Foreign banks are scrambling to obtain broader securities underwriting powers in the United States.
Spain's Banco Santander this week announced that it has applied to the Federal Reserve Board to underwrite and deal in equities and fixed-income securities, mainly for Latin American and European issuers.
It filed its application under section 20 of the Glass-Steagall Act, which permits banks, through separately capitalized units, to underwrite securities that had previously been off limits - for example, corporate debt and equity. However, these activities can contribute no more than 10% of the unit's revenues.
In addition, Deutsche Bank last week announced plans to merge its three U.S. securities units into what it hopes will become a section 20 powerhouse.
Foreign banks make up nearly a third of the 34 banks that have received Fed approval for securities underwriting powers under section 20, according to an informal list drawn up by the Federal Reserve Bank of New York.
Full Underwriting Power
The section 20 units of Deutsche Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, and Royal Bank of Canada have full power to underwrite corporate debt and equities.
Other foreign banks have applied for and obtained more limited underwriting powers for their section 20 units.
Bank of Montreal and Barclays Bank PLC have section 20 powers to underwrite corporate debt.
Holland's ABN-Amro Bank NV; Japan's Dai-Ichi Kangyo Bank Ltd., Long-Term Credit Bank Ltd., and Sanwa Bank Ltd.; and Canada's Toronto Dominion Bank can underwrite municipal revenue bonds, commercial paper backed by consumer-related receivables such as mortgages, and asset-backed securities.
Other foreign banks are expanding securities activities without applying for section 20 powers.
Seventeen foreign banks have favored status under the International Banking Act of 1978 to conduct both commercial and investment banking activities here.
Some foreign banks are using that "grandfather" status-to expand securities operations here. For example, Westdeutsche Landesbank Girozentrale, one grandfathered bank, has reorganized and expanded its U.S. securities unit.
But other grandfathered foreign banks have found restrictions n acquisitions in the United States under the International Banking Act too confining. One such bank, Deutsche Bank, for example, recently gave up its status and will focus its energies on its C.J. Lawrence Inc. section 20 unit.
Foreign bankers say they need to develop U.S. capital markets operations to retain corporate customers.
"Commercial and investment banking are converging," said Peter Casey, executive vice president for ABN-Amro North America Inc. "What we're doing is gearing up for the 21st century."
Analysts think foreign banks will have a logical niche in the U.S. capital markets.
"It's overwhelmingly likely that foreign banks will find their natural niche is underwriting securities issued by corporations or entities from their home country," said Lawrence W. Cohn, a bank analyst with PaineWebber Inc.
"Depending on where you're from, that's not necessarily such a small business," he added. "They'll have a tremendous competitive advantage when it comes to getting those mandates."
He also speculated that some of the securities business now done in the Euromarkets could gravitate to the United States.
Still, some observers doubt foreign banks will pose a serious challenge to U.S. institutions.
U.S. Banks Have Big Lead
Foreign banks have a long way to go before they can match the underwriting and distribution capabilities of the big U.S. commercial and investment banks, the bankers said.
They added that even the grandfathered institutions have developed only limited business.
"None of the foreign banks with grandfathered securities subsidiaries has been able to do anything startling or succeed in developing a meaningful presence in the market," said one Wall Street source.
But foreign bankers argue that institutions with large operations in the United States are capable of challenging U.S. securities firms on underwriting corporate debt and equity.
"Companies that have been unsuccessful have been ones that tried to open up securities firms without a broad U.S. presence," said Thomas Heagy, vice chairman of LaSalle National Corp., a unit of ABN-Amro.
"Our U.S. presence gives us a basis for handling U.S. corporate business nationwide," he said.