The average quarterly return on equity ROE was found to be slightly higher for bank subsidiaries than securities subsidiaries, although the difference was not statistically significant.
They include municipal general obligation bonds, U.
Although the results indicate that banking organizations can reduce their risk exposure by engaging in the right amount of securities activities, too much securities activity can raise their overall risk due to the high stand-alone risk of Section 20 subsidiaries.
What degree of integration among financial services providers, and between financial and non-financial firms, would be socially desirable. Furthermore, Section 20 subsidiaries have been given the option to index the revenue test for interest rate changes.
For example, during the first six months oftwo of the top ten underwriters of U. With full financial integration on the horizon, it is important to understand what these affiliations might mean for the profitability and risk of banking organizations, and thus the stability of the banking sector.
The main difference is that in providing credit, banks hold and fund the loans until they mature, whereas in underwriting, the underwriters hold the bonds for a very short period of time and quickly resell them in the open market. In essence, the securities activities conducted by banks were subtracted from the bank subsidiaries and combined with the securities activities conducted by their Section 20 affiliates.
While policymakers seem to be in general agreement that the Glass-Steagall Act should be repealed, there is vigorous debate on how to integrate commercial and investment banking. How can the financial services industry be modernized without compromising the safety and soundness of the banking system.
For robustness, the analysis also was performed at the activity level. Beginning inthe Federal Reserve authorized bank holding companies to establish securities subsidiaries to engage in limited underwriting and dealing in bank-ineligible securities.
Permission to reprint must be obtained in writing. Entering the securities business by acquisition was either infeasible due to the cap, or unattractive because of limited growth potential. This Economic Letter considers the implications of affiliations between commercial banking and securities activities.
These firewalls are aimed at preventing conflicts of interest between the securities subsidiary and the commercial bank, the primary concerns that led to the passage of the Glass-Steagall Act in the first place.
Section 4 k 4 E Securities Subsidiaries A bank holding company or a foreign bank that elects to become or be treated as a financial holding company pursuant to provisions of the Gramm-Leach-Bliley Act that amended section 4 k 4 E of the Bank Holding Company Act, may engage in securities underwriting, dealing, or market-making activities.
Certain securities are exempted from the act. Banking organizations have been fairly successful in entering the market for corporate bond-underwriting partly because of their expertise in providing credit services.
This publication is edited by Sam Zuckerman and Anita Todd. Since certain kinds of securities activities are bank permissible and are performed by banks rather than their securities affiliates, this may confound the analysis of banking vis-a-vis securities activities by examining activities at the subsidiary level.
But the wall is not perfectly solid. Within the class of securities activities, securities trading is found to be more profitable and riskier than banking activities. Based on the responses, in Octoberthe Fed relaxed three firewalls between securities affiliates and their banks.
Nevertheless, true financial modernization can be accomplished only by reforming the Glass-Steagall Act, rather than by loosening banking regulations.
Inthe Federal Reserve made a new ruling on Section 20 of the Act. Conclusion Introduction Sincethe Glass-Steagall Act has stood as a wall between commercial banking and investment banking in the U.
securities underwriting is found to be riskier, and in the case of non-primary dealers also less profitable, than banking activities. Nevertheless, its return exhibits low correlation with banking return and trading return, suggesting that securities underwriting provides potential diversification benefits to both banking and trading activities.
However, trading desks intending to take the underwriting exemption must also estimate RENTD, which is defined differently for underwriting and in our view poses fewer implementation challenges. Underwriting RENTD is the anticipated market demand for an underwritten deal’s securities (estimated as a monetary range).
A section 20 subsidiary is also limited to deriving no more than 25 percent of its gross revenue from underwriting or dealing in bank-ineligible securities. A section 20 subsidiary may be limited by the terms of its Board approval in the types of securities that it may underwrite or deal in.
The FDIC permits subsidiaries of state nonmember banks to underwrite and deal in securities, subject to certain limitations." The Comptroller's recently adopted revision of its "Part 5" regulations has the potential for enabling national banks to underwrite and deal in securities through a subsidiary.
Securities Underwriting and Dealing Subsidiaries A broker-dealer authorized to engage in securities underwriting, dealing, or market-making may, under certain circumstances, be acquired by a bank holding company, by a foreign bank subject to the Bank Holding Company Act.
taking and full-scale securities dealing, securities underwriting, investment advising, and brokerage activities within a single holding company structure. To do this, the report first examines the historical differences between the regulatory structure of commercial and investment banks.Securities underwriting and dealing subsidiaries of disney