The Federal Reserve Board will not sit back and watch new powers from competing agencies make bank holding companies obsolete, Governor Susan M. Phillips said Monday.
Addressing a conference co-sponsored by the Bank Administration Institute and the Washington law firm of Arnold & Porter, Ms. Phillips said the Fed is committed to expanding the businesses holding companies may enter.
"Well-managed, well-capitalized institutions that have demonstrated they are serving the needs of their community should have greater freedom to expand and innovate," said Ms. Phillips, who leads the Fed's committee on supervision and regulation.
Her comments came less than a week after the Office of the Comptroller of the Currency adopted its controversial operating-subsidiary rule, which opens the door for national banks to directly underwrite securities and operate nonbanking subsidiaries. Some experts have predicted the rule will lead to the demise of the holding company.
Ms. Phillips, however, said the Fed will provide "as much latitude" as possible for holding companies to underwrite securities and insurance.
"Except for some types of insurance underwriting, these activities are generally no more risky, and often significantly less risky, than many activities in which banks routinely engage," Ms. Phillips said. .
Ms. Phillips also said the Fed will allow holding company affiliates to enter any business that banks are involved in. "If banks may engage in a given activity, there is no logic in prohibiting or imposing any additional restrictions on that activity when it is conducted in a holding company," she said.
Recent changes to Regulation Y and the section 20 rules are proof that the Fed wants to improve the holding company structure, she said.
The section 20 reforms eliminated many of the firewalls that prevented bank employees from working for or selling products offered by the securities underwriting subsidiary.
The Fed, she said, also is studying many of the remaining firewalls, some of which limit transactions between banks and section 20 units.
"While there may be legal or reputational risks unique to affiliation with a securities firm that justify some of the existing restrictions, many firewalls may not address such risks and thus can no longer be justified," Ms. Phillips said.
The Regulation Y proposal would sever the link between the applications process and examinations, she said. When considering an application, the Fed would rely on its most recent exam, she said. It no longer would delay an application while it investigates supervisory issues that have nothing to do with the transaction.
Ms. Phillips said she expects Congress will review the OCC's operating-subsidiary rule. The issue, she said, is whether riskier activities should be conducted directly by banks, which have access to deposit insurance and the discount window.
"There also appear to me some unanswered legal and accounting questions relating to the separateness of a bank and its operating subsidiary," she said.
Not everyone is convinced that the Fed is going as far as possible to enhance the holding company structure. Earlier at the conference, Arnold & Porter partner Melanie Fein rattled off more than two dozen additional reforms the Fed could adopt.
These include allowing holding company subsidiaries to: sell insurance outside of small towns; offer variable and fixed annuities; earn up to 49% of their securities revenue from underwriting activities; and provide municipal bond underwriting services without a section 20 unit.
The Regulation Y proposal "falls short in many areas," Ms. Fein said. "It is a relatively modest version of what could happen if the Fed were to exercise its authority more broadly."
