WASHINGTON - Despite the regulatory relief granted by the nation's bank regulators this year, House Banking Committee chairman Jim Leach will push in the coming year for passage of legislation to repeal the Glass-Steagall Act, a Depression-era law that separates commercial and investment banking.
"I expect to lay on the table the first day of the new session a bill which incorporates the financial modernization package which was last under consideration by the House Banking Committee with a series of refinements," the Iowa Republican told a group of bankers earlier this month.
Leach has also indicated that he will work closely with the House Commerce Committee to resolve differences over how much securities powers banks should have - an issue on which the two committees have differed in their numerous legislative attempts to tear down outdated banking laws.
"On this subject, it must be stressed, the Commerce Committee on the House side has a considered interest, and if the Banking Committee is to have a prospect of establishing a consensus House position, the view of the Commerce Committee members will have to be taken into serious consideration on this issue," Leach said in his speech to the bankers.
The Commerce Committee has been sympathetic to the securities industry, which feels financial modernization has so far been only a one-way street, allowing banks to move more into the securities business while leaving securities firms out of the banking realm.
Commerce Committee members, including Rep. Michael Oxley, R-Ohio, have indicated that they want to reach consensus on a financial modernization bill.
Regulatory Changes
Ironically, any financial modernization legislation will now follow regulatory changes that have already been put in place, and which are designed in part to expand bank securities powers in the same way as the proposed new laws.
For example, the Federal Reserve Board less than two weeks ago voted on rules that will allow Section 20 bank affiliates to underwrite more municipal revenue bonds. The central bank raised the limit on how much revenue these securities affiliates can generate from securities underwriting and dealing to 25% from 10%.
That move followed the Office of the Comptroller of the Currency's approval of rules in November to allow subsidiaries within a bank to engage in an array of activities, including municipal revenue bond underwriting. Banks would be allowed to engage in a host of businesses not currently allowed, provided the OCC approves such requests.
Leach had asked the Federal Reserve to raise revenue limits last fall as a stopgap modernization measure since Congress again failed to pass sweeping financial services reforms. But he vowed to take up the issue again in the next Congress.
However, the lawmaker has expressed concerns over the OCC's changes to its Part 5 regulations, accusing the comptroller's office of trying to enhance its own powers over the Federal Reserve's. He also questioned the legality of the move, saying such a change should first be done legislatively.
"The comptroller may be right in wanting to help lead bank modernization approaches, but it is not self-evident that his office is legally empowered to authorize activities in a national bank's operating subsidiary that are prohibited by statute in a bank itself," Leach said.
"While I may be in general agreement, for instance, with a large part of what the comptroller may desire for bank modernization, I have an obligation to uphold the right of Congress to authorize any change not previously provided for or contemplated in statute," he added.
Bank Affiliation
Nonetheless, Leach said his new legislation would modernize the financial services industry by allowing banks to affiliate with securities firms and insurance companies under a holding company structure, with the Federal Reserve being the holding company's regulator.
The bill would also incorporate the new rules approved by the OCC.
"We are very pleased that House Banking Committee chairman Jim Leach plans to incorporate in his new Financial Modernization bill the approach of our Part 5 regulation to permit broad activities for bank operating subsidiaries," comptroller of the currency Eugene Ludwig said in a statement earlier this month. "The ratification of our approach by chairman Leach will enhance progress toward reaching a consensus on financial modernization."
In addition, under the new legislation holding companies would be allowed to engage in activities that are found by the Federal Reserve Board to be financial in nature, according to Leach.
In order to allow a "two-way street" for affiliation between banks and securities firms, a new category of holding companies - known as investment bank holding companies - would be created.
"This new holding company would be permitted to engage in a wider range of financial activities than bank holding companies," Leach said.
Section 20 of the Glass-Steagall Act would be repealed and Section 32 of the act amended to permit common officers, directors, and employees within a bank's securities affiliate. That means officials within banks who have been involved in general obligation bond underwriting could also work with Section 20 affiliates that underwrite municipal revenue bonds.
The Securities and Exchange Commission would regulate bank broker- dealer activities, which could lead to confusion over what disclosure rules will govern banks' behavior. A series of restrictions and requirements would be imposed on the relationships and transactions among securities affiliates, their parent bank holding companies, and affiliated insured depository institutions.
Investment Bank Holding Companies
Commercial banks or securities companies would be allowed to establish or become an investment bank holding company to acquire or establish an uninsured wholesale financial institution. These institutions would have to maintain higher capital and leverage ratios than insured banks, but would not be subject to the same firewall restrictions of insured banks.
Leach's legislation would also authorize national bank subsidiaries to engage in securities underwriting and brokerage activities, insurance agency activities, and any other activities that are part of or incidental to the business of banking, even if such activities are not permitted directly in the bank.
But the bill would provide for firewalls between the bank and its securities subsidiary that would be comparable to those placed between a bank and its securities affiliate.
