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Cities watch securities legislation

Cities watch securities legislation

Cities and counties currently attempting to finance public infrastructure must buy the municipal revenue bonds necessary to do so through securities firms.
  • Written by Silverstein, Kenneth
  • 1st May 1995

Cities and counties currently attempting to finance public infrastructure must buy the municipal revenue bonds necessary to do so through securities firms. But Congress could change that this year.

Legislation to allow banks and securities firms the right to engage in each others’ businesses has been introduced in Congress and is backed by the Clinton Administration. Currently, banks cannot sell or underwrite many types of securities, including revenue bonds, because of the Glass-Steagall Act, which was written in 1933 against the backdrop of the Depression to safeguard the financial system.

“National banks have long had the authority to underwrite and deal directly in general obligation (GO) municipal bonds, [and we support] similar authority to underwrite and deal in municipal revenue bonds,” says Secretary of the Treasury Robert Rubin.

Since 1987, the Federal Reserve Board has allowed some banks – in the name of competitiveness – to sell and underwrite GO bonds, which are backed by the full faith and credit of the municipality. Revenue bonds, on the other hand, are supported by a project’s revenue stream.

Big banks have long wanted unimpaired access to the securities business, but securities firms have, naturally, balked at the idea. However, they are warming to it because the legislation would extend their access into commercial banking.

Despite the hoopla, there is still the question of safety and soundness. Opponents of reform point to the 233-year-old British banking house, Barings, which was brought down by a 28-year-old futures trader in Singapore, arguing that banks have not yet mastered their own craft enough to take on one as risky as securities underwriting.

But Frank Shafroth, director of federal relations for the National League of Cities in Washington, D.C., says the convergence of commercial and investment banking is inevitable, and delaying the process through artificial barriers makes the U. S. financial system less efficient and more costly. Both commercial and investment banks have proved they have the expertise to expand, he says. The legislation would also benefit local governments who would find it less expensive to finance public projects, he notes.

“More competition means cheaper prices, and cities wouldn’t have to charge as much to finance a public facility,” Shafroth says.

Both the administration and congressional leaders say that preserving safety would remain a top priority. Denying bank securities subsidiaries federal deposit insurance protection could provide one safeguard, Rubin says. He insists a bill can pass by year’s end, but that is probably wishful thinking. The revenue bond provision is just one – and probably the most innocuous – aspect of the measure.

Potential obstacles to the legislation abound. They include:

* language in the Senate bill that would allow any enterprise wanting to engage in any aspect of financial services the freedom to do so. That will draw the wrath of insurance agents, who do not want banks to sell insurance, and the insurance companies, which do not want banks to underwrite policies;

* opposition of regional banks that argue that repealing Glass-Steagall would lead to a consolidation of financial power, hurt borrowers and communities and put some of them out of business; and

* the expectation that consumer groups will try to convince Congress to amend the bill to force banks to lend more to minorities and depressed areas in exchange for expanded powers. Banks argue that such rules are too burdensome.

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