In Focus: Fed Plan to Let Banks Sell More Securities Moves to Back

WASHINGTON - The whirlwind of congressional activity surrounding Glass-Steagall Act reform has claimed its first casualty - the Federal Reserve's proposal to relax volume restrictions on banks' sales of securities.

Fed Governor John P. LaWare said he expects the central bank to delay any action on the July 1994 proposal until Congress considers its own reform proposals.

"I don't think it would be appropriate for the Fed to take final action on that in as much as this legislation is pending," said Mr. LaWare, who chairs the Fed committee that handles securities issues. "For the moment, it ought to be put on the back burner."

Congress currently is considering three proposals, all of which would substantially remove the current restrictions on bank underwriting powers.

The administration's plan, proposed last week by Treasury Secretary Robert Rubin, would allow insurance firms, securities firms, and other financial firms to affiliate with banks as subsidiaries.

Also, New York Republican Sen. Alfonse D'Amato, who heads the banking committee, introduced a bill allowing common ownership of federally insured banks and commercial enterprises.

And, House Banking Committee Chairman Jim Leach, R-Iowa, proposed allowing just banks and securities firms to affiliate under a holding company structure.

Several members of the Fed, including Chairman Alan Greenspan and Mr. LaWare, have repeatedly advocated repeal of Glass-Steagall.

The news that the Fed plans to delay action on its proposal disappointed banking industry experts, who said they are growing impatient.

"If the Fed is committed to Glass-Steagall reform, I don't know why they would delay the more modest change," said Karen Shaw, president of the industry-consulting firm ISD/Shaw Inc.

The Fed has traditionally worried that its efforts to loosen Glass- Steagall would be overturned by Congress, Ms. Shaw noted. Now that Republicans control both houses, the Fed should proceed with its proposal, she said.

But, Richard Whiting, general counsel to the Bankers Roundtable, said the Fed's stance was expected.

"The Fed is always sensitive to the political implications of using its authority and they have traditionally deferred to congressional guidance," Mr. Whiting said. "So, this statement is not a surprise."

The Fed last July proposed three different ways to calculate the 10% cap on gross revenue that Section 20 subsidiaries can earn from ineligible securities. The proposal, which would allow banks to measure average daily assets on hand, or average daily sales over a two-year period, would allow banks to handle a larger volume of securities without violating the 10% cap.

Bankers were never enamored of the proposal, saying they would prefer to have the Fed up the 10% limit to 25%. But, bankers also have said they'd prefer this proposal to no action at all.

Mr. Whiting said he believes the Fed has an obligation to move forward, noting that Congress explicitly gave the Fed discretion to interpret Section 20.

If the Fed doesn't act, several banks may have to cut back on their securities businesses, said James McLaughlin, the director of regulatory affairs at the American Bankers Association.

"I think it will put some institutions into a state of suspension and preclude some from additional activities because I'm told there are some banks that are bucking up against the threshold now," Mr. McLaughlin said.

Also, there is no guarantee Congress will act on the reform proposals, he said. "We would hope that after it gives Congress a very short period, the Fed would move ahead with its proposal," Mr. McLaughlin said.

Quick action also is in the Fed's best interest, said Bert Ely, president of the industry consulting firm Ely & Co. The Comptroller of the Currency's Office could continue pushing his proposal to allow bank subsidiaries to underwrite securities. That may shift the Glass-Steagall spotlight away from the central bank, he said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER