Segment 1 Of 3     Next Hearing Segment(2)

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House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Banking and Financial Services,
Washington, DC.
  The subcommittee met, pursuant to call, at 10:40 a.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema [chairwoman of the subcommittee] presiding.

  Present: Chairwoman Roukema, Representatives Metcalf, Barr, Kelly, Paul, Ryun, Vento, LaFalce, Maloney, Watt, Roybal-Allard, Bentsen and Kilpatrick.

  Chairwoman ROUKEMA. The hearing will come to order.

  We certainly hope that more Members will be arriving shortly in the near term. I certainly thank all the Members of the subcommittee as well as our panelists for being so understanding in that we have had to reschedule the hearing today and delay the beginning of the hearing because of a meeting that I was involved in at the White House as a Member of a bipartisan group of cosponsors to campaign financing reform. The President had called the meeting of those cosponsors, and it was quite productive. But I appreciate your indulgence and your understanding.

  There are lots of things to be done, lots of issues on the agenda this year. But, White House or not, I certainly hope that this issue that we are here today to discuss will be at the top of everyone's agenda. But our work is cut out for us, and we are initiating that today.
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  As the Chairwoman of the subcommittee, I welcome my colleagues. I certainly welcome Congressman Vento, our Ranking Member here today, and hope that this will be the beginning of a long and very productive, I am sorry, not a long, a short and very productive series of procedures whereby we will be coming up with major landmark legislation.

  Today, we are initiating the hearings of the Banking Committee to address financial services modernization in general and the Depository Institution and Thrift Charter Conversion Act, H.R. 268, specifically. This is the first in a series of hearings where the issues confronting our Nation's financial institutions will be fully examined and analyzed.

  This is the second chapter, as I see it, of a long search for a legislative process to culminate with Congress passing landmark legislation. That is my stated intention, landmark reform legislation, which I hope will reconstruct financial institutions and replace the outdated Glass-Steagall Law of the 1930's.

  Glass-Steagall did its job in its day to protect safety and soundness, control economic concentration of power and, in a principled way, to protect the consumers and businesses and the taxpayers of this Nation. No, we do not want another savings and loan debacle. No, we don't want another Depression where the savings of the people were gambled away either by ignorant or unscrupulous financiers. But we must have a financial system that is able to compete in the modern world, and that is what I hope these initial hearings will be all about.

  As we proceed with these hearings, our common goal must be to provide for a defined and principled piece of legislation for enactment which will benefit the consumer by increasing competition in the financial sector service of the economy and preserving the safety and soundness of our financial system. All relevant issues will be explored; assumptions will be challenged; and all parties will be heard, big and complex as it is; but we will succeed by passing landmark legislation this year.
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  Technology and market forces have broken down the barriers between banking, securities and insurance. Our current statutory framework has remained stuck in the 1930's because of Congress' reluctance to act. This has led to an inability of our financial institutions to compete in a market that can only be defined as global.

  In the absence of Congressional action, Federal agencies and the industry have been forced to find loopholes and novel interpretations to allow financial institutions to adapt to an ever-changing marketplace. An all-too-real recent example is the Office of the Controller of the Currency when he authorized national bank subsidiaries to engage in activities that previously were prohibited. Furthermore, the Federal Reserve has proposed to eliminate the firewalls it applies to its Section 20 affiliates.

  Unfortunately, this has resulted in piecemeal regulatory reform that may not be in the best interests of the system as a whole. We haven't fully realized the potential here.

  As elected representatives of Congress, it is our duty to make the important policy decisions, giving statutory authority regarding the structure of these markets. It is not in the best interest of the system to continue to let the financial regulators make these decisions in a piecemeal and arbitrary fashion. For Congress not to act would be a serious abdication of our responsibility; and for those of us who serve on the Banking Committee, we are painfully aware of how controversial the issues surrounding the financial services industry can be, to say the least.

  Various sectors of the industry have differed in different and often conflicting views on how to go about this job.
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  Over 2 years ago, a coalition known as the Alliance for Financial Modernization was formed to build a common framework for financial modernization. Participants in the Alliance group are well known; and we will include in the record all of them, including the American Bankers Association Securities Group, America's Community Bankers, and so forth.

  I won't go through all of them. They will be included in the record. But they represent a wide spectrum of financial interests; and through a great deal of good-faith negotiation and compromise, the Alliance developed a comprehensive approach that addresses affiliation issues, Glass-Steagall reform, functional regulation, insurance and thrift charter conversion.

  While each of the members of the Alliance for Financial Modernization has participated in drafting the legislation, each does not necessarily endorse all of the provisions that are in the current product.

  But I believe, and therefore I have introduced this legislation because I believe it to be the best legislative vehicle to bring everybody to the table. Now that is stretching it, I understand; but this is the beginning of bringing everybody to the table.

  I have introduced this Alliance proposal, H.R. 268, for that reason and to force us to focus and re-examine the traditional approach to financial services reform.

  I won't go into all the details of the Alliance bill; but I personally would note there is one case, for example, that I support holding company regulation; but the Alliance bill, as an example, has forced me to consider how it should be modified and can be modified and approved so it is less cumbersome while still maintaining and not compromising the safety and soundness of our insured institutions.
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  Similarly, conventional wisdom suggests that mixing banking and commerce would be detrimental to the overall vitality of a system because of a possible conflict of interest and a potential concentration of economic power. I won't go into the full details of this at this point in time, but we all know in this room, or certainly should know and will know by the time these hearings are over, that this is an essential question that is controversial in various forms. But I believe that the Alliance's incremental approach to banking and commerce is worth further consideration as compared with other proposals that have an open door for introduction of commerce and banking.

  Clearly, it is time to reform the Glass-Steagall. The Alliance bill repeals Section 20 and incorporates a functional regulation which will ensure that all who participate are playing on the same level playing field. This is an important document, H.R. 268, because it includes many compromises between the various financial services industry. Clearly, to use the vernacular, it is a ''work in progress.'' They will require more detailed analysis and development.

  However, I believe that the proposal will definitely move the debate forward toward modernization and set the action for precise legislation and reform in this Congress; and it will reform the financial institutions in the interest of businesses, consumers and the taxpayers and, very importantly, bring us into the 21st Century, the Millennium, and beyond, and make us more competitive in the global financial marketplace.

  But, to use an overused analogy, that building that bridge, most of all, while we are building the bridge, we must build it on a sound foundation, a sound financial foundation, so we can get to the next century.
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  Now, I am not going to go into all the details, although I would ask unanimous consent that in my opening remarks we include an outline of the major portions of the legislation and the headings, and then we will continue through our hearing today to proceed to have these witnesses kick off this very important effort which I fully expect will lead to landmark reform legislation in the very near future.

  [The prepared statement of Hon. Marge Roukema can be found on page 176 in the appendix.]

  With that, I will turn to my colleague, the Ranking Member, Congressman Bruce F. Vento.

  Mr. VENTO. Thank you, Madam Chairwoman, for holding the first of a series of hearings on H.R. 268, the Depository Institutions Affiliation and Thrift Charter Conversion Act. I was pleased to join you last fall and again this year as a cosponsor of this important legislation.

  Although I do not support each and every provision and section of the bill, it was introduced as a marker of our intention to move forward this year in a bipartisan manner on legislation that we are hopeful will translate into meaningful financial services modernization. H.R. 268 is a product that resulted from a great deal of compromise between significant actors in the financial services industry who are referred to as a coalition, as the Alliance.

  Our current system of financial laws and policy are lagging behind actual marketplace conditions. We need to rewrite and, in essence, modernize the legal framework of our financial services system for the sake of the players, for the markets and consumers who, a priori, should be well served by strong and competitive U.S. financial industries.
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  In general, as we move forward with modernization legislation, we should look to do no harm. Rather, we should seek to improve the opportunity for everyone involved or actively engaged in the financial services equation, whether consumer or enterprise.

  My prepared statement of objective to do no harm means simply that we are restructuring. The restructuring of our financial services system must ensure continued safety and soundness in the banking financial systems, community access to a broad range of financial services, intact fundamental consumer protections and enhanced international competitiveness for U.S. institutions.

  Most importantly, modernization must better protect the U.S. taxpayer from exposures to losses from bank, stock or underwriting systems that are more complex and potentially more susceptible to slips, missteps or inappropriate actions that would translate into costs borne by the taxpayers.

  This is, of course, the moral hazard inherent with the deposit insurance funds. To do no harm is no small task, but it demands a positive answer in the work product of this subcommittee and committee.

  Of course, there are risks in any system. As we look to appropriately expand our powers and alter charters, we must be vigilant in our attention to those risks and in our crafting of structures and safeguards that will mitigate and neutralize such risks. We will look broadly today and in the future at regulatory structures, affiliates versus subsidiaries, firewalls, conflicts of interest issues, internal controls, regulatory powers under the existing laws by FIRREA and FDICIA, the most recent changes, and, of course, market forces and community and consumer services.
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  The Alliance bill we have before us is not completely supported by every organization in the Alliance, nor members with the organization, nor, as you have heard, by the sponsors in Congress. It does, however, demonstrate that groups can come to the table and work constructively toward together for modernization. I am hopeful that we will build upon this strong base a still broader coalition and act to modernize our laws in today's complex financial marketplace.

  Madam Chairwoman, as this broad legislation moves forward, I am able to envision a number of improvements as policy questions are asked and resolved. I have reservations about several aspects of the Alliance bill. I want to assure myself that tough firewalls are intact and that a proper focus regarding service and responsibility to consumers and communities remains as we modernize our laws.

  The overall approach of this measure, H.R. 268, reflects a compromise. It is a bill that has tried to bring some harmony to the debate for the purpose of focusing and shaping the policy for the future. It is a sound framework, a base, not necessarily the final product or policy.

  In view of that, Madam Chairwoman, the fact that we have significant work to do on this measure, much less other measures such as H.R. 10 and measures that are pending, still pending, introduction as we sit here on February 11th, I am interested in the reported procedures apparently reached on the Republican side to defer markup of financial services modernization legislation of the full committee following subcommittee hearings.

  I would just like your attention, Madam Chairwoman, because this deals with the reported agreement that you and Chairman Leach and other subcommittee Members made with regards to the procedure and to defer any markup in subcommittee; and I assume all relevant financial modernizations would be heard, including H.R. 10, in subcommittee. I must wonder aloud, though, if the consensus document will look very much like any of the measures that are being considered or will possibly be introduced in the near future.
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  Whatever the decision regarding markup vehicles, I am compelled to note that I offered an amendment last week that empowered our subcommittees to return to regular order simply because of financial modernization legislation. As an example, there is more than one pass by Members of this committee. Unfortunately, my amendment in the committee and to the committee rules failed; and the Majority has unilaterally agreed to a peculiar and unusual process. To address the hearing process separately on numerous modernization proposals, then to empower the Chairman to synthesize a consensus markup vehicle, is to deem the subcommittees less relevant.

  The consensus bill that is heard by no subcommittee and will not have the benefit of subcommittee markup jettisons regular order for no apparent reason. I must ask, does this prevent the chairperson from chairing, do our rules prevent the chairperson from chairing a subcommittee. Does that mean they are the chairperson of all subcommittees under this procedure?

  I am very concerned about this agreement; but, nonetheless, I understand and I hope that we can continue to work together to reach some bipartisan consensus. This isn't a partisan issue; but, obviously, I think that the regular procedure of this committee, if we are going to be in the best possible position to deal with the issues, we have thorough hearings on all aspects of it. There has to be a good understanding.

  Because I think when people and individual groups are not aware of what is in measures, there have not been hearings and debate within committee and subcommittee thoroughly, that puts us in a weaker position on the floor; and this committee has had big challenges in terms of bringing forth measures to the floor and holding them intact. So we need to be together as we leave this subcommittee.
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  The procedure that has been established begins to raise concerns with me whether or not that is going to be possible in that particular format. I hope that that is not the case, but I must at this time state my concern regarding that particular procedure.

  Thank you.

  [The prepared statement of Hon. Bruce F. Vento can be found on page 185 in the appendix.]

  Chairwoman ROUKEMA. I certainly hear your concerns. I am not sure that I am not sure why you raise them now, having been given the vote which established a modification of regular order which, in my opinion, gave me as a subcommittee chairwoman a little more power than under the previous Congress. It certainly, well, under the previous rules. This is not the place to go over that debate again. Let me just assure you that I, as a subcommittee chairwoman, and all of our Members will have definite input as to what that consensus document is.

  The complexity of three pieces of legislation dealing with very difficult and, by the way, the overlapping jurisdiction with another subcommittee does make this a little more complex than we might have thought at first blush. So this is a compromise. It does not preclude myself or any other member of the subcommittee not making the strongest argument in the development of the consensus document based on the hearings, by the way.

  As we go through this hearing process, it will permit us to reconsider the procedure that led us up to that consensus document. But again, excuse me. Excuse me. Let me finish my prepared statement.
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  Then, as we go through, there is nothing that precludes that there will not be a full and complete amendment process in the full committee, but we can reconsider this as we go through the process. But, again, I don't want to have the debate over the amendment that you proposed on the regular order. This is consistent with the rules as they were adopted.

  Mr. VENTO. I don't----

  Chairwoman ROUKEMA. I yield.

  Mr. VENTO. I think Congressman LaFalce wants to suggest something.

  I don't intend to go through a process debate with our witnesses waiting today to testify. I just want to say that I think, while certainly it is consistent with the rules to cede to the Chairman the power to put together a consensus document, I disagree. I think we are better served by the subcommittee.

  The rule doesn't require this particular procedure. This was something that was agreed to between the Chairman and the Republican subcommittee chairman.

  I would ask to put the Chairman's release as of February 6th in the record at this particular point to underline my concern and the importance of that. I would look forward to talking and working with you on this.

  Chairwoman ROUKEMA. So moved for inclusion in the record.
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  [The information referred to can be found on page 188 in the appendix.]

  Chairwoman ROUKEMA. Mr. LaFalce.

  Mr. LAFALCE. Yes, I would like to make a brief opening prepared statement, Madam Chairwoman.

  Chairwoman ROUKEMA. Excuse me, no. I think we will see if there is a Republican Member who has a prepared statement. I thought you were following up on the comments.

  Are there other opening prepared statements?

  Mr. Metcalf.

  Mr. METCALF. Thank you.

  I would like to commend the efforts of Madam Chairwoman and Chairman Leach to move forward on this issue and to congratulate them on their efforts.

  I mentioned before the need for financial modernization and my concern about safety and soundness. Specifically, we must establish a place for true competitiveness to occur. Concentrating too much authority in too few hands is of concern to me, and we have seen some problems in other areas of modernization in the last few years. The consumer does not always benefit and, in fact, is sometimes put at risk. I appreciate the Chairman's concern on this issue.
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  With that said, the climate for financial modernization seems more positive. I look forward to seeing this issue move forward in a positive way that takes into account the needs of the industry, the concerns of consumers and provides a legislative response to regulatory authority.

  I look forward to hearing witnesses and have the time for questioning. Thank you very much.

  Chairwoman ROUKEMA. Thank you.

  Congressman LaFalce.

  Mr. LAFALCE. Thank you very much, Madam Chairwoman. I appreciate your convening this hearing so early on the issue of financial modernization.

  This certainly is an issue that we should be able to work cooperatively on in a very bipartisan fashion. I believe that the bill that you and others have introduced takes important steps in the right direction.

  Chairman Leach also has a bill, and subcommittee Chairman Baker and I will be introducing a bill today that I believe adds some additional perspective to the debate. It is my fervent hope that the administration at the Treasury Department will take a leadership role and submit legislation soon for our consideration.

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  I hope that today's hearing will provide an opportunity to explore in some detail those bills already on the table, at least notably H.R. 268 and H.R. 10. I personally would ask every witness to feel free to comment at least on every bill that has been introduced so far, if not on others.

  I am very concerned about the press release of February 6th, 1997, the so-called procedural plan for consideration of this financial modernization legislation. There is no rule of the House which allows six Members of the committee, all of the Majority party, to determine unilaterally how the committee should or will conduct its business.

  In one meeting, the legislative jurisdiction of the Financial Institutions Subcommittee was taken away from it. It was stripped of its legislative jurisdiction on the most important issue it was to consider. Not one single Democrat was involved in either the deliberations or the decisionmaking on this. I personally find this quite offensive.

  The plan subverts normal subcommittee and committee processes. It renders subcommittee membership and participation largely meaningless. We will apparently be holding general hearings on broad issues when we also need to be deliberating on specific bills.

  No legislation will be considered at the subcommittee level. At the subcommittee level, we will not have the ability to offer amendments. We will not have that gestation period that is so necessary for thoughtful legislation, and we will not have the opportunity for the type of involvement that can only come through a subcommittee process.

  One of the charges in this last Congress was that certain individuals played things too close to the vest. The response at that time was it is the exigency of the moment, it is the timeliness of it, and so forth. Now on February 6th we are announcing a procedure, once again, on the issue of timeliness. It is difficult for me to understand, because, in all candor, understanding financial modernization legislation and, despite the good intent, I think it will probably become the final product of all the land some time toward the end of 1998 rather than the beginning of 1997.
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  Our subcommittee should be more than a forum for suggestions to be tossed into a suggestion box. I am fearful that the decision that has been made by the chairman and the subcommittee chairs makes our subcommittee simply a suggestion box.

  I thank the Chairwoman.

  [The prepared statement of Hon. John J. LaFalce can be found on page 181 in the appendix.]

  Chairwoman ROUKEMA. I would point out, again, you will have every opportunity for full amendment process at the full committee. We are not going to spend, I don't intend to spend more time debating this while our panelists are waiting to discuss the substantive issues before us.

  Dr. Paul, I believe was the next in attendance. We are going in order of arrival.

  Mr. Ryun, we welcome you as a new Member of the committee.

