Fed Proposes Liberalizing Many Curbs on bank Powers

The Federal Reserve Board has proposed a massive revamping of its rules to give banking companies more competitive freedoms.

Resulting from months of internal review, the Fed actions would liberalize restrictions in such areas as consulting, computer services, and derivatives; allow closer marketing cooperation among nonbank affiliates of holding companies; and streamline the merger-application process.

The changes, which could take effect by yearend, pending completion of a public-comment process, "will result in real savings for holding companies and will increase competitiveness," Fed Governor Susan M. Phillips said at a Friday meeting during which the proposal was unveiled.

Banking industry observers viewed it as a landmark development.

"This may be the most progressive action taken by the Federal Reserve in the last 25 years," said H. Rodgin Cohen, a partner at the New York law firm of Sullivan & Cromwell.

American Bankers Association senior federal counsel Paul A. Smith called the proposal "a big change and a substantial improvement." Quicker regulatory approvals would save institutions millions of dollars, he said.

One change would allow up to 30% of a data processing subsidiary's revenue to come from the unrestricted sale of computer services, such as the processing of airline frequent-flier information or the distribution of educational software.

Currently, these units of bank holding companies are restricted to services that are financial in nature, such as payroll processing.

Melanie Fein, a partner at the Washington law firm of Arnold & Porter, said banking companies would be able to offer money management software with video games and other nonfinancial attractions. Their home banking packages could thus be more competitive with those marketed by Microsoft Corp., among others.

The central bank also would broaden the range of consulting services available from banking companies. Holding company units could earn up to 30% of their consulting revenue from selling management and other nonfinancial advice to customers. As in the data processing area, Fed rules currently restrict banking companies to financial and economic matters.

The deregulation plan also would expand leasing activities, allowing banking companies to buy properties to lease without the signed contract currently required.

The Fed also would let banking companies buy derivatives and offer advice on commodities purchases to retail customers. This power is now limited to institutional customers.

Anti-tying rules - which are designed to prevent coercive cross-selling - would be overhauled in the proposal. The Fed recommended eliminating cross-marketing restrictions for nonbank affiliates.

The agency has carved out a half dozen exemptions for nonbank units during the past five years, allowing them to offer discounts to customers who buy multiple products. The new rule would replace this piecemeal approach by dropping all but one restriction, in the area of electronic benefits transfer. Customers of these systems for automating welfare payments, food stamps, and other government entitlements could not be required to buy another product or service.

Securities underwriting affiliates would be able to offer discounts on underwriting activities to customers that buy private placement services. Banking companies have been clamoring for this power, saying they lose business to investment houses and foreign banks that offer discounts.

The Fed's proposal also would radically reshape the merger application process, establishing expedited procedures for well-managed, well- capitalized banks.

These institutions could submit a two-page letter briefly explaining the proposed deal and certifying the company's health. Today, the Fed requires hundreds of pages of financial documentation.

The Fed also said it plans to act on the filings within 15 days, down from an average wait of 35 days.

Fed officials included some caveats. Applications subject to "substantive" Community Reinvestment Act protests or antitrust evaluations would take longer. Also, a banking company must have at least a "satisfactory" CRA grade, one of the top two Camel ratings, and asset size that could not have increased more than 35% during the previous year.

Companies with less than $300 million of assets would be exempt from the 35% growth restriction.

The Fed estimated that half the merger applications it considered in 1995 would have qualified for the streamlined procedures.

Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America, said she was concerned the Fed might not be giving itself enough time to review the anticompetitive effects of some mergers. That could endanger small banks, she said.

The Fed also proposed a new way for banking companies to get approval for products already authorized for other banks. Rather than applying for each product individually, a company could ask for permission to offer all at once.

Fed Vice Chairman Alice Rivlin noted that the agency would no longer use the application process to review banks' condition. "The success of this effort turns on a new mindset on supervision," she said, explaining that regulators would have to rely more on annual exams.

Ms. Phillips said the changes resulted from the Fed's internal review process. Also, she noted that the Riegle Community Development and Regulatory Improvement Act of 1994 had required the central bank to examine all its rules.

The proposal is expected to be published in the Federal Register shortly. Comments will be due 60 days later.

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