Speculation by banks questioned

April 21, 1994|By New York Times News Service

WASHINGTON -- In a sharp policy shift, the Clinton administration's top bank regulator expressed alarm yesterday that the nation's biggest commercial banks were taking too many risks in trading stocks, bonds, foreign currencies and other financial instruments. He said new regulatory limits might be needed.

The official, Comptroller of the Currency Eugene A. Ludwig, criticized two related but distinct approaches banks have taken to expand their securities trading as their traditional corporate lending operations have withered.

One approach involves increasingly speculative trading operations; the other involves derivatives, which are complicated contracts that allow traders to bet on the direction of future price changes in stocks, bonds, currencies and other financial instruments.

Banks have bought and sold bonds and currencies for years to limit their losses if interest rates or exchange rates suddenly move in an unexpected direction, or to help customers find scarce bonds and currencies.

But in recent years they have used more complicated financial instruments, such as derivatives, for these purposes and have increasingly sought profits from trades unrelated to reducing risks or serving customers.

Mr. Ludwig, who oversees more than 3,000 federally chartered banks -- three-fifths of the banking industry -- expressed his worries yesterday in a speech to the Exchequer Club, a group of economic policy makers, financial lobbyists and wealthy investors.

Until now, administration and Federal Reserve officials have tended to play down congressional concerns about bank trading practices and derivatives. It was unclear whether Mr. Ludwig was simply responding to congressional pressures or actually intended to take quick action on banks. He declined to elaborate on his speech.

Douglas E. Harris, a senior policy adviser to Mr. Ludwig, said that the comptroller's office had become more worried about banks' trading risks after reviewing information the agency gathered in preparation for a House Banking Committee hearing last week.

Edward L. Yingling, the chief lobbyist for the American Bankers Association, said the industry trade group would oppose any move by the comptroller's office or by Congress that would impose tougher limits on commercial banks than on insurance companies, securities firms and other financial services businesses that engage in securities trading.

Special limits on commercial banks would put them at a competitive disadvantage, he said.

He said in his speech that limits might be needed on the size of bank trading desks. He compared these trading desks to hedge funds, which are investment partnerships, usually of fewer than 100 wealthy investors, that borrow heavily to take highly speculative positions in securities and commodities.

Banks accounted for $12 trillion of the $14 trillion market for derivatives in the United States, Mr. Ludwig said.

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