Senate Banking Chairman William Proxmire will introduce legislation this fall to abolish a 50-year-old law that separates commercial banking from securities underwriting in the United States, the Wisconsin Democrat's top banking aide said yesterday.
Whether Proxmire will push for passage of the bill or use it "for discussion purposes" remains to be seen, Ken McLean, Proxmire's chief banking aide, said. In either case, the move represents an about-face for Proxmire, who has long championed separate banking and securities industries.
Although banks and securities firms for years have used loopholes in the law to invade each other's turf, many barriers still separate the two businesses. Passage of the bill Proxmire envisions would clear the last major hurdles separating the two industries and would be the most radical change in financial services law since 1980, when Congress voted to phase out savings account ceilings and permit NOW checking accounts.
Proxmire, by saying he will introduce a bill to repeal the Glass-Steagall Act, is taking an even bolder step than he took two weeks ago when he told the Senate that "the time has come" to reconsider the rationale behind Congress' decision in 1933 to separate commercial lending from securities underwriting.
McLean said the bill will require companies that sell bank products and underwrite securities to keep the two activities separate by enclosing them in separate subsidiaries -- a concept known as "a Chinese Wall" of financial services.
In addition, the bill would reflect Proxmire's worries about concentration of financial services by barring the largest banks from merging with the largest securities firms, McLean said.
Proxmire, a five-term Wisconsin Democrat who will not seek reelection next fall, was the chief author of a banking bill passed several months ago that temporarily bans banks from selling any new securities products.
The bill's purpose was to give Congress more time to debate how far the walls should be torn down between securities firms and banks.
Because of improved computer technology and the internationalization of financial markets since the late 1970s, Proxmire in recent years became convinced the banks should be given a few new, but very limited, securities powers, including the ability to underwrite commercial paper -- short-term IOUs offered by companies to investors -- and to offer mutual funds. But he continued to favor the basic separation of the industries that Glass-Steagall intended.
Now, those same factors have led Proxmire to consider allowing banks to offer a full range of securities products, including corporate debt and equity underwriting -- in effect, a full repeal of Glass-Steagall, his aides said. The result would be that securities firms would also be able to offer a full range of commercial bank products, such as deposit-taking and checking accounts.
"It would be a two-way street that way," said one bank industry lobbyist, and therefore the bill would be more likely to gain support of many bankers and securities underwriters.
By contrast, a proposal to allow banks limited new securities -- products would be vigorously opposed by the securities industry.
The notion of repealing Glass-Steagall has split the securities industry in much the same way that similar questions of deregulation have divided the commercial banking and savings and loan industries, pitting large institutions that favor deregulation against smaller institutions that generally cannot afford to compete with additional products.
"I think that's true," McLean said, referring to the division within the financial community.
Some lobbyists, including the Independent Bankers Association of America, which represents smaller banks, said they are skeptical that Proxmire could win from the 20-member banking committee the 11 votes needed to send the bill to the full Senate. Even if he did, they said, the bill likely would meet stiff opposition in the House.