G.A.O. Urges Caution on a Glass-Steagall Repeal

The New York Times | February 11, 1988
By Nathanial C. Nash

The General Accounting Office has recommended that Congress take a go-slow approach should it decide to repeal the Glass-Steagall Act, which separates banking from securities underwriting.

The G.A.O. report makes no specific recommendation on whether Congress should repeal the 55-year-old law. Congress is holding hearings on whether to repeal part or all of the act. Among the issues is whether to give banks new powers to underwrite securities, as well as whether to recommend that the Securities and Exchange Commission regulate all securities operations of banks.

The legislators face a March 1 deadline, when a moratorium prohibiting banks from engaging in new securities underwriting, insurance and real estate activities expires. Congress is not expected to extend the moratorium.

Additional impetus for banks' participation in the securities business came Monday, when the United States Court of Appeals for the Second Circuit, in New York, upheld the rights of banks to engage in some limited securities activities.

Charles A. Bowsher, the Comptroller General, who heads the G.A.O., told Congress that, if it decided to give banks new powers, the agency favored a plan in which banks would, at first, be allowed to commit only 5 to 10 percent of their total business revenues to securities activities.

''Congress, by using that approach, could bring back the regulators, bring back the industry people, and ask for explanations as to how well things are going,'' Mr. Bowsher told the House Subcommittee on Telecommunications and Finance. ''If everything is going well, then the phase-out could proceed.''

Mr. Bowsher said an alternative plan to limit the specific securities powers of banks might cause dislocations in the financial markets.

A leading banking industry spokesman reacted strongly to the percentage proposal formulated by the G.A.O., which is the independent investigative arm of Congress.

Robert Dugger, chief economist at the American Bankers Association, a banking trade group, said the G.A.O. proposals would cripple banks in their competition with non-bank competitors that do not face these restrictions.

The G.A.O. study has also supported a proposal by the Federal Reserve Board and other agencies that would attempt of insulate a commercial bank from the risks and potential conflicts of interest related to securities underwriting. This proposal recommends that any securities activity of a bank be conducted in a separate subsidiary of its parent holding company.

The G.A.O.'s cautious approach reflects its concern that banks need to build up their capital levels before they are permitted to enter a broad range of securities businesses. It is also concerned that Federal regulatory structures are not in place to monitor the complex financial network that would evolve once banks and brokerage firms enter each other's businesses.