White House Outlines Bank Plan Proposal Loosens Restrictions On Risky Ventures

The Clinton administration on Monday proposed far-reaching changes in the nation’s banking system that would remove most ownership barriers of banks and permit them to sell insurance and securities.

Opponents of the proposals, which partly revise Depression-era measures designed to limit speculative activity by banks, found the timing ironic, coming days after the collapse of Britain’s Barings PLC bank on risky trading bets.

“The Barings Bank fiasco should sound a major cautionary note to the American Congress and financial regulators,” said Kenneth Guenther, president of the Independent Bankers Association of America.

Guenther said the reforms allow banks to sell “the most speculative and profitable securities.”

Treasury Secretary Robert Rubin, outlining the administration’s new proposal, said a key issue will be how banks will manage the potential risks of entering these new fields. “Nothing is more important, in our judgment, than making sure a bank’s new affiliates don’t become a source of weakness to the institution,” Rubin said.

The administration proposal would permit banks to “affiliate” with Wall Street firms, insurance companies and other financial services firms. Under the plan, banks also could sell insurance, underwrite securities and engage in other financial services business.

The proposal, to be fleshed out later this week when Rubin testifies before Congress, would revise:

The Depression-era Glass Steagall Act, which forbids commercial banks from entering the securities underwriting business or sell insurance. The law emerged in 1930s as Congress sought to restrict banks from engaging in speculative activities.

The Bank Holding Company Act, passed in 1956. The law effectively bars most financial concerns from owning both commercial banks and insurance companies.

Today, the rapid growth of technology has blurred many of the traditional lines between banking and financial services.

“No other industrialized countries have the rules we have separating our commercial and investment banks, our insurance companies and our other financial industries,” Rubin said in a luncheon speech in New York.