Not all of the industry is waiting for Congress to repeal the Glass-Steagall Act.

Thirty-eight banks are successfully using so-called Section 20 subsidiaries to build up their investment banking businesses now, before Congress or the Federal Reserve Board opens the floodgates to full bank involvement in securities underwriting.

"You need to hire people and build up revenue sources, so it takes some time," said Ronald I. Mandle, a bank analyst at Sanford C. Bernstein & Co. "The longer-established ones would be more profitable."

Industry observers said these subsidiaries have found creative ways to operate within the government-imposed 10% cap on revenue from securities work that is generally prohibited to banks. The subsidiaries also entice companies to keep all their business with the bank.

"Generally, it seems to be profitable for the banks that have made the investment in it," said Karen Shaw Petrou, president of the industry consulting firm ISD Shaw Inc.

Just how profitable these units are remains in doubt. Bank analysts said institutions do not separate a Section 20's earnings from the rest of the institution's profits. This makes it impossible to know exactly how well these units are doing, although most experts agree they are making money.

Despite their apparent good fortune, industry officials said the 38 banks - including well-entrenched veterans such as Chase Manhattan Corp. and PNC Financial Corp. - would gladly give up their exclusive niche in exchange for full underwriting powers.

"There is an opportunity for us in one sense, because not every bank on the block can afford to set up a Section 20," said Shiv Krishnan, president of Key Capital Markets Inc., an affiliate of KeyCorp. "But the flip side is those costs are real costs, whether it is to set up the back office or to create the firewalls.

"At the end of the day, I'd much rather see a scenario where we don't have this artificial separation and we all play on a level playing field."

With the Glass-Steagall Act in 1933, Congress separated the banking and securities businesses, prohibiting banks from being "principally engaged" in underwriting stocks, bonds, and other securities.

The restrictions held firm until April 1987, when the Fed allowed Citicorp, J.P. Morgan & Co., and Bankers Trust New York Corp. into the business, using an exemption found in Section 20 of the law.

The new powers came with a price. The Fed required the banks to conduct the business in a what became known as a Section 20 affiliate, which must be cut off from the bank. That means separate capitalization, no management interlocks, and no sharing of customer information.

The Fed also restricted how much a bank could earn from securities underwriting. The Fed initially limited revenue from underwriting to 5% of earnings from Treasury notes and other government bonds - products that banks have always been allowed to sell. The ceiling was raised to 10% in 1990.

The Fed has done little to widen bank securities powers since then, other than to permit more banks to open Section 20 affiliates.

The only other change occurred in 1992. Falling interest rates had hurt the government securities business, raising the specter that banks wouldn't earn enough to permit any underwriting business. The Fed stepped in, giving banks permission to base the 10% revenue cap on an index rather than the bank's 1992 revenue.

The central bank did propose in 1994 to let banks recalculate the 10% cap using either asset value or sales volume data. But the plan was never acted on.

Fed officials said the central bank is sitting on that proposal - and on industry demands that the 10% ceiling be lifted - until Congress gives up on Glass-Steagall repeal. "We are not ready to make that assumption yet," Fed Governor Edward W. Kelley Jr. said. "As a consequence, we have not and are not addressing Section 20s."

Mr. Kelley wouldn't comment about how the Fed will determine when the legislation is dead, but bankers said they expect the central bank to come to that conclusion this fall or winter.

Of course, they are just guessing. The Fed has previously considered easing the restrictions but has not done so. There is little to indicate this time will be different.

Industry officials said this helps explain why the big banks have focused their attention on Congress, where House Banking Committee Chairman Jim Leach is pushing Glass-Steagall repeal.

His bill, however, is mired in a side debate about the future of bank insurance sales. The insurance industry wants lawmakers to include restrictions on banks' entry into this lucrative market as the price for Glass-Steagall reform. Bankers aren't willing to pay that price, creating a stalemate on the Hill.

Many industry officials give the legislation little chance of passing this year. "Time is not on our side," said Larry Larocco, executive director of the ABA Securities Association.

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