It's been the bankers' lament for decades: Outdated laws from the Depression hamper them from offering other financial services, while letting rivals offer banklike products such as commercial paper and cash-management accounts. Yet repeated attempts by the commercial banks--including a big push this year--to convince Congress to level the playing field have been thwarted by powerful insurance and brokerage interests that favor the status quo.
Well, here come the banks. With Congress safely out of town, federal regulators are poised to enact new rules that will smash gaping holes in the Glass-Steagall Act--the statutory Berlin Wall separating commercial banks from investment banks. In coming weeks, the Federal Reserve is expected to boost the share of revenue that banks' securities affiliates can derive from underwriting corporate stocks and bonds from 10% to 25%.
What's more, the Comptroller of the Currency plans to issue new rules by yearend to give banks broader entree into a range of financial services through new operating subsidiaries (table). While Comptroller Eugene A. Ludwig isn't talking, Washington lobbyists predict he could set his own ceiling on securities activity to as much as 49% for banks he regulates. Those changes could enable the biggest commercial banks to acquire large Wall Street investment firms.
That's not all. Lobbyists predict the Comptroller may also give banks more freedom to sell life and auto insurance--and even create travel and real estate agencies. For a banking industry used to grinding it out in Congress each year, only to gain little ground, these moves "are the equivalent of a 40-yard-long bomb," says Kenneth A. Guenther, executive vice-president of the Independent Bankers Assn.
To be sure, Ludwig's sweeping changes will anger lawmakers who view the Comptroller's gambit as an end run around their legislative authority. The pending changes are also raising the hackles of brokers and insurers, who fear they will suddenly be put at a competitive disadvantage--and they could derail the protracted congressional efforts to deregulate all financial services. Ludwig "is going to have to justify his actions in court," warns Gary E. Hughes, chief banking counsel for the American Council of Life Insurance (ACLI). "If the regulators give banks these powers, there will be nothing left [for banks] to negotiate." But bankers insist they can't afford to wait for Congress to negotiate a truce in the financial-service warfare--or for courts to referee challenges to the Comptroller's moves. As rivals have increased their offerings of banklike products, bankers have watched their share of the financial-service market plunge to 26% from 30% in 1990 and 69% after World War II.
POWERFUL. Ludwig isn't tipping his hand, but the Clinton confidant and former banking lawyer is clearly feeling his strength; four U.S. Supreme Court verdicts in recent years have upheld his authority to grant new bank powers. In early October, Ludwig told the American Banker that he has the authority to approve "any financial activity and anything incidental to a financial activity, provided that it is fundamentally safe." Lobbyists think he'll approve as many as possible before Congress reconvenes. "Ludwig figures if enough requests are approved, Congress won't be able to put the horses back in the barn," says Alexandria (Va.) consultant Bert Ely. "I'm advising clients to push the envelope with their applications."
Wall Street analysts predict that the one-two combo from the Fed and Comptroller could set the stage for a spate of mergers, with U.S. and foreign banks bidding for smaller brokerages such as Lehman Brothers and Oppenheimer. Similar marriages between banks and insurers could also lie ahead: In a stunning reversal, the ACLI's board on Sept. 20 authorized its lobbyists to negotiate a legislative settlement allowing common ownership of banks and insurers. The insurance agents may, too, drop their long-term opposition. That's music to the ears of the Clinton administration, which plans to follow in Ludwig's wake with a financial deregulation bill in the next Congress. "There's a lot of momentum picking up," says John D. Hawke Jr., the Treasury Dept.'s Under Secretary for domestic finance. If Ludwig prevails in reshaping the financial industry, it will be the brokers and insurers lamenting the status quo.