Derivatives legislation may be in the formative stages in Washington, but investors in bank stocks are already spooked. "Equity investors in bank stocks are a bit leery because of the probability of what the federal government might do. The stocks of banks that get a significant portion of their earnings from derivatives have not been performing well," said Sam Lehman of Natwest Washington Analysis.

The congressional activity has affected trading banks such as Bankers Trust New York Corp., as well as banks that are known to use derivatives to hedge their own risk, such as Bane One Corp.

Bankers Trust stock has slipped 19% from its high of $84.625 earlier this year to trade at $68.50 Thursday afternoon. Bankers Trust derived more than half its revenue from trading in 1993, and part of its stock decline reflects concern over the volatility to the business, after a poor first quarter.

But the bank suffered additional hits on news of a General Accounting Office report that recommended regulation, because some investors regard regulation as a threat to a profitable business.

Stock Reaction

Among end-users of derivatives, Banc One saw its stock swoon late last year, after it disclosed some of its off-balancesheet activity. Its stock, too, has reacted to the threat of regulation, Mr. Leaman said.

Banc One was trading at $34.75 Thursday afternoon, off $39 earlier this year and from $42.125 last year.

With at least three bills in the works, the investors figure its a good bet that banks in the derivatives market will be subject to some form of additional government oversight before long.

What remains to be seen is how restrictive the legislation will be, and when it will emerge.

"The pot is beginning to boil," Mr. Leaman said. "Legislation does not have to go through to create uncertainty. In the next three or four months there will be a lot of activity in Washington on derivatives."

Several Proposals

Furthest along in the legislative process is a bill introduced last month by House Banking Committee Chairman Henry B. Gonzalez, D-Tex. An amalgam of previous bills introduced by his committee and by Rep. Jim Leach, R-Iowa, the legislation seeks to ensure that bank regula, tors are adequately informed about the derivatives market. (See related story, page 1.)

A more radical proposal is under consideration in the Senate Banking Committee. That bill, introduced by Sen. Byron L. Dorgan, D-N.D., and Sen, Barbara Mikulski, D-Md., would prohibit federally insured banks and credit unions from engaging in proprietary trading.

Sen. Dorgan said his bill would prevent "banks and other institutions with federal insurance from playing roulette in the derivatives market. If an institution has deposits insured by the federal government, it should not be involved in trading risky derivatives for its own account."

A Senate Banking Committee staffer said the bill most likely would not be taken up in this session, however.

The third bill is expected to be introduced by Rep. Edward J. Markey, D-Mass., chairman of the House subcommittee on telecommunications and finance. He is expected to focus on regulating the trading of derivatives by securities firms.

An aide to Rep. Markey said the congressman 'is now in the process of identifying the issues involved in the market and is awaiting the results of the House and Senate hearings.

Protests from the industry that self-regulation is the answer aren't carrying much weight on Capitol Hill, where congressmen have vivid memories of how deregulation seemed to lead to the costly S&L crisis.

A House banking committee staffer argued that with taxpayer dollars potentially at stake, regulators can't leave it to banks to police themselves in a rapidly evolving market for derivatives.

"Our biggest concern is the exposure of the Federal Deposit Insurance Fund," the aide said. Rep. Gonzalez "wants to make sure regulators have enough information to avoid systemic risk.

"Banks can't regulate themselves, because they are concerned with serving their own client base. The committee," she said, "is concerned with the public and the safety and soundness of the banking industry."

The staffer characterized the House Banking Committee bill as "extremely modest" in scope, noting that most of the suggestions are contained in the Gonzalez-Leach bill already are recommended by the Office of the Comptroller of the Currency.

She said the committee wants a law that ensures that clients are properly informed of the risk involved in a specific derivatives deal and that the clients are offered products that suit their needs.

"The fear in the derivatives market is that it'll be overregulated," she said. "But it's very important to have some oversight. You need something on the books, just as long as the law is not a straitjacket. We don't want to kill off an industry."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.