Fed Governor Warns EC on Banking Policy

Federal Reserve Governor H. Robert Heller warned the European Community on Wednesday against blocking full participation of U.S. banks in European banking after 1992.

In 1992, the EC plans to implement complete financial and economic integration, but Heller told a Cato Institute conference, “There have been indications recently that the EC might impose a policy of reciprocity on banks from outside countries.”

Heller said that would mean a U.S. bank would not be allowed the same powers as European banks unless foreign and domestic banks also had those powers in the United States.

“As an extreme example of how this policy might be applied, a U.S. bank could be denied the right to branch throughout the EC since no banks, domestic or foreign, are allowed to branch throughout the United States,” Heller said.

Non-banking activities, such as sales of stocks and bonds, could also be restricted in Europe because they are restricted in the United States, Heller said.

“Clearly a policy of reciprocity would be detrimental not only in that it would harm the ability of U.S. banks to compete in the European market for financial services, but it could lead to further protectionist pressures that would be harmful to all,” Heller said.

Needs National Policy

Heller also urged the U.S. government to allow nationwide banking to compete more effectively with foreign financial firms and to encourage geographic diversification, which could have protected some Oil Patch institutions from their current problems.

“Interstate banking is clearly an area where a national policy is called for,” Heller said.

Heller said other areas of expanded powers for banks, including allowing commercial firms to own banks, could enhance the safety and soundness of the U.S. banking system, as long as strong fire walls were in place to keep subsidiaries from draining banks and banks from raiding subsidiaries.

“As we have found out, especially in time of financial stress, there is literally no limit to the inventiveness of the human mind when it comes to devising new methods to get hold of money--legal or illegal,” Heller said.

Heller said expanding banking powers was nevertheless a good idea and should be implemented.

“Unfortunately, Congress failed to enact appropriate legislation and the Federal Reserve will therefore be faced with applications by banks requesting new powers within the context of the existing legislation,” Heller said.