Fed Seen Hiking Section 20 Cap In Vote Friday

The Federal Reserve Board is expected Friday to free commercial banks to earn more money from securities underwriting.

The Fed will vote on a July 31 proposal to increase to 25%, from 10%, the amount of underwriting revenue bank section 20 units may earn. All seven members of the Fed's board have previously expressed support for the plan, which could take effect early next year.

Securities underwriting isn't the only thing on the Fed's agenda. Also on Friday, the agency is expected to debate a controversial April 1995 proposal to let banks voluntarily collect race and gender data on borrowers. Finally, the Fed is expected to adopt rules explaining how banks may protect the confidentiality of fair-lending self-assessments.

Bankers, trade group officials, and consultants expect the section 20 change will entice more regional banks to enter the business and let banking companies run their underwriting units more efficiently.

Richard B. Roberts, treasurer of Wachovia Corp., said the change to 25% might prompt his Winston-Salem, N.C., institution to create an underwriting subsidiary.

"We are entertaining this in a much more serious vein now then we would have otherwise," Mr. Roberts said. "Moving to 25% definitely expands the ability to conduct business in an efficient manner. It is quite welcome relief."

Rachel F. Robbins, general counsel at J.P. Morgan, agreed that more regional banks would enter the underwriting business. "But we don't see this as something radical that will change the landscape the next day," she said.

Rather, Ms. Robbins said the change would allow section 20 units to continue their moderate expansion pace. "You won't see a doubling of everyone's business tomorrow," she said. "But this allows banks to grow their businesses in sensible ways."

No longer would section 20 units have to buy and sell government securities to bulk up their total revenue figures, which in turn make it easier to live within the 10% cap, said Karen Shaw Petrou, president of the industry consulting firm ISD/Shaw Inc.

"This proposal, combined with the earlier changes, will more than triple the amount of securities underwriting banks can do," Ms. Petrou said. "For smaller institutions, that makes the securities underwriting business viable. For big ones, it makes them powerful competitors."

The section 20 vote caps off the Fed's four-month effort to revamp the rules separating commercial and investment banking. It already has excluded some interest income from the revenue cap and made it possible for a single employee to sell underwriting, loan, and transaction account products.

The Glass-Steagall Act, a Depression-era law, raised a wall between the banking and securities businesses. The Fed first put a dent in the law in 1987 by giving J.P. Morgan & Co., Bankers Trust New York Corp., and other money-centers the right to underwrite commercial securities through subsidiaries. But these units could only earn 5% of their revenue underwriting commercial securities. The Fed increased the cap to 10% in 1990. Congressional leaders, after failing to repeal the Glass-Steagall Act this summer, urged the Fed to ease up further.

While banks are excited about the pending Fed action, industry analysts played down its significance.

"This is marginal," agreed Robert Albertson, U.S. bank research director at Goldman, Sachs & Co. The higher revenue cap would not prompt commercial banks to acquire investment houses. "Most investment banks are relatively expensive and an acquiring bank will find it difficult to economically justify a purchase," he said.

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