WASHINGTON -- Treasury Secretary Robert E. Rubin touched off a vigorous lobbying and political fight yesterday by proposing the elimination of legal barriers that have separated the nation's commercial banks, securities firms and insurance companies for decades.
Big businesses in the three industries welcomed the administration's call for Congress to pass legislation essentially abolishing the Glass-Steagall Act, which forbids banks and securities firms from merging.
They said it would help to make them more efficient and more competitive. But small banks and insurance agents strongly criticized the plan as a threat to their operations and bad public policy.
Mr. Rubin said the administration's plan would foster competition, forcing companies to offer better service at lower cost. The proposal would allow banks to diversify into new industries, while requiring that they not use federally insured deposits in those industries. The administration contends that taking such steps will produce a healthier banking industry.
"It's absolutely essential that the banking system maintain safety and soundness," Mr. Rubin said in a speech to the New York Savings Bond Committee in New York City. "But where there are constraints that have become outmoded by changing conditions, then those constraints should be lifted."
The critics of the plan on Capitol Hill and at various trade groups quickly warned that allowing mergers of banks and securities firms could mean heavy losses to taxpayers if the combined companies gambled in stock markets with federally insured money.
"It's absolutely incredible to me that we have a Democratic administration that does not see the dangers of allowing these large financial institutions to have cross ownerships at the expense of Main Street," said Paul A. Eguale, senior vice president at the Independent Insurance Agents of America.
But Edward Yingling, chief lobbyist of the American Bankers Association, said the group would now push actively for the repeal of the Glass-Steagall Act.
Two Republican bills are already working their way through Congress that would also deregulate the U.S. financial system. One, introduced by Rep. Jim Leach of Iowa, chairman of the House Banking Committee, would only allow the mergers of commercial banks and investment banks, but not insurance companies.
Mr. Leach expressed dismay yesterday that the administration's plan was not stricter in preventing the use of federally insured deposits in areas outside commercial banking.
Mr. Leach's bill would have the Federal Reserve regulate a holding company that would own a securities firm and a commercial bank, thereby giving the Fed new powers over the nation's securities industry.
The administration's plan, by contrast, would give the Fed a central role only in regulating financial conglomerates primarily in commercial banking.
Sen. Alfonse D'Amato, R-N.Y., who heads the Senate Banking Committee, and Rep. Richard H. Baker, R-La., who heads a panel of the House Banking Committee, have introduced identical bills in the House and Senate. They would allow non-financial companies like AT&T; Corp. to merge with commercial banks, as well as securities firms and insurance companies.
Mr. D'Amato praised Mr. Rubin's plan for its similarities to his own plan.