WASHINGTON -- Banking and securities firm membership in financial trade grou ps is becoming more homogenized as activities of the two sectors increasingly overlap and the debate on modernizing financial services heats up, according to industry officials.
But the American Bankers. Association, which does not represent, securities firms and whose commercial bank membership has been eroding, announced plans hie Monday to form a new subsidiary that would address bank involvement in securities underwriting, mutual funds, and derivatives.
The new American Bankers Securities Association, which will be housed in the association's government affairs division, is being formed because "existing securities associations are concerned principally with securities finns," according to a statement from the association. "The potential exists for conflicts of interest on critical legislative and regulatory issues involving bank securities activities," the group said.
The association's president will name members to an organizational committee in coming weeks to set the priorities of the new subsidiary, said James McLaughlin, the association's director of agency relations, trusts, and securities.
On the derivatives side, the new subsidiary plans to focus on transactions by banks as end-users, claiming it would be in a better position to act on behalf of banks since all of its members will be banks.
"There are peculiarities involved with banking," said Sarah Miller, an official with the bankers group. "It's not that existing trade associations are doing an inadequate job."
Miller said the main difference between the new affiliate and other organizations, such as the International Swaps and Derivatives Association, is that it will primarily focus on banks as end-users of derivatives.
Should any "peculiar" events take place, however, the new panel would be better suited to represent banks in the derivatives arena, Miller said.
The new affiliate's focus on securities underwriting will encompass reform of the Glass-Steagall Act, which was passed in 1933 to separate commercial from investment banking activity. The act is "outmoded," and the new affiliate "is really a recognition of what banks can do now" under the act, McLaughlin said.
Glass-Steagall permits banks to underwrite general obligation bonds, but prohibits direct bank underwriting of revenue bonds. Roughly 30 banks have set up subsidiaries under Section 20 of the act to underwrite revenue bonds, but many banks cannot do so because they cannot meet certain financial requirements set by the Federal Reserve Board.
However, the Securities Industry Association, which represents securities firms and a substantial number of banks, recognizes that regulatory and court actions have "substantially eviscerated" the walls erected by Glass-Steagall, said Steve Judge, the securities association's senior vice president for government affairs.
"We are not going to be able to put the genie back in the bottle. We've got to ... see how to structure a new financial services system that provides protections for insured deposits," while allowing banks to expand securities activities and securities firms to engage in banking activities, Judge said.
Despite the bankers group's contention that securities firms serve the interests primarily of securities firms, the securities association and other groups increasingly are focusing on their bank members' needs, industry officials said.
The securities association has urged Congress to allow bank holding companies to own full-service securities firms, and securities firms to own or affiliate with banks. But there must be "firewalls" between the two types of activities to protect insured bank affiliates from risks of nonbanking activities, Judge said.
Another securities industry group, the Investment Company Institute, started accepting banking firms as members in the early 1990s and is seeking more members as bank involvement in mutual fund sales grows.
The institute generally represents registered investment companies and their advisers and underwriters, which now include many funds that were started by or in conjunction with banking organizations, said Richard Pogue, the institute's executive vice president.
Reform of Glass-Steagall "is very likely to come up again next year and ICI has favored legislation in this area, provided it recognizes the need for shareholder-investor protection," Pogue said.
"The real question is whether [banking and securities interests] can see eye to eye on what the legislation ultimately ought to be," Pogue said. "They have had somewhat different interests over the years ... but whereas back in the 1980s we were generally seen against any legislation to allow banks securities powers, we've changed ... [and] have become a supporter of legislation."
"I think a lot of the banking and securities groups see pretty much eye to eye on the need for legislation now," Pogne said. The big question is, how will reform be done, he said.
The institute represents about 88% of the assets of bank proprietary funds, Pogue said. The group is "accustomed to having in our environment" differences among its members that can be accommodated, he said.
One Securities trade group that is staying out of the Glass-Steagall debate is the Public Securities Association, a 360-member organization that includes 77 banks. The PSA, which was formed in 1976 as an offshoot of the Securities Industry Association in part because of the contentiousness of the Glass-Steagall debate, is maintaining its silence on reform, said a spokesman.
"That is an off-limits topic for us" by tradition, although there is nothing in the PSA's charter prohibiting the group from engaging in the debate, said association spokesman Pen Pendleton.
"The problem is that the banks who are members and are Section 20 affiliates ... are just natural competitors with securities firms" and others, and "we are not going to say whether we think banks should have greater participation or less participation" in securities, Pendleton said.