Commercial banks are powerful and possess "clout"; as an issuer develops dependency on a bank to meet short-term financial needs the line of least resistance is to succumb to requests of the bank for underwriting relationships - and even to support of revenue bond underwriting. Many state and local government officials find that, under certain market conditions, they have no alternative but to include their commercial bank, with whom they have short-term loans, as managing underwriters of their permanent bond financings.

Existing Bank Participation in Securities Markets is Not Needed Commercial banks are already in the securities business underwriting general obligation bonds and certain revenue bonds and government obligations. This limited commercial bank participation in the securities business is really an historic anomaly. It was an exception to the blanket prohibition from investment banking activity a squiggle in the Glass-Steagall

line

because the securities industry in 1933 was just beginning the separate and independent life ordained by the legislation and there was concern for the market for general obligation and government bonds. Piecemeal expansions of the exception have occurred from time to time since. If the line is to be redrawn today, no such exception is necessary because we now have a mature securities industry capable of serving these markets efficiently. And, as stated, the existing competition of commercial banks

with their capital, tax and captive market and

is already inherently unfair. The elimination

of those special advantages in our existing attempts to compete with banks, is, we believe, essential to insure a fair and efficient system of financial markets, if they are to continue to be in the securities business to any extent.

Regional and Smaller Securities Firms Lose

But commercial banks are not satisfied with their current inroads and special advantages. They always have evidenced a relentless desire to move further and further into our business with their special advantages intact. Their ambitions do not end with revenue bond underwriting. While today it is revenue bonds and mutual funds, tomorrow they want corporate debt securities and, ultimately, equities. We are sure you are aware, Mr. Chairman, of H.R.4040, which spells out those desires. If those cravings are satisfied, without fundamental alteration of the banks' statutorily-conferred advantages, the alternative capital formation opportunities in the United States as we know them today will cease to exist.

As the arena of unfair competition expands, regional and small investment bankers will be particularly threatened and significant numbers will be forced to merge or go out of business. Local jobs and revenues will be inevitably lost and power shifted to the major financial center banks. A joint study of the SEC and the Small Business Administration just completed supports this conclusion.

As the SEC/SBA study forecasts, the

principal losers in the securities business will be the small and regional broker-dealers who are important not only for the

smaller municipalities in many parts of this country but also for the capital raising needs of businesses, particularly small

businesses, (e.g., for high technology and venture capital) throughout America.

Only Big Banks To Benefit

Who will benefit from the proposed changes set forth in Title III? The Dealer Bank Association, composed of 160 or so of the nation's most powerful commercial banks out of 14,000 want this legislation. They have fought for it year in and year out. They and they alone If you

will really benefit.

scrutinize the present industry activity of these banks, it will be clear that the largest dozen or so money center banks in this country will be the principal beneficiaries of Title III.

Some may believe municipal issuers will benefit and it is understandable that many issuers support the proposal. Our response is to call to their attention and to the Committee the testimony of former Governor C. Canby Balderston of the Federal Reserve Board testifying in the House in 1965:

"I can appreciate the feeling of some public finance
officers about this bill [authorizing banks to
underwrite revenue bonds]. From their point of view,
enactment of such a bill might yield some benefit; if
not, nothing would be lost. To them, even a relatively
insignificant saving of interest cost, if one
materialized, would be welcome. They naturally feel
that the passage of such a law might yield some benefits
to them and, in any event, would do them no harm.

"But in evaluating the proposal, this committee and the Congress must of course take a broader view, and balance the risk of conflicts of interest against the possible

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gains from lower borrowing costs for public bodies. If
the participation of commercial banks in securities
underwriting posed a substantial threat to the effective
performance of their banking functions and yet offered
substantial benefits in the financing of State and
municipalities, then your committee would face a real
challenge in balancing the relative importance of the
two factors to the general public. But in our judgment,
no such problem is presented here. The danger of
conflicts of interest is real and substantial, whereas
the promise of cost benefits in public financing is
remote and insubstantial." Hearings on H.R. 7539,
Committee on Banking and Currency, 89th Congress, First
Session." (Emphasis supplied.)

Freedom of Choice Will Be Eliminated in U.S. Financial Markets The present financial system, aided and abetted in no small part by the Glass-Steagall Act, has encouraged alternative credit and investment opportunities to flourish on a scale unparalleled in our nation's history. This diversity is fully in keeping with the American spirit and in the best interest of our citizens. What to one person may be "one-stop banking," to another may be "only one place to go," or, even, "no place to go."

America will not be better off with a financial marketplace dominated by large banks exercising much greater concentrations of power and control over economic resources as is the case now in Europe. Make no mistake, Title III of S.1720 clearly takes a significant step in that directon. It will result in a substantial increase in big bank power within the financial marketplace. A gaping hole will be opened in the Glass-Steagall wall for the big commercial banks to roll through with all of their unique weapons in place. It will mean fewer securities firms and big bank domination of municipal bond underwriting. To quote an October 19, 1979 SEC report:

"While it cannot be predicted how many, if any, firms would not remain in the securities industry due to expanded bank MRB [municipal revenue bond] underwriting, the potential exit of securities firms could lessen any competitive gains from bank entry. Moreover, because of the importance of the smaller firms in underwriting smaller issues, the loss of these firms could have an impact on the ability of small municipalities to meet their financing needs. Finally, any adverse impact on smaller, regional broker-dealers may have serious implications for the corporate business formation process, particularly for small businesses." (Bank Participation in Municipal Revenue Bond Underwriting: Impact on Securities Industry Revenues)

The Bank's Proposal is A One-Way Street

Mr. Chairman, we know you well recognize the unique power of the commercial banks. The banks' proposal as incorporated into H.R. 2828, H.R. 3000, H.R. 4040 and S. 1424, as well as Title III of your bill S.1720, constitutes a one-way invasion of our industry by the banks without their surrendering any of their special bank advantages. These unique advantages have been pointed out time and time agan, but the banks have chosen not to change their proposed legislation in any way to respond to these concerns. They must, we assume, wish to keep the benefits of these advantages as they move beyond the field of commercial banking. And they do not want any of those special advantages to be conferred upon the securities industry.

In your May hearings you asked Mr. Gunderson, the president of the ABA, if securities firms should have the right to take deposits. He did not agree. At that time you stated your interest in solving the question of equity so that perhaps one