Congress debates giving banks greater powers to deal in securities

As the walls separating banks, investment companies, and insurance firms are broken down by courts and regulators, people who want to keep the walls in place say there's still a need for a strong and competent agency to police the new financial landscape. A study released by the comptroller of the currency last week could provide support for their arguments.

The year-long study found that the primary cause of insolvency among banks and thrift institutions was not economic depression as often claimed, but was mismanagement and, in some cases, fraud. Indiscriminate lending and insider abuse by high-level directors, managers, or principal shareholders put more than one-third of the problem banks examined by the comptroller in the red, the report said.

The findings ``quantify the deep concerns'' held by Rep. Fernand St Germain (D) of Rhode Island, chairman of the House Banking Committee and a leading congressional opponent of expanded bank powers, an aide to the congressman says.

The chairman ``is just not convinced [regulators] have a good long-term game plan to deal with the problems of abuse,'' the aide says.

The legislation that Congress is debating would allow banks into more speculative securities and insurance activities. But if the bill were passed, a whole new class of holding company would be created, says Brian Smith, a Washington lawyer who specializes in bank services. Yet there is no appropriate regulator to oversee such a company, says Mr. Smith, a former chief counsel to the comptroller.

The various agencies currently overseeing financial services have different missions, he explains, and this often leads to a lack of cooperation and information sharing.

``The SEC [Securities and Exchange Commission] is concerned about the condition of [banking] institutions because investors buy shares in those institutions,'' he says, and therefore it favors full disclosure of a bank's economic strength or weakness. ``But the bank regulators think that if you tell the world the condition of an institution, you can precipitate a run on the institution.''

Legislation that has passed the Senate and is still being drafted in the House would remove most of the provisions of the Glass-Steagall Act, a 55-year old barrier between the banking, securities, and insurance industries.

The House Banking Committee's version, which came out last week, is much more stringent than the Senate bill. The committee's proposal, which is not yet final, does not approve corporate equity underwritings for banks, considered the most risky area. The Senate version also prohibits such underwritings, but calls for another vote on this issue by 1991. It also includes protective measures for consumers and would allow banks to sell mutual funds but would prevent them from underwriting them, a restriction the banking industry resists.

The House may be pushed into action by a recent Supreme Court decision that gave banks a green light into limited underwriting and dealing in securities. The high court refused to hear a plea by the Securities Industry Association to reverse a 1987 ruling allowing commercial banks to get into this area.

This is only the latest link in a series of court and regulatory actions that has opened doors for banks, allowing them to underwrite commercial paper, mortgage-backed securities, municipal revenue bonds, and securities backed by consumer debt.

Mr. St Germain and other opponents, like Rep. John Dingell (D) of Michigan, call such decisions ``a mistake.'' As a year-long moratorium came to an end on March 1, St Germain urged banking agencies not to approve any more banking powers until Congress could work out the specifics. The moratorium was part of the 1987 Competitive Equality Banking Act, intended to prevent banking agencies from deciding the direction of the financial industries.

But despite some concern that banks would be loosed into an arena without appropriate guidelines, most analysts argue that holding them back would be even more destructive.

``If banks are not provided with new powers, there will be more failures because their core business is shrinking,'' says William Haraf, director of the financial markets project at the American Enterprise Institute here.

Even the largest US bank holding companies are losing business to their full-service financial competitors from the US and abroad.

``Big banks are doing investment banking through their European subsidiaries right now, and they would rather do it at home,'' says Richard Peterson, professor of finance at Texas Tech University.

Though the industry says that a lot of smaller banks - the majority of institutions - will not be able to afford to take advantage of new investment opportunities, it is essential that the remaining three dozen or so large holding companies be allowed to do so for their survival.

``The issue is not whether the banks that have failed can handle the new authority, but whether the ones that remain can,'' says William Isaac, managing director of the Secura Group, a consulting firm here. The former head of the Federal Deposit Insurance Corporation does not believe today's bank failures are the result of mismanagement. Maybe they were in the early 1980s, he says, ``but today, the banks that are failing are failing primarily because we are in the middle of a very severe depression in the Southwest.''

You've read  of  free articles. Subscribe to continue.
QR Code to Congress debates giving banks greater powers to deal in securities
Read this article in
QR Code to Subscription page
Start your subscription today