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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: William H Huebl who wrote (44174)	10/24/1999 12:35:00 PM
From: Skeet Shipman	Read Replies (1) \| Respond to of 94695

Bill It seems ironic after last year's financial crisis and the talk of an asset bubble Congress would move ahead in repealing Glass-Steagall without detailing the impact on Federal Deposit Insurance Corporation. DOES REPEALING GLASS-STEAGALL PUT THE FDIC BANK INSURANCE PROGRAM AT RISK? (Engulfed in details sometimes legislators forget to ask the most important questions?) dailynews.yahoo.com TOO BIG TOO FAIL? Will the economy, consumer and taxpayer end up paying the bill? Curbing banks' ability to grow too large has been a common theme in legislation through the years. The Glass-Steagall Act assumed that the economic consequences of allowing interdependence of commercial banking, investment banking, insurance business and securities business (and international exposure) would lead to excessive risk to our banking system. It was enacted because 40% of the banking system failed (1929 - 1933), security asset abuses of self and interdependent ownership (Investment Trusts), and the idea that it is improper for banks to risk losses from insurance underwriting (self insuring networks). Understanding How Glass-Steagall Act Impacts Investment Banking and the Role of Commercial Banks: cftech.com A Summary of the Rationale Leading up to the Enactment of the Glass Steagall Act The original (and in some measure, continuing) reasons and arguments for legally separating commercial and investment banking include: ú Risk of loses (safety and soundness). Banks that engaged in underwriting and holding corporate securities and municipal revenue bonds presented significant risk of loss to depositors and the federal government that had to come to their rescue; they also were more subject to failure with a resulting loss of public confidence in the banking system and greater risk of financial system collapse. ú Conflicts of interest and other abuses. Banks that offer investment banking services and mutual funds were subject to conflicts of interest and other abuses, thereby resulting in harm to their customers, including borrowers, depositors, and correspondent banks. ú Improper banking activity. Even if there were no actual abuses, securities-related activities are contrary to the way banking ought to be conducted. ú Producer desired constraints on competition. Some securities brokers and underwriters and some bankers want to bar those banks that would offer securities and underwriting services from entering their markets. ú The Federal 'safety net' should not be extended more than necessary. Federally provided deposit insurance and access to discount window borrowings at the Federal Reserve permit and even encourage banks to take greater risks than are socially optimal. Securities activities are risky and should not be permitted to banks that are protected with the federal 'safety net'. ú Unfair competition. In any event, banks get subsidized federal deposit insurance which gives them access to 'cheap' deposit funds. Thus they have market power and can engage in cross-subsidization that gives them an unfair competitive advantage over non-bank competitors (e.g. Securities brokers and underwriters) were they permitted to offer investment banking services. ú Concentration of power and less-than-competitive performance. Commercial banks' competitive advantages would result in their domination or takeover of securities brokerage and underwriting firms if they were permitted to offer investment banking services or hold corporate equities. The result would be an unacceptable concentration of power and less-than-competitive performance. ú Universal v. Specialized Banking. If the Glass-Steagall Act were repealed, the U.S. Banking system would come to resemble the German universal system, which would be detrimental to bank clients and the economy. WHO WILL PAY? Using the impact of nationwide banking legislation as a guide, you need only ask yourself : Are your banking services less expensive now? Do you have better customer service? The acquisition debt costs will be passed on to the customer. If a financial crisis were to develop banks are presently insured by the Federal Reserve - FDIC Program, either the Federal Reserve would have to extensively lower interest rates resulting in high consumer inflation, and/or taxpayers would have to provide the excess funds required through Congressional appropriations. INABILITY TO FAIL INDEPENDENTLY? = FDIC AT RISK? (FDIC - Federal Deposit Insurance Corporation) There should be no reason to oppose the repeal of the Glass-Steagall Act provided the commercial banking identities can stand independent of the failure of other operations. If not, it places the entire FDIC at risk.(to an unspecified degree.) Congress could still repeal Glass-Steagall as long as those banks which are not independent from the failure of other operations are removed from the FDIC Insurance program. (This is not saying the present system does not need to have limits on its risk from derivative and international exposure.) I DO NOT KNOW THE DETAILS OF THE PROPOSAL. YET, THE SECURITY OF THE FDIC BANKING INSURANCE PROGRAM MUST BE AN UNCOMPROMISING REQUIREMENT. Skeet MAJOR PROVISIONS OF THE BILL: washingtonpost.com Mergers Repeals the Banking Act of 1933 (Glass-Steagall), which separated commercial banking from investment banking, and a 1956 law that separated bank and insurance companies. This would allow banks, insurance companies and securities firms to more easily merge or otherwise enter one another's businesses. That process has already begun -- Citicorp bought Travelers Insurance last year, and many banks have bought securities firms -- because firms have taken advantage of loopholes and creative rules written by various regulators. But regulatory hoops have been costly for financial firms. Without the new law CitiGroup next year might have been forced to shed its insurance operations. The legislation also would create wholesale banks that cater to institutional investors and the wealthy and don't carry federal deposit insurance and so are subject to fewer federal regulations. These banks could not affiliate with banks with deposit insurance. Privacy Requires financial institutions to craft privacy policies and to clearly spell out those policies to consumers in writing. With some exceptions, the bill also would allow consumers to block companies in most instances from sharing or selling information to third parties, such as telemarketers. Banking, insurance and securities regulators are required to develop and enforce financial privacy rules. State law was given preference over federal law if the state gives consumers greater rights to control -- and prevent -- the sale or sharing of personal financial data. Consumer groups, however, have complained that the bill language does not go far enough. For instance, information sharing would be allowed if a bank requires a third party such as a telemarketer to maintain the confidentiality of the information and notifies customers of the relationship. Savings & Loans Stops federal savings and loan institutions from being sold to non-banking companies, though it grandfathers several companies, including clothing retailer Nordstrom, that already own a thrift. The government used such sales during the savings and loan crisis of the 1980s to get ailing thrifts off the government's hands to try to save taxpayers money, but recently non-bank companies have purchased thrifts as a way to offer in-house banking services such as credit cards and equity lines of credit. The practice has been dubbed derisively by critics as a buy-a-blouse-on-the-house style of financing that could lead American consumers even more heavily into debt. But banks, which are barred from being owned by or owning a non-banking company, have argued that thrifts had an unfair advantage. Community Lending Retains key parts of the Community Reinvestment Act (CRA) that requires banks to lend in the same low-income or minority areas where they take deposits. Some small banks will receive less frequent CRA reviews but large banks merging with insurers or securities firms will have to have a satisfactory CRA rating. And a company that owns or is affiliated with a bank carrying an unsatisfactory CRA rating would not be able to engage in mergers or other activities permitted under the new law. But low-cost checking accounts for poor people and a study on ATM fees and other rising bank charges were voted down, against the wishes of the consumer lobbies and several lawmakers. Regulation Allows the Federal Reserve and Treasury to split oversight over banks entering new financial activities. Though the Fed would oversee financial holding companies, the bill, with some exceptions, calls for activities within the holding company to be regulated by the federal or state agency with the most expertise in that business. The sale of stocks and bonds by banks would mostly be regulated by the Securities and Exchange Commission, for example. Checking accounts, lending and other traditional bank activities would be regulated at national banks by the Office of the Comptroller of the Currency, a unit of the Treasury Department. Insurance under-writing and real estate development will have to be kept in affiliates of their holding companies, which fall under Federal Reserve scrutiny. The Treasury and the Fed would share oversight of newly allowed bank affiliates known as merchant banks that could take limited ownership positions in non-banking companies.