Prodded by the Supreme Court's decision allowing bank insurance sales in all states, House Banking Committee Chairman Jim Leach last week abruptly dropped his opposition to common ownership of banks and insurance companies.

By striking down a Florida law that blocked Barnett Bank from selling insurance from towns of 5,000 or fewer residents, the court also invalidated similar laws in 20 other states.

Rather than give a competitive advantage to banks in small towns, Rep. Leach wants to allow affiliations between all national banks and insurance companies as part of his bill for Glass-Steagall reform and regulatory relief.

Though many banks would be happy with such a move, the Independent Bankers Association of America, the trade group for community banks, is opposed. The IBAA is the only bank trade group backing Rep. Leach's broader Glass-Steagall bill, but it warned last week that it may withdraw support.

In a March 29 letter to IBAA executive vice president Kenneth Guenther, Rep. Leach explained why he changed his mind.

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As you know, I have had a long-standing hesitancy about affiliations between banks and insurance companies. But, clearly, the Barnett decision profoundly changes the landscape of financial services and sets in motion a process of change that makes the key policy question related to affiliations no longer "if" but "how."

Given the impact of the Barnett decision, I am puzzled by your assessment that the IBAA will have to oppose our new Glass-Steagall approach because of the shift to authorization of insurance affiliations. It would seem to me that, logically, the IBAA should object to Glass- Steagall reform if we failed to adapt to Barnett and embrace affiliations, not because we have.

There simply can be no doubt that affiliation in the area of insurance is coming. The only issue is whether it comes through a congressionally approved structure or through the actions of the Comptroller of the Currency. Failure on the part of Congress to act in the area will leave it open for the OCC to authorize affiliations through operating subsidiaries. This means that large banks will be able to directly leverage insured deposits to compete in the marketplace with various products against competitors who can't.

The reality of the Barnett decision for Congress and for financial services reform is that it empowers a certain class of banks to the competitive disadvantage of other banks.

(The decision) will not allow all national banks to engage in insurance agency activities, and it certainly does not authorize insurance agency activities for state banks. Only a limited class of national banks will benefit ... those national banks that are big enough to establish an operation in a town of 5,000 or those small enough to be located in such a town.

Hence, the result of Barnett is that there will be banks offering insurance in competition with other banks which will be prohibited from doing so.

The only way to ensure competitive equity for banks of all sizes is to support the congressional approach of permitting affiliations through a holding company. This will establish a level playing field in the insurance arena ... for all banks. An IBAA position against the new affiliations approach in our Glass-Steagall bill runs directly counter to the interests of a large number of your members - those banks which have or could have holding companies that would permit this type of affiliation.

Permitting insurance affiliations though a holding company structure will give small banks in holding companies in the large number of states that do not have anti-affiliation laws the ability to offer insurance. Holding companies with banks in towns over 5,000 will benefit by having an avenue through which they can offer insurance.

Moreover, the Glass-Steagall legislation contains expedited application procedures for holding company activities, which will significantly reduce the time and costs associated with receiving Federal Reserve approval.

Finally, let me stress that there is a massive misunderstanding of the moratorium concept contained in this bill.

The emotive nature of the word "moratorium" has obscured the fact that in the context of the affiliations approach all it does is ensure functional regulation - a precept accepted by virtually all banks.

Moreover, the bill will contain federal statutory protections against a rogue state regulator who may seek to discriminate against banks using the standards established by the Barnett decision.

In addition, statutorily, the Glass-Steagall reform bill protects existing banking products and products that are "part of" banking from being included in definitions of insurance to preserve their regulation within the national bank regulatory framework.

Before closing, I want to turn to the subject of the regulatory-burden ... legislation.

I understand your strong personal preference for a stand-alone bill. But I want to caution you again that a stand-alone regulatory-burden bill of any significance for banks would be sheer veto bait for the (Clinton) administration. The only way credible regulatory-burden relief can become law is if it's tied to a more substantial bill - most appropriately, Glass- Steagall reform.

I'd be appreciative if you would share this letter with your leadership.

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