Last year's surge in bank holding companies seeking expanded securities powers is expected to continue for much of 1998, industry observers said.

Seven regional banks sought Federal Reserve approval to establish section 20 subsidiaries in 1997; six were approved last year, one this month. The applications-spurred by the Fed's decision in March to ease a battery of rules governing section 20s-were the biggest batch the Fed has received in a single year.

Also, at least six bank holding companies applied to the Fed in 1997 to expand existing section 20 subsidiaries. These banks, including some with long-established securities units, asked the Fed for Tier 2 powers to add corporate debt and equity underwriting to their product menus.

Just last week Fleet Financial Group-which in 1988 was one of the first banks to win section 20 approval-won Tier 2 approval from the Fed. The Boston-based bank had sought expanded powers in conjunction with its pending acquisition of Quick & Reilly Group, a Palm Beach, Fla.-based discount brokerage.

Other banks making acquisitions of securities firms are expected to keep the Fed's applications pipeline busy over the next few months. Fifth Third Bancorp of Cincinnati plans to file an application for Tier 1 and Tier 2 powers in the next few weeks as it prepares to acquire Ohio Co., a retail brokerage firm.

And Minneapolis-based U.S. Bancorp, which received Tier 1 authorization in November, expects to file for Tier 2 powers by early February, a spokeswoman said. In December, U.S. Bancorp announced plans to buy Piper Jaffray, a Minneapolis-based investment bank.

The field of possible applicants for section 20 powers is thinning out fast. Overall, 45 large to midsize banks already have section 20 approval, including about 30 banks with Tier 2 powers.

Generally, only larger banks view securities activities as a natural extension of their corporate finance business. And all but two of the 25 largest U.S. banks have section 20 approval.

One of those two, Wachovia Corp., Winston-Salem, N.C., plans to apply for Tier 1 powers this year, with an application for Tier 2 powers to follow, a spokesman said. The other big holdout, Wells Fargo & Co., San Francisco, has no interest in applying for section 20 powers at this time, a spokeswoman said.

According to industry observers, 1998 may see more applications from regional banks with assets as low as $5 billion.

"Most of the largest, most adamant players have already established section 20s," said Michael Mayo, an bank equities analyst with Credit Suisse First Boston. "What we may continue to see is a decrease in size."

But Hal Schroeder, an equity analyst with Keefe Bruyette & Woods, said section 20 powers may not be right for everyone. Banks with a heavy emphasis on small-business loans, he said, should probably stay away from the securities business for now.

"But those banks with a core cadre of midsize corporate customers should consider how they are going to meet those customers' capital markets needs," Mr. Schroeder said. "If they wait too long, the money-center banks and brokerage firms are going to go further downstream, and regionals run the risk of losing those relationships."

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