Magazine article American Banker

New York Fed Quizzes Citicorp on Securities: Application Prompts Queries; Response Date Was Friday

Magazine article American Banker

New York Fed Quizzes Citicorp on Securities: Application Prompts Queries; Response Date Was Friday

Article excerpt

NEW YORK -- Citicorp faced a deadline Friday to respond to a series of questions from the Federal Reserve Bank of New York on the company's proposal to engage in a wide variety of securities activities, including underwriting of corporate debt issues and municipal revenue bonds, through a nonbank subsidiary.

A source at the New York Fed said late Friday that the agency had not yet received Citicorp's response. The New York Fed gave Citicorp eight business days from the date of the request, which was Dec. 21, to reply. The application can be returned if Citicorp does not respond in time.

A spokesman for the New York Fed said neither the agency's questions nor Citicorp's original application, which was filed Dec. 7, were available to the public. However, the American Banker has obtained copies of both, and each is stamped "reviewed fro public inspection." Another New York Fed spokesman said he could not explain the discrepancy. The copies do not include confidential information that was deemed proprietary to Citicorp.

In the application, Citicorp requested permission to engage directly or indirectly, through its Citicorp Securities Inc. subsidiary, in underwriting and dealing in municipal revenue bonds, including industrial development bonds; corporate debt securities, including commercial paper; mortgagerelated securities, and other debt securities.

Since the Great Depression, banks have been prohibited from underwriting corporate securities and municipal revenue bonds. The New York bank holding company argues that under Section 20 of the Glass-Steagall Act, the federal statute that separates commercial from investment banking, the affiliate can engage in these activities as long as the unit is "engaged principally" in another line of business.

Citicorp has pledged that no more than 20% of Citicorp Securities' business will be in the underwriting activity. Citicorp Securities' principal business line is underwriting and dealing in government securities, a permissible activity under Section 4(c)(8) of the Bank Holding Company Act.

The Bankers Trust New York Corp., in a recent application to the Federal Reserve to house its commercial paper activities in a nonbank subsidiary, also is citing Section 20 of Glass-Steagall.

Somewhat surprising to some observers is that Citicorp, in its application, asks authority for itself or for Citicorp Securities. and in one of the New York Fed's questions, citicorp is asked to clarify whether it is seeking approval to engage in the proposed activities itself as well.

The questions involve four areas:

* A fuller description and clarification of the proposed activities.

* Additional information to address concerns with respect to the permissibilty of the activities under the Glass-Steagall Act.

* Additional information supporting the view that underwriting and dealing in the proposed securities are closely related to banking.

* Information supporting the view that the plan would produce public benefits that outweigh possible adverse effects.

A bank attorney noted that the public policy questions may prove pivotal.

For example, the New York Fed requested evidence showing that Citicorp Securities' proposed capital level would be adequate to support the activities and how that capital level compares to industry standards and to any capital requirements imposed by the Securities and Exchange Commission and the National Association of Securities Dealers.

In addition, the New York banking firm must describe how it intends to implement a commitment to have no interlocking employee relationships between Citicorp and Citicorp Securities and whether any prospective or present directors, officers, or employees of Citicorp Securities are now employed by Citicorp or other affiliates. Glass-Steagall Raised

Clarification is sought from Citicorp on how it plans to administer the separation between Citicorp Securities' investment banking activities and other related areas in affiliate banks and from credit-granting affiliates. …

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