Brokers engage banks in a three-front war for turf
The securities industry has hung up a ''no trespassing'' sign. It doesn't want the banks or thrifts nudging into its business territory.
For some 48 years, the border between the banking and investment businesses has been drawn by the Glass-Steagall Act of 1933. It bars banks from Wall Street's traditional activities of underwriting new issues of securities and trading in those stocks. Banks can have trust departments that manage customers' funds, although they must buy or sell stocks through brokers.
But technology, regulation, and legislation have blurred the line between the two industries. And the securities industry sees the banks and thrifts shoving a foot further onto its turf.
''We have resisted the chipping away at Glass-Steagall,'' said Edgar D. Jannotta, chairman of the Securities Industry Association (SIA), during a visit to Boston. He was accompanied by Edward I. O'Brien, president of the trade group.
The turf war has broken out on at least three fronts:
* Bank of America bought a major discount broker, Charles Schwab & Co. The SIA sued, charging a violation of Glass-Steagall.
* Last month the Federal Home Loan Bank Board ruled that some 4,000 federally chartered savings-and-loan associations and a tiny group of federally chartered mutual savings banks could offer investment and brokerage services to their customers.
There's a legal question here as to whether Glass-Steagall applies to thrift institutions. But the SIA is considering suing. ''We may do something quickly,'' Mr. O'Brien said.
* Congress has been considering two bills since last autumn that would expand banking powers to engage in securities activities.
One House bill would permit commercial banks to underwrite all municipal bonds. Since 1968, they have been authorized to underwrite only housing and educationally related bonds that today make up about 40 percent of the revenue bond market.
A Senate bill would allow banks not only to underwrite any of these municipal revenue bonds, but money market mutual funds as well. Hearings have been held on the legislation. So far, though, it is unclear whether Congress will act on it. Congressmen, Mr. O'Brien noted, have ''so much on their plate'' - the budget, the risky financial situation of the thrifts, high interest rates, and so on - that it is difficult for them to find time to consider such legislation thoughtfully.
The chairman of the Securities and Exchange Commission, John S. R. Shad, suggested in Senate testimony the creation of a task force to develop recommendations on simplifying and rationalizing regulatory oversight of banking and securities. In other words, he wants a broad look at Glass-Steagall and the division of banking-investment turf.
The SIA likes the idea. The business territory division for almost 50 years ''has served the economy well,'' Mr. Jannotta held. ''But we think it is timely to look at Glass-Steagall in its entirety.''
So far, however, Congress has not leaped on this study idea.
Meanwhile, the financial scene is changing rapidly. Thrifts are becoming more like banks. Banks and thrifts are edging into securities industry territory (See accompanying story).
Legislation has tended to confirm financial developments, not initiate them. Congress and regulators have often been engaged in catch-up measures. That's why the SIA is concerned with ''piecemeal'' invasion of its territory ''without tackling the fundamental issue,'' as Mr. Jannotta put it. That issue is economic concentration.
Some nations, such as West Germany and Japan, have what is termed ''universal banking.'' Commercial banks can buy and sell securities. They can underwrite new stock issues. They can also hold stock in nonfinancial companies. In fact, Germany's Big Four banks own a substantial chunk of Germany's major industrial corporations.
So far, the financial industry in the United States is highly diversified. There are some 14,500 commercial banks, perhaps as many thrifts of various kinds , and more than 500 securities firms. Various nonfinancial firms - Sears, Roebuck, National Steel, Parker Pen, and so on - have moved into the financial area. Banks are also anxious about their territorial rights. Depositors of money and users of money have a wide choice of business partners. The various financial businesses are highly competitive.
But innovation and deregulation are fast changing the industry. When stock commissions were made competitive, not fixed, the membership in the Securities Industry Association declined from some 825 to less 500 by the mid-1970s as firms merged or went out of business. Membership has since risen to around 540 as new firms have found niches in the industry.
Many suspect the number of commercial banks will be halved in coming years as new technology and competition prompt consolidations within states and, perhaps sometime soon, between states.
Messrs. Jannotta and O'Brien say it's time the nation took a serious look at the future of its financial industry.