The ongoing transformation of banks, brokerages and insurance companies into all-purpose financial superstores would accelerate under legislation the House overwhelmingly approved Thursday night.
The House vote to drop most of the legal barriers separating those financial businesses is a huge advance in the industry’s decadeslong struggle to dismantle a regulatory structure set up during the Great Depression. The 1929 stock market crash and ensuing bank failures made keeping banks out of risky activities an overriding priority at the time.
Now, in an era of global markets and public sentiment for deregulation, political concern has shifted. The focus is on removing regulations that might hinder the competitiveness of U.S. financial institutions and thereby unlock potential savings for consumers and businesses from efficiencies in consolidating financial enterprises.
During House debate, advocates of the legislation described a vision of one-stop providers of financial services that would cut costs for consumers, particularly for those willing to take advantage of bulk discounts by placing multiple services such as bank accounts, stock-trading and insurance coverage under a single umbrella.
“This is fundamentally important for the American economy,” said Rep. Rick Lazio (R-N.Y.). “Congress should break down these barriers to competition, creating an environment for more innovative products and better prices.”
But Rep. John Dingell (D-Mich.) said the legislation would allow banks to engage in “all manner of mischief” and raised the possibility of a repeat of the savings-and-loan scandal in the 1980s on a grander scale. “That cost us about $500 billion. This will cost us a lot more.”
Courts and regulators have been acting for well over a decade on the current deregulatory sentiment to chip away at the legal barriers among financial businesses. Consolidation across traditional industry lines has speeded up during the 1990s through a wave of mammoth mergers.
Although Congress repeatedly has considered legislation to repeal the Depression-era banking laws since 1979, the 343-86 House vote Thursday marks the first time both chambers of Congress have concurred in a vote to lower the regulatory barriers.
The Senate in May passed a measure that is similar to the House bill, and the two measures must be reconciled.
Although some politically thorny differences remain, the House and Senate agree on the outline and most of the details for a far less restrictive regulatory system.
Both measures repeal provisions in the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act that prohibit banks from underwriting securities such as stocks and bonds and from underwriting insurance policies. Likewise, it repeals prohibitions that keep insurance companies and Wall Street securities companies from entering the banking business.
Over the last 15 years, regulators have allowed many of the nation’s largest banks to establish subsidiaries that engage in such Wall Street activities as issuing and selling securities. Yet, although some states allow banks to sell insurance policies, laws generally prevent banks from underwriting insurance themselves.
The Clinton administration declared its support Thursday for the House version. However, the White House expressed reservations that the package includes inadequate protections against racial and sex discrimination in insurance sales.
It also criticized insufficient safeguards for consumer privacy, particularly for medical records.
Consumer activists such as Ralph Nader contend that the financial behemoths contemplated by the legislation would endanger consumer privacy by combining individuals’ financial records, buying habits, hobbies and medical charts into customer profiles.
House Democrats led by Rep. Ed Markey (D-Mass.) sought to give consumers the option to stop financial companies from disclosing their personal financial or medical records to either outside companies or corporate affiliates.
Republican leaders refused to permit consideration of the amendment. Instead, the House approved a Republican-backed provision that allows consumers to protect private information from being shared with outside companies but allows banks to provide the data to corporate cousins.
The opportunity to better target customers by sharing data is one of the significant benefits available for financial companies that affiliate.
Critics also charged that a provision in the legislation intended to safeguard medical privacy weakened existing protections. They said that an exception included for research was so vaguely worded that it would allow insurance companies to divulge medical records to market researchers.
Democrats failed on a 227-203 party-line vote to hold up consideration of the banking measure until the party’s objections on two matters were addressed. One is the privacy issue, and the other a provision they wanted that would have subjected affiliated insurance companies to the same requirement banks have under the Community Reinvestment Act. That act requires banks to serve minority and poor communities.
The Community Reinvestment Act promises to be among the more contentious issues as the House and Senate negotiate a compromise bill that they each must then pass again before a law goes to President Clinton for his signature.
The Clinton administration has promised to veto the regulatory overhaul if it includes rollbacks of the existing reinvestment act contained in the Senate version.
Senate banking chairman Phil Gramm (R-Texas) is among the critics and prevailed in the Senate to exempt about 4,000 banks and savings and loans with under $100 million in assets from the service requirement. His bill also would make it more difficult for community groups to challenge mergers through allegations that a bank had failed to meet its requirements under the act.
The service requirement in banking law is cherished by liberals as a means of protecting against “redlining,” or excluding minority and poor communities from financial services. But many economic conservatives regard the requirement as an unwarranted interference in the marketplace and a vehicle for community groups to blackmail financial institutions.
The White House also has threatened a veto of the Senate bill over a seemingly arcane but financially and politically significant issue of regulatory authority.
The House version, which the administration favors, would allow nationally chartered banks to enter such businesses as insurance sales and stock brokerages through subsidiaries.
The Senate version instead requires banks to create a separate company and affiliate through an overarching holding company.
Small banks contend that the holding-company requirement puts them at a disadvantage because the additional overhead costs would be difficult for them to bear.
But advocates of the requirement argue that it creates a stronger wall between federally insured bank deposits and an affiliate that could fail.
There also is a significant bureaucratic difference between the Senate and House approaches. Nationally chartered banks are regulated by the Treasury Department, which is under the power of the White House.
Bank holding companies are regulated by the Federal Reserve Board, which is independent of the president.
HOW THEY VOTED
How Illinois representatives voted Thursday on a 343-86 roll call by which the House passed a bill that would allow banks, securities firms and insurance companies to merge.
Republicans voting yes: Biggert, Crane, Ewing, Hastert, Hyde, Manzullo, Porter, Shimkus, Weller.
Republicans voting no: LaHood.
Democrats voting yes: Blagojevich, Davis, Gutierrez, Rush.
Democrats voting no: Costello, Evans, Jackson, Phelps, Schakowsky.
Lipinski did not vote.
