WASHINGTON - Congress may give banks the power to underwrite a broad range of securities, but industry representatives are concerned that the cost of gaining those new powers is getting too high.
House Republican leaders announced last week that they would link Glass- Steagall repeal with regulatory reform legislation and vote on the combined bill this fall.
After working for years to tear down the wall separating investment from commercial banking, industry lobbyists are now scrambling to prevent Congress from forcing banks to push securities activities out to holding company subsidiaries.
"The main issue is where can banks offer revenue bond underwriting," said Edward L. Yingling, executive director of government relations for the American Bankers Association.
"Basically, we want to be allowed to do it in the bank. But a compromise could force (the underwriting) into a subsidiary."
This would not be a problem for the largest banks, which opened securities units in the late 1980s. But for regional banks just entering the market, setting up subsidiaries would be costly.
Currently, banks are allowed to sell municipal general obligation bonds, which are repaid through tax revenue, but not revenue bonds, which are repaid through funds generated by a specific project, such as a toll tunnel.
Mr. Yingling said the creation of a subsidiary for such a low-margin business as revenue bonds would be too expensive for many of the regional banks now hoping to get into the business.
Glass-Steagall repeal legislation approved by the House Banking Committee in May adds revenue bond underwriting to the industry's list of eligible securities.
That underwriting, as well as other securities activities now allowed at banks, could be conducted through a "separately identifiable department or division," which is technically part of the bank and would be regulated primarily by the Federal Reserve.
The division would have to register with the Securities and Exchange Commission and be regulated as a broker-dealer, but would be exempt from the SEC's net capital rule.
Furthermore, Banking Committee Chairman Jim Leach's proposal would allow the Federal Reserve to determine if additional products defined as securities by the SEC are permissible to banks and whether they should be more appropriately regulated as banking products.
Concerned that the lack of SEC oversight would create a competitive advantage for banks, Rep. Thomas J. Bliley, R-Va., has balked at the separately identifiable division framework, and securities lobbyists claim he favors requirements that would put almost all new bank securities products into a separate subsidiary under the regulation of the SEC.
"It's essential that any legislation provide that all securities sold to the public be governed by the same regulator and covered by the same securities laws," said Steve Judge, senior vice president for government affairs at the Securities Industry Association.
The prospect of banks underwriting a broader range of products without new capital requirements also rankles the securities industry. Mr. Yingling, however, said banks in many cases already hold more capital than the SEC would require.
Lobbyists said a compromise between Rep. Leach, R-Iowa, and Rep. Bliley will be necessary, but are unsure of the likely outcome. "There's no way to know. We know for a fact they haven't drafted anything yet," Mr. Yingling said.
The longer the issues remain unresolved, the greater the chance the legislation will be unfavorable to the industry.
"The more time this takes, the more uncomfortable people become with the process," said Samuel J. Baptista, president of the Financial Services Council.
A spokesman for Rep. Leach said talks with Rep. Bliley over the regulatory oversight and structural issues are likely to begin this week.
The Senate Banking Committee has not addressed Glass-Steagall repeal this year, but in the past Chairman Alfonse M. D'Amato has said he favors a broader approach that would blend banking and commerce.
While the legislation is unlikely to pass Congress this year, most lobbyists expect the House to approve it this year and the Senate in 1996. The most important phase of the legislative process will come when representatives from each chamber sit down to reconcile differences.