WASHINGTON - More than 100 companies, including Citigroup Inc., Charles Schwab Corp., and J.P. Morgan are expected to usher in a new era in financial services today by qualifying as financial holding companies.
These 100-plus firms will be the first to take advantage of the Gramm-Leach-Bliley Act, which established financial holding companies as the vehicles for banks, brokerages, and insurers to affiliate on the freest terms since the Depression. President Clinton signed the law on Nov. 12 and it takes effect Saturday.
The Federal Reserve Board, which will supervise these new holding companies, refused Thursday to divulge which companies had applied or even how many applications it has received. But a spokesman confirmed the central bank's governors plan to meet in closed session today to approve "somewhat over 100" applications and finalize the rule it unveiled in January which spells out how to become a financial holding company.
Possibly more important, the Fed is scheduled to vote today on proposed ground rules for broader merchant banking authority - one of Gramm-Leach-Bliley's most coveted new powers.
Industry officials are upset because the proposal is expected to include additional capital requirements for merchant banking, a line of business that includes venture capital and other types of equity investments.
The law says these investments may be held for only a limited time, but leaves it to regulators to set time frames. Industry officials are worried the agencies will impose a strict cutoff of, say, seven to 10 years.
The merchant banking rules are so sensitive because they represent a compromise between the supporters and opponents of letting financial and commercial companies own each other.
If the Fed's proposal is too strict, financial holding companies will be less attractive, said Richard M. Whiting, executive director of the Financial Services Roundtable. "There does not appear to be enough benefit to trying to be a financial holding company," he said.
But for financial companies trying to buy banks, such as Charles Schwab, which is buying U.S. Trust Corp., the financial holding company is the best option. Two-thirds of the requests for financial holding companies were filed by companies with less than $1 billion of assets, Fed Chairman Alan Greenspan said this week.
Under the law, only bank holding companies may become financial holding companies, but the Fed has established procedures so that securities firms or other nonbank organizations may accomplish both steps at once.
A bank holding company may become a financial holding company under a 30-day notice process if all its depository institutions are well capitalized under federal standards, are well managed, and hold satisfactory or better ratings under the Community Reinvestment Act. There are two main benefits of becoming a financial holding company, according to William J. Sweet Jr., a partner with Skadden Arps Slate Meagher & Flom.
A financial holding company may own a much broader range of businesses than a bank holding company. Financial holding companies also may do deals without getting regulatory approval first. After-the-fact notification is all that is required, and this should make financial holding companies more nimble and competitive, Mr. Sweet said.
Less day-to-day regulation should save these companies money, but Mr. Sweet noted the Fed still has plenty of power over firms it considers unsafe or unsound. "People have this notion that it's a free walk. It's not,'' he said. "If the Fed does not see the right controls and proper management, it will shut you down."
Experts expect the new rules, coupled with a tightening of merger accounting rules expected at yearend, to spark more mergers. "Somewhere between May or June and December, that is when we would expect to see the merger and acquisition activity pick up," said Stephen A. Blumenthal, vice president of the Schwab Washington Research Group.
Also on Friday, the Office of the Comptroller of the Currency plans to publish its final rule on how national banks may form direct subsidiaries to underwrite securities and conduct other activities they would otherwise be barred from offering. Financial subsidiaries were established so that banks could take advantage of many of the law's new powers in-house and not be forced to use holding companies.
The comptroller's office has received 13 applications from national banks, an agency spokesman said, including one by Bank of America seeking to move its insurance operations into a financial subsidiary. Gramm-Leach-Bliley also lets state member banks acquire financial subsidiaries, and the Fed is expected to approve rules outlining that process, too.