The recent announcement from Merrill Lynch, Pierce, Fenner & Smith that it intends to offer its customers a new, brokerage account with consumer loan services similar to those obtainable from commercial banks has reheated the debate over territoriality between brokers and bankers.
Included in the floodgate of legislation that marked the Roosevelt administration's first hundred days in office in 1933, Congress passed the Glass-Steagall Act. It was designed to split commercial banking - the taking of deposits and lending of funds - from securities underwriting (known as investment banking) and brokerage.
But with the advent of computers, electronic fund transfer and many previously non-existent financial services, the demarcation lines in Glass-Steagall have become increasingly blurred.
The act is under review by this Congress, in large part because of complaints from Wall Street. Congress could decide to strengthen the law, merely reaffirm it or liberalize its restrictions.
The securities industry has charged the banks with improperly encroaching on their underwriting and brokerage activities through private placements of corporate debt, the development of stock purchase plans, and engagement in other securities-related activities.
But Merrill's move has put the pinching shoe on the other foot. Some banks seem worried about the potential inroads on their turf by the country's largest brokerage firm.
The so-called cash management account that Merrill Lynch plans to test-market this fall in three cities would, among other features, give customers a line of credit based on their brokerage margin account limit. This is equal to 50 per cent of the value of securities held with the firm by current regulation. A customer could draw directly on this account through use of a VISA bank card or special checks.
Resembling overdraft checking accounts that many banks offer today, it has this added appeal: Merrill Lynch plans to charge the same interest rate on the loans the customers now pay to buy stocks on margin. Currently ranging between 6.5 per cent and 8 per cent, these charges would be highly competitive with most bank consumer lending rates and about half the rate generally applied to unpaid bank card balances.
"It does not put us into the banking business," Merrill Lynch chairman Donald T. Regan asserted in an interview. He said the proposal merely combines perfectly legal customer brokerage services.
Regan noted that brokers are already allowed to extend credit under the Federal Reserve Board's margin rules, "so we're doing nothing more in the lending field than we're already permitted to do."
Some banks, and even some other brokers, are not so sure. The pressure at the Federal Reserve Board, where the plan is under informal review, must be mounting.
"I have heard from a number of smaller bankers, in particular, that they will use whatever lobbying or other powers they possess to try to stop steps of this sort," said one Wall Street brokerage chief.
The American Bankers Association, the chief trade and lobbying group for the nation's 14,000 banks, most of them small, said that philosophically, bankers think that any firm which engages in the business of banking - which appears to be the case with the Merrill Lynch plan - should have to conform with the same safeguards and regulatory strictures as the banks have. "We basically agree with David Rockefel- ler's position," an ABA spokesman said.
This was in reference to a statement Chase Manhattan Bank chairman Rockefeller made to the Wall Street Journal last week that Merrill Lynch should be subject to the same regulatory requirements as banks - including the maintenance of reserves - it it is determined that it is taking what amounts to checking account deposits.
But in an attempt to back off from what was instantly interpreted as a head-to-head confrontation between the country's third largest bank and Merrill Lynch, a Chase Manhattan spokesman said Rockefeller had not meant to indicate he plans to challenge the plant.
"We don't perceive it will have any impact on our business at all. We welcome competition, and we are in favor of competition," the Chase spokesman said.
"As long as all the rules are followed, we see nothing wrong with it." Citibank said in conciliatory statement. "Based on what we have read so far about the Merrill Lynch plan, it does not seem to involve the receipt of deposits and therefore does not appear on its face to violate the Glass-Steagall Act."
George I. Ball, president of E. F. Hutton and Co., a prime rival to Merrill Lynch, said his firm is completely prepared to offer services with features not unlike this. "But it seems to us untimely to force the issue before there is legislative or regulatory clarity on Glass-Steagall," he said.
Ball cited as deterrants to going ahead "the very serious legal questions that still have to answered and the perhaps ill-advised dangers of stepping into areas where we could be viewed as competitors of, particulary, the smaller banks around the county . . . with whom we have close working ties."
A number of other big retail brokerage firms such as Paine, Webber, Jackson & Curtis and Bache Halsey Stuart have also said they are looking at developing their own plans it Merrill Lynch turns out to be successful, but none seems eager to jump into the competitive fray.
Merrill Lynch is usually large and highly diversified, observers note. This allows the firm to separate itself from other brokerage firms on policy issues and to level the kind of bold marketing challenges embodied in the proposed brokerage account.
