Fed Chief Backs Mix of Banking and Securities : But Greenspan Wants to Go a Step at a Time

Federal Reserve Board Chairman Alan S. Greenspan endorsed legislation to mix the banking and securities industries Tuesday but said going faster and further could be dangerous.

Greenspan told the Senate Banking Committee that the Federal Reserve Board, the regulator of the nation’s largest banking organizations, supports legislation sponsored by Sen. William Proxmire (D-Wis.), chairman of the committee, and Sen. Jake Garn of Utah, the committee’s ranking Republican.

Their bill would repeal the Depression-era Glass-Steagall Act, which separated banking and securities. It would allow a holding company to own both a bank and a securities firm. Most securities underwriting would be banned within the bank, and banks and securities firms could not own each other directly.

The central bank chairman, in his third congressional appearance since taking his post in August, backed the repeal of Glass-Steagall. But, for now, he said he would not allow banks into insurance or real estate, nor would he permit commercial firms, such as auto companies or department store chains, to own banks.

That position, he said, “is based not on what an economist thinks is the right thing to do in principle but on what is feasible and practical to do in a legislative environment.”

Can Test Each Step

Repeal of Glass-Steagall would be “a major important change, which in and of itself will significantly improve the banking structure of this country,” he said.

He added that step-by-step deregulation permits each step to be tested before going on to the next.

“If you’re wrong (about comprehensive restructuring) and there are unforeseen technical problems . . . the costs to the economy could be large. It’s not elegant to go incrementally . . . but it does have the advantage of limiting the downside,” he said.

Two alternate bills have been introduced in the Senate. One, by Timothy Wirth (D-Col.) and Bob Graham (D-Fla.), would allow the mixture, through holding companies, of banking with securities underwriting and insurance.

Based on a proposal by Federal Reserve Bank of New York President E. Gerald Corrigan, the Wirth-Graham bill would maintain the separation between banks and commercial firms, set up a 15-member Financial Services Oversight Commission to watch over deregulation and adopt, according to its authors, a more comprehensive and future-looking approach.

The second Senate bill, backed by securities firms, was introduced Tuesday by Alfonse D’Amato (R-N.Y.) and Alan Cranston (D-Calif.). It would permit companies called depository institution holding companies to engage in a wide range of activities, including commercial operations, real estate and insurance. It would require banks owned by such holding companies to maintain higher capital levels.

“We propose a new landscape where no one segment of the financial services industry receives preferential treatment,” D’Amato said.

Ruder to Testify

Greenspan expressed support for the idea of a supervisory body to coordinate the policies of various federal and state regulators, but said Wirth and Graham’s bill did not provide enough guidance to that supervisory body.

A Proxmire aide, who spoke on condition of anonymity, said Proxmire has not decided yet whether to incorporate elements of the Wirth-Graham bill into his own.

In a related matter, Proxmire said Securities and Exchange Commission Chairman David S. Ruder, who is scheduled to testify before the committee on Thursday, will call for an amendment saying the SEC must regulate all securities activities of banks, including brokerage services, and not just the activities of the underwriting affiliate.

Greenspan said he supported such “functional regulation” in principle but could not endorse Ruder’s proposal before reviewing its details.