  Mr. RYUN. Thank you very much. It is a pleasure to be here. I am looking forward to the progress; and, according to your wishes, I would like to speed the process and give our panelists an opportunity to speak. We would like to see that process sped up.

  Chairwoman ROUKEMA. Thank you. I appreciate that.

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  I believe Congresswoman Kelly was the next to arrive.

  Mrs. KELLY OF NEW YORK. I would like permission to insert a prepared statement just in the record of the hearing in the interest of keeping this time short so we can hear from our witnesses.

  Chairwoman ROUKEMA. So moved. So moved.

  [The prepared statement of Hon. Sue W. Kelly can be found on page 180 in the appendix.]

  Chairwoman ROUKEMA. Congressman Barr.

  Mr. BARR. No prepared statement.

  Chairwoman ROUKEMA. All right. Yes, we should alternate. I apologize.

  Congresswoman Maloney.

  Mrs. MALONEY. Thank you. Thank you, Madam Chairwoman.

  I would like to begin by thanking Chairman Leach. In the opening weeks of this Congress, he publicly joined the distinguished Ranking Member, Mr. Gonzalez, and myself in opposing the Federal Reserve's ill-conceived proposal to extend the permissible hold on local bank checks from 2 to 3 days. That was a great bipartisan beginning for the work of this committee. When we work together, we can get things done.
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  But that is why I am deeply, deeply disappointed with the press release of yesterday declaring unilaterally that there will be no subcommittee markups on modernization, the most important issue before this subcommittee, and that decisions about the substance of this bill that will come before the full committee for markup may be made by a select few. Each member of this subcommittee, Democrat and Republican alike, is willing to work hard to make this process work; but, in return, the subcommittee deserves a real substantive say in the final product in the form of a markup.

  The press release of yesterday says that that will not happen. We will not have that say. That is disappointing, because I think it is more important than ever that any modernization bill be subjected to the fullest possible review. I had been on record from the beginning about my discomfort with mixing institutions, holding federally-insured funds with those that engage in potentially riskier activities.

  However, I also know without Congressional action the regulators are crafting an ad hoc structure that serves no one's optimum interests. We have a world where most non-commercial potential affiliations are already taking place, but without a rational regulatory model, a world without streamlined institutional models, so that affiliations that are currently happening produce level competition, the fullest possible customer benefits and maximum cost savings. A world without consumer protections tailored specifically to these new realities.

  The OCC's recently-revised opinion on its Part 5 rule is an important case-in-point. First, it is not clear if, or how far, banks will now be able to use an operating subsidiary to engage in new securities and insurance underwriting activities. There is no list of activities except the unseen list in the mind of the controller. The result is confusion and guesswork where there should be clarity and certainty.
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  Second, such an extension pushes the limits of a regulatory structure created at a time when no one envisioned a bank-operating subsidiary engaging in these activities. The result is regulators overseeing product lines with which they have limited or inadequate experience in that setting.

  Third, under these circumstances, banks might understandably favor the operating subsidiary model, but not because of any input Congress has given to the relative merits of the different institutional models, but only because the OCC has used its jurisdiction to make the operating subsidiary the most attractive option for the new activities expansion.

  This is not to say that the operating subsidiary is not a good place if there is going to be expansion into new activities, but that it is something for Congress to decide, not the OCC. Congress should make the limits clear, not murky. As long as regulators make the policy, our financial services industry will be subject to court battles and changing Administrations.

  The Alliance bill we looked at today at the very least makes an honest effort to confront these issues without penalizing firms that currently use existing models. For instance, in creating its new financial service holding company model, the bill enumerates specifically its list of activities deemed to be financial and sets up a well-defined committee process that includes representatives from the Treasury and all the involved industry regulators to evaluate new activities. A set list and a defined process is far preferable to our current method of having no list and competing regulators.

  Of course, we all know that the devil is in the details and functional regulation can mean one thing to one group and something entirely different to another and there are questions that need to be answered about cross-marketing, competing institutional models, consumer safeguards, commercial ownership and adequate firewalls. If a legislative proposal emerges that can change the irrational development affiliations, of affiliations taking place today into a more definable structure that addresses the points I raise, I certainly will be open to it.
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  I commend the Chairwoman and particularly the Ranking Member, Mr. Vento, the industry representatives here today for their hard work to meet this goal; and I thank all of you for coming.

  Chairwoman ROUKEMA. I thank you, and I apologize for not having gone back and forth in regular order here. But I believe Mr. Bentsen is in order of arrival the next to be recognized.

  Congressman Bentsen.

  Mr. BENTSEN. No prepared statement.

  Chairwoman ROUKEMA. Thank you.

  Ms. Kilpatrick.

  Ms. KILPATRICK. Good morning and thank you, Madam Chairwoman. I, too, like my freshman colleague, am sitting here with bated breath to hear the testimony.

  Chairwoman ROUKEMA. Yes, you are getting your initiation, Ms. Kilpatrick, into the ways of Congress. Thank you. We welcome you into the subcommittee.

  Ms. Roybal-Allard.

  Ms. ROYBAL-ALLARD. Thank you, Madam Chairwoman.
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  I would like to thank Chairwoman Roukema for calling these series of hearings on the important issue of financial modernization and specifically on H.R. 268.

  Over the last decade, the financial services industry has experienced tremendous changes. Although banking regulators have begun to address these changes, Congress lags behind because it has been unable to agree on how to change our laws to reflect the realities of the modern financial services industry. What is clear, however, is that, as we move toward modernization, Congress must be sure to balance the goal of increasing the efficiency and competitiveness of our financial services industry with the equally important goals of protecting consumers, such as the depositors and taxpayers, by ensuring the safety and soundness of Federal Deposit Insurance system and making sure that low-income and minority communities are able to share in the benefits of any reform proposal.

  In the 4 years that I have served on this committee, we have been trying to address the issue of financial modernization and reform of Glass-Steagall. It was my hope that these hearings would be a step toward accomplishing the goal in a bipartisan way.

  Unfortunately, I, too, am dismayed by Chairman Leach's announcement to bypass the subcommittee process and refer all bills on financial modernization directly to the full committee for markup. After last year's attempt to circumvent the committee's process resulted in failure, I would have hoped the Majority would have adhered closely to the committee process. I urge the committee Members to reconsider this strategy and allow us to work together to successfully produce much-needed financial modernization legislation.

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  Thank you, Madam Chairwoman.

  [The prepared statement of Hon. Lucille Roybal-Allard can be found on page 183 in the appendix.]

  Chairwoman ROUKEMA. I thank you.

  And Mr. Watt.

  Mr. WATT. I pass.

  Chairwoman ROUKEMA. I thank you.

  Now, panel, I think we are ready for you with one more point of business here on procedure. I would ask unanimous consent that the testimony of the witnesses be included in the record. This is procedural. Are there any objections? No objection.

  Mr. VENTO. I ask that all opening prepared statements in their entirety by the Members be made part of the record if they want to submit them later or if they didn't read them altogether.

  Chairwoman ROUKEMA. So moved.

  Mr. VENTO. Without objection, so ordered.

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  Chairwoman ROUKEMA. Thank you. Now we welcome all members of the panel. Thank you for being here today, and I will introduce you in the order in which you are seated.

  William T. McConnell is testifying here today. We welcome you, Mr. McConnell. You are here on behalf of the American Bankers Association; and you now, I understand, are President-elect of that national association. You also are Chairman and CEO of Park National Corporation, a holding company headquartered in Newark, Ohio, not New Jersey, Ohio. Welcome.

  Weller Meyer is here representing America's Community Bankers, and Mr. Meyer is also CEO of a Federal savings bank, Acacia, in Northern Virginia.

  Craig Kelly is here today as Senior Vice President of Banc One Corporation and is testifying on behalf of Consumer Bankers Association. I think many of us know that the Columbus, Ohio, banking organization is establishing itself with increasing presence in the United States, and so we welcome you here today.

  Dr. Alfred Pollard is the Senior Director for Legislative Affairs for the Bankers Roundtable, certainly a well-known group of the largest bank holding companies; and Dr. Pollard is well known in these areas and is also well known throughout the United States for his book on banking law in the United States. We will benefit from your academic, as well as practical, knowledge.

  Mr. Jeffrey Tassey, did I pronounce that correctly? Mr. Tassey is before us today for the America Financial Services Association, where Mr. Tassey is Vice President, or Senior Vice President for Government and Legal Affairs; and certainly we welcome our former colleague here.
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  Last, but certainly not least, Dr. Joseph Bracewell. We are particularly appreciative of Dr. Bracewell being here on behalf of the Independent Bankers Association. He is CEO of Century National Bank right here in the District of Columbia. But our particular appreciation because he has filled in at the last minute for Anthony Abbate, who is the CEO of First Interchange Bank in New Jersey; and Mr. Abbate is also one of my constituents. Mr. Abbate is down with the flu, as I understand it; so Dr. Bracewell is coming for him.

  Mr. BENTSEN. Madam Chairwoman, would you yield for just a second?

  Chairwoman ROUKEMA. I would be happy to yield.

  Mr. BENTSEN. Dr. Bracewell, though a resident of Washington, I think at one time was a resident of Texas, which I would say is a good exchange for New Jersey; and his father, I believe, was a long-time leader of the Bracewell & Patterson law firm in Houston, which also had a long bank practice as well.

  Chairwoman ROUKEMA. So Texans have some redeeming value. All right, fine. Thank you very much.

  Without further introduction then----

  Mr. VENTO. Let me make a parliamentary inquiry just for the purpose, I understand that all the witnesses today have gone through, jumped through, the regulatory hoops of the committee and filed under Rule 11, Clause 2(g), the disclosure requirement which I think probably will provide nothing useful to the Members of the committee. I think it is one more impediment to testifying around here.
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  I noticed that someone actually did receive some money from the Federal Government here in terms of grants and carrying out some responsibilities, but I did want to point that out that I hope that this form is what is used and it receives the same consideration. This, as I understand, is available for staff who want to look at this. If anyone wants to look at it in order to guide their consideration of the testimony today, I wouldn't want this moment to pass without this observation.

  Chairwoman ROUKEMA. I am glad for the observation, and I am glad there is no objection here to the questions raised. Although I will state that one of the witnesses and I believe it was because of the fact that there was a last-minute substitute for the witness, the IBAA did not submit their information, their disclosure form, until this morning. But it is the opinion of the Chairwoman, having gone over this through staff, that all witnesses have complied with the rules of the committee. Whether we, some of us may or may not think it is an added paper burden, I don't know, but it is the rules of the committee; and it is the opinion, my opinion, that all witnesses today, for the information of everyone on the subcommittee, have complied with the----

  Mr. VENTO. If the Chairwoman would yield.

  Chairwoman ROUKEMA. ----With the requirement.

  Mr. VENTO. The procedure is that the timeliness of this that great latitude will be given in terms of timeliness of documents being given today.

  Chairwoman ROUKEMA. There are some extenuating circumstances from time to time; and it will be my responsibility and yours, too, to determine with staff if the disclosure is in compliance with the intention of the rules; and, in my opinion, this has certainly been the case today.
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  Mr. VENTO. I intend to be very liberal----

  Chairwoman ROUKEMA. You liberal? We are almost an hour late now, an hour beyond our starting time.

  Yes, Mr. LaFalce.

  Mr. LAFALCE. Madam Chairwoman, I will not do this again in subcommittee; but since this is the first hearing, I just want to point out how many of us think that this rule for the disclosure of the contracts you may or may not have had with the Federal Government is offensive to the concept of freedom of speech. It is just a regulatory burden.

  The fact of the matter is that a procedure has been devised where we will not be provided the material in the ordinary course so it will, for the most part, collect dust. Some staffers may or may not look at it. I don't think any evaluation is going to be made about the credibility of the witnesses on the basis of it. This is a punitive measure brought about by the Majority in order to get at certain types of witnesses. It is offensive. I think most Republicans feel the same way but are constrained to go along with the wishes of the Speaker and their House leadership.

  Chairwoman ROUKEMA. I think we must get on with this hearing, but I just want everyone in the audience to know that this is in compliance with the Rules of the House, and it has been complied with, and the staff of the Minority was provided with this information under the Rules of the House as of last night. The information, both on the Majority and the Minority side, should be available to every individual Member who wants it.
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  But it was in your staff's, Minority staff's, possession as of last evening, with the exception of the one that was mentioned because of the change in the substitution of the witness. So I think, with that understanding, that everything is copacetic, as they used to say.

  We will begin with our hearing.

  Chairwoman ROUKEMA. Mr. McConnell and all panel members, I believe you know the rules. We will try to limit the prepared statements to 5 minutes; but I will be understanding, realizing that each you have important prepared statements to make on this extremely critical question.

  Mr. McConnell.


  Mr. MCCONNELL. Thank you, Madam Chairwoman. I am pleased to be here today to present the views of the American Bankers Association on modernizing the structure of our financial system. This is a critical issue for bankers and indeed for all financial service providers.

  I would like to thank you, Madam Chairwoman, for your continued leadership in this area and for introducing House Bill 268 as a vehicle for discussion. Your efforts over the past several years have been very important in keeping the process moving. Representative Vento has also been a leader in this area, and this bipartisan approach is very encouraging.
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  I would also like to thank Chairman Leach for his dedication and hard work last year in trying to build a consensus for modernization legislation. While the bill did not pass, the process toward reform was moved forward considerably.

  Until recently, there were deep divisions on some key issues among the many financial service participants. The result, understandably, was gridlock. In this Congress, the atmosphere is much more positive. For the first time, virtually all sectors of the financial services industry are in agreement on a general outline for financial reform. This is indeed a huge step forward. There will certainly be differences among us as we work through the details, some of which will be difficult to resolve, but we are confident that our remaining problems can be worked out.

  Revolutionary improvements in technology and escalating competition have fundamentally redefined financial services. At the same time, it is clear that these forces are in the process of overwhelming the out-of-date legal and regulatory structure. Financial modernization will take place. The only question is how it will do so.

  In such dynamic markets the ability to quickly and efficiently respond to changing customer needs is critical. Successful firms must be flexible, innovative and able to offer a competitive range of financial services. This means organizational flexibility is a key consideration. Tomorrow's customers will demand a range of financial products, combining banking, securities and insurance delivered in ways that may not even exist today. The more organizational flexibility a firm has, the more flexible and innovative it can be in meeting customers needs.

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  Therefore, our bank Members strongly support giving banks the option to undertake new activities in an operating subsidiary. This issue is critical to us. H.R. 268 would maintain current law and thus leave open the option of conducting new activities with the exception of securities underwriting in a bank operating subsidiary.

  At the beginning of this Congress, Chairman Leach introduced H.R. 10, which also incorporates the option of an operating subsidiary for many activities. This is a very important improvement and moves in the right direction. We urge the subcommittee and the full committee to fully incorporate the idea of the subsidiary, of an operating subsidiary option, in any final legislation.

  A second critical area is functional regulation. There is broad agreement on the concept of functional regulation. Drafting the actual language, especially in the area of insurance, will be difficult. We pledge to continue to work toward these problems.

  Another key question is holding company regulation. ABA does not have a specific position at this point, but I would like to make several comments on this issue.

  First, regulation at the holding company level should be minimized; and redundant regulation by the holding company regulator and the regulator of the individual subsidiary should be avoided.

  Second, H.R. 268 contains a holding company regulatory structure based on a risk assessment model currently used in the securities industry. We believe this model is worthy of active consideration, and other options or refinements to this model should also be considered.
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  Your letter of invitation raised another issue on which there is not a consensus the degree to which commercial firms should be allowed to affiliate with or even own banking institutions. The American Bankers Association wants to maintain flexibility to work with policymakers on this difficult issue, but let me give you our current thinking.

  Until the last Congress, we had never supported any significant intermingling of banking and commerce. However, in the last Congress, ABA amended its position to indicate receptivity to the idea of a basket approach. We have not yet defined the appropriate parameters of such a basket, but the general approach taken in H.R. 268 seems to us to make sense.

  In conclusion, Madam Chairwoman, we applaud you for your leadership; and we are ready to work with you, Mr. Vento, your subcommittee and indeed the full House Banking committee to resolve the remaining issues and to complete this historic effort to modernize our financial system.

  Thank you.

  Chairwoman ROUKEMA. Thank you very much. Appreciate that.

  [The prepared statement of Mr. William T. McConnell can be found on page 190 in the appendix.]

  Chairwoman ROUKEMA. Mr. Meyer.

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  Mr. MEYER. Madam Chairwoman, my name is Weller Meyer. I am President and CEO of Acacia Federal Savings Bank in Falls Church, Virginia.

  Today I am representing America's Community Bankers. ACB appreciates this opportunity to testify on financial and charter modernization. We believe that this Congress has a unique opportunity to enact progressive legislation.

  I would like to emphasize the importance of merging the FDIC's two deposit insurance funds, BIF and SAIF. It is a key ingredient in financial modernization. A merged fund would be stronger than either one alone and is the most efficacious way to insure deposits and protect taxpayers.

  Merging the funds has been and remains a top priority for ACB and its members. Merging the funds is imperative, regardless of actions that Congress might take on charter issues.

  ACB remains committed to working with Congress on financial and charter modernization, but we believe that modernization legislation must pass this test: Will it provide consumers and businesses with better financial services without needlessly disrupting current businesses? Modernization is not merely a technical exercise of combining separate statutes. Real people, customers, employees, stockholders and managers, as well as the communities where they live and work, stand to gain, or to lose, depending on your decisions.
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  For example, H.R. 268 and Chairman Leach's H.R. 10 would require savings associations to divest their real estate development activities. That means that an Illinois savings association, Financial Federal of Orland Park, would have to cease a business that renews middle-income housing in mature midwestern communities. That renewal has strengthened the tax base, assisted local law enforcement, revitalized the homebuilding sector and given new hope to those who aspire to own their own homes.

  We believe that forward-looking legislation could make these important contributions to the Nation's economy:

  A stronger banking sector will be better able to provide credit and other financial services.

