Back in 1987, William D. Glover, chairman of the First National Bank of Eastern Arkansas, spotted what looked like an opportunity.

His bank had been selling to its borrowers something called credit life insurance -- but only as an agent. The policies themselves -- which pay off loans if the borrower dies -- were being issued by insurance companies.

Glover asked himself: Why couldn't the bank write the policy? That way, the bank could keep not only the 40 percent commission it already was getting, but the insurance company profit as well.

Federal regulations appeared to allow it, calling them "debt cancellation contracts" instead of insurance. Since credit life insurers pay out only about 30 percent of premiums in claims on average, it looked to Glover as if "there was another 30 percent of that premium out there someplace" that could be going into his bank's coffers.

To the state's insurance commissioner, however, debt cancellation contracts still looked like insurance, and when he learned of First National's plans, he forbade them.

The result was a three-year legal battle that went all the way to the U.S. Supreme Court and involved major principles of how financial institutions in this country will be regulated.

In this case, the bank -- and by extension bank regulators -- won. In doing so they took another piece out of the wall that has separated banks from other types of business since the Great Depression.

Nor is the Arkansas case an isolated one. While a major debate is building over whether and how to rewrite the laws covering financial institutions, the banks, their regulators and the courts are proceeding with a de facto deregulation that has already provided banks with wide new powers.

Much of the shift has come in the sale of insurance, but as the Arkansas case indicates, banks also are dipping their toes into the underwriting of insurance as well.

While the pending legislative battle involves a broad spectrum of special interests, nowhere is the battle more furious than over the banks' efforts to invade the turf of the other giant of American finance, the insurance industry.

Banks argue that expanded powers make sense in a global marketplace. Insurers, however, charge that banks might use their position as lenders to coerce borrowers into buying insurance and that the banks also might be tempted to put government-insured deposits at risk by recklessly courting new business in the insurance arena.

Wider Powers for Banks First National, which took its cue from regulations issued by the Office of the Comptroller of the Currency, was battled all the way to the high court by the insurance industry. The insurers, backed by the Arkansas commissioner, argued that debt cancellation contracts are indistinguishable from credit life insurance, and thus they should be outside the bank's authority to write.

However, the comptroller, reasoning that such contracts are incidental to the business of banking, views them as a perfectly proper activity. Indeed Comptroller Robert L. Clarke, who was recently reappointed to another five-year term, is an outspoken advocate of wider powers for banks.

Clarke told the Senate Banking Committee in July that current law unduly restricts American banks, making them less efficient than foreign competitors and driving up the cost of credit and consumer services. "These restrictions can be relaxed without threatening the safety and soundness of the banking system," he said.

At the same time, the other major bank regulatory agency, the Federal Reserve Board, which regulates bank holding companies, has also shown a willingness to let its charges expand.

As a result, the First National case is but one of a series of regulatory cases in the past few years in which banks have gained sharply expanded insurance powers. The major gains:

The Federal Reserve granted Merchants National Corp., an Indiana bank holding company, power to sell insurance through state-chartered banks that it owned. The Fed reasoned that since Indiana law permitted banks to sell insurance, Merchants National could do so through its bank subsidiaries. Insurers challenged the Fed but lost. The Supreme Court in October refused to hear the case.

The comptroller ruled that Citicorp could sell financial guaranty insurance, a type of insurance covering municipal bonds, through a subsidiary called American Municipal Bond Assurance Corp. Insurers sued but were told by the court that jurisdiction lies with the Fed. Insurers have petitioned the Fed to overturn the comptroller.

The comptroller has ruled that a provision of the law meant to allow banks in small towns to sell insurance means that any national bank can sell insurance to anyone if it does so through a branch that is located in a town of less than 5,000 as specified by the law. U.S. National Bank of Portland, Ore., had set up a branch in Banks, Ore., population 489, and begun selling a full range of insurance products to its customers and others. The comptroller's ruling was upheld by a federal court here last May.

Last February, the comptroller granted permission to the Goodhue County National Bank of Red Wing, Minn., to sell fixed-rate annuities to its customers. This was followed a month later by permission for NCNB National Bank to sell similar products through a subsidiary throughout the Southeast. A coalition of insurance agent groups has filed suit in Texas to overturn the comptroller's action in the NCNB case. Annuity contracts, which provide a steady income to the buyer after a number of years, are a major part of the insurance seller's product line.

Waving the 'Magic Wand' The rationale, in most of these cases, is a provision of the law that allows banks to engage in business substantially related to banking.

The comptroller, in the eyes of insurers, has turned this from a provision meant to allow regulatory flexibility into a loophole through which the entire banking industry is about to climb.

"The comptroller is off on a real lark, on what you could call deregulation by magic wand," said Gary Hughes of the American Council of Life Insurance. "The comptroller waves his magic wand and says something is not insurance" but instead is the functional equivalent of some banking product.

Annuities, for example, though traditionally sold by insurers, "are primarily financial investments," the comptroller's office wrote in approving annuity sales by Goodhue County National Bank.

"Investors who purchase annuities are not seeking to pool a catastrophic risk such as death, injury or property damage, but are instead seeking a guaranteed, long-term return on their assets... . {The} risk is essentially an investment risk, not an insurance risk," the letter said.

Banks have not won all the cases, however. While regulators seem willing to allow them to sell insurance under many circumstances, they are less enthusiastic about allowing banks to underwrite it -- that is, to bear the risk of paying claims.

For example, when Citicorp sought to take advantage of a new Delaware law that allowed state-chartered banks to sell and underwrite a wide range of insurance, the Fed said no. The board in September ordered the bank holding company's American Family Life Insurance subsidiary to stop writing anything but credit-related insurance. Annuities, whole and term life insurance, hospital coverage and the like, which American Family had begun offering, were off-limits. Citicorp is appealing the Fed's order to the courts.

Insurers Fight Back Insurers, especially agents, see in all of this an effort by banks and their regulators to find some profitable business because the banks don't seem to be able to make any money in traditional banking.

While applauding the Fed's action against Citicorp, insurers fear the regulatory and judicial tide is running against them. Thus they plan a major push this year to win back from Congress some of the ground lost in the courts.

"Because of the regulatory and judicial setbacks we have experienced in recent years, we need a bill worse than anyone," said Joel Wood of the National Association of Professional Insurance Agents.

Banks, for their part, would like a bill that would eliminate the patchwork nature of their new powers and allow them economies of scale.

However, they prefer the present system to one that locks them in to their old limitations.

"We at {the American Bankers Association} would say it's better to have piecemeal change that allows some progress than to have no change at all, to have the whole system ossifying," said Philip Corwin of the ABA.

Few people on either side of the issue were willing to speculate on the likelihood of congressional action this year, but most agreed that the willingness of the Bush administration to push for a bill will be key.

Several Hill experts suggested that many members of Congress are not unhappy to watch what one called "incremental deregulation" by the regulators and courts. The savings and loan debacle, which came in the wake of a global deregulation of those institutions, has disposed many to wait and see if the comptroller's "magic wand" produces workable results.