Taking Stock (and Other Securities) (1990)

Constrained by the Glass-Steagall Act and the Bank Holding Company Act, ...U. S. banks have lost market share in the core businesses of banking, are less efficient, more risky, and less capable of serving the needs of our customers and the nation's economy. This comment, made in April testimony before the Senate Banking Committee by Thomas G. Labrecque, president, Chase Manhattan Corp., put the challenge of bank securities efforts in a nutshell. There have been many calls for changes in bank legislation in the last decade. Yet the Glass-Steagall Act remains largely unchanged since its passage in 1933. As a result, banks have devoted significant efforts to satisfying customer needs within the constraints of existing law. Some history. As passed, the Glass-Steagall Act limited bank securities activities to and selling such securities and stock, without recourse, solely upon the order and for the account of customers. It prevented Federal Reserve members from dealing in, underwriting and purchasing all but a limited range of securities, and prohibited banks from being affiliated with any organization engaged principally in the issue, flotation, underwriting, public sale or distribution of any stocks, bonds, debentures, notes, or other securities. The Glass-Steagall Act was designed to make the banking system safer and to insulate banks-and their depositors-from the risks inherent in the securities business. While virtually everyone agrees that the U.S. banking system seems much safer today than in the 1920s, some argue that the perceived safety is a result of the Federal Reserve Act and creation of FDIC, rather than Glass-Steagall's separation of investment and commercial banking. Nevertheless, Glass-Steagall was reinforced in its efforts to separate the banking industry from unrelated industries by the Bank Holding Company Act of 1956. This act regulates the nonbanking activities of bank holding companies and their subsidiaries. It requires, among other things, that nonbanking activities performed by bank holding companies be closely related to the banking business. TIDES TURN Their securities activities severely curtailed, for over 40 years banks stuck to the core banking activities of taking deposits and making loans. In the 1970s, however, a number of shifts in the U.S. financial industry introduced a climate of change. The abolishment of fixed commissions on securities transactions in 1975 led to the introduction of discount brokers. These brokers offered execution and settlement services (without investment advice or research) at low commission rates. Many banks concluded that these discount brokerage services fell within Glass-Steagall restrictions and introduced them to help keep customers' investment business at the bank. Also in the 1970s, banks lost commercial loan customers to less expensive types of financing offered through the money market. Large corporations started issuing commercial paper at market rates, instead of borrowing from banks at higher rates. In the face of this, banks searched for ways to retain customer relationships by helping customers raise funds through the capital markets. In one attempt, a bank asserted that commercial paper was not a security, as defined by the Securities Act of 1933, and therefore was not covered by Glass-Steagall restrictions. These efforts, started as a way to maintain customer relationships, led to a series of rulings that now allow subsidiaries of bank holding companies to go so far as to underwrite corporate debt and equity securities. Road to change. To be sure, these changes have not occurred overnight. Introducing new securities-related banking services without changing any statutes has required banks to challenge the traditional interpretation of existing legislation. These challenges occur when banks apply for a regulatory body's permission to offer a proposed service-usually subject to certain well-defined limitations. …