THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, February 19, 1995 TAG: 9502180268
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 143 lines
Seven thousand banks had failed in four years, and the nation's financial system was in shambles.
Months of congressional hearings had also brought to light the self-dealing and speculative practices common at some banks during the 1920s.
It was 1933, and the administration of President Franklin D. Roosevelt was under pressure to do something to restore confidence.
Congress responded by passing the Glass-Steagall Act. The landmark legislation separated banks taking deposits from those that engaged in securities underwriting and trading.
Six decades later, part of the U.S. banking industry is campaigning aggressively to recover the securities powers lost during the Great Depression.
Although several of its attempts to gain broader powers have faltered in Congress, the industry stands a good chance of getting what it wants this year.
``You've got a Congress now that has much more of a free-market mind,'' said Mark Leggett, director of government relations for NationsBank Corp. in Charlotte.
In addition, a major stumbling block to changing the Glass-Steagall Act was removed last year when Congress allowed banks to expand their branch networks throughout the country.
``We've always contended that once you got interstate banking out of the way, it would be easier to deal with Glass-Steagall,'' Leggett said.
The House Banking Committee is scheduled to begin hearings Feb. 28 on a bill that would allow financially strong banking companies with internal controls and expertise to engage in a broad range of securities activities. The bill, the Financial Services Competitiveness Act of 1995, is sponsored by Rep. James A. Leach, an Iowa Republican and House Banking Committee chairman.
Another bill addressing Glass-Steagall's restrictions has been introduced in the House by Rep. Richard H. Baker, a Louisiana Republican.
And Sen. Alfonse D'Amato, a New York Republican and chairman of the Senate Banking Committee, has submitted a bill that would loosen Glass-Steagall's restrictions on banks and allow nonfinancial companies to own commercial banks. No hearings on the Baker or D'Amato bills have yet been scheduled.
How would the securities powers provided in the three bills affect bank customers?
Services for individual and small-business customers probably would not change.
However, corporations, especially giant ones, would probably see more institutions competing for their business. Larger banks would likely use the lending relationships they have developed over the years to offer securities-related services to their corporate customers.
This heightened competition probably would drive down the cost to corporations of raising capital and debt, said William Sihler, a professor at the University of Virginia's Colgate Darden Graduate School of Business Administration.
But any consideration of broader securities powers will involve a debate over the risks that securities activities might present to banks' federally insured deposits.
``There are some good, compelling reasons for allowing banks into securities activities,'' said Larry Pulley, associate dean and professor at the College of William and Mary's School of Business.
``The question is, `Is this a dramatically different business for banks and one with a new set of risks and concerns?' ''
Like past proposals to remove restrictions imposed by the Glass-Steagall Act, the latest bills would require that securities affiliates of banks maintain their own capital. Also, these bills would require the creation of barriers separating the deposit-taking part of a banking company from its securities operations.
But one sector of the banking industry has expressed doubts whether Congress can devise adequate protections for insured deposits.
``We question whether even the best `fire walls' will work if there is a real problem,'' said Peter M. Kravitz, legislative counsel at the Independent Bankers Association of America, a trade association representing many of the nation's smaller banks.
``We question whether fire walls can stop a bank holding company from transferring assets from one subsidiary to another when the company gets into a panic situation.''
The banking companies pushing for broader powers insist that they need securities powers because they have lost business to investment banks and financial-service providers like General Electric Corp.'s GE Capital subsidiary.
Advocates for eliminating the restrictions imposed by the Glass-Steagall Act have some valid evidence for their argument. The percentage of financial assets controlled by the nation's commercial banks has declined steadily during the past two decades, from 40 percent to less than 25 percent.
Instead of borrowing from banks, many large corporations have turned to investment banking firms and raise funds less expensively through the sale of commercial paper, a form of short-term corporate IOU.
The debate over securities powers for banks has become a perennial issue on Capitol Hill. In the late 1980s, the discussion was clouded by the stock market crash of 1987, which required a quick injection of liquidity by the Federal Reserve to protect the solvency of some banks and securities firms.
By the early 1990s, the banking industry was reeling from heavy losses on commercial real estate loans. And Congress, worried about the cost to taxpayers of protecting federally insured deposits, was not in the mood to consider broader powers for banks.
Today, banks are flush with profits, have stronger capital ratios and are better prepared to make a case for securities powers.
But the industry's campaign to gain those powers comes amid heavy losses and cutbacks at large investment banking and securities firms. Throughout 1994, the securities industry was battered by rising interest rates and reduced demand for securities.
Brokerage and investment banking firms have responded by laying off employees and withdrawing from less profitable lines of business.
Still, some bankers insist that their institutions have adequate resources to handle the volatility that is part of securities underwriting and trading.
By focusing on the needs of medium-sized corporations instead of the largest, most creditworthy corporations, First Union Corp. expects to minimize the volatility of securities activity, said Jerry Schmitt, co-managing director of the company's Capital Markets Group.
``We think that if we do eight or 10 deals a year, that will be the limit,'' Schmitt said.
Several large banking companies campaigning for expanded powers already have created subsidiaries for underwriting and trading securities. During the past decade, the Federal Reserve has allowed three dozen large banking companies to engage in a limited amount of securities underwriting.
One of these, NationsBank, received approval from the Fed in mid-1993 to underwrite corporate debt. In December, it received permission to underwrite stock issues for corporate customers, something few banking companies have gotten so far.
First Union, which last year added 60 investment bankers, securities traders and other specialists to the staff of its Capital Markets Group, is applying for permission to underwrite corporate issues.
Whether Congress votes to revamp the securities-related restrictions on banks this year, this consolidation is certain to continue.
But NationsBank's Leggett cautioned that other issues on the congressional agenda this year could again hamper the banking industry's efforts to speed up the process.
The Senate Banking Committee, for instance, is expected to hold hearings on the Whitewater scandal, the troubled real estate development in which President Clinton and his wife had invested.
``Those hearings could become so volatile and so partisan that they slow down or stop the legislative process in the Senate,'' Leggett said. ILLUSTRATION: Graphic
JOHN EARLE/Staff
LOSING GROUND
SOURCE: Federal Reserve Bank, American Bankers Association
[For complete graphic, please see microfilm]
by CNB