Limited Banks’ Giant Hurdle
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For a part of the financial services industry with only a tiny fraction of the nation’s deposits, ”non-bank banks” have certainly created a ruckus. For a part of the financial services industry with only a tiny fraction of the nation’s deposits, ”non-bank banks” have certainly created a ruckus. Little known and poorly understood, these curious financial institutions, which look and act like commercial banks but legally are not, have turned sleepy country banks into powerful tools of financial marketers. They have allowed myriad industrial companies, impatient with existing bank law, to shoulder their way into financial services when that law doesn’t allow it. And they have allowed eager money center banks to get ahead of regulators and around interstate banking prohibitions. In the process, the non-bank, or limited-service, banks have come to symbolize the campaign to deregulate the banking industry. An Assault in Congress Now they face their greatest challenge. In Congress, legislation passed by conference committee yesterday would outlaw new limited-service banks while limiting the asset growth of existing ones - growth that in some cases has topped 100 percent a year - to 7 percent annually. If the legislation becomes law, a lot of the big companies that viewed limited-service banks as an important element in their expansion strategy - from Sears, Roebuck to Gulf and Western to Chemical Bank - might be forced to rethink that strategy. ”It would be the end for new non-bank banks, and a significant restriction for the others,” said H. Rodgin Cohen, a banking partner at the law firm of Sullivan & Cromwell, which represents owners of non-bank banks. ”Seven percent just isn’t that much growth.” But passage of the bill, principally supported by small commercial banks, is far from certain. An advocate of financial deregulation, President Reagan has threatened to veto the legislation, although he may be unable to do so because another part of the bill, which Mr. Reagan favors, would bail out the nearly insolvent Federal Savings and Loan Insurance Corporation. If the bill is killed, just about everyone agrees, the limited-service banks will continue to pop up in virtually every state and offer consumers cut-rate loans and high-rate deposit accounts - better deals, in short, than could be obtained from the local bank or savings and loan. And that, in turn, is expected to give fresh momentum to efforts to deregulate financial institutions. The limited-service bank issue ”really gets to the question of what the structure of financial services will look like,” said Anthony M. Santomero, the Richard K. Mellon Professor of Finance at the Wharton School. A 31-Year-Old Loophole ”Non-bank bank” is the phrase coined to describe the more than 160 institutions established in recent years through a loophole in the Bank Holding Company Act of 1956. As defined in that act, a bank both offers checking accounts and makes commercial loans. If an organization does one but not the other, it is not legally a bank. Capitalizing on this, financial giants from American Express to Merrill Lynch to Beneficial Finance to the Dreyfus Corporation have slipped into the banking business without formally establishing a bank. Their non-bank bank subsidiaries offer almost all the products of a full-service bank. More : query.nytimes.com |