Fed May Give Banks New Power Proposal Would Allow Banks To Expand Their Securities Dealings

Amid the deadlock in Congress over proposals to modernize banking, the Federal Reserve Board on Wednesday proposed to let banks substantially expand their securities dealing and underwriting businesses.

The Fed is seeking public comment on a plan to raise from 10 percent to 25 percent the revenue banks’ can derive from their Wall Street affiliates. It also proposed loosening other rules to separate securities activities from the commercial bank.

At issue are revisions of Depression-era restrictions, contained in the Glass-Steagall Act, and aimed at reducing the risk to banks by limiting their involvement in Wall Street deals.

House Banking Chairman Jim Leach, R-Iowa, asked the Fed to use its administrative powers to loosen the restrictions after Leach’s 1-year effort to push a broad financial modernization bill collapsed in June. The bill died after insurance companies bitterly fought efforts to let banks expand into their business.

Leach said that while he was hopeful Congress would pass a narrower bank reform bill this year, “I believe today’s action by the Federal Reserve Board is a constructive step toward making America’s financial market more competitive.” A top Democrat on the committee, Rep. John LaFalce of New York, issued a statement also supporting the Fed’s action.

The Fed proposal was warmly greeted by banks but got a cool reception on Wall Street. If approved, it could further propel banks with a large securities business, such as J.P. Morgan & Co., into the industry’s upper rankings.

“We are very pleased with it,” said Rachel Robbins, managing director and general counsel at J.P. Morgan, which ranked eighth in global stock underwriting in the first half of 1996. Robbins said the bank would continue to push for financial modernization, but in the interim, she applauded the Fed for “encouraging flexibility.”

At Chase Manhattan Bank, a major bond dealer and underwriter, spokesman John Steffans called the Fed’s proposal “a very positive move.”

The Securities Industry Association, Wall Street’s main trade group, denounced the Fed’s proposal as a “quick fix” for banks that failed to address broader problems in the industry.

Steve Judge, the SIA’s chief lobbyist, said banks would have less incentive to push for full financial services modernization if they win the expanded powers proposed by the Fed.

Currently, banks apply to the Fed to deal in securities through affiliates that are separate from the part of the bank that accepts insured deposits and offers checking accounts. Most major banks have so-called “Section 20” affiliates, so named for the part of the Glass-Steagall Act which separates banks from securities activities. Most economists now believe such a separation isn’t necessary in a modern financial system.

The Fed’s proposal also seeks comment on proposals to amend so-called “firewalls” which separate other aspects of commercial banking and securities businesses. These proposals would let banks market securities deals underwritten by their affiliates, allow officers and directors to serve on both the banks and the affiliate, and loosen restrictions on purchase or sale of assets between the bank and affiliate.

Robbins, the J.P. Morgan official, said these proposals primarily would benefit smaller banks.