WASHINGTON -- Bankers are asking the Federal Reserve Board to dramatically expand its proposal to rejigger limits on their securities underwriting business.
In comment letters filed with the Fed, bankers argued that their securities subsidiaries should be authorized to derive up to 25% of revenue, sales, or assets from underwriting or dealing in certain securities.
Currently, the Fed prohibits bank securities subsidiaries from drawing more than 10% of their revenues from underwriting or dealing in municipal revenue bonds, commercial paper, asset-backed securities, and corporate debt and equity.
But the central bank proposed July 6 to apply the 10% rule to sales, assets, or revenues, a move that is expected to give considerably more elbow room to the 30 banks that now operate so-called Section 20 subsidiaries. The term comes from the section of the Glass-Steagall Act that bars banks from being "principally engaged" in the securities business.
The bulk of revenues in these subsidiaries come from activities that have long been permissible for banks, such as dealing in government bonds. In 1987, the Fed began allowing banks to underwrite and deal in "impermissible" securities to a limited extent.
While bankers generally expressed support for the Fed's plan to revamp its policy, they said the proposal did not go far enough.
"We agree with the board that there should be new alternatives to the current revenue test," wrote Patrick M. Frawley, the director of the regulatory relations group at NationsBank. "We also strongly urge the board to reconsider the 10% limit."
"We believe that the 10% limit is overly restrictive and is not necessarily a definitive threshold per the Glass-Steagall Act," Mr. Frawley added.
A jump to 20% to 25% would not violate the act's "engaged principally" restriction on ineligible securities, said David A. Simpson of SunTrust Banks Inc.
"Under these revised standards, the traditional, bank-eligible securities business of any Section 20 would still be at least three to four times the size of any ineligible securities activity," Mr. Simpson wrote.
A group of 30 major domestic and foreign banks said that if the board doesn't raise the limit to 25%, dire consequences could follow.
"It would undoubtedly have a serious adverse impact on our business," the bankers wrote in their joint letter. "Customer relationships and our ability to recruit and retain the most competent and highly motivated professional personnel" would be damaged.
Staffers at the central bank currently are reviewing the comments.
When that process is complete, the question will be put to the Fed's board, which is expected to act on the plan fairly soon.
"I suspect they will get to that by the end of the year," said Richard Whiting, general counsel to the Bankers Roundtable, who predicted the changes will be adopted.
Other bankers focused on the Fed's specific proposals, calling the suggested changes fairer and more accurate.
"Either an asset-based test or a sales-volume test is a better basis for measuring compliance with Section 20 than the existing gross revenue test," wrote Norwest Investment Services executive vice president Richard M. Joseph.
Mr. Joseph wrote that the existing test is inaccurate because it treats all of a company's activities together for risk purposes, rather than looking at each operation independently.
Of the two proposed replacement tests, the sales volume test is preferable, wrote Banc One Corp.'s deputy general counsel, Lee S. Adams.
Mr. Adams wrote that the sales volume test is less volatile than the asset-based test and it would apply equally to regional and money-center banks.
The asset-volume test also has benefits, wrote Patrick J. Manning, the president of Chemical Securities Inc. He said it is simple to administer and not subject to interest rate fluxes.
But, the proposal has its flaws, he wrote. First, it asks banks to include items not on the balance sheet, making it closer to a hybrid between an asset and a sales test. Also, it does not adjust for netting.
While most institutions called for accepting either the asset or sales test, some wanted a choice of either option.
"The Roundtable strongly support adoption of both the proposed assets and the proposed sales-volume test," wrote Anthony T. Cluff of The Bankers Roundtable.