Millennium brings banking revolution

As far as banking is concerned, the new millennium will see the return of an old way of doing business.

The repeal of the Bank Act of 1933, commonly referred to as the Glass-Steagel Act, has removed many restrictions that have shackled the industry for 66 years.

Before the new legislation passed last month, a bitter barrier, with foundations laid down during the Great Depression, separated commercial banks and investment banking. Angered that banks had risked people’s deposits by investing assets in securities, the country was ripe for legislation that barred commercial banks from dealing in securities and insurance. They also liked the idea of the Federal Deposit Insurance Corp., designed to protect their deposits.

Now that’s all changed with the passage of the Gramm-Leach-Bliley Act. Glass-Steagel kept bankers away from the securities and insurance businesses, but it was frequently a one-way barrier. Securities companies came up with ingenious tools such as the money market fund to get around the restrictions.

“When securities offered the money market accounts, billions left the banking industry,´ said Tom Byington, president of First State Bank in Fort Collins. “And they didn’t have any responsibility to the community.”

After years of cursing Glass-Steagel, bankers find themselves in an odd position. They have the level playing field they wanted, but are not sure what will come in the brave new world Congress has wrought.

“Legally, we will be allowed to do things we couldn’t,´ said Dave Hill, president of Norwest Bank Colorado, Fort Collins South location. “The barriers are all breaking down. They have been doing auto and home loans for years. The brokerage houses have been doing banks’ business with mutual accounts. Now we can do their business, and they can do ours.”

As always, the devil is in the details — implementing Gramm-Leach-Bliley will take time. The regulators have 18 months to lay out the new rules under which American banking will operate. That will delay change until at least the summer of 2001. After that, banks will have to go through a trial-and-error process to find out which strategies, alliances and methods work, and which don’t. and that could take us well into the first decade of the new millennium.

“Interstate branching was first allowed in 1997,” Byington said, “and we still haven’t seen the outcome of that. When we look back, there are going to be a bunch of things that will drive the changes in banking in the early 2000s.”

Take something like a bank expanding into the insurance business. “We have Norwest Investment Inc., and we have an insurance company, but they’ve all been separate,” Hill said. “Now how will we deliver that to the customer? It’s unknown to us.”

Hill thinks banks will have to decide whether to bring in companies as subsidiaries or outsource the work to small companies specializing in narrow areas of expertise.

And there are other concerns. Take the role of FDIC in the new system.

“FDIC is concerned that people understand that investments purchased in a bank would not be covered by FDIC insurance,´ said Dayton Johnson, president of American Bank in Loveland. “Only deposits are covered. I suspect FDIC would keep that position.”

The good things about Gramm-Leach-Bliley are legion. Small banks under $500 million will have access to money at a lower interest rate. They will also have less red tape entwining them. And the act will address restrictions on the thrifts that will make them more responsible to the depositor and the community.

Even in this nebulous landscape, bankers are willing to make some predictions for the next few years. One of them is that Gramm-Leach-Bliley will fuel more mergers.

“The merger movement will continue,” Byington said, “and it will take on a different complexion.”

Instead of gobbling up other banks, larger banks will try to acquire insurance companies and securities firms as well.

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