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New Rules Open Doors For Banks

Thu., Nov. 21, 1996

The Comptroller of the Currency announced new rules Wednesday to further modernize banking by opening the door for banks to expand into securities, insurance and other bankingrelated businesses.

Comptroller Eugene Ludwig called the new rules “a small step forward” that could eventually result in “a broader and less expensive array of financial services for American’s communities and consumers.”

The complex rule package essentially contains two parts, a streamlined application process and procedure to let healthy, well-managed banks conduct a broader range of businesses in new operating subsidiaries.

Ludwig emphasized his agency, an arm of the Treasury Department that regulates 2,800 nationally chartered banks, will proceed cautiously in letting banks expand into new businesses.

“We’re going to look at this on a case-by-case basis, and safety and soundness is number one,” Ludwig told a packed meeting of the Exchequer Club, a banking group.

The new rule is the latest expansion of banking powers by federal regulators and further blurs the lines between commercial banks and Wall Street.

In the 1980s, the Federal Reserve began allowing major banks to set up affiliates in the holding company level to deal in stocks and bonds. While banks welcomed these new powers, they complained that the securities units were expensive to establish and were limited to bringing in only 10 percent of the banking company’s revenues.

The Fed is expected later this year to loosen the rules and let banks’ securities affiliates bring in up to 25 percent of the banking company’s revenues from securities dealings.

Regulators are moving ahead to modernize bank rules following defeat of bank reform legislation in Congress earlier this year.

Ludwig’s initiative met with a mixed reception. Treasury Secretary Robert E. Rubin supported him, saying the rules provide “an orderly, prudent and public process” to let banks expand their businesses while providing sufficient safeguards.

“Allowing banks to diversify their financial service activities will reduce the risk and strengthen the banking system over the long term,” Rubin said.

The winners in these new rules will be small banks, which will have a “simpler structure to engage in new activities without the need to establish a holding company,” said Larry LaRocco, managing director of the ABA Securities Association, an arm of the American Bankers Association.

Wall Street’s biggest trade group, the Securities Industry Association, along with the American Council of Life Insurance, and Senate Banking Chairman Alfonse M. D’Amato, R-N.Y., all blasted Ludwig’s move.

D’Amato said he’s “deeply troubled that the Comptroller of the Currency’s action may subject insured banks to excessive risks and expose the bank insurance funds, and therefore the taxpayers, to unnecessary liability.”

D’Amato, whose concerns are echoed by consumer groups, believes banks are at greater risk if new securities and insurance business are conducted in a bank’s subsidiary instead of at the holding company level, where presumably the risks could be better isolated in a separately capitalized business.

Anticipating this criticism, Ludwig described numerous safeguards to limit risks to banks, including internal controls, separate corporate identities of the subsidiary and bank, and limits on dealings between the bank and subsidiary.

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