International Finance:

U.S. Commercial Banks' Securities Activities in London

NSIAD-88-238: Published: Sep 8, 1988. Publicly Released: Sep 8, 1988.

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Pursuant to a congressional request, GAO reviewed how U.S. commercial banks performed securities underwriting and trading activities in the London markets during 1986 and 1987 to assess how they might handle such activities within the United States if Congress revised or repealed the Glass-Steagall Act.

GAO found that: (1) most of the U.S. commercial bank subsidiaries recorded unprofitable or marginally profitable underwriting and trading activities during 1986 and 1987; (2) losses among a number of large money-center bank subsidiaries required capital infusions from their U.S. parents in order to continue operations and to bring capital up to United Kingdom (U.K.) minimum standards; and (3) the financial difficulties were attributable to both weaknesses in management and internal control and to turbulent market conditions from 1986 to the present. GAO found that the major management and internal control deficiencies were: (1) lack of a sufficient Eurodebt distribution network or customer base; (2) high overhead expenses and staff problems; (3) absence of trading limits or exceeding of established limits; (4) inadequate credit and market risk evaluation; (5) overburdened accounting and computer systems; and (6) nonexistent or inadequate written procedures for accounting, credit evaluation, and separation of duties. GAO also found that the factors which caused the difficult market environment were: (1) soaring trading volumes following deregulation of the U.K. market, which overwhelmed accounting and computer systems; (2) strong competition in both the U.K. and Euromarkets, which hurt profitability among both established firms and new entrants; (3) uncertainty about changes in U.K. regulation; (4) contraction in the Eurobond sector; (5) the virtual collapse of the perpetual floating rate note market; and (6) the stock market crash of October 1987, and the ensuing increase in investor caution. In addition, GAO found that the London experience showed that U.S. banks in the United States should: (1) strengthen internal controls; (2) ensure adequate capitalization for bank holding companies; and (3) undergo greater regulation of any additional securities powers.

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