Senate Banking Committee Chairman Alfonse M. D'Amato threatened Thursday to block regulations expanding bank securities powers.
"I'm prepared to start to offer piecemeal, single-shot legislation dealing with what I consider to be dangerous overreaching," Sen. D'Amato said at a hearing on a Federal Reserve Board plan to ease the firewalls separating banks and securities affiliates.
The New York Republican accused the Fed and Office of the Comptroller of the Currency of an "unwholesome competition" to ease restrictions on bank securities activities.
He likened the current climate to the early 1980s when regulators allowed thrifts to enter new businesses with little regard for safety and soundness.
"We need to keep the resources of American taxpayers from being placed at risk in situations where it was never intended," he said.
He also threatened to haul Comptroller Eugene A. Ludwig to Capitol Hill to explain why he adopted his operating subsidiary rule, which could allow banks to underwrite securities directly.
"We should get Mr. Ludwig in here and go over these rules he is promulgating and his mad dash-and that is what it is-he is dashing into an area and jeopardizing the taxpayers," Sen. D'Amato said.
Sen. D'Amato's remarks were just part of a morning-long, bipartisan attack on bank securities activities. Facing this barrage was Fed Governor Susan M. Phillips, who repeatedly defended a regulatory proposal to eliminate 20 firewalls between banks and securities affiliates.
Sen. Lauch Faircloth, R-N.C., chairman of the banking panel's financial institutions subcommittee, said the Fed had decided to reexamine the section 20 firewalls only after Mr. Ludwig adopted the operating-subsidiary rule.
"That didn't play a role at all," Ms. Phillips said. "The Federal Reserve is the only regulator that sets firewalls. This is something we have done on our own."
But Sen. D'Amato said the Fed is worried that bank holding companies will give up section 20 units entirely in order to underwrite securities directly in their banks. "I know why the Fed is coming up with this," he said. "You don't want to lose the action."
Sen. Faircloth also blasted the Fed for failing to consult with the Securities and Exchange Commission or the National Association of Securities Dealers. "That needs to be done, and quickly," he said.
Ms. Phillips defended the Fed's proposal, saying banking and securities laws already prevent banks from artificially propping up section 20 units. For example, she said, sections 23a and 23b of the Federal Reserve Act require banks to collateralize all loans to affiliates and to charge market rates. They also limit to 10% of capital the amount of credit a bank may extend to any affiliate. Securities laws require section 20 units to be adequately capitalized, she said.
An interagency policy statement on nondeposit products, Ms. Phillips also said, requires all banking companies to notify consumers that securities products are not covered by deposit insurance.
The firewalls the Fed wants to eliminate either duplicate these rules or impose restrictions not placed on investment houses, she said. The restrictions have made it too expensive for many small- and midsize banking companies to operate section 20 units, she said.
"The loss is not just to those companies but also to their customers and market competition," she said.
Her explanation did not go over well with Democrats or Republicans. Sen. Faircloth questioned whether the Fed actually monitors compliance with sections 23a and 23b.
Ms. Phillips said compliance is checked during annual exams. That wasn't good enough for Sen. Richard H. Bryan, D-Nev., who urged the Fed to conduct more frequent reviews. Ms. Phillips said the Fed would consider it.