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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives Roukema, Bereuter, Baker, Lazio, Castle, Campbell, Royce, Lucas, Metcalf, Ney, Fox, Foley, LaFalce, Vento, Frank, Kanjorski, Kennedy, Waters, Sanders, C. Maloney of New York, Gutierrez, Roybal-Allard, Barrett, Watt, Hinchey, Ackerman, Bentsen, Kilpatrick, J. Maloney of Connecticut, Carson, Weygand, Sherman, Meeks, and Lee.

    Chairman LEACH. The hearing will come to order.

    The committee is meeting today to hear testimony from 23 witnesses on recently announced mergers of large financial institutions. Because of the number of witnesses and the importance of their testimony, I am asking unanimous consent for my full statement, as well as those of other Members, to be included in the committee's record. Without objection, that will be the case. I intend to limit myself to a few comments and ask that because of the number of witnesses, the time has to be held 10 to 12 minutes on each side.
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    It is an understatement to say that this is a period of dramatic change in the banking industry in the United States. Since 1980, according to Federal Reserve statistics, there have been about 7,000 mergers of financial institutions in the country that have occurred, and the number of individual banks has dropped from a peak of 14,400 in 1980 to 9,064 today.

    At the same time, however, the number of bank offices has actually increased by nearly 40 percent to some 71,000 banking offices today, and in fact today there are more bank branches per capita than there were 20 years ago.

    For some consumers, this has been a difficult period of adjustment to new locations, personnel and accounts, while for others it has brought opportunities for more convenience and greater services. This hearing is designed, in part, to review questions about the consumer impact of these mergers, and inform the public of what may or may not be involved. In addition, we will explore whether the management and regulators are equipped to prudently administer and supervise institutions of such dimension, as well as the issue of the competitiveness of smaller banks and financial services firms with these newly created financial conglomerates.

    Each of the recent merger announcements needs to be looked at on an individual basis as well as on an industry-wide basis.

    The Citicorp-Travelers merger involves the integration of a money center commercial bank with a major insurance and securities firm.

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    The NationsBank-BankAmerica merger involves the creation of a national coast-to-coast retail bank based upon a union of two dominant regional banks.

    The Banc One-First Chicago NBD merger involves a major consolidation within a particular region.

    The Washington Mutual merger with Great Western and Home Savings involves the creation of the largest S&L in the country, with a West Coast emphasis, the deposits of which account for over 11 percent of the taxpayer-backed savings association deposit insurance fund.

    And, finally, the Household-Beneficial merger involves a consolidation of two of the largest consumer finance companies in the country.

    In response to the trend toward bigness, 3,600 new banks have been formed since 1980, more than 300 chartered in the last two years, and most are growing faster than larger institutions, providing increased competition in the financial services sector.

    It is clear the big are getting bigger from the top down. But from the bottom up, locally controlled institutions, credit unions as well as community banks, often do better on a same store basis.

    Indeed, the greatest secret in American banking today is that community banks merge with regional or national banks, the market share for locally controlled competitors, including newly chartered institutions, has generally increased. There is a great deal of vibrancy in banking today, with institutions stressing personal services doing particularly well.
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    In any regard, technological developments, overcapacity in the industry, and other market forces are reshaping America's financial services industry. These developments have unique implications that should be reviewed separately, as well as within the context of the general trends occurring in the financial services marketplace.

    The good news is that our financial services industry has never been stronger or more competitive. The bad is that globalization of finance holds dangers as well as promise. The key is to proceed forthrightly, but with a degree of caution and recognition that the public interest is definitively intertwined with the health of the financial community. A strong economy is impossible to achieve and maintain without a vibrant, competitive financial services industry.

    Changes in the financial services industry must foremost be evaluated from the perspective of what is best for consumers and the overall economy. The critical question is whether these consolidations bring more products to more consumers at lower costs or whether they fuel anticompetitive forces.

    To assess this concern, the Committee has asked the banks involved in the mergers, as well as regulators, consumer groups and economists, to testify today.

    Chairman LEACH. The distinguished Ranking Member, Mr. LaFalce, is recognized for an opening statement.

    Mr. LAFALCE. Thank you. I thank you and congratulate you for having this extremely timely hearing on an issue that has enormous implications for our financial services sector, most for the consumers that it serves.
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    The recent spate of mega-mergers in the financial services industry has precipitated considerable concern among consumers and community groups. Many of the mergers we will be examining today are occurring under existing law and can proceed whether or not Congress acts on H.R. 10. Others require legislative change, at least to proceed fully as contemplated, although even those proposed transactions could still proceed in greater part under existing law. These financial transactions and the financial services modernization legislation currently pending in the House raise very complex, technical and abstruse issues that are largely the province of legal technicians and accountants, but financial modernization also has, must have, a human face.

    I have always believed that the measure of a financial institution's effectiveness is not its size but its service and its commitment to the community. There is nothing inherently preferable about either larger or smaller financial services firms. The measure of these newly formed institutions will ultimately be taken by the quality, the efficiency and price of the consumer services they offer, the fees they impose, the consumer protections they afford, and the depth of their commitment to the communities they should be serving.

    There are both potential benefits and potential risks to consumers from financial modernization. On balance, the potential benefits may be greater, as long as Congress creates a structure that will ensure that consumers and investors are protected from potential abuses, consumer service is enhanced, and adequate safety and soundness protections are put in place. We should only support modernization legislation that meets those basic tests.

    Some fear that this era of the mega-merger will work to the serious disadvantage of community banks. I am inclined to believe that it is the larger conglomerates who will have to prove their worth to the consumer. I believe consumers still like to go where someone knows their name. I believe they will ultimately choose those institutions which make a real effort to provide high quality and efficient service and play an integral role in enhancing the growth and development of the communities in which they operate. That is a challenge for all financial institutions. But I believe it is a challenge inherently easier for smaller community banks to meet.
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    Mr. Chairman, I would urge that this hearing mark the beginning, not the end, of this committee's inquiry into changes in the financial services marketplace and the impact of those changes on consumers and communities. I am particularly concerned about the implications of the trend toward diversified financial services conglomerates for consumer privacy. The ways in which financial conglomerates organize and utilize customer information can facilitate better and less expensive consumer services, but it can also intrude upon the consumers' privacy. It can reduce services to consumers who are less desirable marketing targets and leave others subject to harassment from endless marketing initiatives.

    We must examine closely whether the regulators have adequate authority to deal with these potential problems and whether Congress has given them adequate guidance. I welcome all of today's witnesses and look forward to each and every one of your testimonies.

    Chairman LEACH. Before turning to Mrs. Roukema, why don't we introduce our new Member, and let me turn to you to do that. But first let me say, Barbara Lee, you are most welcome. Barbara is a graduate of Mills College, the University of California, and may have a conflict of interest, I note, for today's testimony. She once received a Bank of America scholarship. So we welcome you, and we are recognizing this awesome conflict, but let me ask John to formally introduce you.

    Mr. LAFALCE. I would very much like to say hello to Congresswoman Barbara Lee, to welcome her to the United States Congress, to the House Banking Committee.

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    For those of you who do not know a bit about Congresswoman Lee's background, let me tell you that she received her B.A., as Congressman Leach mentioned, from Mills College in 1973, but also a Master's Degree in social welfare from the University of California-Berkeley in 1975.

    While working on her graduate degree, she founded a community mental health center in Berkeley. She worked as a senior adviser and then chief of staff to Congressman Ron Dellums from 1975 to 1987. And then she returned from Washington to California in 1990, ran for the California State Assembly, was elected with over 80 percent of the vote, and after three years in the Assembly, was elected to the California State Senate in November of 1996, again with an enormous vote.

