Leach may propose another version of his bill by Friday (see story on page 2), Mr. Seidel's memo rebuts the OCC's arguments.
In examining the discussion contained in Ms. Williams' memo, the following points may be relevant.
First, the memo is inaccurate in that the committee reported H.R. 1858 with a permanent limitation on the OCC's "incidental" powers.
It should be noted that the bill also included the Baker affiliation approach, which affirmatively grants new bank insurance authority at the holding-company level. It should be noted that the bill reported last June also included the Baker affiliation amendment.
In subsequent drafts the Baker amendment was dropped, and the so-called moratorium was reduced to five years. The current draft restores the Baker amendment permitting affiliation and uses the committee-reported text as the base bill. Activities that are not currently "incidental" or "part of" banking per the Castle amendment may be conducted in the holding company affiliate.
Second, the definition of insurance contained in the staff draft expressly protects all current banking products. Therefore, the OCC statement that "what is permissible banking activity today may be an impermissible 'insurance' activity tomorrow" is simply untrue.
In addition, new language is under active consideration to protect qualified financial contracts (i.e. derivatives). Of course any product that is "part of" banking could not be regulated as insurance under the Castle amendment.
Third, the Barnett standard is expressly adopted in the draft. The staff draft states, "No state may impose any insurance regulatory requirement relating to providing insurance as an agent or broker that prevents or significantly interferes with (including by discrimination against) a national bank's ability engage in insurance activities." This is widely recognized as the Barnett standard.
Fourth, the form of the Baker amendment agreed by ... (Rep. Richard H. Baker, R-La.) and endorsed by Mr. Leach and the other subcommittee chairs adopts the approach consistent with section 7 of the Bank Holding Company Act. This provision states that no provision of the BHCA (including section 4, which is amended by Baker) shall override state law.
The revised Baker amendment is consistent with this standard, as verified by the Federal Reserve Board, the primary administrator of the Bank Holding Company Act.