Magazine article American Banker

Study Says Finance Firms Need to Be Regulated like Banks

Magazine article American Banker

Study Says Finance Firms Need to Be Regulated like Banks

Article excerpt

WASHINGTON - Banks are helping finance companies take away their lending business, a Washington think tank concluded in a study to be released today.

According to the Economic Policy Institute, banks "shoot themselves in the foot" by issuing guarantees on finance companies' commercial paper, which have risen dramatically in recent years.

As a result, "banks are in a classic Catch-22 position," said the study's authors, Jane D'Arista and Tom Schlesinger. "Their portfolios will become more risky if finance companies falter, but they are already more risky because of a thriving finance company sector."

Ms. D'Arista is an instructor at Boston University, and Mr. Schlesinger is director of the Southern Finance Project, a grass-roots research group in Charlotte, N.C.

Guarantees Defended

Their study of banks' interrelationships with nonbank competitors created a stir weeks before its release. It sparked a letter to the editor in American Banker on Feb. 2 from Jeffrey Tassey, an official of the American Financial Services Association. He said the financial guarantees are not inimical to banks' missions, and can contribute to profits.

"Clearly one of our concerns has been that companies that are providing financial services are not similarly regulated," American Bankers Association spokeswoman Virginia Dean said on Monday.

The study found that by 1992, more than 90% - or $112 billion - of the commercial paper outstanding at the 15 biggest U.S. finance companies was backed by bank guarantees.

Modest Fee Income

Commercial paper constitutes the major funding source for finance companies like General Motors Acceptance Corp. …

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