allows an array of financial services to be offered through diversified holding companies. But National Bank of Commerce in Memphis is bucking the expected trend.
The $7 billion-asset bank won regulatory approval last week to underwrite and deal in corporate bonds and other debt securities through its NBC Capital Markets Group.
The Office of the Comptroller of the Currency granted the power under part 5 of its regulations, which allows bank operating subsidiaries to engage in businesses that the bank may not. According to the agency, the approval is consistent with standards set for the financial subsidiaries authorized under the financial reform law President Clinton is expected to sign soon.
Lewis E. Holland, vice chairman of National Commerce Bank Corp., the bank's holding company, said he is not interested in getting involved in insurance underwriting, merchant banking, or real estate development -- activities the new law specifically bars bank subsidiaries from offering.
National Bank of Commerce says it is interested, however, in the capital leverage that a bank subsidiary enjoys when it comes to underwriting corporate debt. The size of an underwriting transaction is limited to a percentage of the underwriter's capital. A holding company affiliate's capital, Mr. Holland explained, is calculated on its own, but a bank subsidiary's capital is considered to be the sum of the subsidiary's capital plus the parent bank's capital.
Mr. Holland predicted that other banks faced with the decision of where to place corporate securities operations will follow the same logic. "If they were going to pick one or the other, they would pick the bank subsidiary, because of the double leverage of capital," he said.
Christopher T. Kelley, a bank analyst with Morgan Keegan & Co. in Memphis, agreed.
"Looking at a bank of this size, it really makes sense to do it this way," he said. "Now that the OCC has given them the O.K., I think you are going to see other banks lining up to do it as well."
Comptroller John D. Hawke Jr. said Monday that it makes sense to house underwriters in a bank subsidiary, because deals are likely to flow from the bank's normal course of business.
"These opportunities to do things like bond underwriting ... will typically grow out of the bank's existing relationships," he said. "It is the most natural thing in the world to want to capture the benefit of those relationships and those opportunities rather than forcing them out into the holding company."
Besides, holding companies, he said, are often merely a means for owning multiple banks.
"When you get out of the major money-center cities, holding companies for the most part are not operational entities in the sense that you have a different management at the holding company than you do at the bank," he said.
Bob McPherson, chief counsel for NBC Capital Markets Group, also said offering new products from an existing bank subsidiary is simply more convenient than establishing a holding company affiliate such as the Section 20 units the Federal Reserve Board oversees.
"This bank has had a bond division for 35 years and an NASD member operating subsidiary for 13 years," he said. "It really didn't make sense to restructure our whole company. We would have had to move the operating subsidiary from the bank to the holding company and make an application to the Fed to set that up as a Section 20, all of which was more cumbersome than asking the OCC to let us take another step in the direction we were already heading."