WASHINGTON - Limiting banks' investment in derivatives could result in less credit for customers, a top banker warned the Senate Banking Committee on Friday.
Richard B. Roberts, executive vice president and treasurer of Wachovia Corp., Winston-Salem, N.C., added that restrictions on derivatives could force banks to take on more interest rate risk, which eventually could threaten the safety and soundness of the system.
"Any effort to restrict the ability of banks to engage in derivative transactions would increase costs and burdens to the industry and the communities served by these institutions," concluded Mr. Roberts, who testified on behalf of the American Bankers Association.
Not surprisingly, nearly all of the banking and financial markets representatives testifying before the panel agreed that further legislation in the area of derivatives is not necessary.
"There do not appear to be any gaps in the authority of federal regulators to deal with any issues or circumstances that might arise in the markets for these instruments," said Robert D. McKnew, executive vice president of Bank of America.
The only person in the room calling for legislation was Bonnie Ridley Kraft, president of the Government Finance Officers Association. Her recommendation, however, focused only on intensifying scrutiny of investment advisers.
"Congress can improve investor protection by the expeditious enactment of investment adviser legislation to provide for more frequent inspection and additional oversight of investment advisers," Ms. Kraft said.
Her suggestion seemed to fall on deaf ears, however. Nearly all members of the committee came out against any derivatives legislation or regulation on Thursday, when bank and financial market regulators testified before the committee.
Nevertheless, committee Chairman Sen. Alfonse D'Amato, R-N.Y., called for a voluntary effort on the part of the securities industry to pursue more disclosure to investors.
Securities brokers should be "disclosing in a manner that makes it obvious to the greatest dunderhead what the situation is," Sen. D'Amato told Securities Industry Association president Marc E. Lackritz and B of A's Mr. McKnew, who is also chairman of the Public Securities Association.
"I would ask that both the SIA and the PSA would work on this so that we can positively provide a better opportunity for investors," Sen. D'Amato added.
When Sen. D'Amato reaffirmed his concern about federally insured banks using derivatives, Mr. Roberts responded with a warning.
Forcing a bank's investment in derivatives out of the bank could create more problems than it would solve, he said.
"It would dilute the skill level and talent level," Mr. Roberts said. "If you put the two together in a single unit in a bank, you've created a larger critical mass of skill - you concentrate the monitoring and management of these positions in one location, and you save money."