A barrier between commercial and investment banking came down Thursday as Zions First National Bank of Salt Lake City gained permission to underwrite municipal revenue bonds.

The Office of the Comptroller of the Currency said Zions may form an operating subsidiary to issue the bonds. Previously, only securities firms or units of a bank holding company could underwrite municipal bonds.

"Banks must be able to engage in new businesses," said Comptroller of the Currency Eugene A. Ludwig. "It's essential that they diversify income."

The approval is expected to trigger dozens of similar applications.

"Go forth and apply," suggested Karen Shaw Petrou, president of the Washington consulting firm ISD/Shaw Inc., who added that the decision also opens the door for banks to directly underwrite asset-backed securities and corporate equities.

"This will provide a way to get into the business without the burden of setting up a holding company affiliate," said Richard M. Whiting, general counsel at the Bankers Roundtable. "It opens the markets to community bankers who want to serve local governments."

Zions, the principal subsidiary of Zions Bancorp., is the first to take advantage of the OCC's controversial "op-sub" rule, which allows subsidiaries of banks to engage in activities that the parent may not perform directly.

In its order, the Comptroller's Office spelled out several restrictions that are expected to apply to all banks' subsidiaries seeking securities powers.

The agency said a subsidiary may not earn more than a quarter of its revenue from new underwriting activities. The balance must come from traditional services such as investment advice and government securities sales. This is identical to the Federal Reserve Board's restriction on section 20 units.

Also, the bank may not count any of its investment in the subsidiary toward capital requirements or offer the unit below-market rate loans. The subsidiary must keep operations "physically separate" from the bank and no more than two-thirds of its directors may also serve on the bank's board.

The subsidiary also must register as a broker-dealer with the Securities and Exchange Commission and would be subject to oversight by the National Association of Securities Dealers.

OCC Chief Counsel Julie L. Williams said the decision is an "incremental step" in expanding bank powers, noting that municipal revenue bonds are no more risky than the general obligation bonds already underwritten by banks.

"We recognize we need to be careful," Ms. Williams said. "We want good control over what we are opening up."

Two other pending requests, both by NationsBank, seek permission to enter real estate development and lease financing businesses through subsidiaries. OCC officials would not comment on those applications.

The ruling got a mixed reaction from lawmakers who blasted the op-sub rule when it was adopted a year ago.

House Banking Committee Chairman Jim Leach said the Zions decision was "extremely credible" and consistent with a financial modernization bill his panel passed in June.

However, Rep. Edward Markey, a Democrat on the House Commerce Committee, called the approval "inconsistent with the system of strong functional regulation and separate affiliate structures currently under consideration in Congress."

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