A House committee has recommended sweeping changes in the nation's banking laws, criticizing present laws that bar banks from the securities business and other industries as anticompetitive and potentially dangerous to their financial soundness.
The House Government Operations Committee, in a report adopted Tuesday and released yesterday, recommended changes that would allow federally insured banks and thrift institutions to operate as part of corporations that also own securities or nonbank financial firms.
The report did not propose specific legislation, but comes as Congress prepares to debate bills revising federal banking laws. In the Senate, Sen. William Proxmire (D-Wis.), a long-time opponent of allowing banking and investment banking under the same roof, said he is keeping an open mind on the issue and may favor repeal of the Glass-Steagall Act.
The committee stated that the 1933 Glass-Steagall Act, which separates commercial and investment banking, and the Bank Holding Company Act prohibiting affiliations between banks and other types of businesses acting in combination with each other, "severely impair the mobility of corporate capital invested in the commercial banking industry.
"These legal barriers to the redeployment of corporate capital by banking firms, which have no counterpart in other industries, have serious adverse consequences for the financial soundness of banks and the efficiency and competitiveness of the entire U.S. financial sector."
The report is based on a study by the panel's subcommittee on commerce, consumer and monetary affairs, whose chairman, Rep. Doug Barnard (D-Ga.), is a member of the House Banking Committee.
Federal laws prohibit banks from owning or being owned by companies not related to banking, and ban most banks from being affiliated with securities firms.
Major banks have argued for years that the government should ease the restrictions because of increasing competition from giant securities houses and other nonbank corporations for the banks' traditional customers.
"The effects of these barriers are strongly anticompetitive because they protect other industries, particularly the heavily concentrated and highly profitable investment banking industry, from bank competition," the committee report stated.
"Moreover, by effectively locking the corporate capital of banking firms into a restricted range of activities that now exhibit both declining profitability and substantially increased risk, these barriers have contributed to the recent impaired financial condition of the banking industry."
The report proposed a number of safeguards, including a ban against loans between the affiliated companies and strict enforcement of minimum capital requirements.
To discourage a bank's parent company from looting the bank's assets for its own benefit, the report recommended making the holding company liable for losses incurred by a federal deposit insurance fund if the bank failed.
Barnard said, "Greater capital mobility for banking corporations to invest in new lines of financial business, coupled with truly tough insulation of their insured deposits from all risks in the nonbanking side of their business, will significantly enhance the safety and soundness of the entire banking industry."