Banks of all sizes would be able to conduct any securities and insurance agency activities in an operating subsidiary under compromise financial modernization legislation that is scheduled to be marked up Thursday in the House Banking Committee.

At the same time, the Senate Banking Committee appears to have fallen into partisan bickering. Legislation is being drafted by the Republicans on the committee that would reverse earlier agreements and give the insurance industry virtually everything it wants. The revised bill would allow banks with assets of $500 million or less to conduct insurance underwriting and other nonbanking activities in an operating subsidiary, and makes few concessions to the insurance agents industry. However, rollbacks of CRA provisions proposed in the bill are likely to divide the committee along party lines. A markup is projected for Wednesday, but Democrats say they will have an alternate bill and need a delay to study the new Republican version.

Under a copy of the details of the House pact obtained by Financial Modernization Report, there would be no commercial basket allowed for financial institutions covered under the law. However, language is being drafted that would allow activities that are "complementary" to financial activities and other lines of business, provided these activities remain "small," according to a synopsis of the compromise prepared by committee staffers.

The legislation would still bar bank underwriting of insurance and real estate development in operating subsidiaries, and the definition of insurance and a mandate for "functional regulation" would remain. While the agreement could still blow up, Reps. James Leach, R-Iowa, and John LaFalce, D- N.Y., chairman and ranking minority member of the House Banking Committee, appear resolved to reach an agreement on bipartisan legislation that can be passed by the committee. Under the plan, the markup will begin March 4 but is unlikely to be completed until the middle of the next week, committee staffers said.

The compromise House bill will provide the agents with safe harbors contained in last year’s final financial modernization package. However, LaFalce and Treasury Department Secretary Robert Rubin are said to be "adamant" about maintaining deference to the Comptroller of the Currency in disputes over whether a product is banking or insurance. LaFalce is also pushing for language that will allow banks to conduct insurance activities in all branches, eliminating the "place of 5,000" provision that has effectively been obliterated anyway through Comptroller interpretations. The American Council of Life Insurance is said to be insisting on no deference to the Comptroller.

A key provision in the Leach/LaFalce compromise is language that the Federal Reserve Board gets to determine for holding company affiliates what is "financial in nature," and therefore able to be conducted in an affiliate, subject to a veto by the Treasury. It is the other way around for opsubs, with the Comptroller able to determine what is "financial in nature" and therefore capable of being conducted in an opsub, subject to a Fed veto