College of William & Mary Law School William & Mary Law School Scholarship Repository Faculty Publications Faculty and Deans 1992 Banking and Insurance - Should Ever the Twain Meet? Emeric Fischer William & Mary Law School Repository Citation Fischer, Emeric, "Banking and Insurance - Should Ever the Twain Meet?" (1992). Faculty Publications. 485. https://scholarship.law.wm.edu/facpubs/485 Copyright c 1992 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/facpubs Emeric Fischer* Banking and Insurance-Should Ever the Twain Meet? TABLE OF CONTENTS I. Introduction . 727 II. Evolution of Banking in the United States . 731 A. Banking Prior to the Civil War .. .. .. .. .. .. .. .. .. .. 731 1. From the Revolutionary War to 1836 . 731 2. The State Free Banking System, 1837 to 1864 . 733 B. The National Free Banking System, 1864 to 1933 . 734 1. Prior to 1913 . .. .. .. .. .. .. .. .. .. .. 734 2. Mter 1913 . 735 III. Regulation of Banking . 737 A. The Glass-Steagall Act and the FDIC . 737 B. Policy Goals of Federal Regulation. 738 1. The Broad Goals . 739 2. General Constraints on Federal Banking Policy . 739 C. The Policy Implementing Tools (Regulatory Mechanisms) . 741 1. Entry Restrictions .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 741 2. Capitalization Requirements..................... 743 3. Limitation of and Prohibition Against Specific Activities. 744 4. Restrictions on Mfiliations and Geographic Expansion . 749 5. Lending and Borrowing Limitations . 750 * R. Hugh and Nolie A. Haynes Professor of Law, William and Mary School of Law. B.S. University of South Carolina 1951; J.D. 1963 and M.L.&T. 1964 College of William and Mary, Marshall-Wythe School of Law. The huge amount of resource material furnished by Gary E. Hughes, Chief Counsel, Securities of the American Council of Life Insurance has made this study far more meaningful. Richard M. Whiting, Executive Director of the Asso­ ciation of Bank Holding Companies and John 0. Alderman of the Independent Bankers Association of America have also furnished much useful material used in this paper, as have Robert M. Eubanks, III, Insurance Commissioner of Arkan­ sas and Frederick K. Campbell, Esq. of Little Rock, Arkansas. To all my deepest gratitude. And my deepest gratitude to Betty Abele and Della Harris for their superb secretarial assistance. 726 1992] BANKING AND INSURANCE 727 IV. Regulation of the Insurance Industry. 751 A. The Nature of Regulation........................... 751 B. Items of Regulation . 753 1. Entry and Capital Requirements . 753 2. Reserves . 753 a. Property and Liability Insurance . 753 b. Life Insurance . 754 3. Examination, Valuation of Assets and Liabilities and Investments . 754 4. Rate Making . 755 C. Insurance Holding Companies . 756 V. Pressures on Banks to Expand Their Activities . 771 A. The Changes in the Financial Services Industry . 771 B. The Banking Response . 775 1. Bank Holding Companies . 775 2. Nonbank Banks . 777 VI. Regulatory Prohibitions . 778 A. The Bank Holding Company Act . 778 B. Tiptoeing Through The Tulips Of Restraints . 779 C. Congressional Activity And Lack Thereof . 798 VII. Summary and Conclusion. 808 A. In General . 808 B. The Arguments for Deregulation . 811 1. The Capital Mobility Problem . 811 2. Retention of the Wall-The Insulation Device . 813 C. Other Matters . 815 1. Subtle Anti-competitive Issues. 815 2. The Case Against Insurance Integration . 816 3. The 1991 Treasury Department Deregulation Proposal . 821 VIII. Addendum . 824 I. INTRODUCTION During the past decade, and especially since 1983, a controversial national debate has been taking place relative to the question whether banksl should be allowed to sell and underwrite all types of insur­ ance.2 This is but a segment of the debate concerning the limits of 1. Unless otherwise indicated, the term "bank(s)" includes commercial banks, and where the context permits, bank holding companies, but excludes savings banks, savings and loan institutions, investment banks and other depository or nonde­ pository institutions. 2. At present banks are permitted very limited insurance activities. What type of activities are permissible depends on the regulatory entity exercising control over the particular bank. 728 NEBRASKA LAW REVIEW [Vol. 71:726 financial services and products that banks and bank holding compa­ nies should be allowed to offer. This matter has been brought to a head by the Competitive Equality Banking Act of 1987 (CEBA).3 The purpose of this study is to focus on the question of whether the con­ sumer4 of bank and insurance services or products would retain the protections envisioned by the regulatory schemes imposed since the 1930s if bank services and products were expanded to include the un­ derwriting and selling of insurance of all kinds. One of the main goals of the federal and state banking and insur­ ance regulatory schemess is the maintenance of bank and insurer sol­ vency6 to the end that consumers of their services and products be protected from failure of the institutions to which their money was entrusted.7 Each financial institution carries its own particular type of 3. Pub. L. No. 100-86, 101 Stat. 552 (1987)(codified at scattered sections of 12 U.S.C.) It is the intent of the Congress, through the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Bank­ ing, Finance and Urban Affairs of the House of Representatives, to con­ duct a comprehensive review of our banking and financial laws and to make decisions on the need for financial restructuring legislation in the light of today's changing financial environment both domestic and inter­ national before the expiration of such moratorium. Id. § 203(a), 101 Stat. at 584. 