Fed, Securities Association Oppose Bid by Zions Unit

The Federal Reserve Board and the securities industry are both opposing a national bank's application to underwrite municipal revenue bonds.

In recent comment letters, the Fed and the Securities Industry Association urged the Office of the Comptroller of the Currency to reject an application by Zions First National Bank, Salt Lake City, to underwrite municipal revenue bonds through an operating subsidiary.

"Banks' owning securities firms, and securities firms' owning banks, were precisely the types of affiliations that the Glass-Steagall Act was intended to prohibit," wrote Securities Industry Association president Mark E. Lackritz and lobbyist Steve Judge. "Congress could not have intended that a bank could circumvent the strict demarcation of investment and commercial banking ... simply by establishing a subsidiary."

The Fed made a similar argument.

"The board has serious doubts that Congress created a statutory scheme that would allow express prohibitions on the activities of national banks to be overridden by administrative interpretation," Fed Secretary William W. Wiles wrote.

If the Comptroller's Office approves the April 8 application, Zions would gain an unfair advantage over securities firms, the securities association argued. While a national bank would be able to operate securities companies, securities firm could not operate banks, the trade group said.

In addition, allowing national banks to underwrite securities would undermine the effort in Congress to pass financial modernization legislation, the trade association argued.

"National banks would not support any bill that they did not view to be practically ideal, while securities firms and other financial services institutions would be in far greater need of a bill," the securities association said.

Currently, municipal revenue bonds may be underwritten only through holding company affiliates. These units may earn no more than 25% of their revenue from equity underwriting.

Zions filed the second request for new powers under the Office of the Comptroller of the Currency's controversial "op-sub" rule, which effective Dec. 31 opened the door for national bank units to offer products and services that are off-limits for the parent bank.

NationsBank was the first in March, when it filed applications to enter the real estate development and lease finance businesses through direct subsidiaries. (The financial reform plan the Treasury Department announced last week would allow bank units to engage in a broad array of powers, but explicitly bans real estate development.)

Mellon Bank, Wells Fargo Bank, and NationsBank filed letters in support of the Zions application, saying that letting banks enter the muni bond underwriting business directly would increase competition and thereby reduce costs for issuers of the securities.

"Because the issuers, in this case, are public governmental entities, taxpayers and the general public should indirectly receive these benefits," wrote Julius L. Loeser, Wells Fargo vice president and general counsel.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER