Fed Plan Could Expand Investment Banking Ranks

The Federal Reserve's proposal to ease some investment banking restrictions could finally give some of the nation's biggest commercial banks the flexibility they have sought to compete on Wall Street.

And the changes could entice some banks that have been sitting on the sidelines to enter the investment banking fray.

Although about 40 banks have so-called section 20 securities underwriting subsidiaries, a handful that have been extremely active stand to gain the most from the Fed's proposed changes. Among them: money-center banks such as BankAmerica Corp., Chase Manhattan Corp., Citicorp, Bankers Trust New York Corp., and J.P. Morgan & Co.

Most of these banks have been building their capital markets clout since 1987, when the Fed first permitted bank holding companies to build securities operations under section 20 of the Bank Holding Company Act.

More recently, superregionals such as First Union Corp. and NationsBank Corp. have ramped up their underwriting business.

Large banks like these are eager to expand their investment banking presence because their corporate clients are increasingly reaching beyond the loan market for funding.

"This is a natural extension of banks' capital raising activities," said Robert T. Slaymaker, chairman of BA Securities, a unit of BankAmerica Corp.

After watching Congress fail repeatedly to overhaul decades-old laws that separate investment and commercial banking, the Fed seized the initiative last week. It proposed to allow bank holding companies' securities subsidiaries to generate up to 25% of their revenue from underwriting corporate bonds and stocks, up from 10% at present.

The Fed also proposed to tear down some of the firewalls that banks have been forced to place between their commercial and investment banking activities.

The revenue cap has been "the most problematic of all the restraints in the section 20 to date," Mr. Slaymaker said. "The increase could "allow for much more efficient use of capital."

Though the larger banks will benefit most immediately from any of the proposed changes, regional banks also stand to gain in the longer term, some experts said.

"This could lower the entry level for medium-size banks to get involved in section 20s," said John P.C. Duncan, a partner in the Chicago office of Jones, Day, Reavis & Pogue, and the chairman of the securities activities of banks subcommittee of the American Bar Association.

Mr. Duncan said that the Fed's proposed changes may result in approximately 25% more banks developing section 20 subsidiaries.

It takes about two years from the day a bank decides to form a section 20 until they are granted those powers, Mr. Duncan said.

Among the banking companies that haven't yet set up section 20 subsidiaries are Wells Fargo & Co., Bank of New York Corp., Bank of Boston Corp., and CoreStates Financial Corp.

Executives at some large banks said more lenient rules would make it easier for them to retain corporate customers by providing one-stop shopping.

"The need for financial institutions to be competitive in investment banking will increase as the likes of GE Capital and Goldman Sachs offer products (commercial) banks are offering, like commercial loans," said Michael Capatides, the general counsel and managing director at CIBC/Wood Gundy, the U.S. investment banking arm of Canadian Imperial Bank of Commerce.

Jerry Schmitt, the managing director of capital markets at First Union Corp., said that bank managers would be criticized by shareholders and upper-level bank executives if corporate customers go to competitors to access the capital markets.

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