The Federal Reserve Board yesterday denied Citicorp's application to acquire a South Dakota bank in order to establish a nationwide insurance business.
The decision is another indication that the Fed does not intend to let the nation's bank holding companies expand beyond those activities closely related to banking and permitted by the Bank Holding Company Act.
In recent years the Fed has waged a campaign against the "non-bank bank" loophole used by bank holding companies to expand geographically and by retailers and other companies to enter the banking business.
By eliminating either of the two activities included in the legal description of a bank -- offering checking accounts and making commercial loans -- these institutions were able to escape restrictions that applied to bank holding companies.
Another proposal by Citicorp that would also significantly increase banks powers by permitting them to underwrite certain securities is now under review by the Fed.
In denying the Citicorp application to purchase American State Bank of Rapid City, the Fed stated: "The acquisition of the bank is in reality an acquisition for the purposes of permitting Citicorp to engage in insurance activities prohibited for bank holding companies under the BHC Act . . . ."
A Citicorp spokesman declared: "We respectfully disagree with the Fed's decision. Other states are considering such statutes, and U.S. bank holding companies overseas can offer insurance. We are confident that the combination of precedent and consumer benefits will ultimately move the Fed in the direction of approval of an application of this type."
The insurance industry, bitterly opposed to competition by banks, expressed satisfaction at the ruling.
The National Association of Professional Insurance Agents declared, "It vindicates our position that it is a blatant violation of the Bank Holding Company Act." The American Council of Life Insurance said, "The Fed's action should send a clear message to state legislators across the country: similar permissive legislation cannot stand."
Congress is also weighing legislation to close the so-called South Dakota loophole. Under that law, an out-of-state bank holding company can buy a bank there to conduct insurance activities in other states so long as it does not compete with South Dakota firms.
Gov. William Janklow supported the law to attract out-of-state bank holding companies that would increase tax revenues and jobs in South Dakota. Citicorp had pledged to spend $2.5 million for a facility in Rapid City and to employ a minimum of 100 to 125 additional persons for its insurance business.
Citicorp first applied in June 1983, but the Fed suspended the application in January 1984, citing "significant legal questions." Citicorp renewed the request in February 1985, stating it would not underwrite property and casualty insurance without prior approval, although it still intended to conduct insurance activities "to the fullest extent possible."
Citicorp applied to the Fed in December 1984 to underwrite various securities, including corporate bonds and commercial paper, through a subsidiary in an amount up to 20 percent of the subsidiary's combined dealing and underwriting volume. Since then it has twice modified its proposal. The latest version is for underwriting and dealing in municipal revenue bonds, mortgage-backed securities and consumer receivable-related securities up to three percent of the domestic market in such securities.
Citicorp has applied under a loophole in the Glass-Steagall Act which separates commercial from investment banking. It exempts bank affiliates from the prohibitions against underwriting most types of securities as long as they are not "principally engaged" in such business.