US prepares to ease bank rule

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FRThe Clinton administration is proposing sweeping changes in the laws governing the US banking industry, that would break down the barriers between commercial banks, security firms and insurance companies, and clear the way for a new round of mergers and consolidation across the financial sector.

Under the plan, sketched out yesterday by Robert Rubin, the Treasury Secretary, the Glass-Steagall Act which has separated commercial and investment banking since 1935, would be repealed. The aministration is also calling for an overhaul of the 1956 Bank Holding Company Act, so that banks and insurance companies can belong to the same financial group.

Hitherto, every effort by Congress to overturn Glass-Steagall has foundered on the dogged opposition of small banks, and the intractable hostility of Democratic committee chairmen. But last November's Republican takeover has changed things. Mr Rubin's blueprint has enough support in both Senate and Congress, even opponents of reform concede, that some kind of reform is bound to pass.

Today's strict regulations stem from the belief that rampant stock market speculation caused the banking collapse that ushered in the Great Depression.

Accordingly, only a bank or a bank holding company may own another bank. Some restrictions have been lifted in recent years - notably to allow banks to operate outside their home states and to run stock trading business - but the US financial sector is still fragmented and inefficient.

The Administration argues that by allowing banks, securities firms and insurance companies to join forces, artificial barriers would be removed and consumers would benefit through lower costs.

Mr Rubin maintains that by having different agencies regulate separate divisions (the Federal Reserve and the Comptroller of the Currency for banks, while the SEC would continue to oversee securities trading) "firewalls" would be created to reduce the risk of Federal bailouts for a crisis- hit group.

The Rubin plan falls midway between the two Republican versions on Capitol Hill: more ambitious than the draft House bill of Jim Leach, banking committee chairman, which would permit links between banks and securities firms, but stopping well short of the Senate banking committee blueprint, which would allow banks to own, and be owned by, even companies outside the financial sector.