The Federal Reserve Board gave a big boost Wednesday to banks seeking to offer one-stop shopping for corporate customers.
In eliminating three firewalls that separate commercial banks from their securities units, the central bank said a single employee may negotiate loans, offer transaction accounts, and provide securities underwriting services. Previously, customers had to deal with separate salespeople for commercial and investment banking products.
"This is a huge deal," said Richard Whiting, general counsel to the Bankers Roundtable. "It will make the institution a seamless provider of financial services. The customer can now meet his needs by dealing with a single person or set of persons at the same location."
A single sales force will produce lower marketing costs, said Shiv Krishman, president of Key Capital Markets, a unit of KeyCorp. That should let the industry cut prices, he said.
"The firewall has always had a built-in cost," Mr. Krishman said. "That will now go away."
The elimination of firewalls is part of a package the Fed proposed in July to ease restrictions on banks' securities units, known as section 20 subsidiaries. The package includes a plan to markedly raise the limit on how much revenue the units can derive from securities underwriting - 25% of total revenue, up from 10% now. The Fed is expected to act on that proposal within a few months.
The moves came as many of the nation's largest banks and Wall Street firms are stepping up efforts to meet all the financing needs of middle- market and large corporations. In fact, the Fed's package has triggered speculation that banks eventually will seek to acquire Wall Street firms. (See back page.)
Wednesday, the Fed also lifted most of the restrictions that had prevented bank employees, officers, and directors from working for the securities unit as well. Employees and all officers, except the chief executive, may now work for both entities. But directors from one may comprise no more than 49% of the other's board.
Finally, the Fed said banks may buy from their section 20 units securities that have a "readily identifiable" market price. Previously, banks only could buy government bonds from these units.
Governor Susan M. Phillips said the Fed is trying to provide as much relief as possible from the Glass-Steagall Act, the Depression-era law that Congress has repeatedly tried to repeal during the past decade.
"I'd hoped we'd get rid of the legislation," Ms. Phillips said at Wednesday's meeting on the proposal. "But absent that, this is a very balanced approach."
Industry officials were quick to applaud the Fed's actions.
Easing the restrictions "will permit financial services companies to more effectively and efficiently serve our clients while still allowing for prudent oversight and containment of risk," said Frank Newman, chairman and chief executive of Bankers Trust New York Corp.
"The firewalls they have essentially eliminated are three of the most onerous ones identified by the banking industry," added Larry LaRocco, managing director of the ABA Securities Association. "They have hamstrung their ability to be more competitive with securities firms and foreign banks."
Eliminating the three firewalls also will permit many regional banks to enter the securities underwriting business, said Paul H. Dimmick, executive vice president at Mellon Bank.
"The money-centers could afford to put up with some of the inefficiencies that the firewalls provided," Mr. Dimmick said. "But the regionals said they couldn't afford to get over the firewall."
The Fed adopted an additional piece of Glass-Steagall relief, dropping a legal interpretation of Regulation R. The move will permit bank holding company employees, officers, and directors to sit on the boards of mutual fund companies. But the Fed left intact a separate restriction barring a bank holding company from controlling a mutual fund company.
"This will broaden the pool of qualified directors for mutual funds and bank holding companies," said Melanie Fein, a partner at the Washington law firm of Arnold & Porter. "This means the Fed is seriously committed to reform, and that is very encouraging."
But Ms. Fein said she was disappointed that the central bank did not allow employees of banks, as distinct from bank holding companies, to sit on mutual fund boards.
Also Wednesday, the Fed said prices of its payment services would fall an average of 3.4%. Prices for automated clearing house services, funds transfers, and electronic check products will fall the most, but the price for processing paper checks will rise the most.