Bank Underwriting Has Gotten a Bad Rap, ABA Study Says

WASHINGTON - Securities underwriting by banks is not a risky business, and what's more, it never was, according a study published Wednesday by the American Bankers Association.

To back up the trade group's push for repeal of Glass-Steagall restrictions on bank securities underwriting, the ABA study asserts that securities activities by bank holding companies have reduced risk by allowing diversification. Even before the Glass-Steagall Act was passed in 1933, commercial banks involved in securities experienced lower rates of failure, the study said.

"Through history, few if any U.S. commercial banks have failed because of their involvement in securities activities, either before or after Glass-Steagall," wrote the study's authors, George J. Benston, professor of finance at Emory University, and George G. Kaufman, professor of finance at Loyola University at Chicago.

Citing other studies of bank failures, Mr. Benston and Mr. Kaufman said that only 7.2% of the 207 banks with securities operations in 1929 failed during the Great Depression. Among all national banks, however, the failure rate was 26.3%.

Today, the 37 banks holding separately capitalized securities affiliates have shown no sign of increased risk. No banks with so-called section 20 affiliates have failed in the eight years since those activities were permitted, according to the study.

Furthermore, the study said the most basic banking service - lending - can pose much larger risks to banks than securities underwriting. "Unrestrained securities underwriting and dealing, therefore, would not enhance commercial banks' opportunities for risk taking over that which they presently can do," the study concluded.