What will banking reform do for the country?


March 05, 1995|By David Conn

The federal Glass-Steagall Act is on thin ice. Three competing legislative and administration proposals would end some or all of the 1933 law's restrictions on the ability of banks to engage in other financial services, such as securities underwriting and insurance.

The two legislative proposals would require companies to "wall off" the financial services they offer in distinct subsidiaries or affiliates of a holding company. The Clinton administration approach would not require as much separation below the holding company level.

What are the risks of banking reform? Is it good for the country?

Elizabeth Cooperman

Associate Professor,

Merrick School of Business

University of Baltimore

With all the competition that banks are facing, I think there's really no choice. You've got other countries that have this type of arrangement, and our banks are put at a competitive disadvantage. You've got investment banks that have banks as subsidiaries, you've even got some industrial companies, like Sears [with financial subsidiaries].

I guess the concern, especially with what happened to Barings, is that there need to be strict controls.

Some people have this view that you need a narrow bank. That concept is that banks that are allowed to go into investment banking won't be allowed to take insured deposits, and "narrow banks" that don't go into investment banking would have insured deposits.

I don't think it's a complete solution, but it's probably the best one being offered.

Bert Ely

Banking consultant

Alexandria, Va.

I happen to be kind of a free-market type, and I don't believe in any kind of a law that protects industry turf.

The comptroller of the currency has sent strong signals that he is ready to grant very broad powers to the operating subsidiaries of national banks. So what's emerging here is not just a competition between those bills, but really a competition between two different ways of structuring the financial services industry.

I think more and more bankers are beginning to understand that the Glass-Steagall reform, whoever's bill it is, potentially is a Trojan horse. The bills would actually try to restrict what the comptroller is trying to do: to give banks and their subsidiaries more powers.

The financial services industry is not as efficient as it once was. The reason is that we have all these walls that prevent one industry from getting into another's turf. These are not there to protect consumers, they're there to protect the businesses.

Raymond A. Mason


Legg Mason Inc.

I think the country has been well served under the present rules. We are the envy of the world in terms of the securities business and how it operates.

Why would we be allowing banks to go into new businesses when consistently every time they do we have a horror story? For example real estate: when you go back into the '70s the banks all went into REITs [real estate investment trusts] because the Bank Holding Company Act allowed them to, and we had a debacle.

But this is a push that's been going on for 10 years, with no reciprocation [of securities firms] going back into the banking business.

[As for efficiencies] I do think that any time you get a new player in a business, they tend to do things [at lower prices] only because they're trying to get in the business. We had that in the airlines. I think from that standpoint you'll probably get economies. But they really are different businesses.

Perrin H. Long Jr.

Securities industry analyst,

Brown Brothers Harriman & Co.

There's no question that most of the commercial banks up until recently have seen a decline in one of their better profit lines of business, and that's making commercial loans. Over the years more and more corporations who used to borrow from the bigger banks have gone into the commercial paper market, particularly for longer term loans.

The bankers have been aggressively lobbying Congress to expand their powers and they've been able to get into the mutual fund business, they've been able to get into the securities business if they set up separately held subsidiaries. For all intents and purposes most members of the securities industry view Glass-Steagall as having almost completely deteriorated.

I think that if you have the banks in the securities business, and the insurance people in also, they have to be in wholly owned subsidiaries in which none of the money being used to run the broker-dealer are insured deposits. If something should go amiss with the broker-dealer, it's not going to sink the bank altogether.

The upshot of all this is there's still going to be plenty of opportunity for the broker-dealers to make money, and provide better service than what the banks try to do.

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