CoreStates Financial Corp. has applied to the Federal Reserve for section 20 powers to underwrite and deal in securities.
The Philadelphia-based banking company is looking to join 42 others that have set up securities subsidiaries to expand their corporate banking businesses.
The $45.4 billion-asset company has asked the Philadelphia Fed for so- called Tier 1 powers, which would allow it to underwrite and deal in certain municipal and revenue bonds, mortgage-related securities, commercial paper, and consumer-receivable related securities.
"Our strategy is to generate as much product as possible to leverage our existing corporate and institutional client base," said Daniel Aboyun, executive vice president and senior managing director of CoreStates Capital Markets.
Mr. Aboyun is slated to become chairman of the new section 20 unit, which will be called CoreStates Securities Corp. It would offer securities sales and trading, corporate and public finance, asset securitization, and risk-management advisory services.
"This is a logical expansion of what we've been doing for the major players in our region," said John F. Lloyd, senior vice president and managing director of marketing and development. "It's not us getting into something we've never done. We're taking what we think is good and expanding it."
CoreStates has more than just dabbled in investment banking, its executives say. For years, it has offered asset securitization, venture capital, M&A advice, private placements, and global foreign exchange to its middle-market clients-companies with $15 million to $250 million in annual sales. The bank commands a 32% share of its regional market.
Last month, it completed its acquisition of Meridian Bancorp, a $15.2 billion-asset bank in Reading, Pa.
Recent loosening of the rules that restrict commercial banks from selling securities have compelled a number of midsize regional banks to establish section 20s. With the higher end of the market fairly saturated, money-center banks are moving into middle-market corporate finance.
As a result, the regional banks that traditionally served those customers-such as Banc One Corp., Huntington Bancshares, and BankBoston Corp.-are launching securities businesses to sustain their existing clients as they grow.
Analyst Thomas F. Theurkauf Jr. of Keefe, Bruyette & Woods said a section 20 is "a fairly natural adjunct to its existing commercial and corporate business."
"In terms of debt and equity underwriting, there is a natural synergy between what the bank now offers and what they can through a section 20," he said.
At CoreStates, once Tier 1 powers are up and running, the company plans to apply for Tier 2 powers, which would allow it to underwrite and deal in corporate debt and equity.
"We think that its important to get experience in investment banking," Mr. Aboyun said. "This will be an internal learning experience for us, as the evolution of commercial and investment banking continues over the next several years."
While many of CoreStates' peers already have section 20 powers, competitors say there is room for another player.
"It really boils down to the relationships they've personally built," said a banker at another section 20 unit that targets the middle market. "I think that there's absolutely room for another bank," the banker said. "The question is what form is this going to be in.
"Now that a lot of the walls are coming down, you've got to have a niche. In the long run, their presence doesn't frighten me."
Most of the existing 330 employees of CoreStates Capital Markets will be dual employees of the new securities unit. About 60 to 70 executives who work in foreign exchange and capital markets operations will be bank-only employees.
The company filed its application with the Federal Reserve last week. CoreStates executives said they hope to have their new unit up and running by November. Its organizational structure will be announced next week.