Capital Briefs: Fed Governor Wants Firewalls Preserved

Taking a swipe at the new operating-subsidiary rule from the Comptroller's Office, Federal Reserve Board Gov. Laurence H. Meyer said Thursday that banks should not directly enter securities underwriting and other nontraditional businesses.

"The best way to do this is by placing new activities in holding company subsidiaries, rather than in the bank itself or its subsidiaries," Mr. Meyer said at the Ohio Bankers Day Conference.

In his first speech on banking since joining the Fed this summer, Mr. Meyer said a failure of a holding company unit would not cause a bank to fail. But the collapse of a bank affiliate could cripple the institution and imperil the deposit insurance fund.

"The further the separation from the bank, the better is the insulation," he said.

Mr. Meyer also said deposit insurance and the discount window give banks an unfair advantage over securities firms and other competitors. Regulators can mitigate this advantage by requiring banks to use separately capitalized subsidiaries of the holding company, he said.

Mr. Meyer also said banks that expand into underwriting and other nonbanking businesses should retain enough capital that they would need to tap the safety net only in extremely dire situations.

"We will do our best to let strong, efficient banks compete, so long as they are not imposing significant risks on the safety net and taxpayers," he said.