Last week, House Banking Committee Chairman Jim Leach introduced legislation that would allow banks and securities firms into each others' business. The bill draws a strict line, however, between banking and commerce. Not only would securities firms with insurance interests be barred from owning banks, but unitary thrift holding companies would lose their special powers. Here are excerpts from a summary of the Financial Services Competitiveness Act of 1995.
Section 20 of the Glass-Steagall Act would be repealed, and section 32 would be amended to permit common officers, directors, and employees with a securities affiliate.
The bill would create a new section 4(c)(15) of the Bank Holding Company Act that would authorize a bank holding company to own a securities affiliate engaged in the underwriting and dealing of securities.
Fed approval would be required, however. The central bank would have to find that the holding company was adequately capitalized and well managed; had adequate internal controls and securities expertise; and that the acquisition would not imperil the holding company or its bank subsidiaries.
Eighty percent of the holding company's subsidiary banks, including the lead bank, would have to be well capitalized and well managed. Any other subsidiary banks must be adequately capitalized.
The securities affiliate would have to be registered with the Securities and Exchange Commission as a broker-dealer or investment adviser and be separately capitalized.
No combination of banking and securities firms would be permitted if it would result in an undue concentration of economic resources in the commercial banking and investment banking markets.
Foreign banks would be treated on exactly the same footing as as U.S. institutions.
Municipal revenue bonds would be authorized as bank-eligible securities for well-capitalized institutions, subject to certain geographic limitations.
Securities units would be regulated by the SEC, and certain safegaurds, or "firewalls," would apply. For example, banks could not make loans to securities affiliates, guarantee stocks or bonds they issue, or finance the purchase of any securities they issue. Securities affiliates could not offer deposits from the insured institution.
It also amends the Investment Company Act to address issues that would arise when investment companies affiliate with banking organizations. The amendments would bar mutual funds from borrowing from affiliated banks, except in accordance with SEC rules, and would limit the ability of bank officers to serve as directors of the affiliated mutual fund.
Common names would be barred and mutual funds would be prohibited from suggesting that their securities are federally insured.
Investment banking activity by bank holding companies. The bill allows an affiliate to acquire securities in connection with underwriting or investment banking activities subject to Fed rules. However, shares may only be held for such time as will permit the sale of the shares on a reasonable basis. During the period in which shares are held, the bank holding company may not participate in day-to-day management or operation of company.
Two-way street. Securities firms may acquire insured banks by becoming bank holding companies.
The existing separation between banking and commerce is maintained. However, bank holding companies may retain certain companies engaging in activities financial in nature that do not conform to Bank Holding Company Act limitations.
Bank holding companies must have acquired shares more than two years before becoming a holding company;
A bank holding company's aggregate investment in all companies engaged in nonconforming financial activities must not exceed 10% of total consolidated bank holding company capital and surplus.
More than 50% of a bank holding company's business must have involved securities activities.
Transition rule. Bank holding companies must divest nonfinancial companies within five years. The Fed may extend the divestiture period for an additional five years to avert substantial loss to a bank holding company if good-faith efforts have been made to divest shares.
During the divestiture period, nonfinancial companies may not expand or conduct new activities.
Firewalls. Sections 23A and 23B of the Federal Reserve Act, settling limits on transactions between affiliates, is applied to: transactions involving depository institutions and all companies in which securities affiliates hold a 5% share under the exception for underwriting or investment banking activities.
The bill prohibits joint marketing by depository institutions and any company of any product or service, unless the product or service is permissible under the Bank Holding Company Act.
Nonbank banks. In accordance with the Competitive Equality Banking Act and subject to Fed approval, the growth cap is lifted for grandfathered nonbank banks owned by securities firms if all insured institutions are well capitalized and all affiliates are financial in nature. Cross- marketing restrictions continue to apply.
Investment bank holding companies. Securities firms may establish or become an "investment bank holding company" to acquire or establish an uninsured "wholesale financial institution."
An investment bank holding company (IBHC) generally may not directly or indirectly own or control any bank, other than a wholesale financial institution; any savings association or any institution that accepts initial deposits of $100,000 or less, other than on an incidental or occasional basis, or deposits that are insured under the Federal Deposit Insurance Act.
IBHCs may only engage in activities financial in nature. Insurance underwriting activities beyond the incidental level impermissible for bank holding companies are prohibited by IBHCs.
Wholesale financial institutions are treated as state member uninsured banks under the Federal Reserve Act. Capital standards for wholesale financial institution must be higher than levels for insured banks, and they must maintain higher leverage ratios.
Wholesale financial institutions are subject to limitations of sections 23A and 23B of the Federal Reserve Act and prompt corrective action.