Increased Supervision Seen as Necessary If Bar Is Rescinded : Let Banks Deal in Securities, 2 Top Regulators Ask

WASHINGTON — The government’s two top bank regulators testified Wednesday that despite recent turmoil in the stock markets, Congress should withdraw the 54-year-old provision of law barring banks from entering the securities business and underwriting investments.

Last week’s market free fall had stirred skepticism about bank deregulation. Questions were raised anew about whether commercial banks should be allowed a wider role in the risky business of buying and selling securities.

But the federal regulators voiced confidence that effective barriers could be built between banks’ traditional operations and new securities activities, allowing them to offer a wider range of services without putting customers’ deposits or the banking system at risk.

“I remain convinced that a financial system that permits the combination of investment banking and commercial banking would handle shocks effectively,” said Robert L. Clarke, the comptroller of the currency.

Clarke and L. William Seidman, chairman of the Federal Deposit Insurance Corp., testified before a House subcommittee as members of Congress have begun to draft legislation that would amend the Glass-Steagall Act, a tough law approved in the wake of the 1929 stock market crash that was designed to keep banks away from Wall Street.

Emphatic on Deadline

Senate Banking Committee Chairman William Proxmire (D-Wis.) had planned to introduce a bill to amend Glass-Steagall this month. But he decided last week to postpone introduction of the bill for several weeks, saying “it would be a public relations problem” to consider such legislation so soon after the market plunge.

Even under Glass-Steagall, banks have been making inroads into the securities business, and Proxmire was the author of a measure enacted in August that prohibits commercial banks from expanding such activities until March 1. During the moratorium, Congress is to consider proposals to restructure the nation’s financial system.

Advocates of banking reform worried aloud last week that the market crash might persuade Congress to extend the moratorium indefinitely. Those concerns increased on Monday, when Clarke announced that Continental Illinois Bank had exceeded limits imposed on its financial involvement with First Options of Chicago Inc., which provides financing for stock options brokers.

But subcommittee members expressed determination to act before the March 1 deadline. “There can be no further shirking from action,” said Rep. George C. Wortley (D-N.Y.).

In arguing in favor of banking reform, Clarke and Seidman testified that the restrictions on banking activities had handicapped commercial banks, leaving them to grow only about one-fourth as fast as securities dealers. “This disadvantageous situation slowly will lead to a less safe and sound banking system,” Seidman said.

He said reform would benefit consumers because, “if bank costs are lower, the interest rates they charge will be lower.”