Modernizing banking: the repeal of Glass-Steagall.

The Glass-Steagall Act was enacted during the Great Depression to protect banks and safeguard the financial system. However, as Robert E. Rubin, secretary of the Treasury, told the House Committee on Banking and Financial Services, "The banking industry is fundamentally different from what it was two decades ago, let alone in 1933." Since its enactment, the Glass-Steagall Act has restricted the securities activities and affiliations of banks, separating commercial banking from investment banking. Although this distinction has become less marked over the last several years, obstacles to the integration of banking with securities underwriting and dealing still remain.

As of April the House and Senate banking committees were poised to repeal this decades-old law. The chairmen of these committees, Congressman Jim Leach (R-Iowa) and Senator Alfonse D'Amato (R-N.Y.), have introduced legislation to allow affiliations between commercial and investment banking. The Clinton administration also has voiced support for Glass-Steagall's repeal, although it has not produced legislation of its own.

House Banking Committee chairman Leach considers repeal a top priority. His bill, HR-1062, would create financial services holding companies (FSHCs) that would be allowed to operate both bank and securities affiliates. The bill also would allow securities firms to own wholesale depository institutions through an investment bank holding company structure. As is now the case with bank holding companies, the FSHC would be regulated by the Federal Reserve Board; however, each subsidiary would be regulated by function - banks by the appropriate banking regulator and securities affiliates by the Securities and Exchange Commision. Thus, the bill would maintain firewalls between the securities and bank subsidiaries.

The Clinton administration supports reform beyond Leach's proposal and would allow banks to own or affiliate with both securities and insurance companies. In addition, the administration believes the structure of financial services companies should not be dictated by legislation, so it wants to allow banks to operate securities affiliates through a holding company structure or as a direct subsidiary of the bank. The Administration's regulation would be on a functional basis, and firewalls between the securities and bank subsidiaries would be included to protect the insured depository.

D'Amato's legislation goes further than either Leach's or the Clinton administration's proposal. Not only would the bill eliminate the Glass-Steagall division between commercial and investment banking, but it also would end the separation between banking and commerce. D'Amato's bill would allow an FSHC to own a bank, securities, insurance or any other type of commercial firm and would create a National Financial Services Committee to oversee the holding company, while the subsidiaries would be regulated by function. Congressman Richard Baker (R-La.) has introduced identical legislation in the House. However, both the Clinton administration and Leach are opposed to mixing banking and commerce. In fact, Chairman Leach has said he would oppose any legislation that would seek to weaken the historic separation between banking and commerce.