
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: TUESDAY, March 5, 1991                   TAG: 9103050086
SECTION: BUSINESS                    PAGE: A-3   EDITION: METRO 
SOURCE: The New York Times
DATELINE: WASHINGTON                                LENGTH: Medium

HIGH COURT TO REVIEW FED POLICY

At the urging of the Federal Reserve Board, the Supreme Court agreed Monday to review a lower court ruling that invalidated a policy the Fed has relied on for many years in regulating bank holding companies.

The 5th U.S. Circuit Court of Appeals had ruled last May that the Federal Reserve had no legal basis to require bank holding companies to transfer money to ailing subsidiary banks.

The policy, known as the "source of strength" doctrine, had been part of the Fed's regulatory arsenal for more than 30 years.

In general, the policy has required bank holding companies to guarantee that they will be available as a "source of strength" for both managerial and financial assistance to their subsidiary banks.

The current problems in the banking system have added urgency to the issue. The Fed has sought to use the policy to ensure that bank holding companies support their subsidiaries rather than let them become insolvent, thereby shifting the cost of their failure to the federal deposit insurance agency.

The challenge to the doctrine was brought by Mcorp Financial Inc., which was the second-largest banking company in Texas before it declared bankruptcy in 1989, soon after the U.S. comptroller of the currency declared 20 of its 25 subsidiary banks insolvent.

After the Dallas-based holding company declared bankruptcy, the Fed began a civil proceeding accusing Mcorp of failing to act as a source of strength to its remaining subsidiary banks. Mcorp challenged the proceeding as unauthorized.

The Mcorp subsidiaries' failure is expected to cost the federal insurance system about $2 billion.

Last May, the 5th Circuit, which is based in New Orleans and has jurisdiction over Texas, Louisiana and Mississippi, declared the source of strength doctrine invalid.

The appeals court said neither the Bank Holding Company Act of 1956 nor any other act of Congress gave the Federal Reserve the power to require bank holding companies to transfer money to subsidiaries. The court also noted that as a policy matter, requiring the holding company to make such transfers could "amount to a wasting of the holding company's assets in violation of its duty to shareholders."

The Federal Deposit Insurance Corp. has opposed the source-of-strength doctrine, arguing that the policy impairs the creditworthiness of bank holding companies and the attractiveness of their stock.

But the Federal Reserve, in a brief filed on its behalf by the Justice Department, told the Supreme Court that the 5th Circuit's decision had created a "regulatory vacuum" that "poses substantial risks for the stability of the nation's banking system."

The brief said bank holding companies control 92 percent of the assets of insured commercial banks.

by CNB