Citibank Wins Right to Own Insurance Firm : No Fed OK Needed to Own Non-Bank Unit

A federal appeals court ruled Friday that Citibank did not need approval from the Federal Reserve Board to buy a municipal bond insurance subsidiary.

The ruling was seen as a victory for the banking industry, which has argued that the requirement for Fed approval in such a case represents an unnecessary layer of regulation.

“The significance obviously goes well beyond whether Citibank can own an insurance subsidiary,” said Stephen Verdier, an attorney with the Independent Bankers Assn. of America. “It really pulls the rug out from under the Federal Reserve.”

Banks, which have seen profitability in their traditional businesses eroded by deregulation and competition from other types of institutions, have been unsuccessful in persuading Congress to change laws to allow them to enter new fields.

The Fed has also resisted any broadening of banking powers while two other bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., have advocated new powers.

Opinion Reversed

Citibank, a subsidiary of New York-based Citicorp, the nation’s largest banking company, acquired American Municipal Bond Assurance Corp. with approval from the comptroller. But the American Insurance Assn., an insurance industry lobby, challenged the acquisition in court.

After losing in U.S. District Court, the insurance organization won an appeal. In August, the U.S. Court of Appeals for the District of Columbia said the Fed had jurisdiction in the matter and had to concur in the comptroller’s approval.

On Friday, however, the same court issued a new ruling reversing its earlier opinion. The new decision, which came after additional arguments from bank advocates, said the comptroller had authority to make the decision on his own.

Allen Schott, chief counsel for the comptroller, said the issue of jurisdiction is likely to arise again because the Fed has proposed a regulation to require parent firms of state-chartered banks to obtain approval before they can operate insurance, real estate and other non-traditional businesses.

“This does not end the matter for all time,” Schott said.