CFA Institute

Editor's Comment: The Regulation of Financial MarketsAuthor(s): Ira ScottSource: Financial Analysts Journal, Vol. 39, No. 5 (Sep. - Oct., 1983), p. 6Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4478674 .

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FiKur'su C*m*n

The Regulation of Financial Markets The deregulation of interest paid on deposits, Federal preemption of state usury laws, and broadened powers for thrifts have accelerated the flow of capital into the banking business. Securities firms, insurance companies and non-financial in- stitutions have used the non-bank bank (a bank that does not make commercial loans) to escape the bank holding company (BHC) regimen of the Federal Reserve Board. At the same time, Congress has refused to define Wall Street checking accounts as demand deposits, and state legislators have enacted laws that grant state-chartered institutions broader authority than is available to federally chartered banks.

Chairman Garn has described the situation as unhealthy, observing that, "These efforts at fine- tuning and end runs are a direct result of Congress' typical unwillingness to solve the problem we face in a financial marketplace that has outgrown our banking statutes." Although a number of mora- torium proposals have been introduced in the Senate and House, Senator Garn feared that a moratorium would merely serve as an excuse for in- action and pledged an all-out effort to produce a legislative response. The Administration has now come up with a concrete proposal, and so the Finan- cial Institutions Deregulation Act (FIDA) of 1983 (S. 1609 and H.R. 3537) is on the legislative table.

The Treasury proposal (which has the support of the Federal Reserve) would expand the powers of (most) holding companies and increase on a reciprocal basis the variety of financial firms that may own depository institutions. FIDA would eliminate the non-bank bank loophole by defining a bank to include all institutions insured by the Federal Deposit Insurance Corporation (FDIC). The Act would restrict the powers of the unitary savings and loan (S&L) holding company to those of a bank holding company.

FIDA would limit both bank and S&L holding companies to owning a bank; owning a thrift; deal- ing in and underwriting municipal revenue bonds; sponsoring, managing and advising investment companies and underwriting their securities; in- surance underwriting and brokerage; real estate in- vestment, development and brokerage, subject to a 5 per cent capital limitation on real estate invest- ment and development; owning an export trading company; activities currently permitted by law or

regulation to multiple S&L holding companies; ac- tivities currently permitted by law or regulation to BHCs; and activities the Federal Reserve deter- mines to be closely related to banking or of a finan- cial nature. FIDA would grandfather the activities of (1) institutions that own non-bank banks, (2) unitary S&L holding companies and (3) mutual thrifts. A provision in the original draft that would have preempted state laws giving state-chartered banks broader powers than permitted national banks was eliminated at the eleventh hour before the bill was sent to Capitol Hill.

For reasons relating to the specific allocation of authority, the American Bankers Association (ABA) and the Bank Holding Company Association sup- port the measure. In opposition are arrayed the S&Ls (they call it the Reregulation Act of 1983 and cry "Leave Us Out!"), the independent bankers, the investment bankers, the realtors, the home builders and, last but certainly not least, the in- surance companies and agents. The FDIC and the Federal Home Loan Bank Board (FHLBB) oppose giving the Federal Reserve Board the authority to establish the list of permissible activities for S&L as well as bank holding companies. FIDA obviously poses turf problems of gargantuan proportions.

And no wonder. The stakes are high. Congress must decide who, and on what terms, will be given access to the Federal Reserve discount window and to federal deposit insurance. The extent of the sub- sidy involved is, of course, reduced by associated costs and restrictions.

In general, some political return could be gotten through increasing the authority of BHCs and ser- vice corporations rather than reducing the authority of their thrift counterparts. But the obstacles in the way of a consensus-especially those involving the banks, the insurers and securities underwriters- are monumental. On the other hand, under the proposed legislation, a bank may underwrite in- surance and municipal revenue bonds; and a money market mutual fund or an insurance com- pany may own a bank.

As Chairman St. Germain-a brilliant parliamen- tarian and veteran of many Congressional battles- exclaimed: "If the problem is serious, a solution can be found within the legislative process." The ar- chitects of Garn-St. Germain have their work cut out for them. -Dr. Ira Scott

FINANCIAL ANALYSTS JOURNAL / SEPTEMBER-OCTOBER 1983 O 6

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