  Consumers will gain convenience. My company, the Acacia Group, is developing the concept of full-service customer delivery by combining lending, insurance and investment services.

  Community banks' traditional role as financial advisors will be enhanced because they will be permitted to offer a full range of services.

  Both small and large businesses and their customers will benefit from increased competition. Financial services will be offered more efficiently.

  ACB believes that the savings association charter, especially with the changes passed at the end of the 104th Congress, is itself a modern charter. It should be a model from which to design a modern financial system. Savings institutions already enjoy broad affiliation authority being sought by others. Hundreds of other savings institutions use service corporation authority to offer retail insurance products and participate in real estate development.
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  ACB recently surveyed its members on the use of their real estate and other activities. Preliminary results show that over 32 percent of survey respondents engage in these activities. We would request that we be permitted to submit a summary of the results for the record when they are available.

  Reducing or eliminating these business opportunities would not constitute financial modernization. Instead, Congress should look to the proven benefits of the saving association charter as it develops its legislation.

  We believe the last Congress completed much of the groundwork toward financial and charter modernization. By rejecting an attempt to eliminate the unitary holding company power and voting to permit bank/insurance affiliations, this committee made substantial progress. The full House bolstered this by rejecting by 312—107 an attempt to strip the Comptroller of the Currency of his authority to expand national banks' business flexibility. Most importantly, Congress passed the BIF/SAIF legislation which stabilized the deposit insurance system.

  The separation of banking and commerce is a critical issue in the modernization debate. H.R. 268 permits only limited commercial affiliation with banks. ACB believes that this is an artificial barrier to competition.

  Those whose existing organizations don't qualify as financial services holding companies would be subject to very restrictive grandfather provisions. Is there any public policy purpose served by punishing these companies, their employees and ultimately their customers? Arguments calling for the separation of banking and commerce will not persuade these stakeholders that they should lose business options they now have. These businesses are operated in a safe and sound manner to the benefit of their customers and their communities.
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  Opponents of any linkage between banks and commercial firms make contradictory arguments. They contend that combined firms will come to dominate the economy and they claim that these conglomerates will fail. Both prepared statements can't be true. In this instance, neither is true.

  For those companies that have chosen to affiliate with savings institutions, the OTS has already established an effective regulatory system. The OTS closely supervises the savings institutions owned by diversified holding companies as well as any transactions between the savings institutions and their holding companies. This maintains a balance between necessary oversight and excessive bureaucratic control. ACB recommends that Congress look to the OTS's regulatory system as a model for regulating affiliations between banks and diverse companies.

  If Congress does decide to provide for some sort of ''umbrella'' holding company regulator for this or similar reasons, it will not need, and should not have, the full array of powers now exercised by the Federal Reserve. Reporting and recordkeeping should be adequate for most purposes.

  ACB agrees with the stated objectives of the sponsors of H.R. 268, that Congress enact legislation beneficial to all elements of the financial industry and their customers. H.R. 268 falls short of this standard by not taking full advantage of the trail blazed by the savings institution charter.

  Fortunately, the policymaking landscape has changed substantially since 1995, creating a good opportunity to craft legislation that meets the modernization goals we all seek.
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  We urge Congress to seize this opportunity.

  Chairwoman ROUKEMA. Thank you.

  [The prepared statement of Mr. Weller Meyer can be found on page 215 in the appendix.]

  Chairwoman ROUKEMA. Mr. Kelly, Bankers Roundtable. I am sorry. Dr. Pollard of the Bankers Roundtable. But who did I miss here? I missed Mr. Kelly, Consumers Bankers Association. Sorry about that.


  Mr. KELLY. Madam Chairwoman and Members the subcommittee, my name is Craig Kelly; and I am Senior Vice President of Banc One Corporation in Columbus, Ohio. I currently serve on the Consumer Bankers Association Board of Directors, and I am pleased to testify today for them.

  CBA is recognized as the voice on retail banking issues here in our Nation's capital. We have long supported financial services reform. We believe that comprehensive changes in our laws are needed to make the delivery of consumer financial products and services as efficient and convenient as possible for our customers. We are grateful that you in the subcommittee are working on modernization. Congressional actions, coupled with the private sector initiatives and the current actions of both the OCC and Federal Reserve, are indications that modernization is, in fact, essential.
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  As bankers, we are continually seeking new ways of meeting the needs and demands of our customers through the development of new products, services and delivery channels. New technologies are making it possible for new financial services for bank customers, and we are always looking for ways to use these new developments to meet the needs of every part of the communities we serve. Alternative delivery channels will allow expanded access to the bank across all our communities and all our customers regardless of their incomes.

  As we speak here today, the CBA and the OCC are cosponsoring a forum to address the ways of expanding access to financial services in the 21st Century. We can only supply these services effectively and conveniently within the regulatory framework that keeps unnecessary restrictions to a minimum. It must allow banking organizations maximum flexibility to structure their operations in a manner that best suits each organizations' customer base market niche and business goals.

  We believe that comprehensive financial services modernization is essential to achieving this goal. It will benefit customers through increased competition, innovations and the elimination of arbitrary market segmentation.

  However, critical features must be included in financial modernization if it is to be effective. In the interest of time, let me mention just a few of these.

  Banks should be free to offer securities, insurance and other financial services directly through affiliates in order to maximize customer convenience and choice. The organizational structure for such activity should be the decision of each individual banking organization as they best know how to maximize their customer relationships.
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  Second, the ability to cross-market products and services of affiliates on an integrated basis is essential to achieve maximum efficiency and customer service. Elimination of mandatory barriers between banking and the securities and the industries sectors will facilitate cross-marketing, but specific restriction on cross-marketing must also be removed.

  CBA believes that a provision such as Section 107 of H.R. 268, which specifically preempts Federal and State laws that prevent cross-marketing among financial services, holding company affiliates, must be an essential feature of any financial services reform legislation.

  Third, and on a related note, CBA has particular concerns regarding any legislative proposals that would limit the ability of banking organizations to share customer information. From the customer's perspective, sharing allows one-stop shopping for financial services.

  It is our experience that our bank customers expect us to be knowledgeable about the products they already have with us at our institution and to have that information readily at hand. Because they already have a relationship with us, they expect us to make them aware of new products and services that uniquely fit their needs. If we don't, they think we do not value their business.

  If we are to meet customer and community needs, we must remove the artificial barriers that have been imposed on us that serve no real purpose other than to confuse the very customers we need to serve. In order to secure customer information more effectively and to address concerns regarding customer information, the CBA board has recently adopted and approved a ''Best Practices'' policy which we have attached to our written testimony.
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  [The information referred to can be found on page 238 in the appendix.]

  I would like to mention several other important issues. Modernization should end limitation on the ability of banks to affiliate the financial service firms to direct subsidiaries as well as through holding companies. Each banking organization should be permitted to choose its own organizational form, subject to safe and sound considerations, but unburdened by unnecessary regulation. Our financial system is sufficiently mature and strong that strict barriers to affiliations between banks and commercial firms are no longer necessary. Therefore, the relaxation of such barriers is not only timely but recognizes the reality of today's marketplace.

  CBA supports the concept of financial ''functional regulation'' to the extent that its goal is to ensure that similar activities are subject to similar regulation. Having said that, ''functional regulation'' should not necessarily mean that the same activities are always regulated by the same regulator, especially when some financial products have yet to be defined.

  Additionally, in today's and tomorrow's electronic world, customers are clearly demonstrating that they want to bank away from the traditional branch. In this brave new world, having to comply with a maze of rules and regulations that differ from State to State makes it extremely difficult to meet customer needs. The concept of an umbrella regulator to oversee consolidated financial institutions should be studied further before it is implemented in a way that would disrupt existing relationships between banks and their current regulators.

  We also have concerns about the loss of some of the powers under the current thrift charter. A thrift charter offers an attractive alternative structure to commercial banking considerations as well as other types of financial firms.
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  We do appreciate this opportunity and your leadership in working toward comprehensive financial modernization. We are looking forward to working with you and Members of the subcommittee.

  Thank you very much.

  [The prepared statement of Mr. Craig J. Kelly can be found on page 230 in the appendix.]

  Chairwoman ROUKEMA. Thank you.

  Now, Dr. Pollard, Bankers Roundtable.


  Dr. POLLARD. Thank you, Chairwoman Roukema. The Roundtable appreciates the opportunity provided to address the subcommittee today on issues surrounding proposals for financial modernization; your early action to introduce, along with Congressman Vento, H.R. 268, and to conduct a series of hearings that starts today and begins the process of considering long-needed reforms of laws governing the financial services sector. On behalf of the Bankers Roundtable, thank you.

  For purposes of my oral prepared statement, I would like to focus on one element of the written testimony and that is the subject of safeguards, protections, firewalls or other terms that contemplate insulating banks or other companies from one another.
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  The Roundtable urges the subcommittee to carefully consider any proposed safeguards that only make new affiliated entities or operation of new product lines uneconomical and noncompetitive. In businesses, where margins remain extremely thin, a so-called ''safeguard'' that has no real value for safety and soundness can mean the lack of viability of a company. An extensive array of safeguards exist, and adding new authorities or permitting new affiliations need not be accompanied by new protections.

  An approach the Roundtable would suggest consists of asking two fundamental questions of any proposed new safeguard. First, will the proposed safeguard address some real concern for safety and soundness or does it represent merely an attempt to make one competitor's operations more costly than another's?

  Second, do regulators have the ability within the existing panoply of authorities to apply such a safeguard when and where needed? That is, even if a safeguard has merit, does it not already exist within the purview of regulators, both banking and non-banking?

  A review of banking, securities, insurance, Federal Trade Commission, Justice Department, Labor Department, HUD and other Federal regulatory regimes, alongside State laws, indicates no gap in prudential regulation. There are many safeguards today that apply already across markets, antitrust laws, SEC fraud rules, SEC regulations of firms issuing stock, FTC and Justice Department consumer and merger rules and State laws governing privacy or more specific rules, such as insurance holding company statutes.

  Safeguards based on capital and risk management techniques and other rules exist within each regulatory entity. Offering of diverse product lines in whatever corporate structure does not diminish the regulation of the various entities or individual companies within the group.
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  I would like to highlight, if I may, and illustrate this point by the work of this subcommittee and the full committee over the past 8 years. In many ways, permitting new financial activities will be catching the structures up to the safeguards. Let me highlight this with just two areas.

  There are major policy concerns, and always have been, of protecting the insurance fund. Let me just review briefly the safeguards that have been added in the past few years.

  We have a risk-based premium system for deposit insurance. We have a risk-based capital system, and that capital system has been enhanced by addition of risk measures for interest rate, credit and concentration risk.

  The fund is insulated from losses. We have increased the reserve ratio to 1 1/4 percent. This subcommittee and committee worked out early intervention and prompt corrective action measures that mandate regulatory action as capital declines within a banking institution. This committee put in least-cost resolution. That means that in essence, major elements of the too-big-to-fail concept have disappeared. Cross guarantees are in place; capital plans where the bank has to list its future capital plans; growth limitations for undercapitalized firms; the very critical element of depositor preference, which elevated the FDIC in the priority scheme. The likelihood of FDIC losses in a failing bank situation is very small because of depositor preference.

  We have the Change in Bank Control Act that was enhanced by this committee to ensure that people taking over banks are supervised.
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  A second policy concern is insulation among affiliated companies and the ability of regulators to act. Again, the current law contains many of these protections.

  Any institutional change affecting a bank is governed by the Change in Bank Control Act and the Bank Merger Act. Regulators have the ability to restrict dividends and capital. There are lending limitations. Frequently we hear, ''Well, the bank will lend or favor a particular party,'' but there are absolute numerical limits on how much a bank may lend to an individual borrower. There are also limits on officer and shareholder borrowings. There are anti-tying restrictions, cease-and-desist authorities, civil money penalty authorities, removal authorities, the loss of deposit insurance.

  Examinations occur of banks and their affiliates. Investigatory powers are there, as well as reporting, and all of you are familiar with Sections 23(A) and 23(B) that limits transactions among financial affiliates.

  Let me end with one final example, which is Section 23(B). Section 23(B) says fundamentally that a securities firm fundamentally affiliated with a bank should be dealt with on an arm's length basis, so that if a bank is lending to an affiliated securities firm, an unaffiliated firm should have an equal ability to come in and borrow.

  What is interesting about this provision is, it was put in the law, in a proposed bill that would have included the securities affiliate. The protection passed; the securities affiliate did not.

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  Madam Chairwoman, I will end here because of the time. I appreciate the opportunity.

  Chairwoman ROUKEMA. Thank you.

  [The prepared statement of Dr. Alfred M. Pollard can be found on page 245 in the appendix.]

  Chairwoman ROUKEMA. Mr. Tassey.


  Mr. TASSEY. Thank you, Madam Chairwoman, Members of the subcommittee. My name is Jeff Tassey, and I am presenting this testimony on behalf of the American Financial Services Association, AFSA. AFSA appreciates both this opportunity to express our views on financial modernization and your leadership in bringing this issue to the forefront early in the session. We look forward to working with you to bring about a financial services industry where consumers and markets determine what financial services are available and how they are delivered while promoting the substitution of private risk capital for government regulation.

  Financial modernization is necessary to end once and for all the compartmentalization of the financial services industry, established over 60 years ago, thereby removing the barriers to early capital flows in our financial services economy.

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  The affiliation issue is at the root of AFSA's support for financial modernization. As indicated at the beginning of our testimony, AFSA represents an extremely diverse group of lenders, primarily market funded and, accordingly, subject to intense scrutiny and regulation by the markets. A great many of these entities have a wide range of functionally-constrained affiliations with some type of federally-insured institution. There has never been any evidence that any of these entities pose any systemic or deposit insurance risk as they go about their business of providing approximately 20 percent of all consumer credit.

  AFSA strongly supports the ability of commercial firms to own or otherwise affiliate with such a holding company.

  The prohibition on banking and commerce dates from 1970 and has always been shot through with exceptions. Thousands of individuals own banks who also own many and varied commercial interests, none of which are subject to the same holding company affiliation restrictions and oversight as banks owned by corporate entities.

  If it is harmful for banks and commercial entities owned in the corporate form to affiliate, then the same restrictions should apply to the thousands of wealthy individuals who freely mix banking and commercial enterprises.

  The history of commerce and banking in the United States not only shows no greater propensity of commercial and banking firms to fail than banks, but to the contrary, indicates that commercial ownership has provided greater protection to the bank. The most recent example of this is found during the thrift failures of the 1980's where the commercially-affiliated unitaries had an excellent rate of survival.
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  The primary argument postulated against banking and commerce is that such a holding company form would result in large concentrations of economic resources. Such concentrations are far more likely to occur in small towns where, as described above, there is only one bank owned by an individual who also owns other major economic units such as the local independent insurance agency, car dealer, feed store, and so forth.

  Economic concentration, particularly in today's global market, is not just size, but size in relation to the market in which the entity operates. A very large institution operating nationally and internationally is subject to competition at every size level from the smallest independent bank to the largest foreign bank. In terms of risk to the Bank and Insurance Fund from such a diversified structure, the experience with life insurance holding companies is instructive as discussed on page seven of our written prepared statement.

  In terms of the regulation and oversight of the holding company, AFSA supports reliance on the principles of functional regulation as opposed to the extension of some form of current bank regulation to non-depository affiliates.

  In particular, we support the risk assessment approach based on the Market Reform Act of 1990 and successful end use in the securities and commodity futures trading industry today. The best means of controlling risk to the insured affiliate is through proper insulation between holding company affiliates and by ensuring sufficient capital levels in the bank such that they can remain solvent regardless of the failure of any affiliates.

  Coupled with appropriate information-sharing requirements among the functional regulators and strong divestiture provisions, this model gives up nothing to safety and soundness while avoiding excessive regulatory burden in the form of duplicative examination and reporting requirements.
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  While they have received little in-depth consideration, the existing affiliate transaction restrictions contained in Sections 23(A) and 23(B) of the Federal Reserve Act are very stringent and do an excellent job of protecting the insured depository in any holding company structure. AFSA urges this subcommittee to fully review the insulation provided by these two provisions when considering the risk assessment model.

  We strongly support the efforts of the committee to develop a modern legal framework for the financial services industry and urge you to move forward. Thank you for this opportunity.

  Chairwoman ROUKEMA. Thank you very much for your concise and direct report here.

  [The prepared statement of Mr. Jeffrey A. Tassey can be found on page 267 in the appendix.]

  Chairwoman ROUKEMA. Dr. Bracewell, IBAA.


  Dr. BRACEWELL. Thank you, Madam Chairwoman. My name is Joe Bracewell, and I am here representing the Independent Bankers Association of America. I appreciate the opportunity to testify here today, and Congressman Bentsen, I appreciate your kind words of recognition.

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  I am chairman of Century National Bank in Washington, DC., which is a $90-million locally-owned and operated community bank. I also serve as Vice Chairman of a community bank in Houston. I am a member of the Board of Directors of the Independent Bankers Association and am pleased to testify on their behalf today, substituting for Tony Abbate who, as you mentioned, is ill with the flu.

  We understand that the objective of this legislation is financial modernization and that is to encourage competition in financial services while protecting the public's interest in preserving a sound financial system. We believe that this objective, as stated, is shared by this committee, the Administration, the bank regulatory community and most of the industry groups represented here. Of course, the differences and the devil, as Congresswoman Maloney said, are in the details, how to encourage competition and how to preserve the safety and soundness of the system.

  As you know, the IBAA represents the Nation's community banks who, for the most part, are focused on traditional core banking activities, together with some fee-generating services with little or no balance sheet risk. As such, we have a slightly different perspective which I would like to try to highlight in the oral remarks in the few minutes I have here.

  First of all, we do not believe that it is a truism that intra-industry and/or inter-industry consolidation will necessarily promote competition. Common sense and some objective information suggest otherwise.

