George Sutton, Utah's commissioner of financial institutions, has seen his share of financial failures in the past five years.
Since becoming deputy commissioner in 1983 and taking over the top post four years later, Sutton has witnessed a turmoil among Utah's banks, savings and loans, credit unions and industrial loan companies that rivals the financial havoc of the Great Depression.More than 25 institutions have closed their doors since 1983 and few have been spared the agony of profit loss for reasons ranging from deregulation and poor management to a sluggish economy.
Although Sutton now believes the worst has passed, he still has one more item on his agenda that he says could ensure long-range safety and soundness of Utah's banking industry: Change state laws to allow state chartered banks to offer securities, insurance and real estate services.
"Long-term reform has to occur for banks," Sutton said. "If the laws established in the 1930s aren't changed, then we could have a disaster."
Sutton's cry to act now or deal with disaster later is based on Utah's and the nation's experience with the troubled savings and loan industry. He explained that reform and deregulation of thrifts occurred too late, long after inflation had already done serious damage to earnings and savings institutions were desperate to diversify from mortgage lending.
The plight of the savings and loan industry is well known as some experts estimate a nationwide bailout of troubled S&Ls could cost between $50 billion to $100 billion.
"One of the lessons of the S&Ls is that if you have reform during the throes of a crisis, you'll have a disaster," Sutton said, noting changes must take place to avoid a crisis.
Banks have also had their share of problems during the 1980s, Sutton said, and having insurance companies, brokerage houses and other financial institutions chip away at the banks' deposit and lending businesses, without letting banks retaliate, could escalate troubles in the banking industry.
"If we could offer annuities we wouldn't lose so much CD (certificate of deposit) money," said Lawrence Alder, executive vice president of the Utah Bankers Association.
Sutton said banks are also losing their "bread-and-butter business" of large-scale commercial lending. "Corporations are issuing more commercial paper now than borrowing from banks. Investment bankers are becoming more and more efficient at putting borrowers in touch with lenders."
He said state chartered commercial banks should also be allowed to underwrite securities for corporate borrowers. "Why let all the profit go to the investment banks."
Lifting prohibitions on securities is top priority because it would be the easiest new area for banks to get into, Sutton said. He explained that many banks could underwrite and sell pools of their risky assets as securities.
Letting banks also broker insurance and real estate would help banks keep current with the trend of one-stop shopping for financial services, Sutton said. Consumers are demanding convenience in financial services and insurance companies, securities firms and even retailers are meeting this demand by also offering traditional banking products such as federally insured deposits, credit cards and loans.
But banks can't adapt to the changing market under current restrictions, Sutton said, and are being left behind the likes of American Express, USAA, GMAC and Sears - to name a few of the financial services giants entering Utah.
He said that in addition to banks keeping up with the new breed of competitors, being able to sell more products could increase fee income that banks need to offset the risk of their lending business.
Sutton and the UBA tried and failed to push these reforms through the state Legislature this year. The proposal died in the waning days of the session, when enough opposition surfaced to convince lawmakers to wait and see if their federal counterparts could deal with the issue.
But, with Congress also unable this year to lift restrictions on banks in the areas of securities, real estate and insurance, Sutton and the bankers are back again drawing up legislation for the 1989 state legislative session.
If the bill passes, Utah will join some 25 other states that already give their local banks more freedom in other areas of financial services.
Negotiations are under way between bankers and local representatives of the insurance, real estate and securities industries to address conflicts and ensure the proposed bill sails through with minimal opposition.
Insurance brokers and underwriters are the most vocal opponents to Sutton and the bankers. Insurance lobbyists plan to be on Capitol Hill advising lawmakers that banks don't know what is good for the industry or consumers.
"My question is that if banks can't handle what they have now, should they be allowed to get into something like insurance," asked Ken Osborne, Utah state national director for the Independant Insurance Agents of America. "They have plenty to do cleaning up their own mess."
