The Federal Reserve Board is expected this week to take the unprecedented step of applying its rules directly to national bank subsidiaries.
On Thursday, the Fed is scheduled to consider a proposal that would apply sections 23a and 23b of the Federal Reserve Act to any bank subsidiary that is engaged in activities that the bank itself cannot undertake.
This would include securities underwriting and real estate development.
Section 23a restricts investments in subsidiaries to 20% of the parent company's capital, with no single subsidiary receiving more than 10% of capital. Section 23b requires all deals to be done at arms length, which means the parent cannot provide discounted loans or other perks to its subsidiaries.
Industry observers said Friday that the Fed is taking aim at the Office of the Comptroller of the Currency's operating-subsidiary rule, which permits banks to conduct activities in subsidiaries that they cannot do directly.
Fed officials have repeatedly criticized as unsafe the so-called op-sub rule, which took effect Dec. 31.
The OCC itself has said it would require operating subsidiaries to abide by sections 23a and 23b, leading some observers to question the need for a Fed rule.
"This is pretty much stepping on the toes of the OCC," said Charles H. Horn, a partner in the Washington office of the Mayer, Brown & Platt law firm. "You can expect the agency to be pretty negative on it."
"This sounds like open war to me," said Karen Shaw Petrou, president of the industry consulting firm ISD/Shaw Inc. "This is the Fed attempting to regulate the manner in which national bank operating subsidiaries conduct their business."
OCC Chief Counsel Julie L. Williams declined to comment Friday, but a Fed official said the central bank simply wants to ensure that the restrictions in 23a and 23b are applied. "This makes real what the OCC proposed to do," the official said.
So far, two banks have asked the OCC for permission to start operating subsidiaries, but the agency has yet to approve any of the requests.
H. Rodgin Cohen, a partner at the New York law firm of Sullivan & Cromwell, said the Fed proposal may hurt banks planning to take advantage of operating subsidiaries. "If a bank is already at the 20% limit (imposed by 23a), then this could be problematic," he said.
But one banker said she doesn't expect the proposal will affect most institutions. "The comptroller has already said these restrictions apply," the banker said. "This is just the Fed getting its 2 cents in."
The biggest winner from the proposal will be the Fed itself, one industry official said. "The Fed gets to paint itself as the good regulator trying to stamp out practices that are unsafe," the official said.
