Go Slow With Banking Changes, GAO Warns

The law banning banks from the securities business should be phased out gradually because federal regulators would have trouble coping with an abrupt repeal, a congressional agency said Wednesday.

“We have concerns about the regulators’ ability to keep pace with the . . . explosion of activity,” warned Charles A. Bowsher, comptroller general of the General Accounting Office, an investigative arm of Congress.

Congress is considering revamping or repealing the Glass-Steagall Act, the 1933 law that separated commercial and investment banking.

Those in favor of repeal argue that banks must be permitted to enter new lines of business to compete against large foreign banks abroad and the securities industry at home. Opponents say the new activity could endanger the safety of banks’ federally insured deposits.

Bowsher, in a report, offered two ways Congress could ease into relaxing the law. It could at first permit banks to enter only a few securities activities or it could limit the securities business to a certain percentage of banks’ revenue, he said.

Strong Criticism

“In time, as more experience is gained and regulatory resources are put in place, the limits on activities could be relaxed and, if no problems occur, fully phased out,” he told the House Energy and Commerce subcommittee on finance.

The report sparked strong criticism from Rep. Jim Cooper, (D-Tenn.), an advocate of revamping Glass-Steagall, who said it “closely resembles mush.”

“You’ve issued a statement that could be read as a speech to either the Securities Industry Assn. or the American Bankers Assn. without making too many enemies on either side,” he told Bowsher.

It was defended, however, by Rep. Edward J. Markey, (D-Mass.), chairman of the subcommittee. He said the GAO’s “deep concerns” about the readiness of federal regulatory agencies was “very significant.”

Affiliates Hamstrung

A spokesman for the nation’s largest organization of commercial banks said a step-by-step repeal would cripple banks’ competitiveness, while a securities industry spokesman praised that approach.

“There is a great deal of wisdom in phasing this in,” particularly by granting banks only a few securities powers initially, said Donald J. Crawford, SIA senior vice president.

However, Robert Dugger, chief economist of the ABA, said a piecemeal repeal “would result in securities affiliates which are hamstrung and unable to compete effectively.”

The GAO report also suggested that a moratorium on new banking activities, set to expire March 1, be allowed to lapse in stages rather than all at once.

Among the other steps recommended by the GAO were:

- A holding company structure. Banks and securities firms could be owned by the same holding company, but underwriting could not take place in a department or direct subsidiary of a bank.

- Increased capital. A bank wishing to enter the securities business would have to prove it had enough money from investors to survive any loss from the new activity that endangered federally insured deposits.

- Stepped-up federal regulation. Regulatory agencies need more money and employees to oversee the new activities.