CONGRESS PAYS ATTENTION: CITIGROUP DEAL REVIVES REFORM

Financial services deregulation, believed dead last month, is once again alive — if not exactly kicking — thanks to the proposed merger of Citicorp and Travelers Group Inc. that challenges more than 60 years of law separating banking, insurance and brokerage activities.

Regulators and lobbyists agree that there is a good chance to jump-start long-stalled proposals in the House of Representatives, though obstacles to passage remain.

Most serious are disagreements between the Republican House leadership and the Clinton administration. Negotiations by congressional staff members with administration officials resulted in nothing new on the bill, known as HR 10, and the congressional year may be too short for action.

Still, Sen. Alfonse D’Amato (R.-N.Y.), the Banking Committee’s chairman, would like to introduce the legislation in the Senate, especially if it would benefit Citicorp and Travelers, two New York companies.

And last week House banking chairman, James Leach, (R., Iowa) announced that he will hold a hearing April 29 on the recently proposed mergers. The hearing will address whether legislation is needed to ensure that regulators can supervise the larger institutions, Rep. Leach said.

Speaking to reporters at an unrelated Securities and Exchange Commission roundtable last week, Citicorp CEO John Reed reaffirmed that his company had reversed its staunch opposition to the bill.

Citicorp, Mr. Reed says, would “agree to a legal structure that was similar to HR 10, but without the negatives from the bank and savings point of view.”

He’s referring to limitations in the bill on thrift charters: Citicorp operates its banking activities outside New York through savings institutions. Citicorp also opposes provisions in the legislation that would force the Comptroller of the Currency to defer to judicial review in the event of disputes over what should be subject to regulation by the comptroller.

Mr. Reed says he has no problem with state regulation of the insurance business, “but we would like to see the ability of integrated companies” unharmed by legislation.

A Capitol Hill source says that Citicorp indicated last week that it would support the bill in its current form. Travelers has supported passage. The source predicted the House will debate legislation similar to that which was pulled in March.

Citicorp’s support would certainly make it easier for the House to take up a bill the week of May 4, as House leadership pledged to do when they pulled the bill from the floor last month rather than face defeat.

Sen. D’Amato has indicated that if the House passes a bill, he will attempt to move legislation this year in the Senate.

Even the American Bankers Association, which has succeeded in blocking action on the bill, concedes the Citicorp-Travelers deal will help chances of passage. “That would be a little bit of firepower in lobbying support behind the bill,” says Larry LaRocco, managing director of the ABA Securities Association. That and other announced bank mergers “could lead to movement when members return next week,” he says.

Last week’s major merger proposals, NationsBank Corp. with Bank-America Corp. and Banc One Corp. with First Chicago NDB Corp., provides less impetus for legislation, since under current law banks can merge. Further, both NationsBank and BankAmerica support the bill. An official of one of the m, speaking on condition he not be identified, said he believes that if the leadership is willing to allow for more debate, the House could pass the bill.

But major issues must be resolved, in particular within the administration. The Treasury Department and Comptroller of the Currency insist that the bill be changed to allow banks to conduct insurance and securities underwriting activities in operating subsidiaries. The Federal Reserve likes the current version of the bill, which requires those activities to be conducted by affiliates.

tilt toward change

“The developments of the last week or so clearly have tilted everything in the right direction,” says a securities industry lobbyist, speaking on condition that he not be identified. He notes that the bill “came very close to getting passed, even without the recent mergers. With the merger announcements being the catalyst, maybe that will move this thing through the House.”

Under current law, bank holding companies cannot engage in insurance underwriting. But the newly-created Citigroup would have five years, with regulatory extensions, before it would have to sell Travelers’ insurance business. That could be an incentive to stall, hoping that more favorable legislation will be passed later or that sympathetic banking regulators will find ways to aid them in keeping their businesses.

Indeed, a banking regulatory official who spoke on condition that he not be named, says there would be “regulatory developments that might ameliorate that problem over the next five years that could permit some additional insurance underwriting. Now banks can underwrite credit-related insurance. That could be used to push the envelope.”

wait and see?

With the marketplace changing so rapidly, some believe it would be wiser for Congress to wait. “I think if they adopt legislation now they may have to modify it for changes in business plans,” says Robert Rosenblum, a lawyer with Washington law firm Rosenman & Colin LLP, and a consultant to the Securities Industry Association. “But it’s much easier to change the law if you’re working in an HR 10 environment than if you’re working under current law.”

A major concern by securities firms in arguing for change has been that it is easier for banks to buy securities companies than it is for them to buy banks. But the Citicorp-Travelers merger puts that argument in a new light, Mr. Rosenblum says.

Travelers will apply to the Federal Reserve to become a bank holding company and will be subject to its regulation. That “suggests that a securities firm could acquire a bank” by becoming a bank holding company as well, says Mr. Rosenblum.

There also would be many problems for securities firms that tried to become bank holding companies, the securities industry official says. Banks also are not allowed to have fully integrated mutual fund businesses. Whether that approach is taken “will depend on the managements of each individual company. If three or four did it, that might change the outlook.”