    As we know, last week she was sworn into Congress as the successor to Congressman Ron Dellums. We congratulate her and look forward to many, many productive years of service from her. Thank you.

    Ms. LEE. Thank you very much.

    Chairman LEACH. Mrs. Roukema.

    Mrs. ROUKEMA. Thank you, Mr. Chairman. I certainly am here enthusiastically looking forward to this hearing. It was the right thing to do and I appreciate the fact you have taken the leadership here.

    Certainly it has been rather breathtaking and spectacular, the breadth and size of the merger proposals of the last two months. I won't go into the information, as you have outlined it, but certainly these mega-mergers, as well as the Citicorp-Travelers deal, do require a close look by Congress.
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    I might also say that while these are mammoth mega-mergers, they should be put in context, in a global context and even in a national context. Even with them, we only claim 9 of the top 25 spots of world financial services, and I think that puts it in the context of the global financial economy.

    But there are very essential issues that we must address here, questions of safety and soundness, questions as to whether or not the regulators are ready to examine and supervise these diverse and huge entities. Are more institutions becoming ''too-big-to-fail''? That is a very legitimate question. And are the consumers going to benefit or take advantage of these mergers?

    If anyone had any doubt before they came here today as to what the general public understanding is at the consumer level, Secretary Hawke, I have to announce here that I really had cut this cartoon out, from the New Yorker magazine before you distributed it to Members today. In seeing this cartoon in New Yorker, if anybody doubts that consumers have a concern about this and people are confused, you have to read it, because the bank customer is speaking to the loan officer in this cartoon, and the loan officer responds to the customer, ''Of course, you could try another bank, if there were any other banks.'' Well, that kind of sets up one perspective, but I think we will dispose of that, hopefully today.

    I am not convinced, by the way, speaking now for myself, I do not believe that big, per se, is wrong. All the three industries of the financial services arena have been undergoing consolidation for the last ten years, but we are far from being concentrated, if that is a negative term. In fact, I believe that the U.S. banking industry is probably one of the least concentrated in the world, if we look at what are the facts in Canada, for example, Germany, Switzerland and others.
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    We also need to remember, and I won't go into a lot of detail on this, but let me just say there are over 80,000 savings association branches in this country, there are over 9,000 banks in this country, not to mention the 12,000 credit unions. But we do have significant questions to answer here, and I expect that this is going to a close examination of those significant questions.

    And by the way, Mr. Chairman, I think we ought to include in the record today an article by Robert Samuelson in today's Washington Post on the banking revolution. He does make the connection there between what is going on and whether or not Congress is going to deal with Glass-Steagall, repealing Glass-Steagall, and H.R. 10.

    But the questions of safety and soundness, the regulatory authority, whether or not the Federal safety net is appropriate, and how that relates to too-big-to-fail and whether or not we have forgotten the S&L debacle, all these questions do come before us. I believe and I hope that with this hearing, and with the close examination, it is going to be an impetus for us to get H.R. 10 passed in this Congress.

    Thank you very much.
I21Chairman LEACH. Thank you.

    Mr. Vento.

    Mr. VENTO. Thank you, Mr. Chairman, and I appreciate your prompt response to this marketplace phenomenon in terms of holding this hearing.
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    The Congress, of course, has been trying to cope with an orderly, rationalized modernization of financial services. Meanwhile, back at the ranch, an ad hoc modernization is taking place right under our very noses and with few rules and cursory regulatory oversight. It is called merger and acquisition, just another name today for Glass-Steagall circumvention and Hart-Scott-Rodino avoidance. So the existing laws don't matter, apparently, and new laws legitimize in sort of a ''heads, you acquire, tails, we merge'' proposition.

    The interstate banking law was really the first step in banking modernization. It provided banks the ability to consolidate their services through branching across the country, thus achieving operational savings with a more rational service system. In that successful law we provide the modernization framework, while still protecting consumer and local community interests.

    The law set in place crucial protection for consumers and local communities. National and State concentration limits were established, State laws were specifically protected through protections, and criteria were established to ensure local communities and consumers would continue to be served in the procedures.

    It is a good law; it is probably not perfect. There is certainly room for improvement. But I look forward to the testimony today, and in particular I hope we will look at mergers, consolidations and results; and concentration, both the vertical in the interstate branching and banking and the horizontal across financial services industries; and that we can discuss today the impact on communities, consumers and deposit insurance funds and domestic and international economies.
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    While these new mega-institutions will likely be players in an ever-consolidating global market scene, will they be active players in Peoria, or in St. Paul, for that matter? Will we see further cross-industry consolidation? What impacts will the cross-marketing phenomenon have on consumer privacy, as companies collect and utilize more and more data about personal preferences in finances? And what about the cost of these services?

    We must also be cautious as we look to the 21st century. Banks and other financial institutions are crucial parts of our economic engine. Any future structure must respect the role of money multiplier, credit supplier and community stabilizer, and must provide for a true safe-and-sound banking system with certainty and predictability.

    The national bank charter with sufficient powers is one way to ensure banks remain not only safe and sound but also a viable option in the future economic market. Certainly, as bank mergers today approach the 10 percent nationwide limits set in interstate law, we must ask ourselves about the added pressure of too-big-to-fail. What would be the impact of a similar concentration limit on other financial sectors, insurance and investment banking? Furthermore, the subsuming of investment banking into commercial insurance has significant cultural and economic implications as to the effect on our economy. These entities are key components of our mixed economy.

    Mr. Chairman, I am concerned about mega-anything, especially mega-entities with deposit insurance backed by the taxpayer and an implicit moral hazard phenomenon that is assumed. However, our American dual banking system, today's system, this banking system is one of the most open in the world. I hope we don't have to report that as being a historical fact in the future.
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    We have many community banks that are players in their own sphere. What we must assure is that, in this techno wonder world, that they can still maintain a cost-effective, affordable saving and credit service in that market niche. Wishful thinking and rationalization will suggest that this is a win-win situation, that this is indeed a true sign of the vibrancy and health of the U.S. economy, mergers and acquisitions, but many questions remain. Today's hearing is critically important to start to answer them.

    As we continue to struggle with the right balance of H.R. 10, we must be cognizant of how any changes will reshape the financial environment, and by that I mean the big picture for concentration across the spectrum and the Nation, but also at the retail level where value is to be provided to consumers and customers of financial institutions. If the assumption is that Congress and the law is just blessing these mergers, per se, you can kiss H.R. 10 goodbye.

    Issues of H.R. 10 need significant revisiting, including the antitrust sections of the bill, so that we can clearly understand the role of the Justice Department and the Federal Trade Commission and the banking regulators. I understand that the recent late March manager's amendment of the Chairman would have deleted most of those provisions of the bill, and I certainly questioned that proposed action.

    Further, I seek to reinstate an annual GAO report that I added to the bill in the committee on concentration issues. I am looking, furthermore, Mr. Chairman, for a safety valve, if you will, for consumers who are or will project being ill-served by the merger mania. It seems to me that too many self-proclaimed free market advocates like free market in theory but not practice, and justify what is good for them—that is, high profits, exorbitant salaries and stock options—as good for the consumer. You might well understand my constituents and their skepticism in such circumstances.
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    I am concerned about the credit pricing and availability issues presented by the potential oligopoly in major financial service providers. Some have suggested to me the Justice Department was woken up to the antitrust issue. Perhaps we will still see them shake off, finally, their 19th century behavior before we enter the 20th century.

    But let me say I appreciate that Justice is finally looking at the credit card industry consolidation and at the computer giants of the world. We need help. It may be too late with the Department of Defense contractors, but it is not too late in banking.

