Fed to Weigh Expanded Banks’ Securities Role

The Federal Reserve Board, seeking to resolve a high-stakes financial battle, announced Wednesday that it will decide in April whether to grant applications from some of the country’s largest banks for an expanded role in the underwriting of securities.

The board granted the hearing request of three large New York City bank holding companies--Citicorp, J. P. Morgan & Co. and Bankers Trust. Fed officials indicated that they found merit in arguments that the 53-year-old barriers between investment banking and commercial banking are no longer valid.

During the 1930s, Congress separated the banking industry into commercial banks and investment banks. Commercial banks are generally involved in taking deposits from customers and making loans. Investment banks raise funds, for a fee, on behalf of companies; they usually do this by buying a block of stocks or bonds from a company and reselling them to investors.

Recent years have seen the distinction blur between the two activities. Short-term lending to businesses--once the mainstay of commercial banks--has been invaded by securities firms, while commercial banks can now offer basic securities services such as selling stocks and bonds.

However, commercial banks cannot underwrite new securities offerings from companies. (Underwriting involves buying the securities in a block from issuing companies and reselling them in smaller denominations to investors.)

The application before the Fed involves a request by the three banks to underwrite short-term corporate debt, known as commercial paper. The banks also are seeking permission to package and resell to investors municipal revenue bonds, mortgage-backed securities and consumer-related loans, all currently restricted activities.

The Fed said it will hold a hearing in February and decide the issue by the end of April.