  The United States has one of the most diversified financial systems in the world. It is one that has served our consumers and our small business and agricultural communities well over the years, and we would urge the subcommittee's recognition and consideration of this historical perspective in the consideration of additional legislation. That is, preservation of a diversified competitive system as opposed to accelerating the pace of consolidation, which is already taking place. But we question whether it is prudent to dramatically accelerate this pace by passing additional legislation.
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  Second, we believe it is important that the safety net which the banking industry enjoys be preserved and the safety and soundness of the system be protected. This includes the FDIC insurance fund, the Federal Reserve discount window and payments system guarantees. This Federal safety net protects the banking industry and its customers and allows those benefits to be transferred into loans to consumers, small businesses and small farmers throughout the country; and we, as independent bankers, are particularly sensitive to the preservation of that safety net. Therefore, we would urge the Congress to proceed with caution in accelerating the pace of financial industry consolidation, to consider that existing regulation may be sufficient for the time being, as this consolidation proceeds, and also to make the point that the more risky the additional activities that are permitted, the greater the potential threat to this safety net and the greater the concern of the Nation's independent bankers.

  And, finally, along with Chairman Greenspan who testified on this issue a couple of years ago, we don't instinctively have a trust that firewalls can be put in place which will be sufficient to protect the safety net in the event of extreme pressure. The risk of being wrong is great, and it is difficult to unscramble the situation once these companies have been consolidated.

  The second question in your invitation to testify related to our views on the need for regulatory structure reform. IBAA believes that the safety and soundness of the bank cannot be protected without Federal Reserve Board supervision of the holding company. The holding company, under financial services consolidation, can be characterized as the brain and nerve center of such an entity. One regulator should have oversight over this brain center since the failure of such an integrated structure could carry with it systemic risks to the financial system and to the economy as a whole. We believe that the Federal Reserve is best equipped to carry forward this sensitive mission and has a proven track record of insulation from the political process.
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  Madam Chairwoman, I would like to conclude my remarks there. If there are specific questions related to other issues raised in your invitation, I would be happy to take questions after the conclusion of the panel. Thank you.

  [The prepared statement of Dr. Joseph S. Bracewell can be found on page 296 in the appendix.]

  Chairwoman ROUKEMA. I thank the panel.

  This has been, of course, instructive, but as we can see, there is not a consensus on all issues here. I will state in terms of the question has come to me from Members, do we intend to go through the lunch hour? My stated intention is here, yes, that we will. We will have to play it by ear here to some extent. I do understand that the second panel is waiting but we want to allow as much time as necessary for this first panel. But unless time drags on, the intention here is to go through the lunch hour and that is for the Members', as well as the panelists' information.

  There are lots of questions here. I am going to start off with one or maybe two for you. It may be that I haven't heard each one of you clearly, because there was a lot of meat in your testimony here, but I want to ask questions specifically for clarification from one or two on the question of regulation and the holding company. Particularly Mr. McConnell of the American Bankers Association.

  I would like to have something more specific as to the holding company regulator. I was not quite sure how you dealt with that.
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  I do apologize. I don't know what's the matter with my voice. It was fine until I came here.

  But also, in connection with that, for anyone who wants to comment in one way or another, a number of you have referenced it, in terms of that holding company regulation or any regulation, regulatory authority, there is a wide difference of opinion from you. But how do we deal with the firewalls?

  Dr. Bracewell referenced Mr. Greenspan's comment, and I have that in the form of a question, there are many who believe that, under stress, firewalls melt. That is an integral part of the whole question of regulation, and I would like to begin with the ABA, but again, the Bankers Roundtable seems to have another perspective on this.

  Maybe there are two or three perspectives on the whole regulatory structure. I want to give you each the opportunity to make the strongest case for what you are saying and in connection with the whole question of firewalls and conflicts of interest here, too.

  OK? Let's begin with Mr. McConnell, and we will see how much time we have here.

  Mr. MCCONNELL. Well, with regard to regulation, I think the ABA's position can be divided into two parts. As I listened to other panelists, it seemed to me that many of them said, ''We are perhaps a little frightened that we are going to get a lot more regulation and we don't think we need a great deal more than what we have.''

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  Chairwoman ROUKEMA. Well, there are some who would argue that under these circumstances, that is exactly what we have to do. But, again, I want to hear your unvarnished opinion on it.


  Chairwoman ROUKEMA. Your experienced opinion on it.

  Mr. MCCONNELL. In our experience, the regulation that is available, particularly where we are talking about regulating holding companies and the necessity to protect, through firewalls, banks from what could happen in affiliates, it is unlike some proposed regulations we have in place, as Sections 23(A) and 23(B), that have worked. So I think we are apprehensive that we would get additional, and what could become burdensome, regulation.

  The other thing which I am not sure you were asking is our position with regard to who should be regulating? And we aren't taking a stand in that area at this time because of our overall intention to try to promote and move forward this modernization by not having too many opinions where we can't vary from them.

  We have, as bankers, become familiar with regulation by the Federal Reserve and that is a very comfortable situation for us. However, the proposal in this legislation that there be a new Federal Financial Board is something we think is worthy of consideration and we are quite willing to consider.

  So if I in summary, very quickly, I think that we believe that by-and-large there is not additional regulation required, although we would work with the subcommittee in any way we could to look at it on a case-by-case basis to properly protect the safety and soundness of the system.
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  Chairwoman ROUKEMA. Yes, Dr. Pollard.

  Dr. POLLARD. Thank you. I think that most of the witnesses here, when you asked the question about the type of regulation, are looking at oversight regulation because each of the affiliated entities is regulated.

  What I would like to address is this issue of firewalls in crisis.

  Chairwoman ROUKEMA. Please.

  Dr. POLLARD. Forgive me for taking a bit of an academic approach.

  In the 1857 financial panic, in 1870 and 1890 panics, there were no regulatory structures of the type we have today; and there was a fundamental change beginning in 1933, with a full panoply of laws.

  What I would suggest to the subcommittee is that it is quite the contrary, that in times of crisis in modern markets, people run to the law, not away from it. The law now contains provisions on netting. The law contains contractual guarantees. Companies tend in times of crisis not to cut and run as they did in the 19th Century, but much more to hunker down, check their books, contact regulators. And we have seen that in the crises that we have had since 1933. Where there have been extreme economic pressures, we have not seen people cutting and running, trying to carve out their own interests, but rather, looking at the protections they have as helping the firm.
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  Chairwoman ROUKEMA. Does that apply to the way we descended into the debacle of the savings and loans?

  Dr. POLLARD. In the savings and loan issue, what I would suggest to the subcommittee is the government actually was very much involved throughout that time period, in 1980 and 1982, creating laws and regulatory forbearance that permitted people to get into that industry who had not been there in the past.

  The government was very much involved in what was accepted as capital, regulatory goodwill.

  Chairwoman ROUKEMA. Yes. If you don't mind my interrupting, yes, and we won't go into a full-fledged debate on that subject right now, but the regulators were assuring us, before this subcommittee in public testimony, that everything was fine.

  Dr. POLLARD. That is correct, and I think the subcommittee acted in response.

  Chairwoman ROUKEMA. So we get back to my original question of what kind of required regulation will we need, recognizing that firewalls do melt?

  No? No? All right. Go ahead. Someone else, please. And then my time is running out, but I will have two more comments or three short ones.

  Go ahead, Mr. Meyer.
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  Mr. MEYER. Madam Chairwoman, I will try to make my comments short. As someone who lives with regulation on a daily basis, I was struck as Alfred was reading through his list, that frankly, you are not cognizant of the extent of the regulation, but then you start living with it on a daily basis.

  In fact, I do live with Sections 23(A) and 23(B) and my association is owned by a mutual life insurance company that happens to be headquartered here in Washington, DC., and chartered by an act of Congress.

  In that case, we are examined by the Office of Thrift Supervision, and their focus is to make sure that the institution is being run in a safe and sound manner, but also that the relationship between the parent and the subsidiaries is also done in a safe and sound manner, with a primary focus to make sure that the insurance fund is protected and that the activities within the bank are those that are consistent with what should be performed within a bank, and that the parent company, or affiliate, in no fashion is taking advantage of the thrift subsidiary. I think that is an excellent model from which to look to the future.

  In terms of the firewalls, as Alfred was going through his list, I made some notes on them, it seemed to me that since the problems with the thrift industry in the 1980's, sufficient firewalls, sufficient protections have been put in place to operate in conjunction with firewalls that would prevent a meltdown in the event of pressure or changes in the future.

  Chairwoman ROUKEMA. Thank you.

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  Does anyone else want to comment?

  Yes, Dr. Bracewell.

  Dr. BRACEWELL. I would just say two things:

  First of all, that the IBAA believes that companies that own banks should be regulated as bank holding companies, number one, that is by the Federal Reserve.

  Second, that if the issue of whether or not firewalls will melt is a subject that academicians perhaps may disagree about, the question then is, if there is risk, what is the benefit for which we are taking this risk? And in order to perceive that there is benefit, you have to believe that increased consolidation in this business will promote competition. And we have a fundamental difference of opinion about that.

  IBAA believes that diversification promotes competition and consolidation diminishes competition.

  Chairwoman ROUKEMA. Thank you.

  Final comment?

  All right. I will defer now to my colleague, Mr. Vento.

  Mr. VENTO. Thank you, Madam Chairwoman. Gentlemen, the issue in terms of the regulatory structure here is a major difference that exists and what powers are granted.
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  In the legislation that, it is not completely definitive, in fact, in terms of H.R. 268, but the legislation, there is, of course, the concern that obviously you say Mr. McConnell is happy with the Federal Reserve Board and the role that they play in terms of regulation you feel comfortable.

  I suppose that each of the entities we are going to hear from today, whether it is securities, insurance, find certain comfort in the State or the SEC regulator that regulates them in terms of this financial holding company structure that we establish.

  What we are concerned about, of course and I think it is a very legitimate concern is this regulatory shopping, you know, for the lowest common denominator. I mean, I think firewalls probably are as good as the regulator. When it gets right down to it, I mean, we, you, have regulations and the fact is somebody has to stand behind them. Of course, everyone has, in hindsight, the best of intentions and all sorts of Monday morning quarterbacking when things go wrong. So you run to the law as you say, you run to the law. But whether or not there was enforcement of the regulations remains to be seen.

  I sympathize with that. But isn't the regulatory shopping and the concern that there isn't inconsistency between the regulators of concern, or at least in the application of that regulation?

  Dr. Pollard.

  Dr. POLLARD. Well, I think two points. One, this subcommittee directed the regulators to harmonize as many of their regulations as possible, accounting standards and others, and they have been doing that more and more.
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  In terms of how a regulator interprets the law and their authorities, I agree with you that that is very important to the operation of firewalls.

  What I would highlight, and what has changed is the capital-based system that this subcommittee and committee put into place.

  There are definitive triggers, depending on the capital level, that forces regulators to act, some would argue, too much force on those regulators. But the regulators don't operate with as much discretion any more. In other words, what the Chairwoman said about what took place in the mid-1980's and what Mr. Meyer said about the actions we have taken, I think address it.

  It is not going to be perfect. Obviously, it is not perfect. I would like to note, I was not urging this committee not to put any safeguards in place; just to review them.

  Chairwoman ROUKEMA. I understand.

  Dr. POLLARD. So I guess my point is the forum shopping in the area of safeguards, it seems to me, has been greatly diminished by these across-the-board rules. And don't forget, the FDIC was greatly empowered in FDICIA. You don't just apply to be a bank anymore. You have to apply to be a bank and to get FDIC insurance.

  So there are a lot of safeguards that have been built in that actually, in a way, diminish a bit of regulatory discretion. Forbearance was done away with.

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  So a lot has been put in place that I think reduces the shopping between regulators, and then to some degree the discretion of a regulator.

  Mr. VENTO. Five questions I can proceed with on the basis of that answer, but let me invite the others.

  Mr. Kelly or Mr. McConnell, any other comment on this? If you agree with him, that is great, but if you have something more that you would like to add, I would like to hear from you. Mr. Kelly.

  Mr. KELLY. I think that we are not suggesting that there should be no regulation, no firewalls. I think the suggestion is that today consumers deal with a wide selection of providers of financial services, many of whom have nothing to do with these firewalls. They are able to go out into the marketplace and buy product and service that we want to sell, unencumbered with some of the regulation we have to contend with.

  We want to compete. We want to offer the market a better product and service. One of the largest providers of credit in America today is the phone company.

  We would suggest to you that it is time to modernize our system. Yes, we need safety and soundness. There ought to be appropriate firewalls and regulations put in. We also understand that shopping for the regulator-of-the-day is clearly not appropriate for any of us. We ought to be held to common standards and regulations, but there ought to be a regulator that we constantly deal with so they know us and we know them; we also ought to be held to the standards in insurance and in securities that others who are in that business are held to.
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  Mr. VENTO. Let me proceed to another question.

  I realize that Mr. McConnell, all of you probably would like a crack at answering that question, but one of the issues here, of course, is with regards to power, the unitary thrift power. Mr. Meyer points to H.R. 268 as being limiting in terms of what it does with the 25 percent limitation.

  Other bills have even smaller limitations than that, 7 1/2 percent, I note in H.R. 10. And the issue is, we, I think, go along with forward in terms of the unitary thrift.

  But, I mean, is there any type of limitations, Mr. Meyer, that you would accept in terms of this, in terms of this, for instance, on the various power of thrifts?

  I, you know, voted with the, you know, providing the opportunity. You heard my comments about ''do no harm.'' I am sure that resonated with you.

  Mr. Meyer.

  Mr. MEYER. Mr. Vento, I wrote that down. In fact, I was going to make that comment. As you know, I think there is ample evidence, if you will, in modern history in the thrift world, that the unitary thrift does work. And we have to remember that decisions that are made are decisions in the real world, so to the degree that we place limitations on activities that are going on today, that means that real people are going to be impacted. And it would be my view that they are going to be impacted negatively.
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  Mr. VENTO. Could you give, I mean, you did point out some specific examples, but I guess we would like to have a better idea, if it is just a couple of examples, where we are going to have some divestitures on a small scale. Or a number of limited examples, I guess we would need to have that, because we do have, we don't want to completely vitiate the rule of, for instance, 25 percent. We think that that is a pretty wide variance.

  I mean, obviously if somebody has so much business outside of the financial institution basket or network, then the question is, maybe they ought to go into the real estate business. So, I mean, this is a question we are, I think we need to have in order of magnitude if we have half of the thrifts, or a quarter of the thrifts, or who is involved. So I think we need a little better handle on that in terms of numbers than just the two examples that you gave in your testimony, as I recall.

  Mr. MEYER. We would be happy to provide some more living examples.

  I guess my sense is this: that the institutions that exist today are trying to compete in a broad financial marketplace, and by placing limitations, I think we are really causing harm, there is a lot of experimentation that takes place in today's world. Unitary thrift, in my mind, could be thought of as a model of experiment, somewhat akin to the dual banking system between the State and Federal level.

  To the extent that that is a laboratory, an ongoing laboratory, that by all recent evidence seems to be working, my view is, why impose any restriction on it?

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  Mr. VENTO. Well, I think that, I mean, I think there is an answer to that. We are restructuring a lot of powers that had gone on in terms of restructuring it in terms of a different corporate entity, whether it is a holding company or a financial holding company, rather than a bank holding company or unitary thrift. That is, I mean, I think we are rewriting the charter, for one thing, of the thrifts.

  But I think that there is not, I mean, there aren't as many limitations in here. I think it is, you know, pretty open, but there are some. If we do get around the edges, there are going to be some. I think we need to get an order of not just some other examples, but an order of magnitude in terms of what we are doing. I think that would be most helpful to make myself clear.

  But I do appreciate your point of view and obviously have advocated it as we have moved forward with some of the different powers. So I am concerned about it.

  We just want to know what we are doing before we, if we are going to proceed with this. But I think it is helpful to point that out.

  Unfortunately, time doesn't permit further questions at this time, if I am going to observe the 5-minute rule, Madam Chairwoman.

  So I will thank you, Mr. Meyer and the other witnesses, and my apologies to those who were not able to respond.

  Chairwoman ROUKEMA. Yes, Mr. Kelly.

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  Mr. Kelly wants to add a point here.

  Mr. KELLY. Madam Chairwoman, I am about to do the unthinkable. When the meeting was changed, the time created a very embarrassing situation for me; and if I don't leave now, I will miss a flight, and there is no other flight for me today.

  Chairwoman ROUKEMA. Mr. Kelly, do you want to have your last word before you leave?

  That is your last word?

  Mr. KELLY. I am really sorry.

  Mr. LAFALCE. Mr. Kelly, do you want to miss the opportunity to be questioned by me? Come on.

  Mr. KELLY. Give me your best shot.

  Chairwoman ROUKEMA. Seriously, must you leave this moment? Do you want to have one last prepared statement?

  Mr. KELLY. I have a flight at 5 minutes of 1:00.

  Chairwoman ROUKEMA. You are excused. You are excused.

  We will submit written questions for you, and I ask unanimous consent.
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  Mr. KELLY. Absolutely.

  Mr. LAFALCE. Should we have Ms. Sullivan substitute for Mr. Kelly?

  Mr. KELLY. I apologize.

  Chairwoman ROUKEMA. That is Mr. Kelly's call.

  Thank you very much for being here. It is my apology to make to you. It is the committee's apology to make to you because you have been very understanding with the change of time.

  All right. Mrs. Kelly, Congresswoman Kelly, do you have some questions, please?

  Mrs. KELLY OF NEW YORK. Not at this time. Thank you.

  Chairwoman ROUKEMA. All right. Congressman LaFalce.

  Mr. LAFALCE. I had a real zinger for Mr. Kelly, but we will let him go.

  Maybe we will pick on Dr. Pollard instead.

