Bank Wins Underwriting Powers : 1st Interstate Gets Fed Approval to Enter Securities Field

The Federal Reserve Board announced Thursday that it has approved new securities underwriting powers for First Interstate Bancorp of Los Angeles, the nation’s ninth-largest banking organization.

The Fed voted 4-1 on Wednesday to permit the bank holding company, through its First Interstate Capital Markets subsidiary, to underwrite municipal revenue bonds, some industrial development bonds, mortgage-backed securities and commercial paper, a Fed statement said Thursday.

The Fed delayed the effective date of the order until March 1, the end of a bank deregulation moratorium ordered in legislation enacted in August. The new law temporarily barred the Fed from any moves to deregulate the banking industry, allowing time for Congress to hammer out a legislative compromise on the issue.

First Interstate, which has $51.8 billion in assets, operates 24 subsidiary banks in California, Oregon, Arizona, Washington, Nevada, Utah, Idaho, Colorado, New Mexico, Montana, Oklahoma and Alaska. In a number of other states, it has issued franchises to independently owned banks that use the First Interstate name.

In reaction to the Fed’s decision, a First Interstate spokesman in Los Angeles said: “Obviously, we’re pleased. It puts us on an equal footing with some other banks that have received similar approvals.”

On April 30, the Fed approved similar underwriting powers for Citicorp, J. P. Morgan & Co. and Bankers Trust New York. Subsequently, it approved applications from a number of other bank holding companies, including Security Pacific National Bank and Marine Midland Banks.

House and Senate banking committee leaders have promised not to extend the moratorium, and the Fed decisions have the effect of putting pressure on Congress to resolve the deregulation issue or watch the Fed do it on a case-by-case basis.

Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee, is proposing an overhaul of the Depression-era Glass-Steagall Act, which separates the banking and securities industries. Proxmire’s proposal would go further than the Fed by also allowing bank holding companies to underwrite corporate stocks and bonds.

The Securities Industry Assn., representing large investment firms whose business could be threatened by expanded bank powers, is fighting bank deregulation. It has asked the U.S. Court of Appeals for the 2nd Circuit to review the Fed’s decision on Citicorp, J. P. Morgan and Bankers Trust. The court stayed the effective date of the Fed decision on those three cases until it decides the appeal.

Voting to approve First Interstate’s application were Federal Reserve Board members Manuel H. Johnson, Martha Seger, H. Robert Heller and Edward W. Kelley Jr. Opposed was Wayne D. Angell. Chairman Alan S. Greenspan was not present for the vote.

The First Interstate order provides for a “prudential framework of limitations . . . to address the potential for conflicts of interest, unsound banking practices or other adverse effects,” the majority wrote.

One provision restricts securities underwriting to no more than 5% of the company’s total gross revenue over any two-year period. The majority argued that this complies with Glass-Steagall, which forbids banks from affiliation with “any corporation . . . engaged principally in . . . underwriting.”

Angell, in his dissent, said he favors expanded bank powers as a matter of policy but believed that the Fed’s order violated Glass-Steagall. “I urge Congress to provide straightforwardly the authority for bank holding companies to conduct, with appropriate safeguards, the kinds of activities permitted by the Fed in its decision,” he said.