4. The term "consumer" refers to the bank depositor, insurance policyholder, or beneficiary of the policy. 5. "[B]anking has historically been one of the most heavily regulated industries." LAsH, BANKING LAWS AND REGULATIONS 22 (1987) [hereinafter LAsH]. 6. Id. at 23; WILLIAM H. LoVETI', BANKING AND FINANCIAL INSTITUTIONS LAW IN A NUTSHELL 121-25 [hereinafter LoVETI']. Between 1920 and 1933, when there was little regulation, 16,000 banks were closed. Between 1934 and 1982, after the 1933 regulations came into existence, only 765 banks failed. Id. at 125. However, bank failures have started rising in recent years, due to, according to some commenta­ tors, deregulation of interest limitations on commercial banks. Geoffrey P. Miller, Banking Regulation, The Future of the Dual Banking System, 53 BROOK. L. REV. 1, 8 (1987). During the entire decade of the 1970s there were only 76 bank failures, but in 1985 alone 118 failed outright or received FDIC assistance. Id. "The assurance of the safety of deposits, therefore, is a basic objective that bank regulation is designed to achieve." Richard H. Whiting, A Perspective on Finan­ cial Services Restructuring, 37 CATH. U. L. REv. 347, 357-58 (1988)(emphasis ad­ ded)[hereinafter Whiting]; "Since the primary regulatory goals of the members of the NAIC [National Association of Insurance Commissioners] are maintaining in­ surer solvency and consumer protection.... "Bruce W. Foundree, Statement on Behalf of the National Association of Insurance Commissioners, submitted to the Senate Committee on Banking, Housing and Urban Affairs on the Integration of Financial Services, 2 NAIC PROCEEDINGS 91 (1983)[hereinafter Foundree]; "Wrapped in the wonders of the new and exciting, there is a danger that even the most seasoned public policy-makers can lose sight of their basic insurance regula­ tory goal-solvency." John R. Dunne, Risk, Reality, and Reason in Financial Serv­ ices Deregulation: A State Legislative Perspective, 2 JOURNAL OF INSURANCE REGULATION 342, 348 (1983)(emphasis added)[hereinafter Dunne]. 7. Other goals of banking regulation are: (1) providing competition to prevent con­ centration of economic power, (2) lending for social purposes, (3) protecting the consumer (e.g. Truth in Lending Act, Fair Credit Reporting Act, Consumer 1992] BANKING AND INSURANCE 729 risk.B Would consolidating or concentrating several risks into a con­ glomerate financial entity increase those risks? When the iron curtain of institutional separation and segregation is removed, would the forces of competition exert their muscle with the potential result that efficient entities will thrive and grow, but the less efficient ones shall fail and the consumers' savings get the knockout blow?9 Credit Protection Act), and (4) providing an environment for monetary policy. Whiting, supra note 6, at 357-59 and LAsH, supra note 5, at 22-25. Other goals of insurance regulation are: (1) product dependability, (2) strong insurance mar­ kets with adequate capacity and availability of coverage, (3) competition for busi­ ness with fair pricing, buying opportunities and claim settlement, and (4) deconcentration of power and risks. See Dunne, supra note 6, at 348; see also, Bush Task Group Report on Regulation of Financial Services: Blueprint for Re­ form (Part 1), Hearings Before a Subcommittee of the House Committee on Gov­ ernment Operations, 99th Congress, 1st Sess. 307 (1985) [hereinafter Bush Task Force Report]. 8. One of the primary concerns of insurance regulators is the concentration of risks which appears to be contemplated or occurring in the financial services sector. Individually, operations of insurers, securities broker­ dealers, banks, savings and loans, and real estate companies involve enough hazards and difficulties in today's environment. A growing in­ terest in offering insurance, banking and lending, securities, and real es­ tate services under one roof carries with it the potential combination of insurance, credit, investment, and property risks not previously known or foreseen. It is this concentration, to the extent it occurs, which insur­ ance regulators look upon with considerable apprehension. Problems of regulation are compounded by such combinations; the ability of regula­ tors to protect consumers is affected. Foundree, supra note 6, at 92. In the course of their lending activities, banks take credit risks with a duration of years in many cases.