November 1999 should be a month long-remembered by the financial-services industry. The governor signed legislation to keep insurers and banks domiciled in Indiana, and the president signed long-awaited legislation to allow common ownership of banks, insurers and securities firms.
Nationally, the Gramm-Leach-Bliley Act repeals the Depression era Glass-Steagall Act and amends other statutes, clearing the way for a more dynamic financial-services sector. In reality, the walls between banking, insurance and securities firms were like Swiss cheese. New holes appeared with dozens of court decisions, state law changes and with deregulation efforts during the Reagan era. But the reforms are now official.
Under the new law--known as the Financial Services Modernization Act--banks, securities firms and insurance companies can now affiliate within a financial holding company structure, or FHC. The Federal Reserve Board runs the approval process for FHCs and has some umbrella responsibilities, but existing state and federal regulatory bodies--such as the Securities and Exchange Commission, Comptroller of the Currency, Treasury Department and state insurance and banking departments--retain their "functional" regulatory powers. "Functional" is an important word in the new order. Insurance regulators, for example, will regulate insurance issues regardless of the new structure.
The Fed's interim rules, issued in January, outline procedures by which bank holding companies and foreign banks elect to become FHCs. Immediate applications were permitted so that the Fed could approve FHC status on March 13, 2000, the first business day after the effective date of the act. The rules require a bank holding company's depository institutions to be well-capitalized, well-managed and have at least a "satisfactory" rating under the Community Reinvestment Act.
Solvency safeguards are retained preventing the mix of assets among banks, insurance and brokerage businesses. In addition, non-financial companies are now prohibited from owning commercial banks.
"The largest banks in the country will benefit," according to Brad Kime, executive vice president at Irwin Union Bank in Columbus. Kime says Irwin, a state-chartered bank since 1871 with $1.3 billion in assets, has no current plans to purchase insurance or brokerage firms. But, he adds, "We've been able to sell insurance products since the 1930s and brokerage services since the 1980s," acting as an agent and sales arm. The new federal legislation will "spur large cross-industry mergers," Kime predicts.
The highly publicized CitiCorpTravelers merger in 1998 is an example. It was saddled with a five-year window in which to work out its legal and regulatory bugs. But it should have smooth sailing with the passage of the Financial Services Modernization Act.
Bankers worked for two decades to repeal Glass-Steagall. The American Bankers Association touts the benefits of the new law as increased consumer access to services through one-stop shopping and lower costs through economies of scale, greater competition and eliminating agent middlemen.
But the addition of consumer-protection provisions, including full disclosure of fees and safeguarding customer privacy, became part of the price of passage.
Privacy is a hot issue, from grocery store discount cards that track your every cookie purchase to cookies on your hard drive that track your every Web move. Consumers won new privacy protections in the financial reform act. "There are firewalls to protect certain transactions," says Bill King, president of the Indiana Bankers Association. Although he says that most banks didn't sell in formation, some highly publicize cases triggered the new restrictions.
Chase Manhattan Corp. signed a settlement agreement with New York's attorney general to halt its practice of selling credit card limit and balance information to outside marketers. Under the agreement, Chase customers will have to "opt-out" to indicate they don't want their information shared. A similar "opt-out" provision is included in the new federal law for all financial institutions, with a few exceptions. Kin explains the necessity of releasing some information, such as providing account numbers to outside check printers, in order to serve customers.
Privacy concerns and the many other issues financial-services changes are raising have created new business for law firms. For example Indianapolis-based Baker & Daniels has formed a 19-member insurance team to meet projected client needs under the new law.
"Privacy is on the top of everyone's list right now," says Scott Kosnoff, co-chair of the team along with Charlie Richardson in Baker & Daniels' Washington office. The big reason that banks and insurers wanted to affiliate was to get access to each others' client base. Under the new law, "affiliates have a disclosure requirement but don't have to give the opt-out" choice, says Kosnoff. He says that the privacy battle will now shift to the states, where consumer groups are likely to push for even greater protections.
Larry Forrester, president of the Indianapolis-based National Association of Mutual Insurance Companies (NAMIC), says his organization supported the final financial-services bill. But the price of its support included a clear definition of insurance products, a swift dispute-resolution process between banks and insurance regulators, and redomestication provisions for companies wanting to demutualize.
Insurance companies are regulated by the states, unlike banks, which have dual state and federal regulatory agencies. NAMIC, representing its 1,300 members, was successful in including a provision to give state regulators the same clout as federal regulators in jurisdictional disputes on banking and insurance matters.
Insurance companies historically have fought hard to retain state jurisdiction over the industry, but NAMIC sought an exception and won. Mutual insurance companies can now easily redomesticate (move to another state) if their home state does not recognize mutual holding companies. Forrester says some state regulators opposed the provision, reasoning that companies would now shop around for the best regulatory climate.
"Banks have been selling insurance for many years," says Roger Ronk, executive vice president of the Independent Insurance Agents of Indiana. "It's not a big issue."
But he questions the notion that consumers will want one-stop shopping for all their financial services. "Customers will go to the person who offers the better service," says Ronk. "Our guys are independent business people who are service-oriented and competitive." Ronk also notes the new federal law's prohibition against financial superstores luring customers with offers of better interest rates if they also buy their insurance there.
State Farm, Farm Bureau, Nordstrom and some other nonbanks are winners under the new regulations. Wal-Mart is a loser. Before the legislation was passed, a number of non-banking companies such as Nordstrom and Wal-Mart had made plans to obtain their own thrift charters under an obscure "unitary thrift" provision. But the dike is now plugged, and bankers are breathing easier. Any application that had not been approved or was not in the pipeline as of May 4, 1999, is now dead. Unfortunately for Wal-Mart, it missed the deadline by a month. Of course, Wal-Mart can still partner with a bank to provide in-store customer services, but it's prohibited from owning a thrift.
