Rubin Presses Banking Reform
Neither Treasury Secretary Robert Rubin nor Federal Reserve Chairman Alan Greenspan are giving an inch in their dispute over the course of bank reform legislation.
In testimony to the House Banking Committee on Friday, Rubin said the White House wants Congress to repeal laws that prevent banks from selling insurance or stocks. But he warned lawmakers that last year's veto threat is still alive.
"Treasury has long believed in the benefits of such legislation but we have also been clear that if this is going to be done, it needs to be done right," Rubin said.
On Thursday, Greenspan said he would prefer no legislation to a law that adopts Rubin's approach.
The two men, normally close in their thinking about the nation's economic policy, have a fundamental difference that won't be easily bridged. They'll sit down with House Banking Committee leaders, including chairman Rep. Jim Leach, R-Iowa, and the ranking Democrat, Rep. John LaFalce, D-N.Y., to try to craft a compromise.
Greenspan backs Leach's bill (HR 10), which narrowly passed the House last year before getting bogged down in the Senate. Rubin has endorsed an alternative bill sponsored by LaFalce.
Rubin wants banks to have flexibility about how they structure their corporate affairs. He thinks they should have the choice of creating either wholly owned subsidiaries to engage in insurance or stock underwriting or separate affiliates of their financial services holding company to run their insurance and securities businesses.
Greenspan insists that only the affiliate structure will preserve the safety and soundness of the American banking system. Rubin said his approach is actually safer than Greenspan's.
Banks receive special benefits (like deposit insurance and access to the Fed's payment system and discount window) in exchange for tight regulation. Greenspan's worry is that companies will be able to transfer the subsidy inherent in those benefits to non-bank activities unless a firewall is erected between the different activities of the financial services holding company. Rubin has the same concern, but he believes that either corporate form would prevent improper subsidization.
The only difference, Rubin said, is that federal bank regulators would be able to come after the assets of the nonbank subsidiary in case the bank failed, but they would not be able to get the assets of an affiliate.
The debate seems academic at a time when banks are healthy, but both Rubin and Greenspan well remember the savings and loan scandal of the late 1980s that was fostered in part by the encouragement of risky behavior guaranteed by a taxpayer-funded bailout. Neither man wants to extend the scope of federal guarantees or supervision farther than necessary.
Part of the dispute has to be judged as a turf battle. Treasury supervises national banks while the Fed supervises state-chartered banks that form national bank holding companies. Treasury would lose control over bnks that form affiliates to handle their insurance and securities operations.
Rubin said the elected administration must have close, day-to-day ties with the banking industry to help it formulate economic policy. If subsidiaries are not granted new powers, Rubin said, "gradually banks will gravitate away from the national banking system, and this critical connection will be lost."
The disagreement between Rubin and Greenspan is threatening to hold up passage of the legislation just when the dozens of affected industry groups and regulatory bodies seem more united than ever behind getting something done.
"The market will continue to force change whether or not Congress acts," Greenspan said Thursday, but he said legislation is required to allow the convergence of financial services to be rational. Rubin agreed, saying modernization can "occur in a more orderly fashion" with good legislation.
Written By Rex Nutting, CBS MarketWatch