    Mr. Chairman, I look forward to the witnesses and welcome them, and will examine their testimony thoroughly for answers to my questions. Thank you.

    Chairman LEACH. Before turning to other opening statements, let me assure the gentleman the Chair is very open to looking at the antitrust dimension of this in the context of H.R. 10.

    Let me ask, how many more Members on the majority side wish to speak? And how many on the minority side? Well, let me say, I made kind of an announcement as we began that we would like to hold statements to a total of 10 or 12 minutes on each side. We have gone 30 minutes. We have a dilemma. We have a very, very long hearing day, and the Chair is willing to be somewhat, but not immensely, accommodating.

    If I could ask, perhaps we could maybe go forth, with the precedent of the House, if we gave everybody a minute on each side. And I say this, frankly, we could be here another hour if we each had five minutes of opening statements, and I am not trying to squelch. I wanted to have the chairmen on each side have a right to speak, but I think if we are going to get to the hearing, it is going to be very difficult.
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    Mr. FRANK. Mr. Chairman, I was going to make a statement that maybe Members could merge their statements and eliminate overlap.

    Mr. SANDERS. Mr. Chairman, do you have any flexibility on that one minute, are you negotiable?

    Chairman LEACH. I would rather not be, unless you have people that are willing to offer you time on your side.

    Mr. SANDERS. The problem is, this is an enormous issue.

    Chairman LEACH. The gentleman is correct, and I fully acknowledge that. And my dilemma, and I will say to the gentleman, if we have five more minutes from each Member that wants to speak——

    Mr. FRANK. Mr. Chairman, I will yield to the gentleman my minute.

    Chairman LEACH. Then the gentleman may have two minutes.

    Mr. SANDERS. Thank you, Barney.

    Chairman LEACH. Mr. Lazio.

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    Mr. LAZIO. Mr. Chairman, I feel like a spectator with a court-side ticket for the 1998 Olympics, but the participants are not athletes, they are banks.

    You know, in Canada, seeing the Royal Bank and the Bank of Montreal propose merging, a $50 billion effort; the Canadian Imperial Bank of Commerce-Toronto Dominion would create about a $47 billion giant. We are familiar with the Swiss combination, Union Bank and Swiss Bank, awaiting approval of their $33 billion merger. Mitsubishi Bank-Bank of Tokyo, another $33 billion transaction.

    Here in our own shores, we haven't been left out of this combination at the very top, but I think it is very important for us to acknowledge the fact that while this combination is happening at the very top, reflected in both product and regional extension, new commercial banks are also on the rise. Between 1994 and 1997, the FDIC reported that new charters have risen from 50 to 102 to 146 to 188. Start-up commercial banks are the highest they have been in ten years, while there was only one commercial bank failure last year. The banking industry and the thrift industry are very healthy.

    The real question for Congress is what could happen to consumers. I would just simply make the point that while we are fixated on combination and integration at the very top, we should not fear the fact that America is going to have a dozen or two dozen banks in order to serve consumers. We have over 9,000 banks right now. That number will certainly drift down as there are more combinations and more economies of scale, especially those that are seeking an international reach, a global reach. But at the same time, the main street bank, the smaller thrift, will continue to thrive in their niche because they will be providing services, and I think consumer satisfaction in some of the larger players will not be provided.
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    I yield back.

    Chairman LEACH. I thank the gentleman.

    Ms. Waters.

    Ms. WATERS. Mr. Chairman, I am going to submit my entire statement for the record. I will try and cut it down, even though I am concerned about the mega-mergers and would join with some of my colleagues who are asking for a moratorium.

    I think this is an opportunity to examine some of the practices of the banks as the Federal Reserve considers these applications. The proposed Citicorp-Travelers merger is particularly important to examine because of the ongoing investigations into the role of Citicorp, Citibank, and drug-related money laundering cases. Central to the investigations is the use of Citibank's private banking system by some of the world's most notorious drug lords and money launderers.

    I think it is outrageous that we marshal all the resources of our criminal justice system going after small time drug offenders, while we allow the laundering of vast sums of drug monies to go through our largest financial institutions virtually unchecked. That is why I am calling on the Federal Reserve to put a hold on the Citibank-Travelers merger application until the Department of Justice's investigation is completed and a finding is made as to their guilt or innocence.

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    I will be introducing legislation today to take a first step toward attacking the massive criminal money laundering enterprises which are critical to the survival of worldwide narcotics trade. The Bank Merger Money Laundering Prevention Act will put a hold on merger applications involving financial institutions under Federal investigation or prosecution for money laundering, and impose a five-year moratorium on merger applications from financial institutions convicted of money laundering.

    There are a lot of issues to examine. I think it is important that this committee put time in on helping to really understand what happens to CRA and a lot of other issues associated. I am anxious to hear the testimony of all those involved today, and I will yield back the balance of my time.

    Chairman LEACH. Thank you.

    Mr. Castle.

    Mr. CASTLE. Mr. Chairman, I will submit my entire statement for the record.

    I am a supporter of H.R. 10. Our financial service laws must be updated and artificial barriers should be removed. Nevertheless, I would like the bank representatives here today and the others in the industry to know that the word of mouth in many communities on the trend and the quality of bank service is not good.

    What we often hear from our constituents is they are upset over the increasing number of fees on virtually every type of retail banking service, from ATM fees to checking fees. In fact, the industry's own statistics show that fee income is the fastest growing part of bank profits. Income from lending is flat. Obviously banks need more avenues to provide products, but they ought to seriously review the trend toward more fees.
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    Another concern we hear from constituents is about impersonal service. While this is not unique to the banking industry, you can go to many department stores and see the same thing, we tend to hear this complaint more and more about larger banks. The marketplace will ultimately address this problem, and perhaps not in a way that larger banks will like.

    My message to the financial regulators today is to carefully review these mergers on the basis of safety and soundness and to develop some recommendations on whether consumers will continue to be well served in the new banking era. My message to the banking industry is, don't forget about the customer, particularly the average retail banking customer. Personal and prompt service goes a long way.

    I have to tell you that support for credit unions in Congress is in some ways based on concerns we hear from constituents on the cost and quality of commercial banking service. I am not calling for legislation regulating fees, price controls, or Federal intrusion for now, but everyone related to the financial services industry should start reviewing whether they really believe the old adage that the customer should come first.

    I yield back the balance of my time.

    Chairman LEACH. That is the quickest I have ever heard you speak. Thank you.

    Mr. Sanders, who we have heard speak more quickly.

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    Mr. SANDERS. I thank our guests for coming today, Mr. Chairman. I thank you for calling this hearing on this issue of enormous consequences.

    I think one of the scarier things that is happening in our world today is that fewer and fewer people have more and more power. We are living in a country and in a world where the distribution of wealth and power is becoming wider and wider. We have a situation where 300 or 400 people in this world own more wealth than the bottom 40 percent of the world's population, several billion people.

    In terms of the Asian crisis, what we have seen is large multinational banks lending huge sums of money, in some cases forcing the money on the Asian economy, and gee whiz, when they started losing money, they came running to the United States Congress for $19 billion in welfare, including maybe some of the banks we have here represented today. They made a lot of money, but when they lose money they come running here to get the taxpayers to bail them out.

    Mr. Chairman, we also cannot forget, many of the regulations that were put in place were put in place as a result of the Great Depression; and also we should not forget that today the taxpayers of this country are paying off hundreds of billions of dollars as a result of the collapse of the savings and loan industry as a result of deregulation here. So I would suggest that we have some real concerns, and that we must be very careful before we say to a handful of banks that you can have enormous power over the banking system in this country.