Meanwhile, the new law opened the door for certain kinds of financial-services firms, including insurance companies, to enter the banking business. One such entry involves Forrester's insurance association, NAMIC.
NAMIC last month was awarded a charter to operate Assurance Partners Bank in Carmel. The bank, due to open this spring, will offer financial products including consumer loans through NAMIC member companies and their agents. As a startup, it will begin operations with $12.5 million raised from 250 of its members.
"Our objective is to provide an array of banking services, primarily lending, such as auto, personal, home equity, residential mortgage and small-business loans," says David Fronek, the bank's president and CEO. The bank, he says, also will offer a limited menu of deposit accounts, including certificates of deposit and money-market accounts.
But in many ways it won't resemble a typical bank, he stresses. "We will be open to the public, but it's really not going to be a bricks-and-mortar type of bank," he says. Don't look for a lobby, ATM or row of teller windows. For most customers the initial contact will come through an insurance company or agent, and much of the business will be transacted through the mail or over the phone.
Meanwhile, the Federal Home Loan Bank of Indianapolis is reacting to marketplace changes by expanding its roles beyond mortgages to benefit Indiana small businesses and farmers. "Many small banks are finding loan demand is exceeding deposit growth," says Tom Williams, vice president of government affairs. With baby boomers choosing mutual funds over savings accounts, "banks have decided not to chase depositors," Williams says. Instead, small banks are relying on borrowed money to finance their loans. And community banks with assets of less than $500 million may now borrow from the Federal Home Loan Bank to finance a variety of business customer needs.
How are changes in financial service affecting those in the securities business? Mike Bosway, president and CEO of City Securities in Indianapolis, says he won't be doing things any differently. "Well before the repeal of Glass-Steagall, there was a breaking down of barriers between the sectors," he says. "That would have continued to happen. The market demanded it." Bosway points to KeyBank's purchase of McDonald Securities, which took place prior to passage of the new law. And the former Raffensperger Hughes & Co. of Indianapolis has been a part of National City Corp. for much of the past decade.
Also, Merrill Lynch has already offered some of the most competitive banking services, from CDs and money markets to checking and mortgages. "But the repeal of GlassSteagall will enable us to do this more efficiently and will give us the flexibility to offer an even wider array of products and services," says Michael Welsh, resident vice president in Indianapolis.
Indiana Bankers Association's Bill King hopes bank customers will eventually want to shop for securities "at a convenient location where they're already transacting business." But he's realistic. "Consumers can e-trade from home for $8--it's hard to get more convenient than that."
Changes in state financial-services laws were finalized in a special General Assembly session last November. The General Assembly saved the day--or thought it did--by allowing the creation of mutual insurance holding companies. Despite the efforts, a long-planned merger of AUL and Indianapolis Life fell apart when Indianapolis Life decided to demutualize and be acquired by Iowa's American Mutual Holding Co., which is also demutualizing. American United Life will be "reviewing all its plans from last year," according to Jim Freeman, the company's vice president of corporate affairs. "In the first quarter, we'll finalize our future plans."
All of this activity is new for the Indiana Department of Insurance. Commissioner Sally McCarty says her department, charged with overseeing the complicated conversions from mutual companies into stock companies, will seek experienced consultants with no ties to the companies being regulated. This likely will mean hiring out-of-state experts.
"The process could take up to a year," says McCarty, "but we're hoping for eight to nine months."
The General Assembly did hit a home run in November with changes in the financial tax laws. Such banks as 1st Source in South Bend and Terre Haute First Financial won't have to move their charters to other states to avoid double taxation.
The bank tax problem occurred after passage of interstate banking deregulation laws. If an Indiana bank acquired a bank in Illinois, for example, and converted its locations into branches of the Indiana bank, it would be subject to Indiana and Illinois financial institution taxes. Such Indiana bank holding companies as CNB and Old National in Evansville--which like many banking companies wanted to consolidate their various banks under a single charter--found that they could save millions by moving their bank charters to a state that didn't tax twice. So they did.
Moving the charter doesn't necessarily equate to moving the bank headquarters. While CNB moved its Civitas Bank charter to Michigan, it remained Evansville-based. "But once the charter's gone, the loyalty's gone," says King, "and any expansion will probably occur in the other state. That's the big impact."
It's essentially a moot point in the case of CNB, because the Evansville banking giant is in the process of merging with Ohio's Fifth Third. But armed with the new legislative protection, Old National is "100 percent committed to moving its charter back to Indiana this July," according to its general counsel and corporate secretary, Jeff Knight.
Irwin Union, one of Indiana's largest state-chartered banks, had not announced a decision to move its charter. But Kime says that with its increase in out-of-state operations, "we were going to look at it seriously if the legislation didn't pass."
Despite the state law changes, "Indiana still taxes financial institutions higher than other states--we're no tax haven," says First Bank Richmond's CEO, Bob Fix. He adds: "Indiana's non-competitive position extends to the insurance and mutualfund industries," as well. Sounds like a new legislative agenda.
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|Title Annotation:||Financial Services Modernization Act replaces Glass-Steagall|
|Comment:||It's Official.(Financial Services Modernization Act replaces Glass-Steagall)|
|Publication:||Indiana Business Magazine|
|Date:||Mar 1, 2000|
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