WASHINGTON -- In an unusual show of unity, 30 domestic and foreign banks have joined forces to ask the Federal Reserve for freer access to securities markets.
Writing to Fed chairman Alan greenspan on July 5, the banks recommended more than doubling the existing 10% cap on revenues from so-called ineligible securities activities, such as underwriting corporate debt and equities.
The Fed "has the latitude to increase the 10% limit by a substantial amount, and an increase to 25%, for example, would ... avoid the serious disruption that would be caused to our firms if our subsidiaries were to reach the existing limit."
Banks are bumping up against the limit as more corporate debt underwriting replaces lending, said Rob Slaymaker, president of BA Securities Inc., a unit of BankAmerica Corp.
"It was inevitable over time as bank holding company section 20 subsidiaries were successful in building their business that this would become a problem," he said.
Securities activities that are barred by the Glass-Steagall Act as described as "ineligible." It is Section 20 of the act that forbids banks to become "engaged principally" in the securities business.
In April 1987, the Fed reinterpreted the law and allowed several large banks to set up "Section 20" subsidiaries to underwrite commercial paper, mortgage-backed securities, and municipal revenue bonds.
The Fed got around the ban by slapping a 5% limit on revenues from these new activities.
In January 1989, the Fed permitted five banks to underwrite and deal in corporate debt.
The Fed bumped the revenue cap to 10% that year and added equity underwriting to banks' powers in 1990.
The Evolution of Bank Securities Powers Important section 20 dates
April 30, 1987
* Fed approves applications by Citicorp, Bankers Trust New York Corp., and J.P. Morgan & Co. to underwrite commercial paper, mortgage backed securities, municipal revenue bonds, and consumer-related receivables. Agency ruled that if a bank's securities subsidiary does not obtain more than 5% of gross revenues from the new powers, it would not be "engaged principally" in the activities.
June 13, 1988
* the Supreme court upholds the Fed's 1987 decision allowing bank holding company subsidiaries to underwrite four types of securities by declining to review the board's order.
Jan. 18, 1989
* The Fed adds underwriting and dealing in corporate debt to the list of securities powers, and announces it will permit banking firms to buy and sell common stock within a year.
Sept. 21, 1989
* The Fed doubles the size of the cap on revenues from new securities activities to 10%.
Sept. 20, 1990
* The Fed allows J.P. Morgan securities unit to underwrite equities.
Jan. 26, 1993
* The Fed indexed the 10% revenue cap to take account of the depressing effect lower interest rates were having on bank securities units' revenues.
July 6, 1993
* The Fed proposes alternatives to the revenue test. Ineligible securities could amount to 10% of a securities unit's assets or its sales volume.
Proposal to Ease Calculation
Trying to give banks more breathing room, the Fed this month proposed changing the way the 10% lid is calculated. Under the plan, banks could calculate the 10% using total assets or sales volume as the base.
Bankers are grateful that the issue is on the table, but they want stronger action from the Fed.
"We're happy that they are trying to be constructive, but I think that's nibbling around the edges," said Paul Brandow, president of Chase Securities Inc. "It would be far more helpful if they would just confront the issue head-on and change it."
Further Fed Action Unlikely
Fed spokesman Joseph Coyne said Friday, "there's probably some sentiment for raising it, but I don't know how high." But he added that the Fed is unlikely to address the threshold in its pending proposal to change the revenue base. Comments are due on that plan Aug. 12.
Most members of the Fed's board support wider securities powers for banks, but they want Congress to repeal Glass-Steagall.
In their letter, the banks argued that a majority in Congress is ready to dump the Depression-ear law separating commercial and investment banking.
One banking lobbyist who requested anonymity predicted that the Fed would gradually raise the limit to 15% and then 20% and so on "until repeal becomes a fait accompli."
Among the 30 banking companies signing the letter are Banc One Corp., Bankers Trust New York Corp., Citicorp, First Chicago Corp., Fleet Financial Group Inc., J.P. Morgan & Co. Inc., NationsBank, PNC Corp., South Trust Corp, and Synovus Financial Corp.
About 10 of the banks are foriegn-owned, including Canadian Imperial Bank of Commerce, Barclays Bank PLC, Deutsche Bank AG, and the Long-Term Credit Bank of Japan Ltd.
Mr. Brandow said most of the 30 banks that signed the letter have talked to the Fed individually. He said he hopes the "en masse" effort will spur the Fed to act.
"Clearly, that we've all gotten together to do this" is impressive, Mr. Brandow said. "We've put aside our competitive instincts ... to provide a unified front."