The Office of the Comptroller of the Currency on Wednesday cleared the way for banks to offer many financial services directly, rather than through holding company subsidiaries.
The new rule is expected to markedly reduce the expenses that banking companies now wrack up in such fields as securities underwriting and data processing. That, in turn, could make the industry more competitive in those fields.
Norwest Corp., for example, expects to cut $100 million in annual expenses as a result of the rule, said Michael Mayo, a Lehman Brothers analyst.
"There are some real potential cost savings from reducing the hoops that banks have to jump through," he said.
Starting Dec. 31, national banks may ask the agency for permission to pursue securities underwriting, insurance sales, and expanded data processing services, among other businesses. Though the banking industry is already allowed to underwrite securities and sell excess computer capacity, it must operate the businesses through units of holding companies.
"Banking cannot stand still," Comptroller Eugene A. Ludwig said. "You limit an industry, and ... you're creating a financial problem."
The rules have been on hold for two years as Congress debated financial modernization. Mr. Ludwig said the agency had waited long enough. "I have no doubt debate over financial modernization will continue" and eventually be approved by Congress, "but eventually can be a very long time indeed."
Mr. Ludwig refused to identify which activities he might approve. "I think giving a laundry list is a terrible mistake," he said. "We'll take a case-by-base approach."
Wachovia Corp., Winston-Salem, N.C. is already planning to take advantage of the new rule, according to executive vice president and treasurer Richard B. Roberts.
The $47 billion-asset company is laying plans to ask the OCC to let it establish a subsidiary to underwrite municipal revenue bonds, a line of business banks currently are not allowed to enter.
"The comptroller has set this up so that there are very few encumbrances to conducting business," Mr. Richards said. "And when you look at the safeguards that the OCC has outlined, I don't see anything a company would not want to live with."
The safeguards prevent a bank from investing or lending more than 10% of its capital to a subsidiary; banks may not count investments in subsidiaries toward their capital requirements; and banks and their operating subsidiaries must maintain separate financial records.
The Federal Reserve Board enforces similar fire walls between section 20 securities units and their holding company parents. The Fed also limits the amount of money a banking company may earn from securities underwriting; the OCC is not expected to ease those limits.
"I don't personally envision any difference on the percentages," OCC Chief Counsel Julie Williams said.
Still banking industry lawyers - the people who file applications at the agencies - welcomed the new rule, saying they expect quicker answers from the Comptroller's Office than they've been getting from the Fed.
"This cuts out the Fed," said one lawyer who did not want to be identified.
Offering products and services from a direct subsidiary offers a number of advantages to banks - particularly small banks that cannot afford to set up holding companies.
"This keeps the bank central to the financial services business," said Kenneth A. Guenther, executive vice president of Independent Bankers Association of America. "It will allow small banks to offer new products and services."
Karen M. Thomas, IBAA's director of regulatory affairs, said small banks are interested in underwriting state and local revenue bonds and offering real estate brokerage.
Charles M. Vincent, vice president equity research at PNC Asset Management Group in Philadelphia, said the OCC rule also should provide new revenue sources to banks.
"Banks have hit the revenue wall because competitors have moved in and taken business away," he said. "Without this, I think we're going to see earnings growth that is nominal at best."
The Comptroller's Office first proposed this change on Nov. 29, 1994. Mr. Ludwig called the move "a capstone" on the agency's effort to overhaul its rulebook.
