Deutsche Bank said Monday it will merge its U.S. securities units and relinquish its favored status as an underwriter.

The units being merged are Deutsche Bank Capital Corp., C.J. Lawrence Inc., and Deutsche Bank Government Securities. The latter is primary dealer in U.S. government securities.

The consolidated unit will operate as a section 20 subsidiary of Deutsche Bank and thus operate on a level playing field with U.S. banks.

Constraints of Favored Status

Deutsche Bank is one of 17 foreign banks allowed to function as both commercial and investment banks under the International Bankig Act of 1978.

The act, though, prohibits the banks from expanding the investment or commercial banking sides of their businesses by acquiring going U.S. concerns.

Thus, Deutsche Bank was barred from acquiring U.S. banks or brokerages.

The Federal Reserve Board in December 1992 granted Deutsche Bank a special exemption to acquire C.J. Lawrence as part of the German bank's takeover of Morgan Grenfell, a British firm.

Under tha exemption, Deutsche Bank was allowed to run C.J. Lawrence as a section 20 unit but it was barred from merging it into the bank's other securities units.

"We want to achieve coherence," said John Rolls, head of Deutsche Bank's North American operations. "We have been operating with two separate operations, one grandfathered and the other a section 20 company without any ability to communicate. In fact, we were legally prohibited from communicating. As a result, we have not been presenting ourselves to the market in the most focused way, nor pursuing the most effective business strategy."

Section 20, a loophole in the Glass-Steagall Act, permits separately capitalized units of banks to underwrite corporate debt and equity - activities normally off-limits to banks.

But these off-limit activities can contribute no more than 10% of the unit's revenues, under Federal Reserve rules governing section 20 units.

The commingling of the primary dealer's activities with C.J. Lawrence and the other investment banking unit will increase Deutsche Bank's capacity to underwrite U.S. corporate debt and equity securities. Primary dealing of Treasury securities is permissible under federal banking law.

Bankers and analysts said Deutsche Bank has been stymied in its attempts to build an investment banking operation since it acquired C.J. Lawrence.

"Grandfathering proved to be an obstacle and prevented them from making any headway in their plans to develop investmen banking in the U.S.," said a foreign banker.

Ambitions in North America

"One of the group's important goals is to become a leading participant in the North American financial markets," Hilmar Kopper, the bank's chairman, said in Frankfurt. "We believe this structure positions us to realize that goal."

Other grandfathered banks are Union Bank of Switzerland, Credit Swiss, Westdeutsche Landesbank Gironzentrale, and Societe Generale.

Some banks, however, such as Long Term Credit Bank of Japan, gave up their right to do investment banking when they made commercial banking acquisitions.

Informed sources said more grandfathered banks are likely to relinquish their status to escape the legal constraints imposed on grandfatherd units.

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