Despite the battering the investment banking business has taken in the past year, bankers eagerly anticipate the dismantling of the Depression-era law that has kept them out of the business.

For banks that have operated investment banking subsidiaries, repeal of the Glass-Steagall Act would mean the end of a cap requiring that the subsidiary generate no more than 10% of overall revenue. In addition, deregulation would give them equity underwriting powers they don't enjoy today.

Those participating in other investment banking activities, such as municipal bond underwriting, may have a head start on their competitors once the law is repealed.

"We think investment banking is less risky than what banks do already," said Rachel F. Robbins, the general counsel at J.P. Morgan Securities Inc., the investment banking subsidiary of J.P. Morgan & Co.

"I don't think that any of the events of the past year contradict that," she said, referring to various debacles in the trading and derivatives market that dominated the financial news. "The problems we've seen have involved lack of risk management and internal controls, or fraud."

While the legislative momentum for changes in the Glass-Steagall Act builds, an increasing number of commercial banks have been lining up to enter the business.

The number of foreign and domestic commercial banks granted power to underwrite commercial paper, corporate debt, and municipal revenue bonds through so-called section 20 subsidiaries has grown to 39 in eight years since the courts granted the authority.

At the same time, some banks have forged ahead in growing businesses that will put them in a good position to expand if Glass-Steagall is repealed.

First Tennessee National Corp., for example, is the nation's third- largest underwriter of municipal bonds. And it has continued to expand its business despite Glass-Steagall.

"We've been comfortable with the way we've been able to expand our current business mix," said Marty Mosby, a vice president of strategic planning and investor relations at First Tennessee. "We feel we could continue to do that if Glass-Steagall was not changed. However, the change will give us much greater opportunity.

"We did about $8 billion in municipality and agency debt in the last year," representing 26.5% growth over the $5 billion in 1992, said Mr. Mosby. "We've set the foundation with our past expansions, and hope to leverage that to other areas."

To be sure, banks approach the subject of deregulation with trepidation. The commercial banks that have taken advantage of the loophole that created section 20 subsidiaries have endured a year of trading losses, layoffs, derivatives debacles, and interest rate hikes that starkly illustrate the pitfalls of the business.

Banks specializing in investment-banking-type businesses have been hurt much more than those with traditional banking operations in the past year, said Ann Robinson, a fixed-income analyst at Bear, Stearns and Co.

J.P. Morgan and Bankers Trust New York Corp. have received downgrades from Standard & Poor's Corp. and Moody's Investors Service as a result of their increasing emphasis on the more volatile investment banking business.

"It's not all that great to be an investment bank these days," said Ethan Heisler, a fixed-income analyst at Salomon Brothers Inc.

Although the rating agencies noted the strength of Morgan's diverse business base, Morgan became the last U.S. bank to lose a coveted triple-A rating.

"There is overcapacity right now in the investment banking business," said Tanya S. Azarchs, a director of financial institutions at Standard & Poor's Ratings Group.

Compatibility between bankers and investment bankers also could be a problem. "If you don't have the experience, you can go out and buy it, but where is the cultural compatibility?" wondered one banker.

"The cultural issue has been a stumbling block," agreed Mr. Mosby, but one that First Tennessee feels it has controlled.

Commercial bankers also have noted the trading generated upheavals that U.S. and foreign banks have endured, and expressed concern about firing people from a budding investment banking operation.

Additionally, some banks have even closed their section 20 offices in the past few years, waiting for an improvement in the market.

However, the same market conditions could work in a bank's favor as it builds new business units. Investment bankers fearing layoffs from the big firms already have embraced new opportunities at banks that are developing these positions.

In the short term, banks that have operational section 20s or investment-banking-type businesses are expected to benefit the most from changes in Glass-Steagall.

Said Ms. Robbins of J.P. Morgan: "A change in Glass-Steagall would enable us to do business that is a natural outgrowth of our client relations without unnatural restrictions."

Next: Impact on bank brokerages

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