On the question of Glass-Steagall, Merrill Lynch also has long taken an independent line from the rest of the industry, saying it would welcome competition from the banks as long as both banks and brokers are subject to equal regulation. Regan confirmed that this position remains intact.
"I think Glass-Steagall has served us well in the past, but as the world gets more complex, as our nation's economy gets more complex, certainly the lines are blurring," said Regan.
"Banks could be in underwriting, indeed, in any other phase of our business, if the Congress wanted that, if it's national policy, provided the rules are the same," he added, "If you're going to have banks and brokers in underwriting, you can't have two sets of rules. You've got to have one authority and one set of rules."
Currently, banks are exempt from regulation by the Securities and Exchange Commission as broker-dealers, although some of their activities fall under the jurisdiction of the commission. Similarly, banks regulators have little or no authority over securities firms, except for the Fed's supervision of Regulation T. the margin lending rule. Neither the banks nor the brokers are eager for a change.
The past week, the SEC recommended that Congress impose tighter controls on bank securities activities in the interest of investor protection, and implied the bank regulators have been lax or at least inconsistent in monitoring these areas.
Although the commission opposed regislation by banks as broker-dealers because it would be "duplicative and unduly burdensome," the suggestion of expanded was not welcomed by the banks.
"I'm not sure many banks want to come under the SEC or that the SEC wants to let many of us our from under their control," commented Regan, "so I think that's why the lines" in Glass-Steagall "will stay the way they are."
Regan predicted that the distinction between brokers and bankers after the congressional review "will probably remain, but with a further blurring of the ancillary activities."
Most of the skirmishing between the banks and the brokers has been going on in these "axillary" services, with banks making little headway in offering customers brokerage services but creating more concern about their growing role in private placements.
Chemical Bank of New York, sixth largest in the country, earlier this year abandoned a low-cost stock purchase service it was offering to 19,000 checking account customers after only a brief trial. The plan, attacked as illegal by the brokers, had apparently drawn only minimal customer respone.
Automatic investment services offered by Chase Manhattan and some other big banks, which allow customers to buy shares through their bank from a limited list of large companies on a monthly installment plan, also have proven to be a fizzle. They are meanwhile under the challenge in the courts as another alleged breach of Glass-Steagall.
But the activity that most worries the brokers is the growing role played by banks in private placements, which the securities firms see as poaching on their extremely lucrative underwriting business.
A private placement is a long-term corporate debt offering placed with a few large investors, thus circumventing normal securities distribution channels and requirements. The Wall Street firms say this amounts to underwriting, an activity clearly barred to banks by Glass-Steagall, while the banks say it is a logical extension of the corporate financial services they have always offered and does not involve the distribution of securities.
A recent report by the Federal Reserve Board noted that in 1976 banks accounted for $1.3 billion or 7 per cent of the value of all private placements. But the Fed concluded the bank activity in ths area didn't present any "legal or public policy problems" and bank competition in this area provides "appreciable public benefits."
"I'm not surprised by the reply we received from the Federal Reserve," said Edward I. O'Brien, president of the Securities Industry Association, the main trade group for the brokers and investment bankers which has been spearheading the fight against the banks.
O'Brien said the Fed is a "natural advocate on behalf of the banking system" and "naturally they produced the result they were expected to produce. The answer will be decided not by them, it will be decided by Congress. Congress decided Glass-Steagall in 1933 and they'll have to decide this one in 1978."
The SIA chief, meanwhile, defended the Merrill Lynch plan as "directly related to what the brokerage business should have been doing 10 years ago" and "a logical step for a large organization which wishes to be a total financial services organization."
The subcommittee, headed by Sen. Harrison J. Williams (D-N.J.), last year sent out questionnaires to several thousand banks ont the extent of their securities activities. But the response have not yet been tabulated.
Hearings will follow completion of the survey, probably taking place sometime after the planned congressional recess in October. At that time, all of the issues surrounding Glass-Steagall, and whether it needs to be updated or reaffirmed, will be aired.
In the House, meanwhile, legislation has been introduced by Rep. Fernand St. German (D-R.I.), chairman of the Banking Committee's subcommittee on financial institutions, which would require foreign banks to become chartered in the U.S. and thus bring them under the restrictions in the Glass-Steagall Act.
A number of foreign banks which do banking business in the United States have brough into some major Wall Street brokerage firms in the last few years.
If St. German's legislation, which made it through the House during the last session of Congress but not the Senate, passes this time, the foreign banks will have to choose whether to limit their activities in the U.S. to commercial banking or investment banking and brokerage - because they won't be allowed to stay in both.