    Furthermore, I share a concern with Mr. Castle and others that today banks are enjoying record-breaking profits, they are paying their CEOs huge salaries. But then when the average person goes to the bank to use the ATM machine, you are ripping them off, when the average person bounces a check, you are ripping them off, when the average person doesn't have a minimum amount of money in the account, you are ripping them off. And all over this country, there is not sufficient competition, and I fear very much that this trend will make the banking system even less competitive.
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    Furthermore, I am concerned that what large banks are doing when people put money into their accounts, they are not reinvesting that money into the rural economy in my State or into urban economies like Ms. Waters'. What they are doing is they are taking the money to desperate Third World countries where people are being paid 15 or 20 cents an hour, where they are supporting dictators like General Soeharto.

    So, Mr. Chairman, in a nutshell, I have real concerns about this trend toward merger. I think before we go forward, there are enormous numbers of questions that must be asked to make sure that the banking industry starts responding to the needs of ordinary Americans rather than just to their millionaire stockholders.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much.

    Mrs. Maloney.

    Mrs. MALONEY. Thank you, Mr. Chairman.

    I fully support America's fine banking institutions and I encourage their efforts to find new and better ways to compete in a world economy. However, I will not feel comfortable with these transactions until I know that America's taxpayers and consumers are protected. We turn to the regulators to ensure that the safety and soundness of our banking system is not impaired.
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    Very briefly, one of my first votes here in Congress was the bailout of the S&Ls. It took over $125 billion plus interest of America's taxpayers' money. If even one of these merged institutions were to fail, the cost to the taxpayers could dwarf the amount we spent during the entire savings and loan crisis. Thus, it is very, very important to know how strong the firewalls would be between the federally-insured deposits and other parts of these proposed conglomerates.

    I am likewise concerned about CRA. Although many of the institutions have fine traditions of community service, I am certain that they will continue to fulfill their obligations under CRA, but I would like to understand how these mergers will affect the compliance with CRA and the availability of loans in underserved communities.

    Finally, I would like to know how these mergers will impact fees and surcharges for consumers, particularly ATM fees. I would like to put my entire statement in the record, and I thank the Chairman for allowing us this brief statement.

    Chairman LEACH. I thank the gentlelady.

    Before proceeding, let me say we have in our audience today three distinguished colleagues from Canada, and I would like it if they would stand. The Honorable Michael Kirby, who is Chairman of the standing Senate Committee on Banking, Trade and Commerce. Mr. Kirby. As well as the Honorable Jack Austin and the Honorable David Angus. Thank you. We appreciate your attendance and look forward to any input you would like to give the committee, informally or formally, at a later time.
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    Mr. Fox.

    Mr. FOX. Thank you, Mr. Chairman. I am pleased that you are holding these hearings this morning, Mr. Chairman. My concern has been, just looking at the local situation in my own Pennsylvania district, when it comes to mergers we have to be concerned about possible loss of jobs to a district such as the greater Philadelphia region.

    And some of the points that were raised by subcommittee Chairman Castle bear repeating, and that is the question of retaining personal service that was previously there when there is a merger; the community reinvestment factor;.

    And again on the ATM, I think the point is well taken on that, that when originally we had the automatic tellers, there were no fees. Then the fees came later, and I think the public might have been more used to it had the fees been there originally and then come in. But for some reason they came later, and I think that was a marketing question that should have been studied further, because I think that we want to think of the banks as being our friend and being there to make it convenient. I think the other factor we need to look into is the security factor of the ATMs.

    I thank you for holding these hearings and I look forward to hearing the testimony.

    Chairman LEACH. Who else desires recognition?

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    Mr. Kennedy.

    Mr. KENNEDY. Thank you very much, Mr. Chairman. I appreciate the fact you are holding this hearing and I want to welcome all of our bank regulators to join us this morning.

    Sometimes when I look at what has happened in the banking world in the last couple of months, I think that maybe the chairmen of these banks have just gotten a prescription for the Viagra pill. I think every time I turn around they are growing and growing, but I don't know what is going to come of it.

    In any event, Mr. Chairman, over the last month we have seen five mega-mergers announced in the banking industry. If approved, these five banks will control over $2 trillion in assets. Mega-merger mania is the new Beanie Baby of the American financial scene; everybody has got to have one, but at the end of the day they are not worth very much.

    It seems to me we really ought to be looking at what the impact is going to be, not on the CEOs, not on the individual stockholders and shareholders of these banks, but what is the impact going to be on the American family, whether or not the working families are going to get better bank services. The fact of the matter is, in each one of the mergers that has taken place in the past, we have seen the fees on ordinary bank services not just go up, but go way up.

    What is going to be the impact on small business lending and unfettered access to capital, whether or not the local communities will be able to continue to get access or whether we will see the shrinkage of the number of financial institutions that are located at the community level, and whether or not low income communities will be served? And, finally, whether or not people will be discriminated against because of the color of their skin or the size of their loan?
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    And I think most importantly, the real question is whether or not our regulators are going to be able to keep up with the size of these mergers and be able to answer those questions. I think unless you are really able to let us know that those five criteria are going to be met, that it doesn't make sense for us to approve these mergers.

    I would urge you and ask you to agree to a moratorium until you can provide assurances to the Banking Committee, to the Congress and to other interested parties that in fact those issues are going to be answered and answered properly in terms of the interests of the American taxpayers who, after all, pay for the insurance that these banks utilize, or the too-big-to-fail doctrine which seems to be coming about.

    Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Kennedy.

    Mr. Gutierrez.

    Mr. GUTIERREZ. Mr. Chairman, thank you very much.

    I think this is an extremely important hearing. And I would just like to say I also would like to raise the concern and just like to share, in 60 seconds or less, it was 1990, early 1991, I just paid for my Banc One credit card, my $35 yearly fee on my Banc One credit card. I went to go use the same Banc One credit card and they told me I couldn't use it anymore.

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    And I said, ''God, I always pay my bill on time every month,'' and then I subsequently got a letter from Banc One saying, ''You know, Mr. Gutierrez, for some reason, you and your wife, we are not going to extend your credit anymore. You can obviously continue to pay off the debt you owe us, you can continue to have the credit card, and by the way, thanks for the $35 on your annual renewal fee,'' which happened the same month that they cut me off of all credit.

    And my only revenge, Mr. Chairman, is they had an 800 number which I put on automatic redial on my phone. I figured if they were going to cause me all this grief, I might as well cost them some expense on their 800 number. I think that is a bad way of having to go about getting someone's attention, but I figured since Banc One is probably here today, I just wanted to let them know they may have cut me off with credit, but I think it cost them a little bit of money, since it was several days before I turned it off. I am being quite serious.

    But, Mr. Chairman, the point is, as the institutions get bigger, and if people with good credit ratings cannot get an answer from an institution and have to go through the frustration level, I just think we—you know, let's figure out how we do this so that as people go around getting credit and have access to credit, that it is available and that big institutions don't simply say, ''We are not going to give you a reason, we are not going to talk to you, we are not going to tell you why, and you are not going to have any more credit, even when you pay your bills,'' Mr. Chairman. So if somebody who pays their bills can get this kind of treatment, I start wondering what is going to happen with the rest of America.

    Thank you, Mr. Chairman.

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    Chairman LEACH. Thank you, sir.

    Mr. Royce.

    Mr. ROYCE. Thank you, Mr. Chairman. I want to thank you for holding this hearing today. I see this hearing as a good opportunity, first, to take a closer look at the recently announced mergers and their ramifications for the financial services marketplace and for consumers; and, second, to examine the marketplace conditions that drove these mergers. I believe these mergers can tell us a lot about the rapidly changing financial services marketplace as we in Congress push forward with financial services modernization.

