Industry executives roundly endorsed the Federal Reserve Board's decision Thursday to eliminate most of the remaining firewalls between banks and their holding company securities underwriting subsidiaries.
"We welcome the Fed's action. We see it as further recognition of the evolution of banks in the securities business," said Donald H. Layton, Chase Manhattan Corp. vice chairman.
"We're ecstatic," said James J. Henson, general counsel for Banc One Capital Corp., the section 20 unit of Columbus, Ohio-based Banc One Corp. "The board's action will create a lot of business opportunities."
Forty-four U.S., Canadian, and foreign banks operate section 20 units, up from five in 1987 when the Fed first allowed banks to underwrite securities.
"In those 10 years, we've lived with essentially an excessive layer of regulation," said Susan W. Evans, chief executive officer and chairwoman of Citicorp Securities Inc.
But the Fed's decision was not without its critics.
"The Federal Reserve action today broadening bank securities activities is cause for concern," said Senate Banking Committee Chairman Alfonse M. D'Amato, R-N.Y., on Thursday.
"I believe we need comprehensive, financial modernization which allows everyone to compete on a fair basis without jeopardizing taxpayers."
Legislation is pending in Congress that would allow banks, securities firms, and insurance companies to own each other.
Under the Fed's ruling, by late October two dozen limits on section 20 units will be replaced by a set of operating standards, also approved Thursday.
Banks will be able to lend to affiliated securities units and its customers, and buy stocks underwritten by section 20 subsidiaries. Investments in section 20 units will count toward holding company capital requirements.
Beyond the Fed's firewalls, bank section 20 units must comply with bank holding company regulations, as well as rules governing securities from the Securities Exchange Commission and the National Association of Securities Dealers.
"One of the big benefits for the section 20 companies is, in fact, eliminating the costs that come about because of this extra layer," added Ms. Evans.
A reduced compliance burden could entice more commercial banks to create securities affiliates.
"It's certainly an advantage for the banking industry, in that it will allow a much bigger range of banks to enter the securities field because the barriers to entry have been reduced," said V. Val Mulcahy, president and chief operating officer of BancBoston Securities Inc.
Bankers also said they were glad to see increased parity between commercial banks and competitors, such as investment banks and insurance companies.
Removing the firewalls "will mean that we're playing on a level playing field with the securities companies, and that we won't have to operate to a higher capital standard," said Mr. Mulcahy.
Eliminating the firewalls also will make it easier for banks to fulfill more of their clients' needs at once and take in more fee revenue.
Banks that offer one-stop-shopping, or the packaging of underwriting, lending, and other financial services such as merger and acquisition advisement, should now be able to add previously restricted products such as credit enhancements to securities issues to their menus.