The popularity of on-line auctions is spilling over into business-tobusiness purchasing with the launching of a consortium that is seeking a bank partner.

The selected bank would work with three companies that have formed an alliance to let businesses bid for office supplies over the Internet. The partners would benefit by doing business they might not be able to develop on their own.

The alliance is in talks with Bank of Montreal and its U.S. subsidiary, Harris Bank of Chicago, according to John Jensen, president of Analytics Inc., one of the consortium’s three constituents. It is seeking a bank to supply electronic funds settlement services and accounts-payable options, he said.

The alliance is talking to "a few other large U.S.-based banks," Jensen added.

The consortium’s purchasing system, E2E, is based on an on-line bidding network supplied by Interactive Buyers Network International of Ventura, Calif. Interactive Buyers’ Virtual Source Network, started in December, lets suppliers post bids on-line in response to buyers’ requests for quotes.

The other consortium members are Analytics of Madison, Conn., which is to analyze purchases and offer real-time reporting to clients, and PricewaterhouseCoopers, which is to supply technology support and integration of back-office accounting systems. The consortium plans to open a Web site in the next few weeks, E2Ebiz.com.

Lawmakers, still incensed by the blows financial markets absorbed from last fall’s near-failure of Long Term Capital Management, are warning that the current oversight system by the Federal Reserve Board may not go far enough to protect investors. Now they are hinting at direct regulation.

Sources said a forthcoming report on derivatives and hedge funds from the President’s Working Group on Financial Derivatives, plus the push toward financial modernization legislation, could encourage lawmakers to attach provisions requiring better supervision by the agencies in the form of a directive, or higher capital levels for banks who engage in hedge fund activities.

"The legislators don’t want blood on their hands," said a banking attorney. She said that House Banking Committee Chairman Jim Leach, R-Iowa, had long used hedge funds as a "soapbox," but now "had some real events to back his position."

The task force, headed by Treasury Secretary Robert Rubin, is expected to introduce its hedge fund report in six weeks, with a report on derivatives to follow this summer.

At a hearing last week of the House Financial Institutions Subcommittee, Leach admonished Federal Reserve governor Lawrence H. Meyer for not having a "cutoff" that would have brought regulators on top of Long Term Capital Management. Leach said the fund was dangerously over-leveraged by a ratio of 30-1.

He said that stress testing was not enough, hinting at restrictions on how much a fund can have leveraged in relation to its capital. "Things change so rapidly," he said. "I am still left with the feeling that there are (hedge fund managers) who are willing to take great risks for short-term profit."

Meyer countered, saying that "leverage is not the same as risk," and that additional disclosures would only give a "false sense of security," but Leach pressed the regulators for more concrete goals for dealing with overleveraged funds.

William J. MacDonough, president of the Federal Reserve Bank of New York, agreed, saying that LTCM got too big and too highly leveraged. He vowed stronger vigilance in the long term. "A new group (of executives) can make the same mistakes, so regulators need to have a longer memory," he said.

The Joint Forum on Financial Conglomerates, an international group of senior bank, insurance and securities supervisors, released final documents Feb. 18 on the supervision of large financial groups. The documents were criticized last week by a group of large international institutions.

The guidance addresses some of the issues faced by supervisors of large groups with mixed activities, including banking, insurance and securities.

The release was called unfortunate by an official of the Institute of International Finance, a group that represents most of the largest financial institutions worldwide.

"It is highly disappointing that the Joint Forum chose to not make significant changes to the techniques used for assessing capital adequacy," said Barbara C. Matthews, the IIF’s banking advisor and regulatory counsel. Specifically, the forum does not discuss risk-based approaches, she said. Furthermore, on controlling intra-group risk, the issues would be best addressed by controlling it through standards on affiliate transactions and limits on intra-groups concentration credit, she said.

While documents released by affiliates of the Switzerland-based Bank for International Settlement are usually used as reference by financial regulators, this one may become obsolete shortly, observers noted.

If a proposal announced two weeks ago and supported by the Group of 7 is adopted, a Financial Stability Forum could be created soon that would supersede the BIS joint forum. Furthermore, since the International Monetary Fund would be part of the new forum, it is likely that existing BIS guidance would be revisited, sources said.

Smaller banks may soon be able to offer customers a financial service provided only by large banks until now thanks to a plan by an upstate New York bank.

Canandaigua National Corp. plans to offer its legal and regulatory expertise in the mutal fund market to other banks at a reduced cost either by outsourcing its investment services to small banks or by helping them start up their own mutual fund family.

"It can cost a bank up to $70,000 to begin offering mutual funds," Robert Swartout, vice president and investment officer at the $500-million-asset bank, told Financial Modernization Report last week. "But through working with us, other banks could save a bundle of money and not have to reinvent the wheel by spending $200 an hour in lawyers’ fees."

Sharing resources will help banks profit from the mutual fund business, said Swartout, adding Canandaigua plans to begin offering its legal and regulatory expertise in three-to-six months.

He said keeping up with the regulatory burden of a fund family can be "a grind" for small banks. "But we think we might be able to deliver our system of dealing with the Blue Sky Laws (regarding full and proper disclosure by securities sellers) and other regulatory matters relatively inexpensively."

Swartout said a pool of community banks have already expressed interest in Canandaigua’s program. He said once the program is up and running Canandaigua will add staff to handle the legal and regulatory work for its small bank clients.