  Dr. Pollard, I am reviewing your disclosure form here, and I see Ph.D., but a big omission. Was it in bank history?
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  Dr. POLLARD. It could be; but it is in foreign affairs.

  Mr. LAFALCE. Foreign affairs. OK. Good.

  Seriously, there are a few issues I would like to get into in this brief period of time. The first has to do with the unitary thrifts.

  You know, obviously the thrifts are going to oppose divestiture. They say, ''We have had unitary thrifts for awhile now. They have been good, not bad. They have been helpful to just about everybody who has ever encountered them so, you know, what's the problem?'' And there is a debate that is going to take place.

  What are we going to do, charter down? Or as I have also said, we ought to charter up.

  Mr. McConnell, Dr. Pollard, Mr. Tassey, Dr. Bracewell, do we charter down and divest, or do we charter up and enhance the powers of other financial services? Just give me one word, up or down?


  Dr. POLLARD. Up.

  Dr. BRACEWELL. Down.

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  Mr. TASSEY. Up.

  Mr. LAFALCE. All right. Thank you.

  Another sticky wicket is going to be the securities industry. They are going to say, ''Yes, well, if we drive around this cyberspace economy in the future, we want two-way streets, not one-way streets. And we don't like some of the legislation because the one way they go is OK, but they don't permit us to go also. We need a two-way street.''

  Now, what are your thoughts about that and how do we best accomplish two-way streets which has a certain sound, fair, sound to it, doesn't it?

  Mr. McConnell.

  Mr. MCCONNELL. Indeed. The American Bankers Association feels so strongly about modernization that we, and we realize that in order to get legislation----

  Mr. LAFALCE. I tell you what, I am going to have to, because of the time constraints, ask for another one. Do you want a one-way street or two-way street?

  Mr. MCCONNELL. If ''two-way streets'' means what is good for ''A'' is good for ''B,'' then I am for two-way streets.

  Mr. LAFALCE. Dr. Meyer, one-way street or two-way street?

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  Dr. MEYER. Two-way street.

  Mr. LAFALCE. Dr. Pollard.

  Dr. POLLARD. Two-way street.

  Mr. LAFALCE. Mr. Tassey.

  Mr. TASSEY. Two-way street.

  Mr. LAFALCE. Dr. Bracewell.

  Dr. BRACEWELL. We oppose banking and commerce being combined either way.

  Mr. LAFALCE. All right.

  Now, let's take, deal, with the insurance industry.

  The insurance industry has voiced objections over the years to some financial modernization proposals, but recently, within the past 6 months or so, I think that they have gone at least halfway, if not far beyond that, in saying, ''OK, we can see a day where we can have affiliation, where bank employees can sell insurance products,'' and so forth.

  But they also say, ''We have to have some safeguards, and most especially we need consumer safeguards.'' Now, some say, ''Well, what's a consumer safeguard?'' Is it really something you are throwing up in the road to block the path? And then the devil is in the details.
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  My question goes to process now. We have the leadership of the banking community here; ABA, IBAA, Bankers Roundtable. Has there been some mechanism to reach out to the insurance industry to say, ''Hey, you have come a long way. We want to come a long way, too, in dealing with these consumer issues, working together so we can come to closure amongst ourselves on these consumer safeguards.''

  Dr. Pollard.

  Dr. POLLARD. Mr. LaFalce, I think two points to make. First of all, the Alliance itself is providing a very useful vehicle on all the points you have talked about securities issues, insurance and the like.

  Mr. LAFALCE. Are the Independent Insurance Agents a member of the Alliance?

  Dr. POLLARD. No. Meeting with the Alliance has been the ACLI, and we have been in discussions with them for more than 6 months. I feel it has been very positive, very progressive. I think we all have the same spirit of trying to work out some language that would make all of this, Mr. McConnell said on functional regulation.

  Mr. LAFALCE. How close are we now?

  Dr. POLLARD. I think we are fairly close. I really do.

  Mr. LAFALCE. Jeff.
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  Mr. TASSEY. I think that that agreement can ultimately be reached, maybe not without a few amendments, but it can be reached. It is not a show-stopper.

  Mr. LAFALCE. All right.

  Madam Chairwoman, we covered the principal points I wish to address. Thank you.

  Chairwoman ROUKEMA. Thank you.

  Mrs. Maloney.

  Mrs. MALONEY. Thank you, Madam Chairwoman.

  At a meeting the Chairwoman mentioned earlier, Mr. Greenspan testified, and I quote, ''In times of crisis, firewalls come down.''

  There is a lot of talk about regulation, but those of us who bailed out the S&Ls will have to say that the regulators didn't do such a very good job. So I am very concerned about the risk to the taxpayer and the insuring fund.

  Either in a subsidiary or in an affiliate, new business is risky business. And I would like to know from each of you whether you think that there are adequate safeguards before us in this bill, or in other bills, to avoid the capital of an insurance, of an insured financial institution, being used to shore up a failing affiliate or a subsidiary?
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  And I don't want to hear that the firewalls are there to protect this. We had Alan Greenspan testify, and I quote, ''In a time of crisis, when an affiliate or subsidiary is in trouble, firewalls go down.'' And I don't want to hear about the regulators.

  I want to know, they don't have a very good track record, do they? It was $500 billion in the S&L crisis. But I want to know what safeguards are there in shifting insured capital to bail out a subsidiary or affiliate that is in trouble?

  Dr. POLLARD. First, would you like me to take a stab at that?

  Mrs. MALONEY. Sure.

  Dr. POLLARD. The first comment, Mrs. Maloney, is new business is risky business, I guess I would only disagree to the extent of saying, not all new businesses are risky businesses.

  Mrs. MALONEY. I agree. I stand corrected, some new businesses, a wonderful area that we need to get into. But assuming that it is a risky business, assuming that in this particular case that I am putting before you the new business was a risk, a bad financial risk----

  Dr. POLLARD. Right.

  Mrs. MALONEY. And the large, highly-insured financial institution now faces a decision whether they bail out the subsidiary or not.

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  There are no firewalls. The regulators aren't there. What safeguards are there to keep insured capital from shifting to, in this case, risky business?

  Dr. POLLARD. I guess I would have to say that in terms of what is already in place, there are limitations on shifting money, extensions of credit. The regulators have the ability to step in and monitor and watch what is being done, to examine and ask for reports. There are fraud statutes and other elements if the behavior violates the rules. And again all I am talking about is the banking industry, not the laws that exist in other cases.

  Mrs. MALONEY. Well, could you give me, in writing, what these capital standards are?

  Dr. POLLARD. Sure.

  [The information referred to can be found on page 253 in the appendix.]

  Mrs. MALONEY. Exactly what the capital standards are for what size banks. And assuming that the regulator doesn't step in and stop it, is it still fraud that it has shifted if the regulator doesn't point it out? In other words, is it written into the law that a certain percentage of capital must be there to back up the insured bank? Is that the law?

  Dr. POLLARD. That is the law in terms of the rules that this committee put in on early intervention and prompt corrective action. They have the ability to go and look at the capital level of the bank, to stop the bank from issuing dividends, to require the bank to increase its capital.

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  Mrs. MALONEY. What happens if the regulators miss it, they are asleep at the switch, like they were in the S&L crisis, and the bank shifts that money----

  Dr. POLLARD. Right.

  Mrs. MALONEY. And the affiliate fails? Are there still what is in place then?

  Dr. POLLARD. What is in place there is what this committee did in FDICIA, which, number one, is to mandate the exams so that they are not asleep at the switch. That is number one.

  And, number two, with these levels of capital you can only engage in activities based on being, and in this committee's bill, well-managed, well-capitalized. So one of the other management risk tools is risk itself. If you want to do something that has more attendant risk, the regulators have required higher capital; and there may be higher premiums for FDIC insurance based on the activities in which you are engaging.

  Mr. VENTO. Would the gentlelady yield to me briefly?

  Mrs. MALONEY. I always yield to the distinguished Ranking Member.

  Mr. VENTO. Mr. McConnell testifies that the bill, H.R. 268, provides a holding company regulatory structure based on a risk assessment model that currently is applied to the securities industry. So one of the issues that we have to meld together here, of course, are these, not being as familiar with that as I would like to be. I mean, he says he believes that this model is worthy of consideration, but it may well be that there are other options that should be considered.
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  So these questions the gentlewoman is asking with regard to these additional activities become very relevant in further consideration with regard to our, and your, concerns about capital.

  Mrs. MALONEY. My time is up, but I would certainly, if the Chairwoman would allow other members of the panel to respond to that question, if they have other things that they would like to add to it?

  Chairwoman ROUKEMA. Yes, I will permit it.

  Mrs. MALONEY. Thank you.

  Mr. MCCONNELL. You seem to be looking at me, and I am not sure I am----

  Chairwoman ROUKEMA. No, don't feel compelled that you have to provide an answer, but if you will.

  Mr. MEYER. Perhaps I could give an example----

  Chairwoman ROUKEMA. Yes, Mr. Meyer, and then Dr. Bracewell.

  Mr. MEYER. ----Where this will work. And I think this is a total package. This is not one isolated control or mechanism that has been built into it.

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  This committee, over the last few years, has implemented a lot of laws which have been interpreted in regulation, that Alfred spoke about and, in fact, are controls.

  An example that would apply in a thrift environment is a real estate subsidiary, which is used, and I gave the example of the institution that does real estate development in support of its local community. That is a separately-capitalized institution. There is a limit on how much capital the thrift could put into it.

  Now, if it went beyond the authorized amount, obviously then they are getting into a whole host of laws that would be enforced. So there are in place today controls that do limit and, I think, protect the insurance fund from these types of activities.

  Chairwoman ROUKEMA. Dr. Bracewell.

  Dr. BRACEWELL. I was just going to say, whether the firewalls melt or not depends on how they work in real life under stress. And through my experience with our little bank in Houston, I have been there with a bank under stress and I understand that capital is a subjective thing. It is a negotiated thing between the banker and the regulator when you get into a stress and a survival situation. And while these firewalls exist and the numbers exist, the prompt corrective action measures exist, and it is called ''triggered by capital.''

  I can just tell you that under stress there is negotiation, there is subjectivity and I don't believe we can be safe in relying on the safety of the safety net that protects the banking system on how those are going to operate under stress, when you have the pressure of commercial ownership of banks and the inherent conflict of interest that comes with it.
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  Mrs. MALONEY. I think your prepared statement is well made. I would be more comfortable if these items were not open to negotiation and subjective interpretation, but were written into law so that it was clear, so that it wasn't up to a regulator and a distressed bank to negotiate what the terms are.

  Dr. BRACEWELL. If I could just, excuse me, but the way it is negotiated is, you have a loan at my bank that you are paying on a timely basis, and the regulator reviews your financial prepared statement, and we get into a disagreement about whether your loan is worth 100 cents on the dollar, 98 cents on the dollar, 95 cents on the dollar; or maybe the loan is secured by your house, and you are unemployed and so you haven't paid in 3 or 6 months and the question is, ''Is your house worth what you paid for it, 80 percent of what you paid for it, 70 percent of what you paid for it?''

  So the subjectivity doesn't really relate to how much capital the bank has, but really a series of numbers that end up with capital at the bottom line.

  Mrs. MALONEY. I would be more comfortable if capital were defining.

  Dr. BRACEWELL. It is only the residual. That is the problem.

  Mr. MCCONNELL. I might add something, if I could.

  It occurs to me that we all do not want to see anything happen again like happened to cause the thrift crisis and there is certainly agreement here.
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  There is also agreement, I am sure, among this panel that we want safety and soundness to be held high. But that is part of what happened with FDICIA was that there were specific points at which intervention was demanded by the regulators and took away some of the, perhaps, subjective parts of that. So that it doesn't mean that there won't be new crises.

  Somebody once said, ''The trouble with making things foolproof is that fools are so innovative.'' So I don't think we will do that. But I think that we have come a long way and indeed the risks are more manageable than they were before the thrift crisis.

  Chairwoman ROUKEMA. Thank you very much.

  I just want to make a very brief observation here to show how this particular issue requires further concentration of attention on all of our parts. I think your answers have been very constructive and interesting, but let's just understand that firewalls do melt.

  What was it, the market crash in 1987, I think was Continental Illinois, in Illinois, and First Option, that was a prime example. But it is a demonstration of how we need not only good regulators but the fundamentals that some of you have talked about that came about in reforms of FDICIA. Maybe they are not going to be adequate for the new expanded powers that we are talking about here, but we are going to have to give intense concentration to that subject and not treat it as though it is only incidental or maybe not central.

  I certainly know that when Mr. Greenspan comes here before our committee in the near future, he will again make this case and make it in very explicit terms, and I hope he will. I am sure he will be constructive as to how it applies in the present circumstances, if we are expanding and modernizing the institutions here.
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  So, again, we welcome your contribution here, but it is central to our concerns if we really mean we are going to protect safety and soundness and economic concentration of power and eliminate, guard against, conflicts of interest and serve the public at the same time.

  Now, I have another question, but I guess I owe it to our colleagues here that have been so patient.

  Yes, Ms. Roybal-Allard.

  Ms. ROYBAL-ALLARD. Thank you, Madam Chairwoman.

  My question is for any member of the panel. It has to do with the provision of the bill that allows depository institutions, their subsidiaries and affiliates, to engage in information-sharing without restriction, as long as, and I am going to quote from page 34 of the bill: ''It is clearly and conspicuously disclosed that the information may be communicated among such persons, and the consumer is given the opportunity before the time that the information is initially communicated to direct that such information not be communicated.''

  I would like to know what the panel considers ''clear and conspicuous disclosure''? And what would be the process by which a consumer would be able to ''opt out''?

  Mr. TASSEY. I will try to answer that question. I mean, basically you opt out at the time the consumer initiates the relationship with the holding company, through whichever affiliate he or she initiates that relationship through. Generally it would be a loan application and there would be a separate signature line or some other device for ''opting out'' of the information sharing that otherwise would occur.
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  Ms. ROYBAL-ALLARD. So by ''clear and conspicuous,'' you are saying that there would be an entirely different sheet of paper with separate questions?

  Mr. TASSEY. I am not saying anything about the details of it. Generally, on the application there would be a ''clear and conspicuous disclosure.'' That term is defined under the Truth in Lending Act, if I am not mistaken, and basically the consumer receives notice of how to ''opt out,'' whatever device, you know, that is.

  Ms. ROYBAL-ALLARD. OK. Given the sensitivity of the information that is gathered, wouldn't it be better to allow the consumer to ''opt in'' rather than ''opt out,'' because then you clearly know that the consumer understands what it is that he or she is agreeing to?

  Mr. TASSEY. I guess it depends on--I don't see the problem with what they are agreeing to. The only reason that you have these structures is to market a full range of financial products to somebody, and if they are initiating a financial relationship with you, as long as this information is used for a financial product, I am not sure where I see the harm to the consumer, especially, again, if it is ''. . . clearly and conspicuously disclosed,'' which is well-disclosed in Truth in Lending.

  Ms. ROYBAL-ALLARD. That is what I am trying to understand, what is meant by ''clearly and conspicuously.'' When you go to get a loan, you sometimes get something this thick and you are asked to sign all of these things, and the writing is so small you can't even read it with glasses.

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  Mr. TASSEY. That is right.

  Ms. ROYBAL-ALLARD. So I am trying to understand exactly what it is that you are trying to do to make sure that the consumer is aware of it. Because I believe that most consumers probably are not aware of half of what it is that they sign when they take out loans and other things, but take the word of, or they trust, the institution that they are banking with or they are getting the loan with.

  Mr. TASSEY. Yes.

  Ms. ROYBAL-ALLARD. So, you know, to have that kind of information shared, because you are open to gain all kinds of information from them that, I am just very, very concerned that consumers are going to agree to something where they don't fully understand what it is they are agreeing to.

  Mr. TASSEY. Two comments. First of all, on the ''clear and conspicuous,'' I would be happy to respond in writing to you in terms of what that is, unless one of the other panelists wants to take a cut to it.

  In terms of what consumers do and don't understand, the University of Michigan Consumer Research Center did a survey for the Federal Reserve on the, part of it involved the Truth in Lending Act disclosures. The vast majority of consumers recalled getting these disclosures. Sixty-three percent found it useful; however, only 6 percent said it impacted the credit decision.

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  So they do get the disclosures. They recall. A lot of them read the disclosures. They don't have much impact on the credit decision. But, you know, that says more about the nature, extent and quality of the disclosures than anything else.

  Mrs. MALONEY. There were some 40 percent who didn't?

  Mr. TASSEY. Who didn't find them useful. That could be for reasons that have nothing to do with the fact that some people think that the disclosures are useful.

  Dr. POLLARD. I would comment only to add that all of the trade groups here make a strong, strong effort to highlight for their members the need for exactly what you are saying, ''. . . clear and conspicuous notification to consumers.'' We get the first crack, obviously, in many cases, when a regulation comes down interpreting this type of language. It is just that regarding Reg Z or Truth in Lending, and I think all of the institutions get it directly, and these trade groups, one of our functions is to reinforce that and to provide methods, easier ways of doing it.

  Ms. ROYBAL-ALLARD. What is the problem with ''opting in''?

  Dr. POLLARD. I think ''opting in'' becomes a very inefficient system in terms of consumers not knowing about the next product. If they have to ''opt in'' each time, they may not be in----

  Ms. ROYBAL-ALLARD. Couldn't they ''opt in'' and be told, ''You will have a variety of services available to you and in order to get that information, you need to 'opt in' to that.''? What would be wrong with that?
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  Dr. POLLARD. I think what you are describing is actually an ''opt out'' procedure where someone initials it and says, ''I will do it, but I don't want to participate in this.''

  Mr. TASSEY. If I could add, there is no consumer research that indicates that consumers are, on a widespread basis, concerned about this. Those are the people we should be asking. There are plenty of people out there competent to conduct consumer surveys. We do it all the time. We have some idea of what our customers want; otherwise, we would not be able to target----

  Ms. ROYBAL-ALLARD. I would say that a lot of consumers aren't concerned about it because I don't think they really know what is going on, or understand it, at this point anyway.

