Zions First National Bank has asked the government for permission to underwrite securities through a direct subsidiary, becoming the second bank to seek new powers under a controversial rule.
Harris H. Simmons, chief executive officer of the $5 billion-asset Salt Lake City institution, predicted Tuesday that the Office of the Comptroller of the Currency would approve his request to underwrite municipal revenue bonds.
"This is clearly related to activities we're already engaged in, so it won't require a new set of skills for us," Mr. Simmons said. "We see this as being an activity that will probably generate an additional $500,000 a year in revenue, with very little additional cost."
On Dec. 31, the Comptroller's Office changed its rules to allow national banks to offer through operating subsidiaries products and services that are off-limits for the parent bank. In the past, many of these activities have been conducted through holding company affiliates.
In seeking the new powers, Zions follows NationsBank, which on March 26 filed the first request for new powers under the OCC's so-called op-sub rule. The lead bank of NationsBank Corp. proposed entering the real estate development and lease financing businesses through direct subsidiaries.
Together the applications may increase pressure on Capitol Hill to enact financial modernization legislation. Banks' competitors, such as securities firms, are expected to complain to lawmakers that the playing field is being tilted by the Comptroller's Office.
"The more bankers are allowed to do, the harder the securities industry will push for a bill," said Diane M. Casey, national director of financial services at Grant Thornton LLP. "It does suggest reform is being done by regulatory fiat."
Since broad legislation will be tough to enact, said Karen Shaw Petrou, president of ISD/Shaw Inc., securities firms also are likely ask lawmakers to clamp down on the agencies. "If you can't get big, get little," she said. "The Faircloth hearings are an overt indication of that."
Sen. Lauch Faircloth, R-N.C., and chairman of Senate Banking's financial institutions subcommittee, has scheduled a hearing for May 1 to examine recent actions by the Comptroller's Office.
Last month Senate Banking Committee Chairman Alfonse M. D'Amato complained that the comptroller and the Federal Reserve Board were "overreaching" their authority in granting banks new powers.
But Julie L. Williams, OCC chief counsel, said Zions would simply be expanding into an area that is closely related to banking. "This is another example of the possible extension of banks' current powers that can be considered under the new operating subsidiary rule," she said in an interview Tuesday.
The lead bank of Zions Bancorp. filed its application April 8, but it has not been released to the public yet. According to the 38-page application, Zions would underwrite municipal revenue bonds through an existing subsidiary. Zions Investment Securities Inc. currently provides investment advice and sells corporate equity securities, U.S. government securities, and annuities.
Currently, municipal revenue bonds may be underwritten only through section 20 holding company affiliates. James D. McLaughlin, the American Bankers Association's director of regulatory and trust affairs, said this requirement imposes unnecessary costs on banks that only want to underwrite municipal revenue bonds. "It's very important to allow banks to do this in an op-sub," he said, noting the Fed limits how much money a section 20 unit may earn off new securities powers.
"This route saves us having to jump through hoops in terms of our organizational chart," agreed Zions' Mr. Simmons.
Mr. McLaughlin added, "While banks have been able to underwrite general obligation bonds, most of the municipal bonds issued today are revenue bonds. So banks have been excluded from the vast majority of municipal underwritings."
General obligation bonds are backed by the full faith, credit, and taxing power of the issuing municipality, while municipal revenue bonds are backed by an income stream from a specific project.
Under the op-sub rule, if the OCC has not approved the activity for national banks, an application must be published for comment in the Federal Register. The Zions application will be published Friday. The comment period will last 30 days.