The Federal Deposit Insurance Corp. yesterday gave permission for subsidiaries of some banks to deal in securities. The ruling gives a green light for a number of mutual savings banks to set up their own money market mutual funds.
The regulatory agency said provisions of the Glass Steagall Act, the federal law prohibiting banks from participating in the brokerage business, do not apply to subsidiaries of banks that are not members of the Federal Reserve System.
The Securities and Exchange Commission, which had been awaiting the FDIC's decision, is expected to decide soon whether to expedite applications for mutual funds by bank subsidiaries.
The FDIC ruling was sought by the Boston Five Cents Savings Bank, a non-Fed member that wants to establish a money market fund. The bank could not be reached yesterday for comment on its plans. A Washington state mutual savings bank did notify authorities that it intends to proceed with its plans for a government-only money market fund. A third bank in Wisconsin has also stated its intention of going into the business.
In the past six months mutual savings banks have lost almost $7 billion in deposits, following an even greater loss last year. Much of that money has gone in search of higher interest rates to other types of investments, especially money market mutual funds. Now that banks are attempting to set up competing funds, they are encountering bitter opposition from the securities industry.
In related action yesterday, the SEC gave its approval to so-called private label sweep funds. These involve the linkage of a bank with an existing money market fund.