Now that Congress has failed to repeal the Glass-Steagall Act, an arm of the American Bankers Association is urging the Federal Reserve Board to more than double the amount of securities that holding company affiliates can underwrite.
The trade group, writing in a June 21 letter, said the Fed should raise the revenue limit for section 20 affiliates to at least 25% of earnings from Treasury notes and other government bonds.
The Fed also should adopt a revised method for calculating the limit on securities revenue and it should eliminate many of the firewalls that separate a bank's commercial and investment banking units, the ABA Securities Association said.
"It is no longer appropriate to defer action on the incremental - but critically important - changes," wrote Richard B. Roberts, chairman of the ABA Securities Association and executive vice president at Wachovia Corp. "The board should effect such changes now."
A senior Fed official declined to comment on the letter directly. But he said Monday that the central bank is considering revising its underwriting limits. "Now that the legislation is off the table, it seems the board needs to address this issue," the official said.
Section 20 of the Glass-Steagall Act prevents banks from being "principally engaged" in securities underwriting. The Fed has interpreted that as limiting underwriting revenue to 10% of earnings from government securities, which banks have always been able to sell.
Currently, 38 banks have permission to operate section 20 subsidiaries, which compete with investment houses to underwrite stock offerings.
Rep. Jim Leach, chairman of the House Banking Committee, sent Fed Chairman Alan Greenspan a letter in early June urging the central bank to raise the earnings limit. Rep. Leach, whose legislative efforts to repeal Glass-Steagall have failed, told the Fed that it has clear legal authority to act.
Legal observers expect the Fed to raise the cap. Melanie Fein, a partner at the Washington law firm of Arnold & Porter, said the Fed has bemoaned the restriction for far too long not to do something. "Now is the time for them to put their money where their mouth has been," Ms. Fein said.
In addition to the raising the cap to at least 25%, the ABA Securities Association also urged the Fed to act on two other measures. First, it said, the Fed should adopt an alternative method for calculating the securities limit that relies on sales volume rather than revenue.
The method would permit a bank that sold $100 million in government bonds to underwrite $25 million in corporate bonds, regardless of how much money it made off either transaction.
Second, the group said, the Fed should adopt a six-year-old proposal to eliminate many of the barriers that prevent banks from cross-marketing underwriting and banking products. It also should allow directors to serve both on the board of a section 20 unit and the board of a foreign-bank affiliate. Finally, it should permit lower-tiered officers to serve both at the bank and the securities affiliate.
Larry LaRocco, managing director of ABA Securities Association, said Fed action is no substitute for legislative reform.
"This relief is only temporary," Mr. LaRocco said. "No one should make any mistake about that. We need Glass-Steagall reform that is truly broad."