Pressures from overseas pushing US to let banks add broker's role
Monster-size Japanese banks move into the United States. London throws open its financial doors. Eurobond and European commercial-paper markets continue to boom. These and other developments are intensifying the pressure on the US to liberalize banking laws - specifically, by allowing American banks to sell securities.
With US banks feeling the pressure from overseas rivals and more and more investment-banking business migrating abroad, American bankers are increasingly arguing that restrictions of the 1933 Glass-Steagall Act are a major hindrance to their competitiveness in the world financial marketplace.
Glass-Steagall, enacted after the banking collapses of the early 1930s, prohibits banks from underwriting or brokering securities. American banks routinely find loopholes in Glass-Steagall, however, by setting up shop in London, continental Europe, or other areas of the world. They are also becoming more involved in ``securitization,'' the sale of loan-backed securities that look quite similar to stocks.
The international rivals of US banks - including not only giant ``universal banks'' such as Deutsche Bank, but also investment houses such as Nomura Securities and Merrill Lynch - are not hampered by Glass-Steagall restrictions. US bankers say these rivals have now skimmed off the lucrative, less risky, short-term financing business, leaving banks in a weaker position.
Unless changes are made, says Citicorp vice-chairman Thomas Theobald, ``we are going to play another steel industry or auto industry with our banks.''
Analysts expect big US banks to use this ``foreign competition'' argument to begin pressuring Congress to modify or eliminate Glass-Steagall. ``It would be a mistake if Congress doesn't look at Glass-Steagall,'' Mr. Theobald says.
It will be a tough fight, however. The law is rooted in painful memories of the bank panics and stock-market collapse of the Great Depression, which some historians contend was exacerbated by bank involvement in underwriting. The securities industry and a number of smaller banks oppose any change in the status quo. They say that banks could easily be involved in conflicts of interest by, for instance, inducing a customer to issue stock to pay back a loan.
Nonetheless, there are increasingly vocal supporters of abolition of Glass-Steagall, including the US comptroller of the currency, Robert L. Clarke, Federal Reserve Board member Martha Seger, and other banking regulators. The Treasury favors step-by-step liberalization of the law.
Comptroller Clarke told the American Bankers Association (ABA) last week that the US ``banking structure is not equipped to meet the competition when a major Japanese bank can propose to become a partner in a major American securities firm - while American banks are severely limited in the types of securities activities in which they can engage in here.'' He was referring to the Sumitomo Bank offer to buy 12.5 percent of Goldman, Sachs & Co.
Mr. Clarke also noted that ``an American bank can do things in London or Tokyo that is it is prohibited from doing in the United States.'' Current US laws ``constrain US banks in the face of world competition,'' he said, and ``for American banking to be preserved, these laws must be changed.''
Ian Giddy, professor of banking at New York University, points out that the underwriting and trading of corporate securities is already part of the daily business of US banks operating aboard.
``Some banks, like Bankers Trust, Citicorp, and Morgan Guaranty, are putting a great deal of emphasis on the international side,'' Mr. Giddy says. ``They expect they will be able to do it at home one day, and so they have been building institutions to do this.''
Where US banks used to dominate global banking, now only three of the top 25 banks in the world are American. But 13 Japanese banks are in the top 25. Meanwhile, US banks are digging into other areas: Five were among the top 30 underwriters in the Eurobond market in 1985, and eight were in the top 30 commercial paper underwriters in the Euromarket.
``They can do there what they couldn't do here,'' Professor Giddy says.
Morgan Guaranty, for instance, moved into the Eurobond market in the late 1970s and is now a major force in London. Bank spokesman John M. Morris points out the irony of a corporate debt offering by J.P. Morgan & Co. in the US this week that was underwritten by Merrill Lynch and a securities subsidiary of Union Bank of Switzerland. The Swiss bank and Merrill Lynch can engage in US underwriting, he says, but Morgan Guaranty, the investment bank owned by the company issuing the debt, cannot.
It is for these sorts of reasons that Robert Shay, a banking professor at Columbia University, calls Glass-Steagall an anachronism. Professor Shay says that if changes are not wrought, he expects continued migration of US banks to overseas markets. He worries that ``like the property and casualty insurance industry, there could be a curtailment of services, higher costs, and less efficient markets'' as a result.
Shay says the recent statements by Chase Manhattan and Morgan Guaranty that they might consider giving up their banking charters to compete more fully shows ``Glass-Steagall is an impediment.''
Perhaps the biggest obstacle in the way of making US banks into ``universal'' banks is the special status they enjoy: their federal deposit insurance and the ultimate backing by the Federal Reserve. Investment banks such as Merrill Lynch don't have that this safety net.
But Edward Yingling, director of government relations with the ABA, says this advantage could be compensated for by separating securities operations into a subsidiary operation of the bank holding company.
Along with the international competition question, Mr. Yingling says, the banks' case against Glass-Steagall could be bolstered by an impending Federal Reserve ruling on whether banks that are ``not principally engaged'' in the securities business may run brokerage subsidiaries. If, as Yingling thinks, the Fed agrees they may, then that, coupled with the worries about international competition in financial services, ``could be enough to turn Congress around.''
Even the rival Securities Industries Association, which represents US brokers, supports a congressional review of Glass-Steagall - but only, says spokesman James Lovering, because it believes the law will be reaffirmed or strengthened when all is said and done.
Association president Edward O'Brien recently told the Fed his group endorses the Sumitomo-Goldman, Sachs deal. Mr. O'Brien called for Congress ``to examine the entire matrix of statutes governing'' the relationships among players in the financial industry.
Such statements indicate that as international competition in finance accelerates - especially so now in the wake of London's ``Big Bang,'' which allows US banks virtually unfettered access to the British securities business - it will be only a matter of time before there is a major reexamination of Glass-Steagall. A Thursday column