The Utah Association of Life Underwriters agrees, saying in written statements that banks have illustrated their abilities through the record number of failures in the past six years, and allowing banks to underwrite insurance would just cause more problems.
State Insurance Commissioner Harold Yancey said banks could quickly gain expertise by acquiring an existing insurance concern, and banks' insurance activities would be regulated by the state. "But there is still some risk and it would be hard to regulate," he said.
A major concern of insurance agents and Yancey is banks' using influence as lenders to pressure customers into also buying insurance. Laws are in place to prevent coercion when banks sell credit life insurance. But Osborne said the laws and regulations "sound good but they won't be enforced. If someone needs a loan they won't report (illegal coercion)."
Yancey agrees, saying "the jury is still out on whether those regulations are adequate."
Banks counter by saying it would not be smart to deny a loan based on whether the borrower buys insurance. "We wouldn't deprive ourselves of making a loan because we can't sell that customer any insurance. That wouldn't be in the best interest of a bank," said Harris Simmons, president of Zions Bancorp., parent company of Zions First National Bank, Zions Insurance Agency and Zions Life Insurance Co.
Zions Bancorp. and First Security Corp., which own two of the state's largest banks, are allowed to deal in all lines of insurance and some restricted securities and real estate activity through a grandfathering clause in the 1956 Bank Holding Co. Act.
"It's not one of our major businesses, but it's a business that is building well," Simmons said of Zions' insurance holdings.
A spokesman for the real estate industry could not be reached. But Sutton said local developers and agents have raised concerns about possible conflicts of interest if banks become competitors as well as a major source of real estate financing in the state.
Sutton said banks can already have limited involvement in real estate development and the proposed bill could set down rules to prevent any possible conflicts arising from expanding a bank's real estate activities.
The main change by the proposed bill would be allowing banks to offer real estate brokerage services, in addition to marketing their foreclosed property. But, Alder added, given the current market conditions not many institutions are expected to get involved selling more real estate than they already have.
Local securities officials haven't raised much of a fuss over state efforts to allow banks into the securities business, said John Baldwin, director of the state's division of securities.
Banks would offer a different product than Utah-based brokerages, so the turf war with banks is being waged on a national level by the large securities firms.
Some have argued that lifting restrictions on the securities activities ignores the lessons learned from the Great Depression. The Glass-Steagal requirements were set in place based on the belief that the mingling of commercial and investment banking caused the economic decline following the stock market crash of 1929.
But some experts are beginning to question that theory. The Federal Deposit Insurance Corp., which insures deposits of the nation's banks, said abuses and problems in the securities markets in the 1920s had nothing to do with the intermingling of commercial and investment banking.
"It was demonstrated long ago, and in a convincing fashion, that the Great Depression in no way resulted from the common ownership of commercial and investment banking firms," the FDIC said in a publication calling for banking reforms.
The proposed reform would actually affect less than half of the local banking industry, Sutton said, and just 22 percent of the deposits held in Utah's financial institutions. Some banks, such as Zions, and other types of depository institutions, such as credit unions, savings and loans and thrift and loans, are already allowed some of the freedoms under the proposed bill. Furthermore, the legislation could not apply to federally chartered banks, only those with state charters.
Asked if expanded powers for state chartered banks could lure Federal Reserve banks to switch their allegiance, Simmons cautiously said Zions would evaluate it.
The legislation now being drafted would allow banks to offer a new service after careful examination of its impact on the safety and soundness of the institution, Alder said. Final approval must then be granted by the respective state regulatory agencies, which will also regulate the bank's activities.
"We would still need firewalls and protections in place to watch what happens," Sutton said. "But that's better than waiting for a crisis."
Neither Sutton nor Alder anticipates an immediate flood of applications to expand services, if the legislation passes. "But we need to at least give banks the opportunity to earn that extra fee income," Sutton said.
of interest if banks become competitors as well as a major source of real estate financing in the state.