Fed Relaxes Rules to Level Playing Field For the Banks

The Federal Reserve Board on Wednesday wiped away scores of rules and application requirements to make it easier for banks to compete against other types of financial companies.

The streamlining should eliminate long application-processing times and delays caused by Community Reinvestment Act protests.

The Fed also eliminated tying restrictions that handcuffed nonbank subsidiaries and added several securities, data processing, consulting, and investment advisory activities to the list of those permissible for bank holding companies.

"This is a massive and far-reaching effort at deregulation," said Fed Governor Edward W. Kelley Jr. "These revisions will help banks a great deal."

The revisions to Regulation Y, the holding company rules, are effective 60 days after publication in the Federal Register, which should occur within a few days.

Most industry officials applauded the changes, though some complained that the central bank did not do enough for small banks.

"This is a welcome step in liberalizing overly burdensome restrictions," said Rachel Robbins, general counsel at J.P. Morgan & Co. "It is a further step toward rationalizing the financial activities that banks can provide."

"The biggest bonus here is that it will make banks more competitive with nonbanking companies," said Richard Whiting, general counsel at the Bankers Roundtable. "It allows banks to react to marketplace changes without the necessity of a burdensome and time-consuming applications process."

Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America, said the Fed should have allowed institutions above the current asset ceiling of $150 million to qualify as small-bank holding companies, which are permitted take on more debt than other holding companies during acquisitions.

Some of the most substantial changes were in applications procedures.

For well-managed, well-capitalized banks, processing times for acquisitions will drop to 20 days from 55 days. The rules also reduce approval times for nonbank acquisitions to 12 days from 30.

The Fed also eliminated for all applications the "pre-acceptance period," a 25-day window that gave the reserve banks a chance to check if an application was complete before it was officially filed.

In a concession to community activists, the Fed promised to make applications available within 72 hours of a request. It also required banks to submit a statement on how a merger meets the convenience and needs of the community, exempted from fast-track consideration any acquisition of a bank with more than $7.5 billion of assets, and said it will remove from fast-track status any applications that are protested.

The Fed also said it will create a list of all pending merger applications, which will be available by fax, mail, or on the World Wide Web.

The application changes appeared to mollify activists who blasted the rules when first proposed last August.

"The furor created by the original proposal had its impact on the board," said Allen J. Fishbein, general counsel at the Center for Community Change. "Community groups will feel this rule is better than the original version."

The Fed estimated that at least half of all applications will qualify for the fast-track procedure.

"Banks are more competitive if they spend less time in the applications process," said J. Virgil Mattingly, the Fed's general counsel.

Nonbank affiliates will be exempt from the tying rules that generally prevent a bank from requiring a consumer to buy one product in order to get another. This means a banking company may offer discounted underwriting services to a business that buys private placement services.

The regulator made one exception: anti-tying rules still apply to electronic benefits transfer services, such as point of sale systems.

The Fed said the tying restrictions do not apply outside the United States and customers with multiple bank products, such as loans and checking accounts, may receive discounts even if their accounts are at different subsidiaries of a holding company.

On the securities front, the Fed said banking companies may offer private placement and riskless principal services. They also may offer advice to mutual funds and clear derivatives transactions for professional traders, even if they do not execute the contracts.

The rule, implementing provisions in the 1996 regulatory relief bill, also allows banking companies to enter a variety of business without prior approval, including leasing and private placement offerings.

"This certainly helps," said Larry LaRocco, managing director of the ABA Securities Association. "The Fed continues to make banks more competitive in the capital markets area."

The Fed also opened up data processing, giving holding company units permission to derive up to 30% of their revenue by offering nonfinancial products, such as word processing and video games. Holding companies also may earn up to 30% of their consulting revenue by offering nonfinancial advice.

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