Halfway Modernization Bill Would Be Good Start

Article excerpt

HR 10, the financial services modernization bill introduced last year by Rep. Jim Leach, R-Iowa, died because it tried to do too much the wrong way.

Though regulatory reform is much needed in the U.S. financial services industry, attempting to revive HR 10 would merely delay reform. Instead, financial services modernization must be rethought in a very fundamental way.

Fortunately last Nov. 8, the day that HR 10 effectively died, Rep. David Dreier, R-Calif., introduced a back-to-basics bill, HR 2940, which should stimulate this rethinking.

HR 10 had substantial flaws. For one thing, it addressed two distinct issues: modernization of the financial services industry and modernization of financial services regulation.

Electronic technology has been blurring distinctions among the three broad product categories of financial services-banking, insurance, and securities. Money market mutual funds and variable annuities are two examples of this blurring. Left to its own devices, the financial marketplace will create many more such products, particularly those that integrate financing with insurance.

Product melding inevitably leads to organizational melding, because a company that is selling melded products cannot be cleanly classified as a bank, insurance company, or securities firm.

The growing inability to neatly classify financial services products and providers renders traditional competitive barriers within the financial services industry meaningless, or worse, anti-competitive. Consequently, these barriers must be demolished to permit financial services providers of various origins to compete on a level playing field.

Instead of doing that, HR 10 would limit what banks could do while locking them into a holding company structure, impede the entry of securities firms and insurance companies into banking, and destroy the thrift charter.

At the same time, HR 10 would preserve the obsolete concept of functional regulation, which is premised on the ability to clearly categorize financial products. To some, functional regulation is the Holy Grail; in reality, it is Humpty Dumpty after his fall.

The genius of Rep. Dreier's bill is that it cuts HR 10's Gordian knot, which would tie industry modernization to regulatory modernization. The four-page legislation addresses only industry modernization, by simply repealing the Glass-Steagall Act and permitting banks and insurers to affiliate.

Though an argument could be made that Rep. Dreier's bill does not go far enough, its objective of separating industry modernization from regulatory modernization is on target. It properly tackles the easier modernization task, because-as is widely agreed in the financial services industry- restrictions on who can compete with whom and who can produce or sell what are obsolete and, worse, counterproductive. …