View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Remarks by

L. William Seidman
U.S. Federal Deposit Insurance Corporation


American Council of Life Insurance Annual Meeting
November 15, 1988

It's a great pleasure to take part in this important discussion
on banking and insurance —

are we meant for each other or shall

we be separate forever more?

I have to tell you that I feel kind of at home with this group.
After all, at the FDIC we run one of the most sizeable insurance
operations around.

We have one great advantage over you, we have no competitors.
Unfortunately, my insurance agency does not always have your
power to turn down risky clients.

That reminds me of a friend of mine who recently tried to get
life insurance from one of your agents.

"Do you drive a car?” the agent asked.

"No," replied my friend.

«Do you often ride buses or taxis?”

”No,” was the answer.

”Well, do you fly much?"


My friend, now encouraged he would get a good, low premium given
his avoidance of these dangerous activities, happily replied,

But the insurance agent's face turned gloomy.

"I'm very sorry,

sir," he told my friend, "but we have a firm policy against
insuring pedestrians."

It should not be news to anyone in this room that the last
several years have seen enormous changes in the financial
services landscape.

A wide variety of businesses —
manufacturers —

from department stores to

have entered into direct competition with


Among this new breed of competitors, insurance companies have
been among the strongest.

By a conservative count, more than 100 insurance companies offer
some sort of product or service that directly competes with
commercial banks, including consumer installment credit, IRAs,
home mortgages, and money market funds.


Insurance companies have a number of advantages in this
competitive arena.

Tens of thousands of insurance agents

nationwide are allowed to ‘»cross market“ traditional banking
products with insurance products.

Insurance agents can offer

their customers the convenience of “one-stop shopping" for many,
if not most, of their financial needs.

Today many banks, including all national banks, are largely
prohibited from offering services in most insurance areas.
Banks are also restricted as to geographic expansion.

Thus, an effective "one-way street" exists where any commercial
enterprise, including insurance corporations, can offer most
financial services, but where commercial banks are severely
limited in the products they are allowed to offer.

That, in a nutshell, is where we stand today.

So, you might ask, are there any good reasons for this

Given the FDIC's experience of insuring all, and

regulating the majority of, our nation's banks, the answer is
clearly n o !

First of all, some banks already offer limited insurance
products, and have done so safely for quite a while.


The U.S. operates under what is known as the ’’dual banking

This means a bank can choose to operate under a

national charter issued by the Comptroller of the Currency, or
it can choose a state charter, and follow rules determined by
state banking authorities.

At present, there are at least 8,000 state-chartered banks in
the U.S. —

or about two-thirds of the commercial bank total.

Although the FDIC does not have the power to confer new product
authority on any state-chartered bank, the FDIC may restrict any
state-authorized activity that threatens bank safety and

In other words, if institutions desire federal

deposit insurance, they must operate in a safe and sound manner
as determined by the FDIC.

This ability of local jurisdictions to determine what powers
their banks can offer facilitates the tailoring of banking
services to the particular demands of local communities and

Moreover, states act as laboratories for change, where
innovative new activities can be tested in the marketplace.

Almost half the states have determined that their communities
can be best served if their banks can offer insurance products.


The most frequently offered insurance service is brokerage
activities for insurance underwriters, which is permitted in 15

Of course, in our role as insurer, the FDIC has taken a hard
look at these activities, and has found no evidence that
insurance activities undertaken in these institutions pose
unreasonable risks.

South Dakota is a case in point.
banks, 90 are state chartered.

Of the state's 137 commercial
South Dakota has virtually no

restrictions on the types of insurance activities
state-chartered banks can enter.

The involvement of state banks

in the insurance field goes back for nearly a century.


we have not seen an instance where such a bank has been put at
risk because it engaged in insurance activities.

In South Dakota, and in FDIC-insu-»d savings banks located in
the Northeast, any commingling or assets or funds between the
bank and the insurance affiliate is prohibited.

In the

Northeastern states where a product known as "Savings Bank Life
Insurance" has been offered for decades, no significant problems
have been recorded.

In these areas all insurance activities are

regulated by the same state authorities that regulate insurance
sold through agencies.


So allowing banks to offer insurance products has not been
proven to be unsafe for banks and the banking system, and in
fact has operated soundly in those places where it has been

A second important reason to create a two-way street and allow
banks into insurance is that consumers will benefit.

A study by the Consumer's Federation of America estimated that
the cost of all insurance is between $5 to $10 billion higher
because of inefficiencies in the present system —
inefficiencies that could be reduced by allowing banks to sell

Indeed, only a few months ago a group of 24 consumer groups
wrote the Senate Banking Committee opposing any federal
limitation of state-authorized insurance activities for banks.

Some have argued that allowing banks to sell insurance will hurt
consumers, such as through so-called "credit leverage" being
exerted against consumers.

The evidence does not support that

assertion, and, in fact, it is in the insurance industry where
products are tied together and consumers are often given a
take-all or nothing non-alternative.


If the walls between banking and insurance are torn down,
consumers will gain access to a greater variety of services, and
possibly at a lower cost.

Let's let the market decide who

provides the best and least expensive insurance and banking

Our view that bank involvement in insurance activities poses no
unreasonable risks to the banking system, and in fact benefits
consumers, led us to advocate a regulatory structure that would
permit a two-way street between the banking and insurance
industries —

and in fact between banks and all commercial


Last year, the FDIC released a study entitled "Mandate For
Change.M which provided a blueprint for reforming bank
regulation along more functional lines.

We found that based on historical and legal research,

there was

no good reason for "banking and commerce" to remain separated.

Thus, our study proposed —

First —

to streamline bank regulation by focusing supervision

by bank regulators on the bank itself, not on holding companies
or nonbanking subsidiaries.

Supervisory firewalls will maintain

an arm's-length relationship between banks and others.


Second —

to attract new capital into banking, the wall between

commerce and banking should be torn down.

Any reputable owner

is acceptable and need not be subject to special regulation.
Insurance companies would be most welcome.

And, finally —

to give banks additional powers, we proposed

that banking organizations be allowed to take part in any
authorized business activity through a separately capitalized
affiliate or subsidiary.

The key to making progress in these areas is functional

Insurance companies would be regulated by state

insurance departments, and banks by bank regulators.

In closing, I think that if both industries approach competition
between banks and insurance companies with the customer truly in
mind, all will benefit from improved profit opportunities.

Let's get together, save the PAC costs and lawyers' fees, and
work out a two-way street that's fair to consumers, insurance
firms, and banks.

Thank you.