  Chairwoman ROUKEMA. Excuse me, I think we have run out of time. We will get back to you if you want to either submit it in writing or come back after Mr. Bentsen.

  Congressman Bentsen, your turn.

  Mr. BENTSEN. Thank you, Madam Chairwoman. This is an interesting subject and it is an extremely complicated subject. I probably understand the securities regulatory structure better than the bank regulatory structure that Mr. Vento was talking about. He understands that far better than I do.

  I do have a few questions. This is somewhat related, and I think it is very important.

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  In the last Congress we looked, both at the full committee level and at the subcommittee level, at some issues dealing with consumer practices on the part of banks as they enter into these other businesses. And obviously through the OCC and others in the Fed, banks are already far beyond the Congress when it comes to securities underwriting and sales practices and insurance sales practices, and we had some studies done by the GAO that raised some questions about the consumer aspects of that.

  This January, I believe it was, the regulatory working group of Treasury, the Fed, the SEC, the OCC, and I think the FDIC put out a proposed rule dealing with sales practices of securities, which I read, and I would be curious as to your comments about that proposed rule.

  Dr. POLLARD. The interagency guidelines on sales of non-deposit products has been around a little bit longer and it is a guide. It also goes to what Ms. Roybal-Allard was talking about where regulatory action was needed. It puts in place, not just for securities but other products, the disclosure, the location, the--some of the appropriateness standards for sales to individuals.

  I think the reception in the industry has been generally favorable to that. I haven't heard complaints at all. I have seen people saying, ''Good, this is useful,'' and people have been adhering to it.

  Another thing this committee did last year that Jeff touched on was self-testing. You encouraged the industry to go in and check all of their practices and procedures, and I think that will be very positive for verifying their systems. So I would just say that for the overall structure of the interagency guidelines, it is a very detailed document.
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  Mr. BENTSEN. You have heard no objection, as I understand the rules, securities sales personnel would be required to fall under NASD regulation and NASD licensing requirements, and you heard no objection to that?

  Dr. POLLARD. I would say in Section 20 subsidiaries today they are almost all registered.

  Mr. BENTSEN. Let me ask Mr. Tassey, and I don't want to get into this debate, but I have to ask this question: As I understand H.R. 268, it would preempt State law with respect to Federal lending law for financial, for diversified, financial services companies such as those that you represent. And I only ask this for the record: Would that preempt State law as it might apply to, say, such things as home equity lending?

  Mr. TASSEY. You are referring to the market-funded lending institutions provisions?

  Mr. BENTSEN. Right.

  Mr. TASSEY. Basically what that would do is give the same treatment on rates and related fees that national banks currently get, although this institution would not be insured or take any deposits or anything like that. So to the extent that a product, a consumer product, is done through this market-funded lending institution, it would receive whatever treatment a national bank would in doing the same, which is generally uniform rates, fees, what have you.

  Mr. BENTSEN. Let me just ask also--let me make an observation. I think we are going to have to look at this, all of this, very closely. I think H.R. 268 is a bill that is moving in the right direction. I do have some concerns about the non-commercial aspect, allowing up to 25 percent of an asset value, I guess, to be in the non-commercial.
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  Last year we argued about 7 1/2 percent or 5 percent in merchant banking. I don't know where I come down on that personally. I know the arguments were made that diversification may, in fact, result in less risk rather than more risk, although there are many examples where we have seen that risk can occur overnight. And so I think we will have to look very closely at that as we go forward.

  But I think we are making, moving, in the right direction, Madam Chairwoman, and I am hopeful we can get a bill done sometime this year, because I think if we don't, Gene Ludwig and others will do it for us. And I thank you.

  Chairwoman ROUKEMA. Thank you, Mr. Bentsen. You have taken the words right out of my mouth. I used some of those references in my opening prepared statement.

  May I also point out to you, we are really running way beyond our time schedule here, but I also have questions about the size of that commerce basket, and I expressed some interest, or reservations, at the beginning. I will not present the question here, but I will present the question in writing to every member of the panel.

  Some of you have alluded to the issue, others have not. But I will present the question particularly with respect to credit ratings for lending decisions, economic concentration. Be a little more specific; I would appreciate your responses in writing.

  Chairwoman ROUKEMA. Now, Mr. Royce has a final question.

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  Mr. ROYCE. No question, ma'am.

  Chairwoman ROUKEMA. Thank you very much. I appreciate so much your being here today, and I am sure you can look forward to a number of questions aside, in addition to mine in writing, and we look forward to your responses.

  Chairwoman ROUKEMA. With that, I call for a 5-minute, no more, 5-minute recess in the subcommittee.


  Chairwoman ROUKEMA. Panelists, don't take this personally. Wait a minute. We had better wait for Mr. Vento. My Ranking Member will be back momentarily, will he not? Yes? All right, well, we will begin here.

  I believe that one or two Members on my side will hopefully be returning, but they have conflicts with meetings in their offices, and they have apologized to me. I am sure Mr. Vento will be back momentarily, but I will take Mr. LaFalce's recommendation and begin with this second panel.

  Let me introduce you in the order in which you are seated. Matthew Fink, President of Investment Company Institute, which represents a good number of companies, well over 400 investment companies.

  Samuel Baptista is President of the Financial Services Council and has been very well known and widely known for his activity in financial services reform.
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  Marc Lackritz is President of the Securities Industry Association, 760 securities firms throughout the United States.

  Roy Albertalli, correct? Mr. Albertalli is Vice President and General Counsel of the Metropolitan Life Insurance Company. We appreciate your being here. We need to hear from those insurance companies.

  Last, but not least is, James Klagholz. His claim to fame is that he is from New Jersey, and we are proud of him, and he is also testifying on behalf of the Independent Insurance Agents of America.

  We welcome you all. We appreciate your patience and indulgence and can assure you that our Members will have the benefit of your, not only your written testimony here, but also the benefit of the conversation and discussion that we will be having in your answers to the questions.

  Thank you so much, and let us begin with Mr. Fink.


  Mr. FINK. Thank you, Madam Chairwoman. I am Matthew Fink, President of Investment Company Institute, the National Association of the American Mutual Fund Industry. I am pleased to be here today to testify on H.R. 268.
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  We believe that there are five principles that should underlie legislation to restructure the regulatory framework for the financial services industry. First, grant banks full mutual fund powers; second, modernize the Federal securities laws to address bank mutual fund activities; third, permit the affiliation of banks, securities firms, insurance and commercial companies; fourth, provide for functional regulation of each entity; and fifth, create an appropriate oversight system for the new financial services holding companies.

  House Resolution 268 contains provisions implementing each of these principles. As a result. H.R. 268 lays a firm foundation for Congress to build on as it proceeds with financial services reform. My testimony today focuses on the appropriate oversight system for the new holding companies.

  Any decision to permit securities, banking and insurance firms to affiliate with each other necessarily raises the question of how government should oversee the new holding companies. Each of the industries, securities, banking and insurance historically has been subject to extensive governmental oversight. But each industry functions under different systems of regulation which rest on different premises and rely on different regulatory tools.

  The task facing Congress is to design an oversight system for the new holding companies that will maximize the public interest by protecting consumers, while minimizing the potential for marketplace disruption through inappropriate regulatory requirements.

  House Resolution 268 constructs an oversight system based on three concepts.

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  The first concept is strong functional regulation. The bill envisions that each subsidiary of the holding company would be separately regulated by function with, for example, the SEC regulating securities firms and banking agencies regulating banks.

  The second concept is risk assessment, designed to protect banks and the financial system by ensuring that banking agencies receive information identifying the effect that activities of non-banking subsidiaries may have on the safety and soundness of affiliated banks.

  The third concept is enhanced regulatory coordination. The bill requires the functional regulator of each of the various subsidiaries to cooperate with each other in the exercise of their regulatory responsibilities.

  We support an oversight system based on these three concepts because it utilizes existing regulatory mechanisms that serve the public interest well. It also is well-designed to enable the banking agencies to monitor risk, both in the context of individual banks and on a system-wide basis.

  Importantly, the model does not seek to inappropriately impose safety and soundness regulation on securities firms and other non-bank subsidiaries. This course of action would interfere with the current system of securities regulation which has served to protect investors and make our capital markets the strongest in the world.

  Although H.R. 268's oversight provisions provide a solid starting point for financial services reform, the bill should be revised in a number of ways.

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  Specifically, the role of the National Financial Services Committee should be limited to that of a coordinating and advisory body. Our written testimony identifies provisions of the bill that would grant the committee broad substantive authority over the committee's member agencies and over financial services holding companies. These provisions potentially threaten the independence of the agencies and conflict with functional regulation.

  Our written testimony also identifies provisions which may be read to grant the banking agencies substantive regulatory authority over holding companies and non-bank subsidiaries. These provisions conflict with the bill's oversight model and conflict with functional regulation.

  In sum, H.R. 268 focuses on the key ingredients: tough functional regulation, effective risk assessment mechanisms, and close interagency coordination that are necessary to provide for effective oversight of the new financial services holding company.

  I appreciate the opportunity to appear before you today. I would be happy to answer any questions.

  Chairwoman ROUKEMA. Thank you, Mr. Fink.

  [The prepared statement of Mr. Matthew P. Fink can be found on page 308 in the appendix.]

  Chairwoman ROUKEMA. Mr. Baptista

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  Mr. BAPTISTA. Thank you, Madam Chairwoman. I appreciate the opportunity to present the views of the Financial Services Council on the need for financial reform.

  We are encouraged by your recognition of the changing financial services marketplace and the corresponding need to modernize our Nation's financial system. I commend you and the Members of this subcommittee for your timely review of the crucial issues impacting today's financial environment.

  Ten years ago, when the council was formed, financial modernization was considered by many a radical concept, the creation of a ''brave new world'' for the financial services industry. Today modernization is simply a debate over how to conform the U.S. regulatory structure to the ''brave new world'' already well-entrenched in the marketplace. Over the intervening years this committee has amassed an extensive record on pros and cons of competing legal frameworks, a record clearly supporting the case for reform.

  The competing approaches to financial modernization introduced this year, H.R. 10 by the Chairman, your bill, H.R. 268, and the last session's D'Amato and Baker Bills, which we understand Mr. Baker and Mr. LaFalce will be reintroducing later today, are not that far apart. We can narrow the remaining issues down to a few, though significant ones. These are: One, the extent of affiliations permissible within a financial services holding company, most notably whether there will be affiliations between banks and commercial enterprises?; Two, if a line is drawn between banking and commerce, are the activities clearly delineated, as in H.R. 268, or are they left largely up to the discretion of the regulator, such as in H.R. 10?; and finally, the degree of oversight, if any, over the holding company?
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  We are most pleased that all of the financial modernization bills proposed this year at a minimum permit affiliations between banking, securities and insurance firms.

  The question now at hand is the extent of commercial ownership. The banking and commerce issue is complex and involves more than a straightforward yes or no response.

  There are Members of this subcommittee who feel very strongly that such a mix is not healthy for the economy and, while disagreeing, I respect their opinions. However, I strongly believe that to define what is, or is not, a financial service is an artificial construct. The list is sure to change as the market changes, but as this decade-old debate clearly illustrates, the law is slow to adapt. I believe the financial system is better served by placing no restrictions on affiliations and addressing particular policy concerns, if substantiated, about commercial ownership by other means. As discussed in our written prepared statement, there are numerous alternative ways to address the concerns that have been raised without restricting the progression of the market by drawing a line between finance and commerce.

  House Resolution 268, however, does draw such a line by placing a broad, yet precise, definition of financial services into the law, then allowing in the corporate mix of a financial services firm a 25 percent basket of ''non-financial'' activities. Once the line is drawn, this basket is absolutely necessary to create a true two-way street for the securities and insurance sectors of the financial services industry, where commercial holdings are not uncommon. This model addresses the banking and commerce question from one of two perspectives. It allows financial firms a certain amount of commercial activity, but it does not afford commercial firms an opportunity to own an insured bank.
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  Furthermore, the definition of ''financial services'' itself perpetuates an undue layer of regulatory burden, for whenever a new line in the sand is drawn, someone must be there to enforce it.

  Another central issue to this debate, and perhaps no less complex than the issue of banking and commerce, is the extent and manner of holding company oversight and regulation.

  House Resolution 268 includes oversight provisions modeled after the risk assessment provisions adopted in the Market Reform Act of 1990. These provisions would grant the appropriate banking agency the authority to require insured depository institutions to keep records and file reports regarding the operations of its affiliates. They are designed to give banking regulators sufficient information about the activities of bank affiliates to apprise them of potential threats to the safety and soundness of the bank itself or the banking system as a whole. Functional regulation of the affiliates, which we believe is appropriate, continues as it does under current law.

  Before adopting any specific model of holding company oversight, it would behoove this subcommittee to hold a full and open hearing on the policy issues involved. Is a degree of oversight necessary? If so, what form would it take and where should such oversight authority be vested? Does one type of holding company oversight fit all forms and sizes of financial services holding companies? The competing proposals before this subcommittee address the issue differently and other bills, expected to be introduced shortly, will no doubt contain other alternatives to the rigid Bank Holding Company Act regulations we have today. Each approach should be explored carefully before a specific model, if any, is adopted.
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  I would now like to take a minute to talk about one very important consumer benefit of financial modernization. Allowing firms to offer a wide variety of products and services to their customers clearly enhances competition in the financial services market. Cross-marketing is the tool financial services providers use to inform their customers of the products available. There have been attempts at the State level to restrict the cross-marketing of financial products, most notably insurance and banking products. Such restrictions are anti-competitive and must be addressed in any serious reform effort. I applaud you, Madame Chairwoman, for including in your legislation a provision preempting discriminatory cross-marketing restrictions.

  In concluding, I repeat my call for the enactment of legislation to modernize our Nation's antiquated financial regulatory structure. The Financial Services Council and its members stand ready to work with the subcommittee to address all of the legitimate policy concerns within the debate and resolve them in a manner that will service the long-term interests of our Nation's economy.

  Thank you.

  Chairwoman ROUKEMA. Thank you.

  [The prepared statement of Mr. Samuel J. Baptista can be found on page 322 in the appendix.]

  Chairwoman ROUKEMA. Mr. Lackritz, please

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  Mr. LACKRITZ. Thank you, Madam Chairwoman. I appreciate the opportunity to participate in this hearing and to present SIA's views on H.R. 268. We commend you, Madam Chairwoman, for your introduction of this legislation and for making financial restructuring such a high priority for this subcommittee.

  When baseball great Yogi Berra said, ''This is like deja vu all over again,'' he could easily have been talking about financial modernization legislation instead of baseball. But while baseball is fundamentally the same as when Ty Cobb and Babe Ruth played the game, the financial services industry today bears little resemblance to the industry that existed in 1933 when Congress enacted the Glass-Steagall Act. We would very much like this annual ritual to end with the long-awaited enactment of financial services modernization legislation.

  Chairwoman ROUKEMA. Hear! Hear!

  Mr. LACKRITZ. Technical innovations, new financial products, and globalization have put heavy pressure on the current outdated regulatory system. Bank regulatory actions have gradually eroded the distinctions between financial intermediaries. Now banks and securities firms compete directly against each other to sell securities, advise mutual funds, and underwrite and deal in securities.

  Both sectors offer sophisticated products, financial advice on corporate transactions, annuities, debt financing, and other products and services, but while commercial banks are engaged in the securities business, securities firms remain excluded from the business of banking.
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  In the context of today's financial markets, this makes no sense. If banks can engage the full spectrum of securities activities, what possible policy object is achieved by prohibiting securities firms from affiliating with firms that accept insured deposits?

  Indeed, technology is now sweeping away the few remaining shards of the Glass-Steagall Act's prohibition against banks owning securities firms. Already consumers can use their home computers to dial into their banks to pay bills, send checks, or buy and sell securities with the mere click of a mouse.

  Computer companies are looking for ways to expand electronic banking services and broker-dealers and issuers are underwriting and selling securities over the Internet. Additional electronic marketplaces for securities are proliferating. The financial services industry is increasingly becoming an information business where consumers use computers, telephones, newspaper ads, and other media to determine which institution offers the best product at the best price. In this environment, arbitrary distinctions such as the Glass-Steagall Act's separation of commercial and investment banking are not effective. Electrons don't reach statutes.

  Comprehensive financial services modernization can only be achieved by Congress. Piecemeal, unilateral regulatory revision has produced a one-sided and confusing regulatory structure that permits banks to have securities operations, but prevents securities firms and insurance companies from affiliating with banks. This structure does not reflect a policy determination by Congress that commercial banks should have broader powers than securities firms and insurance companies; rather it reflects the fact that banking regulators are using great creativity and ingenuity to advance the interests of their constituent banks.
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  The fact that banks now have opportunities that securities firms and insurance companies do not, hurts consumers by preventing fair and full competition in the financial services industry.

  Madam Chairwoman, SIA strongly supports your efforts to enact comprehensive financial services reform legislation. Although H.R. 268 largely incorporates our three principles for financial comprehensive financial restructuring, competition without subsidies, a two-way street, and functional regulation, several aspects of the legislation present some concerns.

  With respect to the competition without Federal subsidies, we believe there should be no government subsidies that benefit one type of financial services provider at the expense of another, which means that the low cost of funding that banks enjoy should not benefit any securities operation and the taxpayers should not bear the risk securities firms face every day.

  We strongly support the provision in H.R. 268 that permits securities firms and banks to meet the financial services needs of their customers by establishing wholesale financial institutions.

