Monday, July 6, 2009

underwriting of municipals by commercial banks

Another reason why commercial banks seem increasingly attached to municipal securities is that they can underwrite and deal in general obligation bonds of states and municipalities. The Banking Act of 1933 denied them the right to underwrite and deal in corporate securities or to operate subsidiaries that engage in this business. State and local government obligation, however, are exempt from this prohibition. The important money market banks, therefore, combine the operation of large investment portfolio of such securities with underwriting and dealing of the broadest sort. The role of under writer gives such banks the chance of securing new offering on a most advantages basis. Furthermore, the dealer role allows such a bank a greater liquidity for its holdings of municipal securities, because they can be sold off, if desired, more quickly and easily by bank than by holder who must resort to outside dealers.

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