The House Commerce Committee holds hearings tomorrow on a banking reform bill already approved by the House Banking Committee. The bill contains a provision that would permit limited affiliations -- primarily through holding firms -- between banks and companies engaged in commercial activities.

Some banking reform advocates contend that the law should be changed to allow corporations to own banks. They say the current restrictions are woefully outdated.

Here are some of their arguments:

• Competition is widespread in banking today and there are many sources of commercial credit from around the world.

• A bank could not extend preferential treatment to its commercial affiliate because, under current laws and regulations, any loan made available to an affiliate must be fully collateralized (in which case it could borrow from any bank, anywhere) and on an arm's-length basis.

• Banks would have an incentive to lend to competitors of their commercial affiliates because with other sources of financing available to potential borrowers the bank would be less profitable if it failed to compete in the credit marketplace.

• Any bank executive who funneled funds to a commercial affiliate in financial trouble would face legal penalties for making a loan without proper collateral.

The penalty for deliberately violating the laws restricting loans to affiliates is a civil fine for up to $1 million for each day that the violation continues.

Those who want to maintain the line between banking and commerce bring up the image of a giant corporation like Microsoft buying a giant institution like Citibank. Those advocating tearing down the barrier counter that such a specter is based on New Deal-era thinking.

Source: Peter J. Wallison (former Treasury Department general counsel), "What if Microsoft Did Own Citibank?" Wall Street Journal, July 29, 1997.