BACK DEREG BILL, STUDY TELLS SMALL BANKS: BOOST THE BOTTOM LINE, BUY AN ADVISER SHOP

Small banks, holdouts in the push for legislation to tear down Depression-era barriers restricting insurers, banks and brokerages from getting into each other’s businesses, should throw their support behind the bill, a new study concludes.

The regulatory impediments, which have eroded in recent years as large banks win exceptions to move into stock underwriting, now are serving mainly to keep community banks out of the lucrative investment industry, particularly the financial planning business.

The Independent Bankers Association of America, which represents community banks, has opposed the bills now pending in Congress over numerous issues, although it supports the concept of removing those regulatory barriers.

The study, issued last week, was done by the Financial Services Institute of St. John’s University in New York. Merrill Lynch & Co., an enthusiastic supporter of the federal legislation, commissioned the project, authored by institute Director Donald Pitti and Francis Lees, a finance professor at St. John’s. Mr. Pitti also is a consultant to InvestmentNews.

“We see it this way,” Mr. Lees says. “In the past, there has always been a falling out between the large and the small. Here, we see the large money-center banks and community banks having a commonality of interest.”

In particular, “We believe there is a niche opportunity for community banks in financial planning, one of the fastest growing parts of the financial services industry,” the authors write.

do the arithmetic

Independent adviser shops are, or will be, looking for ways to realize the value of their businesses, and community banks would be logical buyers. Advisers then could boost their growth through access to the bank’s capital, and the bank would have a steady source of fee income.

“Percentage-wise, (their earnings) could be catapulted,” Mr. Lees argues. “You take a $100 million to $200 million bank that could affiliate with a money-management firm with $100 million under management. It may add 30% to (the bank’s) earnings.”

Nearly 80% of the more than 9,000 U.S. banks have assets of less than $100 million, and many of them offer no investment services. Indeed, even among banks with below $1 billion, less than 40% offer any investment services. By contrast, 71% of banks with more than $1 billion in assets have an investment operation of some kind, according to Boston consultant Cerulli Associates Inc.

Unambiguously dismantling the regulatory walls between the insurance, banking and investment industries — something Congress has tried and failed to do for a decade — would prod more small banks to get into the fray, the study says. As it stands, many of those banks shy away from it out of fear of regulators.

“The lack of clarity is one of the biggest problems for the smaller community banks,” Mr. Lees says. “They might not have the ability to have a New York lawyer give them a report on what they can and can’t do.”

In recent years, as Congress has dithered, federal agencies increasingly have exempted larger banks from restrictions in the 1933 Glass-Steagall Act, allowing them to own investment banking affiliates so long as they account for no more than 25% of the parent’s revenues.

the insurance question

Smaller banks worried about being swallowed by larger banks could fend them off by improving their bottom lines — and mix of revenues — by launching investment businesses, the study argues.

“We certainly support expanded opportunities for community banks,” responds Ron Ence, legislative affairs director for the Independent Bankers Association. “However, we believe this bill would severely hamper the ability of community banks to sell insurance.”

Of particular concern are provisions Mr. Ence says would place banks under the authority of state insurance regulators and would require banks to enter the insurance underwriting field strictly by acquiring existing insurers.

Small banks don’t object to the concept of allowing banks, insurers and brokerages to compete directly, though their opponents often paint their views that way, Mr. Ence says. “The least controversial parts of the bill repeal Glass-Steagall.”