Reacting to congressional criticism, the Federal Reserve Board is expected to delay plans to clear away nearly two dozen firewalls between banks and their securities affiliates.
Sen. Lauch Faircloth said he plans to call Fed Governor Susan M. Phillips before the Senate Banking Committee's financial institutions subcommittee today to explain in detail why most of the remaining walls separating banks and their section 20 units should be dismantled.
"The Federal Reserve's proposal represents a major regulatory action affecting banks and their securities affiliates," the North Carolina Republican said in a written statement. "The subcommittee will take a hard look at the firewalls to determine that prudent safety and soundness standards are in place."
Richard Roberts, treasurer of Wachovia Corp. and chairman of the ABA Securities Association, and Victor A. Warnement, general counsel at NationsBanc Capital Markets, also are expected to testify today. While supportive of the Fed's plan, the bankers plan to make a pitch for broader financial reform legislation.
Compounding the Fed's problems is Rep. Marge Roukema, R-N.J. The chairman of the House Banking Committee's financial institutions subcommittee has introduced legislation that would enact several of the firewalls the Fed has proposed dismantling, such as separate capital requirements for section 20 units.
Fed watchers do not expect the central bank to challenge either of these lawmakers by adopting its firewall proposal. Instead, they said, the Fed would spend the next several months trying to convince House and Senate members that the firewalls are unnecessary.
"The Fed has been hesitant to move more rapidly than the Hill," said an industry official who noted that the central bank waited two years before more than doubling, to 25%, the share of revenue section 20 units may earn by underwriting securities.
Fed spokesman Bob Moore refused to comment Wednesday.
The prospect of a delay did not sit well with banking officials. "This is a reasoned proposal," a trade group official said. "They should go ahead. They have the authority because these are firewalls that they set up."
After knocking down three firewalls in October, the Fed in January asked bankers whether any more should be dismantled. Twenty-two banks, responding in comment letters filed this month, attacked existing firewalls.
Bank of Boston Corp. assistant general counsel Timothy A.G. Gerhold urged the Fed to eliminate the capital requirement for securities underwriting units.
"Section 20 subsidiaries are subject to Securities and Exchange Commission capital standards, and the imposition of separate capital standards by this firewall adds ... layers of compliance burden," he wrote.
Citicorp assistant secretary Carl Howard said the Federal Reserve Act and the Securities Act of 1934 already forbid banks to generate underwriting revenue by offering customers below-market loans.
James F. Powers, senior vice president at First Union Corp., urged the Fed to let banks and section 20 units share offices, saying the current ban serves no purpose.
NationsBank Corp. assistant general counsel Richard K. Kim said the Fed should let banks and section 20 units share customer data.
The latter rule originally was intended to prevent bank-affiliated underwriters from gaining an edge over securities firms. But Mr. Kim said the restriction is unfair because most securities firms now have their own finance companies and are obtaining similar data.
Mr. Howard also questioned several consumer protections. For instance, he said, section 20 units needn't disclose that their products are not covered by deposit insurance unless they are meeting retail customers in a bank branch.