    These mergers remind us that the marketplace continues to evolve even when Congress does not. When I joined this committee just three years ago, the market was remarkably different than it is today. Financial globalization, advancing technology, and, yes, industry consolidation, have dramatically altered the landscape of the financial services marketplace. This in turn has significantly altered, if not complicated, our efforts to modernize the laws governing it.

    As an enthusiast of the market, I welcome its technological advances and the economic efficiencies and choices it created. I believe that these efficiencies and choices benefit consumers just as they benefit the market as a whole. However, as legislators we are bound by responsibility, responsibility to the consumer and responsibility to the taxpayer. There must be a balance between the marketplace and fiduciary responsibility, a balance that produces a financial services sector that allows for maximum growth, economic efficiency and consumer choice, while also ensuring the integrity of the Federal safety net deposit insurance.
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    Again, I thank you, Mr. Chairman, and I look forward to hearing from our witnesses today.

    Chairman LEACH. Ms. Roybal-Allard.

    Ms. ROYBAL-ALLARD. Thank you, Mr. Chairman.

    In the interest of time, I would like unanimous consent to submit my statement.

    Chairman LEACH. Without objection. We have asked unanimous consent for all statements.

    Ms. ROYBAL-ALLARD. I would like to point out, one of the reasons I am extremely concerned about these mergers is we keep hearing that they will be better for consumers. Yet in States like California, where we have had about 80 banks and thrifts acquired by other institutions since 1996, we continue to see, even in the face of these mergers, rising ATM fees and fewer branches. In my district, which is probably one of the most underserved areas by the banking industry, we have approximately 1,100 individuals per bank branch as compared to more affluent areas that have about 2,700 individuals per bank branch. And nothing changes. When we have these mergers, we have even more branch closings. I am extremely concerned about the arguments for these mergers, that they are going to be more consumer-friendly. What we are experiencing in districts like mine is exactly the opposite and certainly there has been no improvement.
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    So I think we really need to pause on these mergers and take a very close look at what is happening and what the real impacts are going to be. This way we can ensure that if these mergers take place, they do so in a way that is going to ensure that the results will be efficient, accessible, and affordable consumer banking services for all Americans. But I have yet to see this, certainly in my district, and I am sure this is true of many other districts throughout the country.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you. Let me just say, every other Member that wants to speak will be allowed a minute, but if at all possible, we would like to move on. But, please, Mr. Watt.

    Mr. WATT. Mr. Chairman, I am not sure I can do justice to what I have to say in a minute, but I appreciate the opportunity and I appreciate you having this hearing.

    I sent a shudder of dismay through my staff this morning when I told them that I didn't want to be called when the witnesses came, I wanted to make an opening statement, because they know how aggressive I have been in pushing the banks in my district, which happens to be the second largest concentration in America, to do CRA and to aggressively serve consumer interests.

    I want to take a minute to say that I think the focus of our inquiry should be not on size, but on service, and we should not lose sight of that. When our professional football team started retooling, we didn't go out and get a whole bunch of fast running backs, we got a bunch of great big linemen to protect our quarterback, we got some fast people. So we got a need for all size institutions to serve the consumers of this country. The focus is less for me on the size of an institution than on the service that the institution is going to provide in meeting the needs of our communities, meeting the needs of our consumers, and so I hope that we won't get so preoccupied with this concern about size that we lose sight of the focus on service.
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    Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you very much.

    Mr. Sherman.

    Mr. SHERMAN. Thank you, Mr. Chairman.

    Obviously this rash of mega-mergers has us concerned. I commend you for holding these hearings, and yet our immediate reaction of being concerned should not cause us to ignore that there are some real benefits to these mergers: First, the ability of our banks to compete internationally against financial institutions that are even larger than the biggest of the post-mega-merger banks. And, second, the opportunity hopefully for lower costs.

    As to service to the consumer, I have a tremendous faith in the market system and believe that if these new, large financial institutions repeat the treatment of Mr. Gutierrez, that he will find smaller financial institutions; and just as the growth of the dinosaurs into even larger animals allowed small mammals to emerge, that smaller banks will emerge in the shadows of these mega financial institutions unless they can treat people fairly and provide good service and, of course, comply with the CRA. Thank you.

    Chairman LEACH. Thank you, Mr. Sherman.

    Mr. Hinchey.
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    Mr. HINCHEY. Mr. Chairman, before us today we have—pending regulatory approval—the largest bank, the largest thrift and the largest finance company in the country, as well as the largest financial services company in the world. Judging from their stock prices, it looks as if the market has already blessed these unions, but it is appropriate that we take a very careful look at what the results of these mergers are going to be.

    Congress has been wrestling with financial modernization now for a long time. Over the years the debate has evolved as decisions by regulators and judges chipped away at the Glass-Steagall and Bank Holding Company Act walls. Now we find ourselves at a point where the marketplace has nearly passed us by. With the advent and expansion of Section 20 affiliates, operating subsidiaries and unitary thrift holding companies, there isn't a lot an insured bank or thrift can't do these days, and the transactions proposed by our witnesses threaten to shatter what remains of the statutory separation between banks, thrifts, securities firms and insurance companies.

    Because the Citigroup merger goes the farthest in this regard, it is the transaction that should give us the greatest concern. By asking the Fed to squeeze a very sizable insurance underwriting operation through a loophole with the expectation that we will repeal Glass-Steagall sometime in the next five years, the Citigroup companies are essentially playing a very expensive game of chicken with Congress. It is important the Fed take a very close look at this.

    The other deals are troubling for their sheer size. The new BankAmerica would control 8 percent of the banking assets in the country, uncomfortably close to the cap allowed by the interstate branching laws. Banc One may bump up against the deposit concentration limits in some of its local markets because of the overlap in service between the two banks. Washington Mutual would hold 17 percent of deposits in California but, more importantly, account for a sizable share of the deposits insured by the Savings Association Insurance Fund.
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    I fear these institutions will give new meaning to the term ''too big to fail.'' I urge the regulators to look long and hard at the effect of these mergers and the effect that they will have on local markets, especially in terms of credit decisions and community reinvestment.

    In addition, I hope that the Federal Reserve takes seriously its obligations under the banking and antitrust laws to prevent undue concentration of assets or unfair competition.

    Chairman LEACH. Mrs. Kilpatrick.

    Ms. KILPATRICK. Thank you, Mr. Chairman, for the opportunity to speak and for calling the hearing. As you probably know, one of the mergers being discussed this morning is happening in my district between First Chicago NBD as well as Banc One, and will be headquartered in Chicago.

    This means a major impact on my constituents. This $30 billion deal will result in a new Banc One Corporation becoming the largest bank in the Midwest in America, a premier national retailer, national service corporation, as well as the second largest credit card issuer in the country. What does this mean for my constituents? Will we lose jobs or close banking facilities? What impact will these large mergers have?

    I agree with Congressman Mel Watt. Size is not as important to me as service. Will the service be there? I don't think enough has been worked out as we talk about the mergers and what they will look like. I think American citizens deserve answers to these. I hope the regulators will work closely with this Congress and the various corporations as they go through these mergers. If we don't, I think we will leave a substantial part of our American citizens out of this market.
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    What I am most interested in is entrepreneurial opportunities. Will there be auditors and attorneys, accountants from the various areas where these mergers have taken place and really across America? I would hope, Mr. Chairman, as we discuss these things, entrepreneurial opportunities will be one that will be addressed in the testimony we receive today.

