The Federal Reserve Board's decision this week to let banking giant J. P. Morgan & Co. underwrite and deal in stocks is not expected to have a broad immediate impact on the nation's securities business, banking lawyers and executives said Friday.
Restrictions on banks' underwriting activity, combined with the financial pressures they face, will discourage all but a handful from getting into securities. Moreover, there is little money to be made now on Wall Street because it, like the banking industry, is suffering a sharp downturn.
Banking experts expect only three major U.S. banks--New York "money center" banks J. P. Morgan, Bankers Trust and Citicorp--to be active initially in securities, although some Canadian and Japanese banks could also enter the business. Among California banks, Los Angeles-based Security Pacific Corp. has expressed some interest but said Friday that it is not ready to apply for securities powers because of limits on what it could do in the field.
In addition, bankers suggest, the Fed will probably give its blessing only to the nation's strongest banks, an elite group that seems to be getting smaller, given the industry's growing woes.
"There are very few banks that are going to be permitted to get involved in the near future," said John H. Higgs, a banking lawyer in the New York office of Morgan, Lewis & Bockius.
One lawyer at a large bank, who requested anonymity, suggested that the Fed may not act on an application by Chase Manhattan because of its recent financial difficulties. On Friday, Chase said it expects a third-quarter loss of about $625 million, in part because of problems in its commercial real estate portfolio.
Still, the Fed's decision in the long run is a landmark blow to the 57-year-old Glass-Steagall Act, which put up a wall between the commercial and investment banking businesses. Bankers expect that they eventually will become active in the securities business to the point where corporate customers can choose their bank for investment banking instead of Wall Street.
Critics still worry about giving banks expanded powers such as underwriting, which involves the purchase of stock for resale to investors. The main concern is that bank deposits, and ultimately taxpayers, could be at risk should a bank's securities business flop. The Securities Industry Assn., the main trade group for Wall Street, questioned the Fed decision and whether the safeguards are adequate.
Regulators have insisted that banks set up subsidiaries that are separately capitalized and clearly apart from their banking activities. But in approving the J. P. Morgan application, the Fed sent a signal that, based on the way banks have handled underwriting of corporate debt, it is satisfied that adequate protections exist.
The main catch in the law that will discourage banks for now is limits on how much business they can do.
Underwriting stocks, corporate bonds, short-term corporate IOUs and securities backed by mortgage payments cannot account for more than 10% of the business of a bank's subsidiary involved in securities. The other 90% of a subsidiary's business must be in areas long allowed under Glass-Steagall, such as underwriting U.S. government securities and general-obligation municipal bonds. As a result, banks must be capable of doing a huge business in government securities and municipal bonds to do any meaningful business in stocks, corporate bonds and the other areas.
Security Pacific, considered the California bank most interested in securities, said Friday that it has not actively sought powers to underwrite and deal in stocks and bonds because the 10% cap is "burdensome." In a statement, the bank said it is hopeful that the Fed will liberalize the requirements by raising the cap to "several times the current 10% limit."
Some banking experts believe that the Fed may raise it to 40%, although that prospect is uncertain.
J. P. Morgan officials were quiet Friday, declining any public comment about their regulatory victory. Sources at the bank said it is planning to get into stock underwriting slowly and is trying to play down its activity so it won't create enormous expectations.
Congress ultimately will consider whether to repeal Glass-Steagall. Some suggest that lawmakers may be reluctant to sweep the Depression-era act aside because they are in no mood to deregulate further in the wake of a savings and loan debacle that is expected to cost taxpayers $500 billion over the next 30 years.