  With respect to functional regulation, H.R. 268 generally requires that the appropriate Federal banking regulator will oversee any bank subsidiaries of any financial holding company, and the SEC will oversee any securities firm subsidiaries of such a holding company. We strongly support this approach because it relies upon the expertise and authority of the functional regulator to ensure that the activities of one affiliate do not threaten the financial stability of another affiliate.
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  We also strongly support the aspect of H.R. 268 that would eliminate regulation at the holding company level. No apparent purpose is served, other than needless regulatory duplication, by having a banking regulator oversee a bank and having the same, or a different banking regulator, regulate the holding company.

  We believe that any legislation that modernizes the regulation of financial services must ensure functional regulation. Functional regulation is essential because it provides investors in the capital markets the same protections regardless of whether they transact business with a bank, a securities firm or an insurance company.

  United States capital markets are the strongest, most liquid and most vibrant in the world. There is simply no reason to reinvent the wheel and permit the development of a parallel system of regulation under which bank securities activities would be regulated by a different agency that would regulate similar activities undertaken by a registered broker-dealer.

  There are some aspects of H.R. 268 that do not conform with the goal of full functional regulation. We hope to work with Members of the subcommittee to modify this and other troublesome provisions. For example, the bill would permit banks to engage in a large number of securities activities inside the bank without being regulated as a broker-dealer. We believe this approach needs to be reexamined.

  And finally with respect to the two-way street, there are several elements of this legislation which fall a bit short of facilitating a true two-way street, that is to say, put securities firms entering the banking business on an equal footing with a banking organization entering the securities business.
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  Of particular concern, Madam Chairwoman, is the 25 percent basket requirement whereby a financial services holding company could derive only 25 percent of its revenue from non-financial activities.

  Although the act's 25 percent basket provides some flexibility, we believe that a diversified securities firm should be allowed to become a financial services holding company without such a limitation on its non-financial business activities. Concerns about mixing banking and commerce can be resolved through strict enforcement of antitrust laws and affiliate transaction regulations.

  In conclusion, Madam Chairwoman, we commend you and the subcommittee for your efforts to comprehensively reform financial services regulation. We support those efforts and look forward to working with you, your subcommittee, and the full committee as the process moves forward.

  Thank you.

  Chairwoman ROUKEMA. Thank you, Mr. Lackritz.

  [The prepared statement of Mr. Marc E. Lackritz can be found on page 347 in the appendix.]

  Chairwoman ROUKEMA. Mr. Albertalli for the American Council of Life Insurance

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  Mr. ALBERTALLI. Thank you, Madam Chairwoman, and Members of the subcommittee. On behalf of the American Council of Life Insurance and its member life insurance companies, I would like to express our appreciation for the opportunity to appear today and to discuss our views on financial services restructuring.

  First, we want to thank you for taking the initiative in introducing H.R. 268. Your bill provides an excellent foundation for addressing the many important and complex issues associated with financial services restructuring. Moreover, it is a realistic approach, one that has encouraged all elements of the financial services community to work together to resolve open issues.

  When ACLI members voted last September to endorse the concept of banking insurance affiliations, it meant that for the first time the three principal components of the financial services community: banking, securities and insurance, shared the same legislative objective. In our view, there has never been a better time for Congress to act.

  ACLI and its members believe that legislation to restructure the financial services industry must include certain important concepts. I will briefly outline several of the concepts important to us.

  First, functional regulation: Functional regulation is essential if there is to be true equality in a restructured marketplace. Simply stated, all those engaged in a particular activity must be subject to the same rules and regulations. For example, those engaged in insurance activities should be regulated by State insurance regulators, while bank regulators should supervise those engaged in banking.
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  Second, while insurance sales may be permitted to occur within a bank, insurance underwriting activities, the risk-taking component, must be conducted in a separately organized and capitalized bank affiliate. This approach is needed not only to facilitate functional regulation, but also to insulate banks from insurance risks and insurance from banking risks.

  Third, the approach to regulation at the holding company level once insurers and banks affiliate is very important to us. Frequently the starting point for discussion is the bank holding company model with its significant Federal Reserve oversight role. This may have been appropriate when bank holding companies only controlled banks; however, H.R. 268 would permit the combination of two businesses, banking and insurance, that are each separately regulated for solvency.

  Some insurers can be expected to acquire banks as downstream subsidiaries. This would certainly be the case with mutual insurers, absent mutual holding company laws. Imposing Federal Reserve financial regulation on operating insurance companies would conflict directly with State solvency insurance regulation.

  We believe that the preferable regulatory structure leaves solvency regulation exclusively at the institutional functional level as reflected in H.R. 268 with holding company regulation providing a means to monitor affiliate activities and coordinate efforts as appropriate.

  Fourth, Federal legislation must place some limits on regulatory prerogatives. This means limiting State regulatory actions which would unreasonably interfere with the bank's insurance activities. Likewise, no bank regulator should be able to circumvent Congress or State insurance regulation, whether by redefining the businesses of banking and insurance, or otherwise.
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  Fifth, Federal legislation should permit commercial affiliations. Insurance companies have a long history of owning and being owned by commercial entities without adverse consequences. It is ACLI's view that adding a bank to the mix would not pose any additional difficulties that could not be addressed through a combination of firewalls and reporting requirements. We believe, therefore, that broader commercial affiliation must be permitted.

  Lastly, mutual insurers constitute a significant portion of our business and must be fully able to participate in a restructured marketplace. Restructuring poses a unique challenge to mutuals because of limits on organizational structure and access to capital markets inherent in the traditional mutual form.

  We are pleased that your bill includes provisions that will facilitate the formation of mutual holding companies, thus providing mutual insurers with a meaningful opportunity to participate. On behalf of MetLife and all the other mutual insurers, I want to thank for your foresight in this respect.

  Again, Madam Chairwoman, thank you for the opportunity to express our views. We look forward to working with you and the subcommittee as the issue progresses, and we will be pleased to answer any questions you may have.

  Chairwoman ROUKEMA. Thank you.

  [The prepared statement of Mr. Roy C. Albertalli can be found on page 362 in the appendix.]
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  Chairwoman ROUKEMA. Mr. Klagholz of the Independent Insurance Agents.


  Mr. KLAGHOLZ. Thank you, Madam Chairwoman. I don't know whether you think you saved the best for last or----

  Chairwoman ROUKEMA. Obviously.

  Mr. KLAGHOLZ. It is a pleasure to be here. I represent over half a million insurance agents, members of the Independent Insurance Agents of America, National Association of Life Underwriters, and the American Land Title Association.

  Throughout the history of our organizations, dating back to the early 1900's, we have always advocated the separation of banking and insurance for a variety of sound policy reasons. Banks have enjoyed special treatment in comparison to insurance agencies and insurers. For example, banks have FDIC coverage, access to the Federal discount window, the too-big-to-fail doctrine and the source of strength doctrine.

  In addition to that, banks have the ability to leverage credit through credit ties, whether explicit, which is illegal but very difficult to enforce, or implicit. But all of this is now history, and we are looking toward the future.
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  Recently, the national boards of both IIAA and NALU adopted policy supporting affiliations within the financial services industry with two conditions.

  First, there must be true, real functional regulation of insurance, which means States regulate the business of insurance, no matter who sells or underwrites the product.

  Second, there must be consumer protections for insurance consumers in this ''brave new world.''

  For our organizations to say this is truly a radical departure, but we didn't come to this point with any misconceptions. The world of affiliations is for big players; we know it, the banks know it, the securities firms know it, and Congress knows it. IIAA represents small businesses. We will not be acquiring banks; they will be acquiring us.

  Affiliation in the context of a small business is a one-way street and one-way streets have warning signs to prevent accidents. But we can and will adapt, and consumers will benefit if Congress creates a true level playing field. The small businesses that I represent, as I said, seek two things in this ''brave new world'' of affiliations to keep some semblance of a level playing field.

  Functional regulation: States have regulated the business of insurance for decades and should continue to do so. We oppose dual regulation where the OCC is a superregulator preempting State law whenever they creatively believe there is a so-called significant interference.

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  Consumer protections: This subcommittee should look at consumer disclosure laws, the appropriate use of confidential customer information and credit tie-ins. Clearly, the States also have an important role to play in adopting consumer protections.

  Recently, Chairman Leach was sent a letter by the Alliance and in that letter it states, and I quote, ''Regulation of financial services should be focused on the specific function being performed and not on the corporate structure. Such regulations should be based on the principle of functional regulation.''

  Mr. LaFalce, I heard your question earlier in regard to this and the Alliance, and it was stated that we were not participants in this. Had we been asked to sign this letter, and we were not, we could have signed this letter.

  We strongly believe that it doesn't matter who is selling the insurance product. They should be regulated by the State without preemption or a different set of standards by the OCC. Granted, States cannot prevent banks from selling insurance and some State anti-affiliation laws would have to be preempted to permit affiliations in States like Louisiana and Georgia and Pennsylvania and Florida. However, after that, States should have the right to regulate.

  Quite interestingly, the OCC is currently taking comments on possible preemption of a new consumer protection law enacted in Rhode Island before the regulations in Rhode Island are even final. The law was passed by an overwhelmingly bipartisan margin in the State legislature, signed into law by the Governor, and yesterday in the week the OCC closes its comment period, the Rhode Island Department of Business Regulation is holding a hearing on the final implementing regulations.
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  The OCC should not be in the business of preempting State consumer protection laws. Prevention of any bank insurance activity is one thing, consumer protections is another.

  House Resolution 268 does not contain an insurance functional regulation provision and therefore ambiguity, litigation and confusion could fill the vacuum. We have, however, discussed this issue with the Chairwoman and look forward to working with you on this section.

  The Leach Bill makes an attempt at implementing real functional regulation, but it needs to be modified, because it continues to permit the OCC to preempt State consumer laws under the significant interference standard. Without addressing this issue, you cannot have real functional regulation.

  Thank you very much for the opportunity to be here.

  Chairwoman ROUKEMA. Thank you. Thank you very much.

  [The prepared statement of Mr. James R. Klagholz can be found on page 411 in the appendix.]

  Chairwoman ROUKEMA. First, I believe I should say that it does my heart good and I am very pleased to see that everybody is at the table, everybody came around to the table, and particularly the two representatives of the insurance industry. I was particularly interested in what you said about the letter and that, had you known about it, you would have cosigned it.

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  Now there seems to be a remarkable degree of agreement here and unanimity of opinion, but I am not quite sure what that means when you get down to the details. The old saying is, ''The devil is in the details,'' and I think that was said previously.

  I don't quite know where to start with the questions here, but someone said, and I think it was Mr. Baptista, but I could be wrong about that, but when you draw the line in the sand, someone has to enforce it. But there seems to be a wide degree of opinion here as to how that enforcement comes about. Can each one of you, in one or two sentences, tell me what your position is on that?

  I know you have talked about it in general, and some of you have been rather specific, but I think when you get down to the details of it, there is quite a bit of distinction between you as to how that is enforced. Or am I wrong?

  Mr. BAPTISTA. Are you talking about the enforcement of the separation of banking and commerce, or regulation of the parent company?

  Chairwoman ROUKEMA. Both. I am glad you asked that.

  I am talking about both, separation of banking and commerce and the general regulatory structure.

  Mr. BAPTISTA. We clearly think that there is no need for separation of banking and commerce. There are concerns----

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  Chairwoman ROUKEMA. But there is going to be, all right. Go ahead.

  Mr. BAPTISTA. On that issue, the two concerns that are most often raised are the concentration of economic power and self-dealing.

  Chairwoman ROUKEMA. Conflicts of interest, safety and soundness. Go ahead.

  Mr. BAPTISTA. On the issue of concentration of economic power, Marc mentioned the antitrust laws. Certainly we can enforce them; we can also come back and put in additional safeguards if this subcommittee determines that from a public perspective that is necessary. And that is, you can prohibit commercial entities from acquiring the top 20, top 25, what have you, the largest institutions and prohibit mergers of the largest institutions.

  You can also require that commercial entities that wanted and needed a presence in the banking business could only enter de novo and couldn't make any acquisitions, with the exception of perhaps portfolio acquisitions; and I think that would get at any of these concerns. We hear this fear that General Electric is going to go out and acquire Citicorp or Chase.

  Today in our markets commercial firms, IBM, Xerox, General Electric, AT&T, have the ability to make any strategic acquisitions outside the banking industry they choose. They can acquire Merrill-Lynch and American Express. They can go out and acquire any major insurance company that is not a mutual insurance company, but in most instances they have simply chosen not to do so. We think if there are legitimate concerns, you can address them short of saying ''absolutely not.''

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  The second question that comes in is the question of holding company regulation. We have long held the position if you enforce functional regulation properly, you don't need the type of holding company regulation we have today with the Bank Holding Company Act. I think Congress needs to stop on this issue and say, from a policy perspective, ''What is it we are trying to accomplish with respect to the issue of holding company regulation? Are we trying to protect the safety and soundness of the depository institution?'' It seems like that is the whole purpose here, because it is there where the safety net begins and ends. If there is a concern, it has got to be because of insured deposits and perhaps access to the payment system or the discount window.

  Your bill in that instance does two things. One is, on the self-dealing concern, it would put in an absolute prohibition on any lending, direct or indirect, between a depository institution and the non-financial affiliate within your 25 percent basket. So there would be an absolute Chinese wall there.

  Beyond that, we think that you are look at the activities, as in the market reform model, that take place outside the depository institution, that could have a material adverse impact on the safety and soundness of the depository institution. That is all you really need to do.

  Why do we need some type of regulatory czar who is coming in and looking at affiliates that are already regulated, in many instances, and most instances when it is really the regulator of the depository institution that should be looking from the inside out?

  Chairwoman ROUKEMA. Yes.

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  Mr. Fink.

  Mr. FINK. I couldn't agree with Mr. Baptista more, and not based on theory, based on experience. And again, as he did, let me divide your question in half, as between commerce and financial services activities.

  The mutual fund industry is knee-deep in commercial affiliations. Kansas City Southern Railroad owns two large mutual fund organizations. In your home State of New Jersey, a drug company owns the Lexington Mutual Fund Company. Fidelity, the world's largest mutual fund organization, owns a limousine service. Mutual funds have always had commercial affiliations. To my knowledge, these affiliations have never posed a problem in the 57 years since the Investment Company Act was enacted. So our experience indicates no problem with a mixture of commerce and financial activities.

  Second, going to holding company regulation; again, I look at experience, actual experience. The Investment Company Act creates firewalls between a mutual fund and its affiliates. In 57 years of experience with the Act, there have not been serious breaches of those firewalls, and the reason is that the Securities and Exchange Commission is a tough cop. If there were to be illegal affiliated transactions, those people in violation would end up at least with civil damages and probably in jail. So we haven't had that problem.

  And more recently, as Mr. Baptista said, in the securities industry we have lived with the 1990 Market Reform Act. The SEC regulates broker-dealers, but does not regulate the holding company. The SEC gets information from the broker-dealer when it needs it about other affiliates, and the system seems to be working well.
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  So based on our experience, you are talking about legislation merging two industries, the banking industry and the securities industry, and in fact the insurance industry. Our industry does not have holding company regulation, never has, and the banking industry has. I don't see why it is imperative that when we merge A, B, and C, because A has a quirk of holding company regulation, we start out with a premise we have to do that when A, B, and C merge. It doesn't hit me as logical and necessary.

  Chairwoman ROUKEMA. Mr. Lackritz, and we will go down the line, we don't have all that much time, but go ahead. I think this is essential clarification for each of your--supplementary to each of your testimonies. Go ahead.

  Mr. LACKRITZ. In the interest of time, I will try to keep my remarks very brief.

  To summarize, I fully agree with Mr. Baptista and Mr. Fink, and I should probably leave it at that. I would add only two points.

  One is with respect to commerce and banking. It is very, in the securities industry, a number of securities firms, a number of broker-dealers, have very active merchant banking and venture capital operations. Those operations, the venture capital operation and the merchant banking operation, are very important in providing capital to new entrepreneurs, high-tech startups, and emerging companies all over the country. And if there is any kind of arbitrary restriction as to the amount of a firm that can be involved in commerce versus banking, that is going to unnecessarily and arbitrarily limit the amount of capital that is available to new ventures, new firms, new startups, new technologies. As a result, we will really favor eliminating that arbitrary distinction.
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  The 25 percent basket that is in the Alliance bill, as far as we are concerned, is basically a way station on the way to reality. The reality is that the line has been obliterated long ago by various ownership, various competition, in the financial services area, and we think the construct is out of date.

  With respect to the holding company regulation, Madam Chairwoman----

  Chairwoman ROUKEMA. That is of particular concern to me. Go ahead.

  Mr. LACKRITZ. We believe the risk assessment model that was passed in the Market Reform Act of 1990, that has governed the regulation of the securities industry, has been very, very effective. It basically requires that the regulator get information from other regulators that are in the best position to get that information.

  There is nothing to be served particularly new or different by regulating a holding company. Every one of our financial crises that have happened in the past have not happened as a result of the failure of a holding company. They have happened as a result of failure of an insured bank, or a failure of a broker-dealer, but they have not involved the failure of a holding company. So we don't think that level of regulation is necessary.

  Thank you.

  Chairwoman ROUKEMA. I have heard what you said, and I will just submit this question for you to answer in writing, because I had it among, we had it among, our questions for Members, but your answer to this has renewed my interest in it.
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  It is my understanding that the European Union has established a standard that financial conglomerates should be subject to overall supervision. Why should those who own banks set a standard that is lesser and can call to question, anyway, I am using the European Union parallel, which is their experience; and their corrective action which they are now contemplating is contradictory to what you just laid out. We will submit that for you. Go ahead. One minute.

  Mr. LACKRITZ. Given the European Union, given the capital markets of Europe, I don't think we want to necessarily emulate anything that Europe is breaking ground on.

  Chairwoman ROUKEMA. Maybe, maybe not, but there is some experience that they have had that we might benefit from. Right?

  Mr. LACKRITZ. I agree.

  Chairwoman ROUKEMA. Go ahead, Mr. Albertalli.