    Chairman LEACH. Thank you, Mrs. Kilpatrick. Our final speaker in our first presentation of the committee, Ms. Lee. You are welcome.

    Ms. LEE. Thank you very much, Mr. Chairman. It is truly an honor to be a Member of this committee.

    This hearing is a very important hearing for my district and many areas of the country. For many years banks have been disinvesting in underserved low income communities. More often than not we have seen the emergence of check cashing facilities as an extremely expensive and poor substitute for banks. Banks have been essential in providing consumers with basic financial services and the ability to establish credit which is so essential in assisting our families to realize the American dream.

    Now, faced with these mergers and concentrations, an even wider economic gulf will widen in this country. I fear this very seriously. Many communities will be left with minimum, if any, full service banks. These mergers will greatly diminish our economic development efforts in these underserved communities. I hope we move slowly in doing this, and I support a moratorium until all of the facts can be debated and weighed.

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    Thank you very much.

    Chairman LEACH. I would like to welcome our first panel of witnesses, which includes John D. Hawke Jr., Under Secretary, Domestic Finance, Department of the Treasury; Mr. Laurence Meyer, who is a member of the Board of Governors, Federal Reserve System; Ms. Ellen Seidman, Director of the Office of Thrift Supervision; Andrew C. Hove, Acting Chairman of the Federal Deposit Insurance Corporation; Ms. Julie Williams, in her first appearance before the committee in her new capacity as Acting Comptroller of the Currency; and, finally, Ms. Catherine Ghiglieri, a Banking Commissioner for the State of Texas, on behalf of the Conference of State Bank Supervisors.

    Why don't we begin with you, Jerry. Mr. Hawke.


    Mr. HAWKE. Thank you, Mr. Chairman, Ranking Member LaFalce, and Members of the committee. I am pleased to appear today to discuss issues that may be raised by several large financial institution mergers that have recently been proposed. I will not address the particulars of the proposed transactions, and I will leave to the bank and thrift regulatory agencies, those having jurisdiction in this area, the questions about the standards and method of reviewing such transactions.

    Instead, I will discuss factors that we believe may underlie the trend toward consolidation in the banking industry, the potential effects of such mergers, and the relevance of some of these mergers for proposals to modernize our financial system.
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    First, the factors driving these large-scale mergers:

    We think there are several factors that have contributed to the trend. Technological advances have greatly increased the speed and decreased the cost of transferring information and funds. For some lines of financial business, large firms are better able to afford the technological sophistication required to compete successfully, with potential cost savings for consumers.

    Financial institutions also need to expand sufficiently to compete in global markets for corporate customers seeking the best funding options worldwide.

    The growth of non-bank providers of financial services, such as money market mutual funds and commercial paper underwriters, has also accelerated the blurring of distinctions between types of financial services firms.

    The removal of barriers to competition has been an important force. In particular, geographic restrictions on bank expansion have virtually disappeared, allowing banks to expand into new markets by large acquisitions that do not raise antitrust problems.

    Let me now turn to several specific concerns that have been raised. First, the potential effects on industry concentration.

    Traditional antitrust analysis of bank mergers has focused concern on the competitive effect of mergers in local markets, because individuals and small business customers whose range of choice may be locally limited have traditionally relied on depository institutions in their local market for banking services, while larger businesses have typically had a wider geographic range of choices.
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    Federal Reserve data indicate that concentration in local markets has remained relatively constant through the merger wave of the 1980's and 1990's, even as concentration has increased nationally and the number of banking organizations nationwide has declined.

    In contrast to local markets, concentration of banking at the national level has increased appreciably. The share of commercial bank deposits held by the top ten banking organizations has increased from about 19 percent in 1980 to 30 percent in 1997.

    Antitrust rules have not yet established the entire country as a relevant market in which to evaluate the competitive impact of bank mergers in the product market comprised of that bundle of products and services included within the term ''commercial banking.'' Moreover, companies that have a national range of alternative lending sources may well have the ability in today's financial marketplace to borrow worldwide.

    But even with this increase in concentration nationally, our banking industry is still far from being highly concentrated, according to standard measures. Moreover, despite this trend toward increased concentration nationwide, small banks remain profitable and new banks continue to be chartered at a very healthy pace.

    I must digress for just a moment, Mr. Chairman. There was some mention earlier about amendments to H.R. 10. One of the amendments that was made eligible for floor consideration in H.R. 10 would have expanded the product market for consideration of bank mergers by directing the Attorney General to consider the deposits of thrift institutions and credit unions in assessing the competitive impact of mergers.
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    I would simply point out that if that were adopted, it would tend to increase concentration in local markets because it would make larger and larger mergers possible.

    Others looking at these mergers have quite properly raised concerns about the effects of mergers on consumers of banking services; what they pay, the quality of service, the adequacy of consumer protections, the effect on communities, and the availability of credit for individuals and small businesses. These are clearly important questions for policymakers.

    While large institutions should be able to bring to local markets the benefit of greater efficiencies and product diversification, surveys indicate that many individual customers of local banks acquired by larger institutions believe they are losing the personalized service and other benefits that smaller banks offer. Other survey data also provide some evidence that large banks charge higher fees than smaller ones.

    These consumer attitudes explain in part why community banks continue to thrive in spite of recent consolidation trends, and why many new banks continue to be established every year. Small banks provide a level and continuity of services that their customers appreciate.

    But these developments and consumer attitudes make it particularly important that the protections of the Community Reinvestment Act be maintained in the face of larger and larger mergers. Regulators must assure that large combinations involving the disappearance of local institutions will not result in an erosion of the commitment and obligation of banks to serve effectively the convenience and needs of local communities. CRA must continue to be looked to as a first line of defense for ensuring that the credit needs of local communities are being met.
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    Another question has been raised about the effect on supervision, and the advent of mergers of such unprecedented size raises the question whether the apparatus of bank supervision is capable of dealing effectively with institutions of vastly increased size. I will defer to the regulators for discussion of the adequacy of supervision to address these challenges, but it is important to note the significant role that Congress has already played in ensuring that strong safety and soundness safeguards undergird the banking system as it continues to evolve.

    In particular, the FDIC Improvement Act of 1991 required supervisors to ensure that banks maintain appropriately high levels of capital, and has mandated a regime of prompt corrective action, and increasingly stringent corrective action, by supervisors in the event bank capital levels should begin to fall. As a result of FDICIA, bank capital levels are now at significantly higher levels than during earlier periods.

    Others have raised questions about the implications for the safety net and the ''too big to fail'' phenomenon. The critical question here, we think, is what should uninsured depositors be led to expect will happen to their claims if a bank fails?

    If the Government routinely steps in to assist takeovers in which uninsured depositors are made whole, so that an expectation of protection is created, it may be difficult or impossible to allow such claimants to experience losses when a particular insolvency arises. On the other hand, if Government policy is carefully crafted to negate such an expectation, there should be no institution that creditors should perceive to be so big that they could rely on governmental intervention to safeguard them against lost.

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    Fortunately, Congress and the regulators have in recent years taken significant steps in this direction, and any creditor that advances funds to an insured depositor institution today with the expectation of being fully protected in the event of an insolvency is simply ignoring the history of recent years.

    I will simply mention the least-cost resolution provisions of FDICIA, the actions of the FDIC in requiring uninsured depositors to take a ''haircut'' in the resolution of failed banks, the depositor preference provisions that have been enacted into law, and, again, prompt corrective action. These developments should send a strong signal to the marketplace that reliance on too-big-to-fail is exceedingly risky.

