House Panel Oks Sweeping Bank Reform Bill But Committee Dodges Decision On Letting Banks Sell Insurance

The House Banking Committee on Tuesday passed a far-reaching bill to overhaul the nation’s banking system by permitting commercial banks to combine with Wall Street firms.

The committee, which passed the bill by a 29-8 margin, didn’t confront the toughest issue threatening the measure: whether banks should be allowed to expand into the insurance business.

Rep. Richard Baker, R-La., labored intensively over a compromise to protect banks’ rights to sell annuities, an investment developed by insurance companies, and allow banks to combine with insurance underwriters. But Baker declined to bring his amendment up to a vote, saying he lacked support at the time.

The insurance industry has argued banks entry into the insurance business would be anticompetitive and hurt small insurance agents. Insurance industry opposition in the past has killed bank reform efforts.

The bank reform bill, sponsored by House Banking Chairman Jim Leach, R-Iowa, would repeal a 62-year-old law that separates commercial banks from investment firms. Under the proposal, new financial services holding companies would emerge that could take insured bank deposits, sell mutual funds, or underwrite stocks and bonds.

It would also streamline bank regulation so securities regulators would look after Wall Street activities of these new companies while banking regulators tended to banking functions. And it would simplify the steps a healthy bank needed to take to expand into the securities business.

Congress erected the barrier between Wall Street and commercial banking after the widespread bank failures of the 1930s, reasoning that the securities business was too risky for banks entrusted with federally insured deposits. That view is now widely challenged by banking experts and academics.

Repealing the law would bring greater competition to the marketplace, lowering prices for consumers and offering new services to small and medium-sized businesses, Leach said.

The day-long committee hearing ended with an odd twist. A leading committee Democrat, Rep. Charles Schumer, D-N.Y., offered to bring to a vote the insurance compromise drafted by Baker, a Republican. The move was ruled out of order.

“This issue has scuttled this legislation time and time again,” Schumer said. “And whether we vote on it here today or not, we’re going to have to deal with this issue.”

The bill now is scheduled for referral to the House Commerce Committee, where chairman Thomas Bliley, R-Va., has sponsored a bill that analysts say could restrict banks’ ability to sell insurance and annuities on the state level.

Banking Committee members spent about 6 hours working through 41 amendments to the bill, ranging from community reinvestment to consumer protection to regulation.

Reps. Kweisi Mfume, D-Md., and Joseph Kennedy, D-Mass., won a significant victory by amending the bill to prevent banks with poor community reinvestment act ratings from purchasing a securities firm.

The aim is to ensure banks are meeting a community’s credit needs, particularly in the inner cities, before they’re granted the new powers under the bill.

“This is a very moderate request considering the magnitude of modernization we are undertaking,” Mfume said.

But another pro-consumer measure sponsored by Schumer was soundly defeated. The amendment would have compelled banks to inform consumers in writing about risks of investing in mutual funds and securities. Leach argued that earlier amendments covered the same territory.