Congress might find it hard to believe, but some of the most important and desired changes in financial services reform can be achieved without it. Many of these changes can be instituted by the bank regulators.

Three reasons are given for allowing banks to affiliate with commercial firms:

Banks and securities firms need to be in the business of making batteries and baby formula.

Banks and securities firms should diversify to enhance their returns, stability, and so on.

Banks and securities firms should be able to finance commercial companies with equity investments.

In fact, banks don't care much about affiliating with most commercial firms, but they do want to be able to finance commercial companies in a variety of ways. Securities firms that would like to merge with or acquire banks often have substantial interests in nonfinancial services companies.

No commercial banker or investment banker thinks the head of NationsBank is going to be flipping burgers or calling bingo just because NationsBank has made an investment in a fast-food chain or nursing home. So no one can seriously argue that bankers should be affiliated with industrial firms for strategic reasons.

Moreover, if banks were to make strategic investments in industrial companies, serious antitrust and supervisory concerns may develop.

Already, bank holding companies may own 5% of the voting securities of any company, and mutual funds allow individuals to invest in a broad array of industries. Bank holding companies may also make noncontrolling equity investments, and regulators are considering lifting the thresholds to permit a larger investment to be considered noncontrolling.

Banks also can diversify by lending to different industry sectors and geographic areas, and by lending on different terms. Stockholders won't necessarily benefit from this diversification into commercial companies, because it merely transforms a bank into a mutual fund. Why convert banks and securities firms into mutual funds? And if they do become mutual funds, shouldn't they be regulated as such?

If financial services firms need to diversify, a regulator would want to limit their investments in industrial firms, ensure that management resources are not devoted to the failing pet-rock business, and prevent weird linkages between financial and nonbanking activities.

Financial investment is probably the most legitimate reason to allow banks to invest in commercial firms. It would keep banks in the business they know and do best-financial services-and would allow them to use the same financing techniques as investment banks. Otherwise, banks are constrained by a hodgepodge of silly and inconsistent rules.

Everyone focuses, incompletely, on the deposit insurance system. The argument is that banks that take advantage of the federal safety net should behave differently.

That's true. It is more important, however, that banks and securities firms follow the rules-even if they do not take insured deposits from retail customers-if they borrow from the Federal Reserve and are engaged in the payment system, or if they could create serious system risk by failing. Though much activity escapes the system because deposit-like products offered by Merrill Lynch are not subject to reserve requirements, a new regulatory regime should stop that.

More regulation is likely. As regulators or Congress allow banks and securities firms to do more, it is inevitable that they will be more regulated in their wider scope of activities. Look, for example, at the Fed's well-meaning elimination of certain firewalls between banks and securities firms.

These firewalls, which had restricted funding, interlocks, and cross- marketing, and imposed limits on revenues, were never legally mandated. The Fed has replaced many of its firewall restrictions-for example, credit enhancement, lending by insured depository institutions to affiliated securities firms, and lending to customers of affiliated securities firms- with operating standards and more vigorous examination standards, and left in place statutorily required restrictions on bank transactions with affiliates.

In other words, as the scope of activities increases, the amount of regulation increases. Indeed, many of these firewalls might make sense as regulated financial services firms begin engaging in other business activities.

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