    We believe that congressionally mandated reforms and market developments have to a large extent curtailed expectations of too-big-to-fail treatment, but the issue here is sufficiently important that we should explore additional means of assuring against the prospect of having to confront a too-big-to-fail choice, and it is particularly appropriate that we do so at a time when the industry is in very good shape, as it is today.

    To this end, Congress might want to consider a few recent proposals that could enhance market discipline and offset the damaging effects of too-big-to-fail perceptions and practices. These would include not only the proposals for the use of subordinated debt, but the recent proposals put out by the Minneapolis Federal Reserve Bank that would mandate that uninsured depositors take losses in resolutions.

    Finally, the current large bank-to-bank mergers may have implications for financial modernization, and they can be expected to continue even in the absence of financial modernization legislation. Such legislation is relevant, however, to the proposed Citicorp-Travelers merger. The Administration's financial modernization proposal and the House Banking Committee bill would have allowed such combinations to occur, but only in the presence of significant safety and soundness protections.
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    These would include the requirement that the bank be and remain well capitalized and well managed. The further requirement that a bank take a capital ''haircut'' if new activities are conducted in a subsidiary, and that the firewalls of section 23A and 23B be applied to transactions between a bank and a subsidiary, just as they apply to affiliate transactions, are strong additional protections.

    In conclusion, we don't believe that the proposed mergers create a need for responsive action by Congress. We continue to support financial modernization that is free from the significant shortcomings that we have noted in the most recent version of H.R. 10, however, and we think it is important for Congress and the regulators to carefully monitor trends in bank merger and acquisition activity to assure the banking system remains truly competitive and fully responsive to the needs of consumers, small businesses and communities.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Secretary Hawke.

    Governor Meyer.


    Mr. MEYER. Mr. Chairman and Members, I am pleased to appear before this committee on behalf of the Federal Reserve Board to discuss issues related to mergers among U.S. banking organizations and other financial services firms.
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    Neither my oral nor my longer statements include any substantive discussion of specific mergers and acquisitions that have been proposed recently. Each proposal subject to the Bank Holding Company Act will be thoroughly reviewed by the Board on a case-by-case basis, in conformance with current law and under the Board's well established policies and procedures.

    The Bank Holding Company Act specifies the factors that the Board must review in these cases, and the Board's flexibility to approve or deny a proposal is narrowly limited by these factors. They include the competitive effects of the proposal, the financial and managerial resources and future prospects of the companies and banks involved, the effects of the proposal on the convenience and needs of the community to be served, including the performance record of the depository institutions involved under the Community Reinvestment Act. In proposals involving the acquisition of a non-banking company, the Board must consider whether the performance of the activity by a bank holding company affiliate can reasonably be expected to produce benefits to the public that outweigh possible adverse effects.

    Since 1980, a high level of merger activity, along with a large number of bank failures, have resulted in the steady decline in the number of U.S. banking organizations, cumulating to 40 percent. Recently, mega-mergers have been a prominent aspect of merger activity. But the decline in the number of banking organizations and the increase in national concentration, taken by themselves, hides an important dynamic of the banking industry.

    For example, while the banking industry was consolidating, some 3,600 new banks were formed from 1980 through 1997. Similarly, while over 18,000 bank branches were closed, nearly 35,000 new branches were opened. While national concentration increased, local concentration, widely accepted as the relevant consideration in the application of antitrust laws to most bank mergers, has remained virtually unchanged. Nevertheless, the Federal Reserve remains alert to the challenge of maintaining a competitive structure in the banking industry at a time of such a high level of merger activity.
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    Even if recent consolidation of the banking industry has not significantly affected local market competition, the consolidation in general and mega-mergers in particular present challenges for regulators and supervisors. Supervisory practice has been evolving in response, targeted on ensuring effective supervision of large, complex and internationally active banking organizations. Clearly, this evolution will have to continue in order to meet the challenge of supervising more diversified financial conglomerates.

    Considerable progress has already been made. Federal banking agencies have increased coordination among themselves, between themselves and State regulators, between themselves and supervisors for other financial services entities, and between themselves and foreign supervisors. Banking agencies, including the Federal Reserve, have moved toward risk-focused examinations, concentrating on risk management systems, internal controls, and corporate governance, and have made increased use of market discipline and disclosure, especially in the case of large, complex banking organizations.

    The creation of large and diverse banking organizations also raises questions about the potential effect of future banking problems on systemic risk and the Federal safety net. It is important to emphasize that no banking organization, however large, is too big for its shareholders to lose their investment or senior management to lose their jobs. Passage of the FDIC Improvement Act in 1991 strictly limited the ability of the Federal Reserve and the FDIC to provide liquidity or financial assistance to weak banks and potential acquirers, whatever their size. The role of public policy in this respect will continue to be to protect the financial system and insured depositors, and resolve banking problems in an orderly way.

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    Bank mergers sometimes result in bank closings and often raise questions about the continued commitment to the local communities involved. The Board gives careful attention to the requirement that the combined banking organization meet the convenience and needs of its local community, in part through consideration of the community reinvestment records of the banks involved. The current wide range of financial services provided by banking organizations has already focused attention on the provision of appropriate disclosures to ensure that consumers are well informed, for example, about differences between insured deposits and uninsured investment products.

    The ongoing consolidation of the U.S. financial services industry and increased market pressures for diversification of financial services firms highlights why the Board supports H.R. 10.

    H.R. 10 effectively addresses the need for financial modernization by allowing the affiliation of depository institutions, insurance companies, securities firms and other financial service providers. By structuring these broader affiliations within the holding company framework, H.R. 10 provides the best insulation of insured depositor institutions from the risks of broader affiliations, restrains expansion of the Federal safety net to the new affiliates, and assures a level playing field for companies affiliated with depository institutions and companies that are independent of depository institutions.

    H.R. 10 provides for a meaningful, but controlled umbrella supervision of financial services companies that preserves and enhances functional regulation of the insurance companies, securities firms, and depository institutions, while ensuring consolidated supervision that is essential for protecting the depository institution.
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    Finally, H.R. 10 limits banking and commerce, especially important at a time of rapid change in the financial sector.

    Mr. Chairman, I again thank you for the opportunity to present the views of the Board.

    Chairman LEACH. Thank you, Governor Meyer.

    Ms. Seidman.


    Ms. SEIDMAN. Thank you. Good morning, Mr. Chairman, Mr. LaFalce and Members of the committee. Thank you for the opportunity to present the Office of Thrift Supervision's views on recent merger activity involving several large financial institutions.

    Although financial services consolidation is not new, the sheer size of the recent proposals has attracted much attention. These recent announcements raise significant policy questions about the operations of the new companies: What implications do the size of these institutions have for regulators? How will mergers affect consumers and small businesses? How will the transactions impact communities in which branches of acquired institutions are closed? What should Congress do to address these issues?

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    These issues are addressed in detail in my written statement, which I ask be placed in the record. In the interest of brevity I will focus my remarks today on two points: The implications for thrifts of our evolving financial markets, and OTS's role in the proposed mergers, including supervisory implications.

    The proposed mergers that are the subject of today's hearing are generally intended to create fully integrated financial services companies. Our regulatory and supervisory experience with the Federal thrift charter provides insights into some of the advantages and the limitations of integrating financial services, albeit in a smaller, community-based model.

    Through the thrift charter, thrifts may, directly and through subsidiaries and affiliates, offer customers a full range of consumer-oriented financial services while maintaining a local community focus. Unlike a bank, however, this service is very limited with respect to commercial lending.

    Nevertheless, given their community focus, thrifts are well positioned to fill niches and gaps, particularly for individuals and small businesses, that may arise as larger institutions focus less on individual communities. With the improvements in the lending powers Congress granted them in 1996, thrifts can meet many of the financial services needs of their local consumers and local businesses.

