Comptroller of the Currency C. T. Conover yesterday gave preliminary approval to plans for 29 controversial "nonbank banks," despite warnings from congressional leaders that he is flouting congressional intent and federal laws that prohibit interstate banking.
In a separate action, the Federal Reserve gave conditional approval for three other bank holding companies and one commercial firm to open non-bank banks. They include Suburban Bancorporation of Bethesda, which plans to open a consumer bank in the District. The four applications had earlier been approved by the comptroller's office.
But the Fed approved the applications reluctantly and Chairman Paul A. Volcker called on Congress to plug quickly the loophole in the banking laws that permits banks to open up deposit-taking offices in states other than their home base and also allow nonbank companies to own banking operations.
Volcker, in his letter, cited the "progressive unraveling of the basic tenets of public policy" on banking, because regulators are forced to approve nonbank banks under current law.
Nonbank banks are little different from full-service banks. But by refusing to offer either standard checking accounts or business loans, the nonbank banks are able to evade the law designed to restrict ownership and geographic location of banks.
That law, the Bank Holding Company Act, says a bank is an institution that both accepts checking accounts and makes commercial loans. For purposes of regulation, examination and insurance, nonbank banks are treated as normal banks.
The comptroller's office yesterday gave permission to 13 separate bank companies -- including giants Citicorp, Chase Manhattan and Security Pacific -- to establish 29 nonbank banks. All of them are in states other than the home state of the applicants and the bank companies are prohibited from setting up full-service institutions in other states. These companies still need Federal Reserve approval.
Citicorp, for example, was given permission to establish nonbank banks in Pennsylvania and Ohio. The Citicorp operations will not accept checking accounts. But they will accept all other forms of deposits -- including NOW accounts, money market deposit accounts and all forms of savings accounts including certificates of deposit.
Conover, in a statement, said nonbank banks are "clearly legal under existing law," and said he had twice put moratoriums on approving them that gave Congress 18 months to close the loophole.
The Senate passed a bill that would have banned nonbank banks, but the House did not. "Under those circumstances, I felt compelled to begin acting on these applications," Conover said.
But both Fernand J. St Germain (D-R.I.), chairman of the House Banking Committee, and Jake Garn (R-Utah), chairman of the Senate Banking Committee, have said they intend to close the loophole early in the next congressional session and force divestiture of any nonbank bank established after July 1, 1983.
Last week, Conover said he would recommend that companies go ahead and set up the nonbank banks despite the threat of divestiture.
Unlike Conover, Volcker made clear he was not encouraging nonbank banks. In a letter to Garn and St Germain, he said the board had no alternative but to approve the pending applications this week after the 90-day waiting period ran out "despite serious reservations about the consistency of the proposal with basic policy established by Congress." He said the move "should not be construed as encouragement to the applicants" to go ahead with their plans," or to others to pursue similar acquisitions.
He emphasized the board's concern over "unfair competitive distortions that can result from exploitation of narrow loopholes to achieve broader purposes," as well as "the dangers of permitting the financial system to evolve in a haphazard and potentially dangerous way."
In addition to Suburban's application, the Fed governors approved, 4 to 2, applications from Bankers Trust New York Corp. to expand the activities of its Florida trust subsidiary in Palm Beach into a consumer bank, and from the Bank of Boston to expand its Florida trust companies in Deerfield Beach and Sarasota in the same manner. An Atlanta firm, Continental Telecom Inc., received permission to open a nonbank bank in Florida. As a condition, the Fed will require that the nonbank banks operate independently from their parent companies.
Conover yesterday acted on 29 of the 342 applications on file from 65 different companies. The Fed will also have to pass on the applications, but unless the loophole is plugged, it likely will make the same decision it did on the four applications yesterday. The comptroller's office granted preliminary approval of national charters for the nonbank banks; the Fed rules on whether the parent companies can own the banks and under what conditions.
Last year, the Fed sought to narrow the nonbank bank loophole by redefining demand deposits (checking accounts) to include NOW accounts. However, in September, an appeals court in Denver ruled against the Fed in its efforts to stop Dimension Corp. from its eventual goal of establishing 31 nonbank banks in 25 states. The Fed has said it will appeal the case to the Supreme Court.
Conover already had approved 26 nonbank banks, of which 14 are in operation. Of the remaining 12, eight either are waiting to see what Congress will do or are under court challenge. Four others were approved yesterday by the Fed.
Two board members, Henry C. Wallich and Emmett J. Rice, voted against approval, saying that the fact the Senate had passed a bill closing the loophole indicated Congressional intent to reaffirm the basic policies governing banking.