Court Strikes Down Fed Effort to Restrict Commercial Banks

The U.S. Court of Appeals on Monday struck down an effort by the Federal Reserve to restrict commercial banks’ entry into investment banking areas long forbidden them to a scant 5% of the market.

The decision, a significant victory for the nation’s big banks, was part of an overall Appeals Court ruling backing the Fed’s decision to allow U.S. banks’ subsidiaries to underwrite and deal in municipal revenue bonds, commercial paper and mortgage-related securities.

The court, in a unanimous decision, rejected arguments by the Securities Industry Assn., which represents Wall Street’s broker-dealers and is fighting to keep commercial banks out of the investment banks’ turf.

But it held back from truly clearing the obstacles before the commercial banks by leaving intact another restriction that said a bank cannot derive more than 5% of its gross revenue from underwriting activities.

The banks had asked the court to strike down the Fed’s rule, which would limit their activities in new investment banking areas to 5% of the current market or 5% of the subsidiaries’ revenue, whichever is less.

The Fed, which regulates the nation’s banks, sought to impose the 5% restrictions to comply with the language in the Glass-Steagall Act. The 1933 law forbids banks from being “principally engaged” in securities underwriting and other investment banking activities.