For a long time the biggest real estate rumble in Washington has concerned the question of whether or not banks should be allowed to offer real estate services.

Having expanded into stocks, bonds and insurance, many national bankers now want to offer real estate brokerage services. In turn, real estate brokers have generally opposed bankers invading their territory in large measure because they fear being crowded out by well-funded rivals.

Now the brokers have another opponent: Newly-minted Federal Reserve Board Chairman Ben Bernanke.

Bernanke told the House of Representatives Financial Services Committee last Thursday that federally-insured banks should only be formed by non-banks under very tight circumstances.

"The purchase of a bank by a commercial firm violates the separation of banking and commerce," said Bernanke, according to the Reuters news service, "and so I wouldn't advise allowing that. But if you do allow it, then it would be better to have consolidated supervision, which includes an overview of the financial condition of the parent, that is, the commercial firm, as well as of the ILC subsidiary."

What Bernanke is saying is that if department stores, hardware chains or oil companies acquire or create a federally-insured bank, the parent company -- not just the financial subsidiary -- should be overseen by federal banking regulators.

One reason for such regulation is fairly plain: A federally-insured bank represents a liability. If something goes wrong, taxpayers can wind up footing the bill. Before accepting such a liability taxpayers should have the right to assure that the bank and its parent are meeting all required criteria.

A second reason for regulatory oversight concerns the potential for conflict. Tom Stevens, president of the National Association of Realtors, argues that "when commercial firms are allowed to engage in banking, the bank's commercial parent runs the risk of using the bank to further the corporate objectives of the company, creating an inherent and irreconcilable conflict of interest."

A third reason for expanded oversight is straightforward -- it will drive off some would-be bank buyers.

For companies not now policed by bank regulators, the prospect of more regulation must seem fairly appalling. Why would any CEO want more government accountants pouring through company books?

Look what happened when Fannie Mae and Freddie Mac agreed to make "voluntary" financial disclosures with the Securities & Exchange Commission. This was the start of some $15 billion in combined financial re-statements.

Given Bernanke's comment, it's not clear whether any proposal to acquire or create a bank by a commercial entity could be approved. After all, if someone believes absolutely and without condition that the "purchase of a bank by a commercial firm violates the separation of banking and commerce," it's hard to see any situations under which non-banks are going to get very far in the approval process.

Since Bernanke is the nation's chief banker you would hardly expect him to favor a limitation of those the Federal Reserve oversees. What's most interesting about his comment, however, is that it appears so one-sided. While commercial entities are essentially banned from the purchase of a bank, there certainly isn't much to stop banks from entering the world of general commerce.

Under the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 banks are able to create "financial holding companies," entities with virtually unlimited portfolios.

The Senate Banking Committee explains that under Gramm-Leach-Bliley a bank holding company "can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities. Activities that are 'complementary' to financial activities also are authorized."

Ask yourself: Is there any product or service that is not in theory "complementary" to financial activities? If you buy a boat, a book or a package of broccoli and pay with cash, is that not a financial activity?

While Bernanke doesn't want commercial companies to acquire banks, he's curiously silent regarding the reverse proposition, the ability of banks to acquire commercial companies.

At this point Congress has blocked national banks from expanding into real estate brokerage, but there should be a permanent fix for the problem. The Gramm-Leach-Bliley standard that anything goes for banks but not for other businesses must be replaced with a standard that offers better balance in the marketplace.

For more articles by Peter G. Miller, please press here.

Published: July 25, 2006

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .