BANKS DIVIDED OVER PROPOSED EXPANSION OF SERVICES

Proposed legislation to expand the services offered by American banks will be difficult to push through Congress because the industry is divided over the issue, according to Sherrill Shaffer, who heads the University of Wyoming's new program in banking and financial services.

"There is strong support among a number of bankers to obtain legislative changes that would expand the range of financial services that banks would be permitted to offer, such as insurance services and securities powers," says Shaffer, a former assistant vice president of the Federal Reserve Bank of Philadelphia. "Part of the political obstacle in passing this legislation is that the banking industry has not been united in support of those changes."

Some large banks support the changes, while many community banks are opposed to the proposed legislation says Shaffer, the John A. Guthrie Distinguished Professor in Banking and Financial Services in the UW College of Business.

"Officers at many of the largest banks believe it would be in their interest to have these broader powers," Shaffer says. "They argue that many of their customers demand that the bank should be able to provide them with a full range of financial services and products.

"Many other bankers, particularly with some of the community banks, don't feel there is a need for those broader powers," Shaffer says. "They say they are doing fine with the traditional range of financial services they are now allowed to offer, and their argument is supported by profitability figures, not just for community banks, but for the industry as a whole."

He says financial diversification would be among potential benefits of allowing banks to offer a broader range of services and products. The legislation must be written to resolve any conflicts of interest, and to avoid an unduly costly extension of federal "safety net" features such as deposit insurance.

Savings and loan associations experienced losses when they were allowed to expand into new product lines in the 1980s. Shaffer says that in many cases, they did not have the expertise to handle the new services successfully. He notes that S&Ls already were in serious trouble, and the broader services were seen as a way to solve their problems.

"If broader product powers are similarly extended to commercial banks during a period of very sound capitalization such as we have now, and record profitability, the incentives to expand unwisely or without adequate preparation and expertise would not be there, " he says. "It would be a much more profitable experience if the banks were to expand now."

Expanded banking services have been approved in some states, he says, but nothing has been approved at the national level, even though such legislation has been considered during nearly every session of Congress.

"It's hard to predict when, and how much, any of those changes may occur," he says.

Shaffer was senior economist with the Federal Reserve Bank of New York for eight years, and is an editor of the Journal of Economics and Business.