Venturing into Other Realms

As heavily regulated custodians of other people's money, banks are often blocked by authorities or sued by irate competitors when they try to venture into allied financial fields. Lately, bankers have found a legal loophole that --so far -- lets them move into new enterprises. Substantial controversy has grown out of the bankers' rush to take advantage of the situation.

The loophole lies in the 1956 Bank Holding Company Act, which prohibits corporations controlling more than 25% of two or more banks from engaging in anything but banking. The law does not cover companies owning only one bank. Today's trend, therefore, is for a commercial bank to reorganize itself as a "one-bank holding company," with the bank becoming a subsidiary. Bank stockholders simply swap their shares for those of the new parent firm.

Within the past year and a half, 48 banks with a combined $69.6 billion in deposits have proposed or actually formed one-bank holding companies in 21 states. Among the 48 are many of the nation's largest banks: San Fran cisco's Bank of America, Crocker-Citizens and Wells Fargo, Pittsburgh's National Bank, Philadelphia's First Penn sylvania Banking and Trust Co. and Winston-Salem's Wachovia Bank and Trust Co. A few days ago, Manhattan's Chemical Bank New York Trust Co. joined the group.

A Can of Worms. Through their non-bank subsidiaries, the holding companies are at least theoretically free to spread far afield -- into retailing, manufacturing, transportation or whatever else looks profitable. That possibility plainly wor ries the Federal Reserve Board. Says Chairman William McChesney Martin: "This is a real can of worms. It can affect the whole capitalistic system in the U.S. The line between banking and commerce should not be erased."

Most bankers disavow voracious intentions. They are, after all, sensitive to the popular concern that banks, with their vast resources, could grab too much control over the economy if permitted to do so. "We don't want to go into the steel business," says Chairman George S. Moore of Manhattan's First National City Bank, which recently won approval from Comptroller of the Currency William B. Camp to turn itself into a one-bank holding company.

A defender of such moves despite the Reserve Board's qualms, Camp argues that banks should be free to per form "any financial function that does not impair their solvency or liquidity." Fitting their plans to that prescription, bankers insist that because of their customers' changing needs they should have the power to offer more services related to banking. They envision affiliates for such activities as travel services, mutual funds, insurance, equipment leasing, bookkeeping and billing for other firms, and land development.

Avoiding the Roadblocks. Commercial banks have already spread into some of these and other fields, notably including credit cards. While national banks have almost always been able to win Camp's required approval, state-chartered banks have encountered much more difficulty in gaining consent from state supervisors and the Federal Reserve. Congress has yet to define, and regulatory authorities have long disagreed over, what the proper scope of banking should be. "The more we attempt to innovate, the more we are harassed," complained J. Howard Laeri, outgoing president of The American Bankers Association.

Lawsuits by financial competitors have brought federal court rulings denying some national banks the right to sell insurance or to underwrite state and local revenue bonds. Travel services and computer operations performed for other companies are currently under attack. Says Laeri: "Telling bankers that they cannot provide data-processing services is like telling lawyers they cannot enter politics, or airlines that they cannot own food-preparation services."

When banks venture into other realms of finance through one-bank holding company subsidiaries, they can avoid both judicial and regulatory roadblocks. Congress left that curious loophole in the 1956 law deliberately. At that time, few banks were organized as holding companies. More important, legislators saw no justification for placing multifaceted industrial concerns that happen to own a bank under the control of banking supervisors. Today, some 600 of the nation's 13,719 commercial banks are owned by such companies, including Montgomery Ward, Macy's, Goodyear Tire & Rubber, World Airways and Gulf & Western Industries.

Only Old Fogies. Many of those ties are long established and have provoked very little complaint up to now. But last month Texas Democrat Wright Patman, chairman of the House Banking and Currency Committee, called the growth of one-bank holding companies "a dangerous threat to the domestic economy." Patman, of course, is a longtime critic of commercial banks. But in this case he has respectable support from both Bill Martin and James L. Robertson, vice chairman of the Federal Reserve. Robertson argues that such laxity as the one-bank loophole "threatens to take us back into the kind of situation that only students of history and a few old fogies remember--unrestrained expansion followed by collapse and a depression."

Robertson's fears may be a bit overdrawn. For one thing, banks since the '30s have been forbidden to underwrite common stocks, a latitude that earlier had led many of them into trouble. Nonetheless, the Reserve Board is expected to recommend legislation next year to bring one-bank holding companies under stricter control. Though bankers hope to thwart such restriction, partly by expanding cautiously, the issue seems certain to generate a bruising battle both in and out of Congress. The outcome will greatly affect the future scope--and profitability--of U.S. banking.

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