Banks’ Success With Securities Doubted

A House subcommittee chairman skeptical of relaxing the barriers between banking and the securities business released a report Monday suggesting that banks may have problems handling new powers.

The study, by the General Accounting Office, Congress’ auditing arm, concludes that large U.S. banks with European securities operations fared poorly in the London markets in 1986 and 1987.

“Bank examination reports . . . indicate that most of the London securities subsidiaries of U.S. banks recorded losses or were marginally profitable in 1986 and 1987,” the report said, noting that the problems were worsened by the world stock market crash in October, 1987.

Since the 1933 passage of the Glass-Steagall Act, banks have been restricted from most securities underwriting and dealing in the United States. However, under Federal Reserve rules, subsidiaries of U.S. banks can underwrite securities abroad.

The GAO attributed U.S. banks’ poor showing in London, in part, to “significant management and internal control problems.” However, it also noted that the turbulence of the London market during the period examined contributed to the problems.

Eighteen of the 50 U.S. banks operating in London engaged in at least some securities underwriting and dealing, the agency said.

In several instances during the period of the crash, London securities subsidiaries were forced to call on their parent U.S. banks for infusions of capital to make up for losses, it said.

Rep. Edward J. Markey (D-Mass.) who requested the report, said in a statement, “This study foreshadows the threat to our banking system if banks are allowed unfettered entry into our domestic securities markets.”

Markey, chairman of the House Energy and Commerce finance subcommittee, said the study does not support the contention of the banking industry that repeal of Glass-Steagall in the United States would strengthen bank profits.

The oversight subcommittee of Energy and Commerce, chaired by Rep. John D. Dingell, D-Mich., is scheduled to review the report and other material in the debate over repeal of Glass-Steagall at a hearing today.

Bills granting banks new securities powers have passed the full Senate and the House Banking Committee. The House legislation must go through Dingell’s full Energy and Commerce Committee.