Proposal to Let Banks Underwrite Securities Draws Stiff Criticism

The Treasury said Tuesday that banks should be allowed into the securities underwriting business for the first time in 53 years, but strong opposition was expressed by members of Congress and others.

The arguments were made at an unusual public hearing called by the Federal Reserve Board to consider appeals by three major banks seeking the power to act as originators of commercial paper, municipal revenue bonds and securities backed by mortgages and consumer loans.

The Fed has promised to rule on the applications by April.

But Fed Chairman Paul A. Volcker said, “The correct answer lies outside this room and in the halls of Congress.” Without new banking laws, Volcker complained, the Fed is forced to interpret Depression-era legislation for a computer-era world, a process presenting “almost insoluble problems . . . in getting consistent and sensible results.”

Congress has been stalemated on the issue. The Glass-Steagall Act of 1933 erected a wall between banking and the securities industry, barring banks from acting as the organizers--or underwriters--of municipal revenue bonds and various new varieties of popular securities.

Home mortgages are bundled together as backing for securities, as are consumer debts such as auto loans. In addition, many corporations issue commercial paper to raise money for short periods.

In the past, corporations raised short-term funds by borrowing from banks. Now, however, even small companies are seeking to borrow through such alternative sources as the commercial paper and Eurodollar markets.

The role of commercial banks as financiers of business has declined as customers have found other sources of money, James J. Baechle, executive vice president of Bankers Trust in New York, said Tuesday. The banks’ share of short-term credit for big manufacturing firms dropped from 49% of the market to 26% during the last 10 years, he noted.

Bankers, watching traditional commercial loans shrink in importance, want to offer their customers such alternatives as raising money in securities markets.

New powers for banks would strengthen “the safety and soundness of our financial system,” the Treasury said in a letter to the Federal Reserve. It said banks would have new business opportunities and competition would be increased if the Fed grants the applications by the large New York banking firms of Citicorp, J. P. Morgan & Co. and Bankers Trust.

Since the first three bank holding companies applied, they have been joined by four others: Chase Manhattan, Marine Midland Banks, Chemical New York and Security Pacific.

But the securities industry, brokerage companies and investment firms that specialize as underwriters, argue that federal law would be breached if banks were allowed to enter the business.

The securities industry insists that only Congress, not the Fed, can give the banks the powers they seek.

The applications by the three banks “raise profound issues of public policy that lie exclusively within the province of Congress,” the Investment Company Institute said in a report to the Fed.

Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee, said in a letter to Volcker that the banks’ applications “fly in the face” of Congress’ intent in 1933 to bar banks from the securities underwriting field. He added that any approval of the applications would make the federal law “a toothless tiger.”

Although Proxmire said he favors giving banks added powers, he wrote: “Until the Congress changes the law, the (Fed) lacks authority to permit the activities in question.”

“Banks should be insulators of risk, while brokers should be conduits of risk,” said Rep. Charles E. Schumer (D-N.Y.), a member of the House Banking, Finance and Urban Affairs Committee.