Is grass greener in money funds? Boston bank takes steps to find out

Sometimes, the only way to tell whether the grass is really greener on the other side is to hop over the fence and try it out.

To many thrifts and savings-and-loans, the grass that money market mutual funds stand on looks lush. Since the arrival of money funds on the scene, these bankers have been sadly watching their customers leave the patchy grazing grounds of a thrift account's fixed interest rate for the healthier green of a high-yielding money fund.

Somehow, thrift executives reason, if they could break into the money fund business themselves, they might be able to lure customers back. Some bankers say this could happen if a thrift acted as a fund agent, or sponsored its own fund.

Boston Five Cents Savings Bank is trying it. Last year the mutual bank established two subsidiaries for the sole purpose of advising and distributing a money market mutual fund, notes Vernon Blodgett, the bank's senior vice-president and director of finance and development. In a pioneering step, on Jan. 5 the Boston Five Money Market Fund was submitted to the Securities and Exchange Commission for approval.

The subsidiaries and the fund are separate from the bank, Mr. Blodgett says. ''A customer couldn't walk up to a bank teller and expect to buy the fund. . . . The fund is a separate Massachusetts business trust, whose trustees are ultimately responsible to the shareholders.'' The fund, like any other money fund, would not be insured and would not guarantee minimum rates of return.

Blodgett says the bank hopes the fund of its subsidiaries will attract more customers. And, of course, the bank would get a share of subsidiary profits.

There is a hitch, though, and it's called the Glass-Steagall Act. In a nutshell, the 1933 law separates the securities industry from the banking industry. It forbids any bank holding deposits from advising on, sponsoring, trading, or underwriting securities.

The act grew out of the need to cure some commercial banks of a conflict of interest. Banks were providing loans to corporations and selling stock in the corporations at the same time. Sometimes one side of the bank influenced the other side's decision.

But the Glass-Steagall Act has ''cloudy'' spots, experts say. ''It is absolutely taboo for commercial banks'' to move toward money funds, but it is not so clear about thrift subsidiaries, says Donald Kohn of the Federal Reserve System's research division.

Though the act forbids Federal Reserve System bank members and their subsidiaries from entering the securities business, it says nothing about subsidiaries of nonmember banks. And thrifts that are not members of the system are saying that ''if there is no 'don't walk on the grass' sign for our subsidiaries, then let's try it.''

Last year the Investment Company Institute - the mutual fund industry's trade association - testified at congressional hearings for revision of Glass-Steagall. ''If banks are allowed in the securities business they should come under the same SEC regulations the rest of us have,'' says Harry Guinivan, a spokesman for the institute. ''In turn, securities firms should be allowed banking privileges.'' At the same time, he adds, ''we don't advocate'' banks getting into securities.

But moving in the direction of money funds is ''an individual management decision'' for each bank, says Jim Butera of the National Association of Mutual Savings Banks. If a bank is large and the first in an area offering a fund, it could build a bank's customer base, he says.

There are also reasons a bank would not want to be involved in a fund. Dan Maclean, general counsel for the Dreyfus Group, says: ''Bankers think they can operate a fund at the same profit we can, but bankers have tremendous overhead costs. Ours are much less.'' Dreyfus now cooperates with banks in the ''Dreyfus overflow,'' by which a bank depositor can have any money in excess of a certain minimum (usually $2,500) automatically swept into the Dreyfus fund.

Mr. Kohn at the Fed points out that if a subsidiary fund performed poorly, the association of the fund's name with the bank might drive depositors away. Though the bank wouldn't be responsible, people could view the fund's poor performance as a reflection on the bank. Also, Kohn says, a bank may find its own depositors transferring money from the bank's accounts to the subsidiary's money fund.

Still, more banks are thinking the securities business offers green pastures. Bank of America recently bought a discount brokerage firm. Perpetual American Federal Savings & Loan in Washington, D.C., and Coast Federal Savings & Loan in Florida applied to the Federal Home Loan Bank Board to offer brokerage services through their subsidiaries. Because of the fuzzy areas of the Glass-Steagall Act , no one seems really sure how legal these steps are.

On Feb. 4, the securities subcommittee of the Senate Banking Committee will focus on two approaches that would liberalize banking restrictions. The first, submitted by Sen. Jake Garn (R) of Utah, would allow banks to directly operate and sell all kinds of investments, ''including money market mutual funds,'' says John Daniels, counsel to the Banking Committee. The second proposal, submitted by the Treasury Department, would limit securities involvement to subsidiaries of a bank's holding company.