US bankers see '87 go-ahead for expanding financial services
Bankers have yearned to sell a full plate of securities. To get a slice of the insurance pie. To taste some real estate profits. This may be the year commercial bankers persuade Congress to fulfill at least some of those wishes.
``This is going to be the best shot we're going to have to get expanded powers,'' says Kirk Willison, spokesman for the American Banking Association, a lobby group in Washington, D.C. ``And we're definitely already seeing momentum in that direction - especially in the securities area.''
The ABA is encouraged by several factors. The Banking Committees of both houses are now chaired by Democrats, which may reduce the partisan infighting that derailed previous bills. And a slew of recent court, state, and federal regulatory moves are circumventing the 1933 Glass-Steagall Act, which has kept banks out of the securities business.
Glass-Steagall created a wall preventing banks from being ``principally engaged'' in trading or underwriting certain municipal revenue bonds, mortgage-backed securities, stocks, and corporate bonds. But with foreign competition increasing and corporations getting cheaper loans elsewhere, the banks complain the law is outdated.
Indeed, the Glass-Steagall wall is crumbling. The courts and regulators are allowing bank subsidiaries to engage in limited securities business. Consider recent and forthcoming developments:
In late December, a federal appeals court upheld an earlier decision by the Federal Reserve Board which allows Bankers Trust New York Corporation to sell commercial paper - short-term corporate IOUs. The Fed does limit the unit's commercial paper activities to a maximum of 5 percent of the parent bank's gross revenue, and a maximum 5 percent share of the commercial paper market.
On Feb. 3, the Fed will hold a rare public hearing on whether to grant subsidiaries of Bankers Trust, Citicorp, and J.P. Morgan & Co. sweeping new underwriting powers. The New York holding companies have petitioned the Fed to sell commercial paper, mortgage-backed securities, municipal revenue bonds, and consumer-related receivables.
A decision is expected in April. Most Fed-watchers say the banks will get the expanded powers. But Ernest Bloch, a New York University professor, says, ``It's very unlikely the Fed will say yes to something it wants the Congress to decide.''
Indeed, Fed chairman Paul Volcker has been increasingly outspoken in urging Congress to overhaul Glass-Steagall. He has advocated that banks be granted power to underwrite more securities and sell mutual funds.
But the Fed and Congress may not have the luxury of waiting for the other to act. Several states are picking up the deregulation ball.
Earlier this month, the New York State Banking Department said state-chartered banks (specifically, Bankers Trust and Morgan Guaranty Trust, a subsidiary of J.P. Morgan) could underwrite previously off-limits corporate securties. And the underwriting guidelines are less onerous than the Fed's new rules on selling commercial paper.
The same two banks are also reported to be leading a lobbying effort to produce similar changes in Delaware bank laws.
Last week, the Comptroller of the Currency approved applications by three New York bank holding companies to set up shop in the District of Columbia. This may allow the banks broader underwriting powers, but it's by no means certain. The district is just now setting up a new banking department and regulations.
Taken together, such steps raise the possibility that unless the banks get broader investment banking powers from the Fed or Congress, they may drop their federal charters to escape Glass-Steagall restrictions. Or they may opt for the looser state charters.
The first could weaken the federal banking system. The second could create a state-by-state patchwork quilt of bank regulations.
Neither step is probable, bank industry analysts say. Securities Industry Association chairman John W. Bachman brushes the maneuvering aside as ``jurisdictional one-upmanship.''
But the effect appears to be greater pressure on the Fed and Congress to dismantle the Glass-Steagall wall.
Last week House Banking Committee chairman Rep. Fernand St Germain (D) of Rhode Island reintroduced several banking bills.
Committee member Doug Barnard Jr. (D) of Georgia brought out an omnibus banking bill that would give banks the ability to sell a wide range of securities, dispense financial advice, sell insurance and real estate, prepare taxes, and run a travel agency.
Sen. William Proxmire (D) of Wisconsin also supports broader underwriting powers for banks in the securities area but opposes giving banks entree into insurance and real estate brokering.
On Jan. 21 and 22, Senator Proxmire will hold hearings on his bill, which includes expanding bank powers, a non-bank bank amendment, check-float delays on fund availability, and recapitalizing the depleted Federal Savings and Loan Insurance Corporation.
Yet another bank reform bill is likely to emerge. Several major banks and financial service firms (including Sears, Roebuck & Co. and Merrill Lynch & Co.) are studying a concept known as ``financial services holding companies,'' or FHCs. The FHCs would be independently capitalized subsidiaries set up to do business in areas that are now off limits. Each of the subsidiaries would be under the jurisdiction of the appropriate regulator.
``There will be a lot of pieces of legislation,'' an aide to Congressman Barnard surmises. ``But they'll all be moving in the direction of allowing commercial banks to get into the securities business. Something's about ready to give here.''
Proponents emphasize the expected benefits of deregulation: lower costs and new products for consumers through greater competition. Banks cite the savings that discount brokers have brought to investors since deregulation.
But opponents are not giving in without a fight.
``What people lose sight of is that banks are insured and the government won't permit major banks to fail. That gives banks a fundamental competitive advantage over us,'' says Mr. Bachman, SIA chairman and managing partner of Edward D. Jones, a St. Louis-based brokerage.
Pointing to the 1930s financial crisis that spawned Glass-Steagall, Bachman says: ``The reason we have the separation of [banking and underwriting] powers is because when the two were together under one roof, they were systematically abused. Have we repealed the laws of human nature since then?''