Federal regulatory agencies are fighting over who should supervise the proposed limited reentry of banks into the securities business through affiliates. The independent Federal Reserve, the nation's central banker, yesterday expressed opposition to an administration proposal that would remove new banking activities from its jurisdiction.
Fed Governor J. Charles Partee told a Senate subcommittee that the Fed feels it would be "unnecessary and inefficient" to require banks to set up separate subsidiaries to underwrite and deal in municipal revenue bonds, as proposed by Treasury Secretary Donald T. Regan. Moreover, the Fed opposes allowing banks to establish money market funds.
Partee's salvo followed testimony by Securities and Exchange Commission Chairman John S.R. Shad, who endorsed the program outlined by Regan.
The administration's idea that revenue bond sales and other activities unrelated to traditional banking be conducted by affiliates is intended to even the competition between the banking and securities industries. Affiliates would be regulated according to function rather than institution.
Shad also urged a comprehensive review of the issue by a nonpartisan task force. Legislation to begin dismantling the 50-year-old separation between commercial banks and securities firms is part of an omnibus banking bill now before the Senate. As drafted, the Senate version would allow banks to engage in limited securities activities directly without establishing subsidiaries.
Partee found many reasons for opposing Regan's concept. In addition to the burden on banks, he cited possible loss of public confidence in the banking system. Despite legal separations between parent bank and securities affiliate, Partee contended that the distinction would not exist in the public perception and that a troubled affiliate could undermine confidence in a bank.
The bills before Congress would empower banks to offer mutual funds, including popular money market funds. The Fed would support permitting banks to offer stock and bond funds, provided they were registered under the Investment Company Act of 1940.
But it adamantly opposes giving banks the power to start money market funds. Their existence makes controlling the money supply more difficult.
The American Bankers Association had a mixed reaction. It applauded the Fed's rejection of the need to establish affiliates, but deplored Partee's exclusion of money market funds.