President Clinton predicted “a fundamental and historic change” in the U.S. financial system Friday as he signed into law legislation tearing down legal walls that have separated banks, stock brokerages and insurance companies since the Depression.
The new regulatory system opens the way to a freewheeling competition in American finance and removes most of the remaining impediments to the spreading growth of giant financial conglomerates that conduct business across traditional industry lines.
At the level most visible to consumers, the ongoing transformation of financial institutions into one-stop financial supermarkets should now accelerate.
But at the signing ceremony Friday, Clinton concentrated on the possible economic impact of a financial sector freed from many of its old regulatory strictures.
Much as the nation’s industrial might propelled the United States to become the preeminent world power over the last century, the seemingly obscure shift in the finance system has “increased the chances of making the next century an American Century,” Clinton said.
After decades of debate, the legislation was enacted following an agreement last month between the White House and congressional leaders.
Clinton hailed it as “the most important recent example of our efforts here in Washington to maximize the possibilities of the new information-age global economy, while preserving our responsibilities to protect ordinary citizens.”
He said enhanced competition and the cost savings that financial institutions can squeeze out of operations by consolidating once-distinct businesses should “save consumers billions of dollars a year.”
Federal Reserve Chairman Alan Greenspan, revered by Wall Street for his stewardship of the financial system throughout the current economic expansion, looked on from a front-row seat, nodding and gently rocking in his chair as Clinton spoke.
The Fed under Greenspan’s long tenure has been a powerful backer of repealing the old legal barriers. For more than a decade, the Fed has been using its regulatory power to steadily chip away at them, as have other federal banking authorities and the courts.
Clinton’s support for the legislation comes despite warnings from Democratic critics and consumer groups that it could lead to price-gouging of consumers as financial institutions consolidate. Mergers over the last few years already have created some of the largest banks in the nation’s history.
“This bill is good for Wall Street but not for Main Street,” said Ed Mierzwinski of the U.S. Public Interest Research Group, a Washington advocacy group. “Consumers are going to pay higher prices because bigger banks are going to have more market power.”
Others fear that the financial conglomerates could erode financial privacy as they share information among affiliates that handle consumers’ health insurance, borrowing, checking accounts, credit card transactions and countless other financial dealings.
Although the legislation allows conglomerates to share information on consumers among their affiliates, it requires financial institutions to notify consumers of their privacy policies and to allow customers an option to prevent the transfer of confidential information to unaffiliated third parties.
Clinton said the privacy provisions “have teeth” but suggested he would like them to go further. He said he was instructing his advisers to come up with a package of privacy proposals by next year.
“I want to make sure every family has meaningful choices about how their personal information will be shared within corporate conglomerates,” he said. “We cannot allow new opportunities to erode old and fundamental rights.”
Representatives of the financial services industry applauded Clinton’s signing of the legislation.
“We’re thrilled to see it signed,” said Charlotte Birch, spokeswoman for the American Bankers Association. “In a world dominated by sophisticated communication technologies like the Internet, cell phones, voice mail and e-mail, banks have been forced to operate under the legal equivalent of the rotary phone.”
Bankers have argued that the old laws prevented them from competing effectively with entities such as mutual funds, which have taken deposit dollars away from banks in recent years.
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Despite the Depression-era laws, however, many banks, insurers and securities firms have begun dabbling in each other’s businesses. They have found loopholes in the laws, and regulators have helped them. For example, for the last few years, banks have been allowed to sell insurance under certain conditions.
And regulators allowed the historic merger of insurance giant Travelers Group with banking powerhouse Citicorp, a combination that created a financial conglomerate that a decade ago would have been impossible to fathom.
The new law will allow the industry to consolidate and offer various products without the legal and regulatory gyrations, something that financial companies insist will result in greater competition and lower prices for consumers.
“It means folks are going to have more choices as to where they purchase their insurance products, investment products and their checking accounts,” said Annie Hall, head of government relations for Chicago-based Bank One Corp., the country’s fourth-largest bank. “And more competition by definition means lower prices.”
While some industry experts anticipate a rash of financial mergers as a result of the bill, others say it will take time to have a major impact.
“As revolutionary as this legislation can be, it actually is more a culmination of a lot of market pressures that have brought us here,” said Dan Zielinski, spokesman for the American Insurance Association.