  Mr. ALBERTALLI. I think the concern initially with commercial affiliations is that many insurers are owned by commercial companies and own commercial companies, and with approaches that take basket, or cap, approaches, we may wind up creating two segments, those that can fully participate and those that can't because of accidents of their ownership.

  I think, to echo everything that the other panelists said, I think if problems occur, they occur at the institutional level and we believe that strong functional regulation of solvency, requiring, whether it be banks, insurance companies, securities companies, to have separate and adequate capital and to require arms-length transactions in dealings between affiliates is probably the right way to deal with those issues.
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  Thank you.

  Chairwoman ROUKEMA. Mr. Klagholz.

  Mr. KLAGHOLZ. From the perspective of our organizations, we believe that the Federal Government has a role to play in the prevention issue, but we believe that the States should be the regulator on the issue of significant interference.

  As to the integration of banking and commerce, we don't have an official position, but we are organizations of small business persons, and our concern is the concentration of economic power.

  In response to the testimony of one of the persons this morning, I would like to illustrate that and say, if anyone tries to equate the market power of a Citibank or a NationsBank or a Bank America owning an insurance agency to the market power of an insurance agent who has an interest in the bank, that person needs to be educated on the life of a small business person.

  Chairwoman ROUKEMA. OK. Thank you. That is heard and duly recorded.

  My colleague, Mr. Vento.

  Mr. VENTO. Thank you, Madam Chairwoman. I think that was a good response. As to this 25 percent, I refer to them as the water wings, we are hopeful that they are not so buoyant that they keep you out of the water. I think that is really the question here.
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  We see a convergence, I think, in terms of insurance and banking and securities functions; and the question is, how significant? If we are trying to, we are not dealing with some theoretical model here; we are dealing with something that is sort of pragmatic that we can have, as I said, we may need these water wings before we start a full swim here of the English Channel. I have been practicing every morning, Madam Chairwoman.

  So, I mean, the issue is, what is the problem? We understand there is nothing inherent in terms of Ford Motor Company that they need to have a bank, they need to have securities. There is not the same convergence of activities that go on with these commerce activities and the full integration that makes it necessary.

  The case has to be made in my mind's eye, obviously, venture capital and some others are a little closer than selling cars, but I think the case has to be made for those activities beyond the 25 percent, which I don't think is going to be very restrictive. I don't think we are talking about 99 percent of the securities, insurance and banking groups.

  It is true there are disparities in terms of treatment here, as you have observed, and you heard in the previous panel about some more disparities that they would like. Even the little limitations that we put on unitary holding companies or other activities are enough to obviously gain, and we are obviously operating from the standpoint of where the courts are, where the law is today, you know, and hopefully we can move it along in such a way.

  I don't know if any of you have any response or any comments back to my comments, but I would be happy, Messrs. Fink, Baptista, Lackritz, or Albertalli, pardon me, Mr. Klagholz. I have some other questions for you, and I was interested, too, to hear your comments about your willingness to sign on to this, and obviously there some elements that are not defined. And I clearly understand that you are, how you might sit down or how your views would be related to that.
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  And one is, of course, how we deal with State powers. We get problems with the consumers and other issues. And, of course, you said that Congress should not preempt State laws relating to an agent's compensation or use of particular individuals as agents, as you believe H.R. 268 would do.

  Mr. KLAGHOLZ. Yes.

  Mr. VENTO. What types of State laws do you believe are appropriate relating to those issues, therefore?

  Mr. KLAGHOLZ. We believe that the business of insurance has been regulated at the State level very successfully for decades and that insurance is a local, more of a localized, issue than other industries. The insurance issues in the State of Kansas are very different from the issues in the State of New Jersey and are very different from the insurance issues in the State of California. There is a regulatory mechanism setup for insurance in each of the States. It has worked effectively and it should continue to work.

  Mr. VENTO. Well, I might, in my State, say that that may be the case. A lot of bank holding companies in my State are substantial insurance powers, some 60-, 65-percent of that.

  I think that the court cases, of course, belie that there are problems. All of a sudden now, if we didn't do anything in terms of this legislation, do anything to incorporate or at least integrate those court decisions, I mean, that is the problem we have.

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  What you seem to be requesting in your prepared statements is at variance with some of the court decisions. I grant you, there ought to be some give and take in this process that they, in terms of trying rationalize what we are doing.

  I very much want to keep you at the table. I think all of us do in terms of trying to work this through in the next year-and-a-half.

  Mr. KLAGHOLZ. For example, as to the Barnett decision, the Supreme Court decision that was rendered in March of 1996, that they neither prevent, nor significantly interfere, with the powers under Section 92 is an issue that, in the absence of Congressional action, will be litigated long into the future as to what specifically is meant by that; and we believe that Congress should assert its authority and stipulate that insurance will be regulated at the State level. But as I mentioned earlier in response to Madam Chairwoman's question, the Federal Government has a stake in the prevention issue, because----

  Mr. VENTO. There is a national banking law obviously, which the Comptroller will remind us, in other words, that he has prevailed in terms of the exercise of that particular role in the national banks. So, you know, can you suggest what you would like to see?

  I understand that, but it isn't as though, so obviously much can be litigated. The option here is to avoid litigation, but at the same time to try to recognize who the groups are and how we can best do that; because in fact those State laws, those regulations have in fact been the issue of lawsuits in which there have been courts that found that they were, in a sense, discriminatory toward the national banks exercise of insurance powers.

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  One of the issues, of course, that has come up time and again has been concentration, and of course, I understand that we have got mergers of banks going on today, we have mergers of securities firms going on these days with Morgan and others. So what is the--do any of you have words of wisdom for us with regard to this?

  We have no limits in this particular bill. We have no, there are various thresholds, I guess, that have to come under. I guess the antitrust laws in the case now are not as active as they have been in previous decades in terms of prevention. Is this something we should be concerned about in terms of with our water wings and other structures in this bill?

  Mr. Lackritz.

  Mr. LACKRITZ. I think that the concern about concentration in the past was in a very different era and with very different numbers of institutions being able to enter the business.

  The entry barriers in financial services are not particularly high. In other words, lots of people and lots of entities have gotten into the financial services business, whether it is banking, whether it is securities or insurance. Now we have a whole new dimension, with the Internet, for a whole new range of competitors who offer the same kind of services that established competitors are already offering, so that the issue about concentration, I think, today is more of a chimera. Really, it is not as real anymore, because of the new opportunities and technologies that are out there.

  Mr. VENTO. I remember I was working on some legislation earlier. We were talking about the affiliate-sharing, and I was wondering whether our service providers have the same sort of qualifications on them in terms of sharing information about our profile on our Web site. They don't, of course.
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  Mr. Baptista.

  Mr. BAPTISTA. I think if you look at experience of what is happening overseas and I use the European example again because we often hear there is no trend toward banking and commerce outside the United States, if you look at the experience in England, the Bank of England has a position that is not a hard and fast position against banking and commerce. What they said is they won't allow a commercial entity to come in and acquire the top clearing banks in England. And if you take a look at Harrod's Department Store, for instance, operates a bank, on the premises, that they own. Ford Motor Credit operates in Europe, not as a finance company, but as a chartered bank.

  So, again, it is this question of size. What are our policy issues? If it is a fact that we don't want, and Congress determines that you don't want, for policy reasons, a commercial entity, a company that is not predominantly financial to acquire one of our largest depository institutions, you can make that determination and still allow for evolution of the markets.

  You mentioned Ford Motor and General Electric as not really needing those powers. Both of those companies have chosen to diversify into financial services. Ford Motor Credit owns The Associates, a finance company that is in the mutual fund business; it is in the insurance business. They own an industrial loan company and a credit card bank. They are already in the businesses today.

  GE Capital is one of this country's largest financial services providers; it is in the mortgage business, the insurance business. At one point they were in the securities business, and they chose to get out of that business; it didn't work for them. But they had the opportunity to enter and exit markets that fit within their own business strategies and let those strategies evolve and change over time.
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  I think we can address, or Congress can address, each and every policy concern without an absolute prohibition.

  Mr. VENTO. I think my time has expired, and I would be happy to----

  Chairwoman ROUKEMA. Well, I don't take exception to what you said, but I do not want to leave the impression here that it is only the European Union, or now you have mentioned the British banks in the British system. The German system also already has restrictions with respect to the major banks being purchased by commercial entities, and they are currently reviewing, as I understand it, their own practices. They are not necessarily a role model for us, but I think we have to learn by their experience, or at least not be ignorant of it, and examine what has forced them to confront these issues.

  Mr. Bentsen.

  Mr. BENTSEN. Thank you, Madam Chairwoman.

  Mr. Baptista's comments regarding Harrod's brings the other side of the dilemma that we have, and I think back in talking about the market basket of going to 25 percent of commercial activities, I think back to the deal for Macy's in the late 1980's that I think, if I remember correctly, brought down the Campo Company in Canada.

  So the dilemma that we face, as we look at the other side of the equation, more on the securities side, I can think of First Boston and some of the experiences they had in the leveraged buyout business toward the end of the 1980's that had a great impact on their ability and resulted in, I guess, Credit Suisse coming in, and then of course there is Drexel-Burnham, but I am not going to talk about that. I think we all know that story, but it does raise that dilemma.
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  On the one hand, you are right, everybody is getting into everybody else's business and it is sort of too late to turn around at this point. On the other hand, there are a couple of points that we look at where there have been problems. That is where our concern is.

  I think from what all of you all have said and I apologize for not being here for your full testimony; I was in another committee. But I think from what all of you all have said, functional regulation is a critical part of this. You have to allow the experts in the different sectors the ability to maneuver.

  I would like to ask Mr. Lackritz, and anyone else who wants to comment on this, I notice that the OCC's proposed rule, they are moving forward with allowing securities underwriting for national banks. Obviously, I agree with you, I think this does give national banks a leg up on securities firms, and I think it does invite some risk. I guess my question is, in your opinion, is this giving national banks a lesser regulatory oversight for underwriting corporate and municipal revenue securities than securities firms would have?

  Mr. LACKRITZ. It shouldn't. If it is done properly, it shouldn't and there should be functional regulation. But part of the problem we have is when, in fact, personnel inside of banks are engaged in securities activities, they are not always required to do so as a registered broker-dealer, which means that they can get a different regulatory treatment in some of those activities. So that is one of the details in this bill that we think is terribly important and terribly critical in terms of working through to ensure that there actually is functional regulation of everybody and everybody else's business.

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  Mr. BENTSEN. In your testimony, you state that you don't believe there is a two-way street. Is it because of this issue or other issues as well? Do you think H.R. 268 gets you to a two-way street?

  Mr. LACKRITZ. Yes, it does get us to a two-way street. As I said in my testimony, it is not quite as open from the standpoint of the banking-commerce issue as ideally as we would like, but it does get us to a two-way street where, in fact, broker-dealers could get into banking or could be financial services holding companies and get into these other areas. So, yes, it would create a two-way street.

  Mr. BENTSEN. You stated that the 25 percent level was a holding pattern on the way to reality, I guess is how you stated it. But, in reality, are most of the firms on the securities side, do they have more than 25 percent of their capital invested in venture activities or in merchant banking activities?

  Mr. LACKRITZ. No. It may be a problem for a few firms in various circumstances where they may be involved in a variety of merchant banking or venture capital transactions and for a particular period of time potentially have a problem. But for the overwhelming majority, this is not a problem.

  Mr. BENTSEN. For the full service firms primarily, it shouldn't be a problem, I guess.

  Do you know, and I think I know the answer to this, but I am just curious, do you think that if we were to go forward with H.R. 268, it would have any direct or indirect impact on the Tower Amendment?
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  Mr. LACKRITZ. Well, you are now recalling back the teaching on the Tower Amendment and the issue of underwriting municipal bonds.

  Mr. BENTSEN. We were taught very well in my prior life.

  Mr. LACKRITZ. I know that. It has lived on in infamy. It may very well. I think the issue of where to house underwriting of municipal bonds, distinguishing right now the distinction between general obligation bonds and revenue bonds which has been written in the law, I think obviously that is one of the considerations that would have to be reexamined as we move forward on this.

  We would like, I think ideally it makes sense to have all securities activities in a broker-dealer that can be functionally regulated by the SEC.

  Mr. BENTSEN. Let me go back for a second to the OCC. Is it possible with the OCC rule that they are creating and I haven't looked at it, so I don't know, are they creating a new category of bank-eligible securities or are they just creating new authority?

  Mr. LACKRITZ. As I understand it, it is new authority for the national banks to engage in new activities through an operating subsidiary.

  Mr. BENTSEN. Thank you, Madam Chairwoman.

  Mr. VENTO. If I can intervene at this time, Madam Chairwoman, I think that is why it behooves us to act before we end up with a greater problem, in a sense, in terms of these bank-eligible activities.
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  One of the points that Congressman Bentsen was pointing to and that Mr. Lackritz was referring to is the bank-eligible securities and how they may be rewritten. Ideally, you would like them outside the bank in an affiliate.

  We run into this problem of do no harm letting them do some of the activities, so we run immediately into problems with what banks are doing today. All of a sudden, under this, they have to, we really are trying to steer them in some direction by taking some activities out, which is very difficult.

  But in any case, I mean, generally the push-out requirements here are explicit. Do you think that they are workable? Are they going to cause certain problems in gray areas for any of you that are on the panel, in terms of push-out activities for the affiliation type of structure? In other words, how is this model here going to work?

  Mr. BAPTISTA. I think it is going to change once you go down that road; and once you create an umbrella holding company that accommodates all the interests of everyone in the financial services industry, the needs are going to change over time. I am not sure, when you do it the first time, you will get it, but it is possible to get it absolutely right.

  I think there seems to be within the industry a kind of a growing consensus of willing to accept----

  Mr. VENTO. You mean that the Vento Bill will not go down in history for a long time?

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  Mr. BAPTISTA. It would go down in history.

  Mr. VENTO. My point is only, of course, we are going to have to make modifications. This isn't the law, but my issue is in terms of this, maybe I misstated this, the push-out requirements that we have obviously permit certain threshold questions. When you engage in certain activities, then they push out. We have questions here when a bank-eligible security. We have to deal with that, otherwise the Comptroller is going to be out here continuing to annunciate new eligible securities.

  Mr. LACKRITZ. If I can just briefly address that, Congressman, in terms of structure for the push-out, we think it is a very workable structure and it makes perfect sense. The concern we have is, there may be too many exceptions in the push-out section of the legislation, so as I said, ideally we would like to house all of the securities activities in a broker-dealer and get it functionally regulated by the SEC. We think there are a few too many exceptions currently in this bill, and we want to work to, in fact, pare that level back and pare the level of discretion for regulators back in terms of this.

  Mr. VENTO. I think we are concerned about superimposing a whole new regulatory structure on an existing bank for doing what they are doing. That is the concern and that is why the exceptions end up in the bill. Thank you for allowing me----

  Chairwoman ROUKEMA. We will go over this again, and maybe I am showing my ignorance on this, but I think that was referenced to one degree or another. Mr. Fink expressed concerns about the oversight model creating potential for many of the dangers associated with the supervision model of oversight. I think that is related, isn't it, to what we are discussing here?
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  Mr. VENTO. The holding company model, not the model in your bill----

  Chairwoman ROUKEMA. I am not saying I agree or disagree with you. I am just saying it is something that should focus our attention. And we should go over that, but I am not prepared to----

  Mr. VENTO.----The holding company model. I think that compared to Congressman Leach, the Chairman has come off the holding company model to some extent. It isn't as rigid as it was, but it still provides a cumbersome process, I believe. The impression that I have from the witnesses here is that the holding company model is not as workable as the affiliations or the other model that we have in this legislation.

  Chairwoman ROUKEMA. That is something that we have to concentrate on.

  Mr. VENTO. That is obviously----

  Chairwoman ROUKEMA. It is central.

  Mr. BAPTISTA. The push-out model, that would be enforced between the bank regulator and the SEC.

  Chairwoman ROUKEMA. They are related, though.

  Mr. VENTO. That is correct. I think in credit, Congressman Leach did initiate that particular aspect in his legislation last year, and we picked it up based on that. It is to his credit that we have that model.
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  Chairwoman ROUKEMA. OK. Thank you very much. Any last word that you want to put in here?

  All right. Well, I am very hopeful that this really is the initiation, as I said, at the outset of this hearing, of a process that I would hope can be accelerated. And I am encouraged. I know that the Chairman has alluded, I guess specifically, to a July 4th date. I would like to think that that is reasonable and not overly optimistic, but we shall see.

  I am encouraged by what I heard here today. On both these panels we are certainly far from agreement, but they don't seem to be irreconcilable differences to me.

  To repeat the prepared statement that I made, or that I have made from time to time, that I was very happy to stick my neck out in an effort, not that I agreed with everything in the bill exactly, but I thought it was essential that we use some device, some vehicle, to get everybody to the table, and I think we have accomplished that.

  Maybe we owe credit to Mr. Ludwig, who encouraged it. But in any case, I would hope that we can accelerate this process, and I am encouraged by today; and the rest of our hearings. The next two that will be coming up and hopefully more, that we can put together based on these preliminary assessments.

  Mr. VENTO. I think over 2 years ago we didn't have any subcommittee hearings on Glass-Steagall, so it is a big improvement over 2 years ago. I think the normal process is strength, and it hasn't been here for as long as it has without good reason. While I am concerned about the press releases, I am more encouraged by the subcommittee Chairperson's assertion of the subcommittee's rights and the interest in exercising that jurisdiction, which I think at the end of the day will prevail in terms of what the work product of this subcommittee is. All of us have the same objective, and that is to build the type of coalition we can go to the floor with and preserve, and then meet with our Senate colleagues and convince them of the superior wisdom of the House position.
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  Chairwoman ROUKEMA. Exactly. In that order. Thank you very much. We appreciate it.

  [Whereupon, at 2:05 p.m., the hearing was adjourned.]

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