Though large-scale effects are ultimately unknown, the repeal of Glass-Steagall has already indirectly trickled into liquidity - marked by the Gramm-Leach-Bliley Act, a recent change in financial legislation.

Among many other regulatory changes, the bill allows small business, small farm and small agribusiness loans to be used by community financial institutions as collateral against advances from the Federal Home Loan Bank System.

"That's a significant change from what the legislation used to require," said Gary Sirmon, president and chief executive officer of First Washington Bancorp. "And basically, the Federal Home Loan Banks were really supporting residential mortgage lending, so the collateral that we could use to borrow funds from the FHL Banks was restricted to residential mortgage related collateral.

"Now they've opened that up to include small business loans and agribusiness loans, which really provides a lot of funding flexibility for small community banks, much more than it had in the past," said Sirmon.

In response, First Washington Bancorp decided to postpone a consolidation of two of its subsidiaries, Towne Bank and Inland Empire Bank, to reap the benefits of the new act. The Gramm-Leach-Bliley legislation states that only banks with less than $500 million in assets (CFI's) qualify for such advances.

"It could create a little bit more of a marketable situation for those types of loans," said Sirmon.

Shattering The Glass

Though the ability to securitize assets has not been directly impacted by the evolving legislation, what it has and will do is create new affiliations among securities firms, insurance companies, and depository institutions.

"What this is probably going to do is eventually make depository institutions restructure their operations in a manner that may actually facilitate the conversion of loan instruments into securities more seamlessly than what we've seen before, said Joseph Lynyak of Buckalter, Nemer, Fields & Younger, a law firm that recently issued an analysis of Gramm-Leach-Bliley.

Lynyak said that the effects down the line will be further reaching than people had originally considered.

"A lot people are saying that a lot of what has occurred is not going to affect a majority of institutions, because the Glass-Steagall act has become almost an irrelevancy," he said. "I think that's really missing the boat."

The evolving legislation, in combination with electronic commerce, is going to be pushing businesses toward the absolute need for a full service approach to banking, Lynyak said.

"As people offer a full service approach of products, out of a need to remain competitive, the need to get those products off their balance sheets and to remain liquid is going to increase," Lynyak said. Each of these products require particular expertise, he explained, and, from a safety and soundness point of view, it might be more prudent for originators to transfer risk and continue with core business.

"One of the things that I think you're going to see - and this is something which has been relatively slow to happen in the securitization market - is a drive to liquefy financial products that heretofore was done on a catch-is-catch-can basis. I guess what it comes down to is that we're probably going to see a whole new wave of creativity," he said.

"We're in a transitional period where the government is going to be issuing dozens and dozens of regulations to implement new powers," Lynyak said. "What I think you're going to see in the first half of this year is people rethinking their overall strategy."

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