WASHINGTON -- Moves by CS First Boston Inc. and Merrill Lynch & Co. to swipe commercial loan business from banks may pressure policymakers to modernize the laws governing the industry.

"How anachronistic does the legal structure for the banking industry have to be before it gets fixed?" asked industry analyst Karen D. Shaw, president of the Institute for Strategy Development.

In the past week, the two Wall Street giants announced that they will finance medium-size and large companies that do not carry investment-grade ratings. First Boston and Merrill Lynch said they will syndicate the loans.

Climate for Reform

"I think this is an illustration of trends that make it more likely that reform occurs," Assistant Treasury Secretary Richard S. Carnell said Wednesday. "I don't want to state large conclusions from a specific instance, but the trend points to how the traditional lines don't have the same validity."

Commercial lending is not new territory for investment banks, which made bridge loans for leveraged buyouts in the 1980s. But First Boston and Merrill Lynch, who even hired commercial bankers to run the new business, are now boldly going after banks' bread-and-butter customers.

"The marketplace once again is ahead of any legal or regulatory developments," said James J. McDermott, president of Keefe, Bruyette & Woods in New York.

Notes of Skepticism

While Mr. McDermott said Wall Street's moves ought to motivate change in Washington, he hedges his bets.

"What motivates change down there may have nothing to do with practical reality," he said.

Banking legislation veterans were also skeptical.

"I think this relieves pressure on Congress rather than creates it," a senior regulator at one of the banking agencies said. "Congress has to have a good reason to pass a law, and good government is never a good enough reason."

Still industry lobbyists confirmed that they plan to point to First Boston's and Merrill Lynch's plans as arguments for repealing the Glass-Steagall Act, the 61-year-old law separating commercial from investment banking.

"It'll be used by me and others as further evidence of a comingling of the industries and that Glass-Steagall doesn't make sense," said a banking lobbyist who would agreed to an interview if his comments were not attributed by name.

Industry consultant Bert Ely called the investment banks' foray into commercial lending "a further nibbling away of banks' franchise."

Commercial banks have ceded market share to nonbanks in credit cards, mortgages, and commercial paper. The industry also stands to lose a big chunk of the small-business lending market if legislation pending in Congress passes. A section of the community development financial institutions bill would facilitate a secondary market for small-business loans.

When a secondary market develops for a product, volume balloons, competition increases, margins narrow, and banks often lose market share.

Ms. Shaw noted that the secondary market for credit card receivables grew from zero to $60 billion in less than five years. Securitization, she said, wipes out the one big advantage banks have over their competitors: the ability to hold a loan to maturity.

Price Advantage

"Banks now have to compete with empowered nonbanks because the one comparative advantage of banks - the ability to hold loans - becomes irrelevant," she said.

Investment banks also have a price advantage over commercial banks because they don't face uniform capital requirements or a plethora of regulations such as the Community Reinvestment Act.

It is possible that First Boston and Merrill Lynch, by digging deeper into banking's territory, could make it easier for Congress to extend laws like CRA to nonbanks.

Rep. Joseph P. Kennedy 2d, D-Mass. is holding hearings in his House Banking consumer credit subcommittee this summer to explore extending CRA to uninsured financial institutions.

Off the Hook

But many lobbyists here believe that investment banks will never be saddled with CRA because they do not carry deposit insurance.

"It's very frustrating for bankers to see nonbanks providing the same kinds of services and not have CRA responsibilities and not have the same kind of regulatory problems," said Jim Chessen, chief economist at the American Bankers Association.

The latest advances by securities firms "tees it up again for Congress to say 'It's time to modernize the banking system.'"

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