WASHINGTON - Comptroller of the Currency John D. Hawke Jr. on Sunday denied accusations by House Banking Committee Chairman Jim Leach that his agency is violating the law by allowing national banks to hold commercial stock for hedging equity derivative swaps.

"This is not a first step toward breaching the wall between banking and commerce. It's got nothing to do with that," Mr. Hawke told reporters at the American Bankers Association's annual convention, his first remarks about the matter since Rep. Leach, R-Iowa, blasted the agency this month.

The congressman has complained that by letting banks hold commercial stocks for hedging equity derivative swaps, the comptroller's office is sneaking around a prohibition on bank investments in commercial activities. Further, in a letter sent to the agency Thursday, Rep. Leach said that his office was expanding its probe to determine whether OCC officials had authorized national banks to hold stock for other purposes.

When a bank enters into an equity swap arrangement requested by a customer for a legitimate business purpose, the bank can legally hold the underlying equity as a hedge, Mr. Hawke said. Banks are already doing this through affiliates, but these transactions would be less costly and cumbersome if the banks held the stock directly, he said.

"Since the holding of the equity is incidental to a perfectly legitimate and permissible banking transaction - namely the swap - we thought it was an appropriate part of the business of banking - incidental to the business of banking - to hold the underlying equity," Mr. Hawke said.

The comptroller went on to defend his position by saying that banks cannot own more than 5% of a company it is holding as a hedge. Banks also have to satisfy the agency's requirements for sound risk management practices before engaging in such transactions, he said.

"It is not a huge deal," and only about four or five banks are even slightly interested in this activity, he said.

"Many people - including me - on first blush when hearing about this might have said 'Gee, I didn't realize you could do that,' or 'I thought that was prohibited,' " Mr. Hawke acknowledged. "That was frankly my first reaction when I heard about" a July memo from the OCC's legal staff to examiners that such holdings were incidental to banking.

"When I read [the memo,] I was absolutely convinced that it was completely right - that not only did it make common, practical, good sense, but that it was absolutely right as a matter of law."

An OCC spokesman declined to comment Monday on whether national banks have been authorized to hold stock for purposes other than hedging swaps agreements.

Mr. Hawke also complained that upon hearing Rep. Leach's concerns, he had requested, but was denied, a chance to brief the congressman with agency lawyers. Rep. Leach issued his first letter on the matter Sept. 8, before such a briefing could take place, he said. A second letter was issued Thursday.

"I wish we had had the opportunity" to brief him, Mr. Hawke said. "I know how deeply [Rep. Leach] feels about maintaining the wall between banking and commercial activities. … I don't think it has anything to do … with the traditional concerns he's had, and we've tried to demonstrate that, but I think he saw some relationship, and that was what concerned him."

A House Banking spokesman said Monday that Rep. Leach felt a briefing on the matter was unnecessary, because he had already discussed the issue with Mr. Hawke in a private meeting before issuing the first letter.

Rep. Leach's office received two boxes of materials from the OCC as requested Friday afternoon and was told that more would arrive in the next few weeks, the spokesman said.

"We are in the process of reviewing what they sent over," he said.

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