    Indeed, every major merger brings people to our regional offices applying to charter new ''plain vanilla'' thrifts. The thrift charter also offers significant organizational flexibility. Various financial services may be offered by a thrift directly, through its subsidiaries or a holding company structure. In exchange for the limited commercial lending authority pursuant to the thrift charter, thrifts may generally organize their business as to best suits them and their customers' needs.
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    The size and magnitude of the recently proposed mergers raise important questions about regulatory oversight and consumer choice. For many, the basic issue from the supervisory perspective is simply whether the existing regulatory framework can effectively oversee and control large institutions.

    For the insurance funds, the industry concentrations that would exist after the proposed mergers create important incentives to ensure that the resulting institutions are run safely and soundly. It also demonstrates the need for a BIF-SAIF merger. For example, while the Washington Mutual-Home combination represents approximately 15 percent of SAIF assets, it would represent just over 2 percent of the assets of a combined fund. A merger of the Federal deposit insurance funds is sound public policy.

    By virtue of their size, bigger institutions present unique regulatory challenges. However, these concerns are not unduly troubling to us in the context of the proposed Washington Mutual-Home merger. Although the new institution would control a very large share of the industry's assets concentrated on the West Coast, it would operate as a traditional thrift, albeit on a larger scale. Both Washington Mutual and Home have a history of solid management, traditional, well-run lending programs, service to consumers, strong community records and relatively straightforward portfolios. In terms of combined operations, the proposed institution will not be breaking new ground.

    OTS's supervisory oversight of Washington Mutual, conducted out of our West Regional office, involves a multi-pronged approach that includes annual full-scale safety and soundness exams, quarterly on-site visits, periodic year 2000 information systems compliance and CRA exams, extensive off-site management and regular meetings with management. The individuals with primary supervisory responsibility for Washington Mutual are highly experienced, come from all over our West Region, and include individuals with substantial experience in the California market.
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    We coordinate our oversight with other regulatory authorities, including the FDIC and the State of Washington, that have an interest in aspects of the Washington Mutual organization. I assure you that we will continue to meet our responsibilities to ensure the safe and sound operation of every thrift, large or small, and of the industry as a whole, even as we meet the special challenges associated with regulating larger financial institutions.

    Let me talk for a minute about what we will look at as we analyze the Washington Mutual-Home merger proposal. OTS's role in the thrift merger, as with the acquisition or chartering of a new thrift, begins with the application process. The application process actually begins long before we receive a written application. We encourage parties interested in the thrift charter to meet with us before preparing the application so that the proposal and any relevant issues may be fully disclosed.

    Merger applications involve a number of specific factors that we must consider, including the capital level at the resulting thrift, the financial and managerial resources of the constituent institutions, the future prospects of the resulting institution, the convenience and needs of the communities to be served, and the conformity of the transaction to applicable law, regulations and supervisory policy.

    We closely scrutinize the business plan for the proposed merger. A solid, long-range business plan is essential. We are also required to consider the competitive effects of the proposed merger. Specifically we look at whether, for any particular section of the country, the transaction would be an attempt to monopolize business, substantially lessen competition, or amount to a restraint of trade. Even where such an effect is likely, however, the anticompetitive effects of the proposed merger can, under our statute, be outweighed by the probability that the transaction will meet the convenience and needs of the communities to be served by the resulting institution.
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    We are attentive to CRA and consumer protection issues. We are required to take CRA into account when considering a merger application. We consider applications filed by parties with a particular interest in community development. We are especially sensitive to ensuring that the new institution has a realistic, satisfactory plan to meet its CRA obligations, including previous commitments made by the merging institutions.

    Finally, we now place strong emphasis on an applicant's year 2000 readiness. Potential year 2000 computer problems are a serious issue, as is the integration of operating systems, and we look closely at all applicants' operations to ensure their systems will work and they will be prepared for the year 2000.

    In addition to merger applications, we have spent a substantial amount of our time in recent months evaluating applications from a variety of companies to become unitary thrift holding companies. This has resulted in a heightened appreciation for the unique qualities of and regulatory challenges presented by unitary thrift holding companies.

    Before Travelers proposed to join with Citicorp, it made news by converting its CEBA Bank to a thrift using the unitary thrift holding company structure. Although insurance companies have owned thrifts for over 20 years, Travelers and other recent applicants focused our attention on how we regulate these entities.

    Traditionally, OTS has focused its supervisory resources on the thrift in a holding company structure. In the past, that approach has worked well because most thrifts have been traditional residential mortgage lenders and either been the overwhelming contributor to a holding company's profits or a very small part of a larger organization.
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    Our examiners' approach has been to concentrate on the interaction between the thrift and its parent. The goal is to ensure that the activities of the holding company do not adversely affect the subsidiary thrift. We look at whether the parent is relying unduly on the thrift for upstreaming dividends; whether fees charged by the parent to the thrift are reasonable; whether tax sharing agreements between the parent and the thrift are fair to the thrift; and whether the parent is usurping the thrift's corporate opportunities.

    Recent applications, some with new business strategies, have caused us to reflect on whether this approach is always the best way to ensure the safety and soundness of the thrift and the Federal deposit insurance funds. As a result, we are actively looking at whether and how our approach to supervising thrift holding companies should evolve. We will not become a duplicate of regulators of insurance companies, securities firms or other types of thrift holding companies. Instead, we need to consider the extent to which systems and risk management are integrated and the impact of such integration on the thrift; and we need to build good relationships with our fellow regulators and do it while the related institutions are healthy.

    In this regard, I would like to mention that we have been having constructive dialogue with the CSBS and have recently sent them a letter responding to some of the concerns raised by Commissioner Ghiglieri and many Members of this committee. I request that the letter be placed in the record with my statement.

    The recently proposed mergers between large institutions, including banks, thrifts, investment banks and insurance companies, have resulted in serious discussion among regulators, business people, community groups and policymakers about how those mergers will impact the marketplace. Although consolidation in the financial services industry is not new, the size of the recent proposed mergers raises important questions with how to regulate these new banking giants and how their creation will affect consumers, communities and businesses. These are serious questions and now is the time to consider them carefully.
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    Thank you.

    Chairman LEACH. Thank you very much, Mrs. Seidman.

    Mr. Hove, before you begin, Ms. Seidman made several requests to place things in the record. Without objection, all statements will be placed fully in the record and all requests for addenda will be placed in the record.


    Mr. HOVE. Mr. Chairman, Members, I appreciate the opportunity to present the views of the Federal Deposit Insurance Corporation on the effect of mergers in the financial services industry. While these recently announced mergers are noteworthy because of their size, they reflect long-standing trends in the financial services industry.

    In the interest of time this morning I want to submit my written testimony for the record and discuss briefly two important points we make in that written testimony.

    Number one, in the midst of these mergers and consolidations, the mission of the FDIC as deposit insurer remains central to maintaining financial stability. Number two, statutory and regulatory changes over the last decade have provided the FDIC with tools to meet the challenges presented by consolidation in the banking industry and the growth of financial services companies that include depository institutions.
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    Throughout its history, the FDIC has played a critical role in assuring stability and public confidence in the Nation's financial system and in preserving liquidity in the Nation's payments system. Deposit insurance has provided an anchor that has allowed the banking and financial system to weather storms that have created great instability in other nations.

    Turning to consolidation, the merger of banks serving different markets can diversity risk and decrease the volatility of earnings. In doing so, such a merger can decrease the likelihood of failure. Many of the institutions that failed or were in troubled condition in the 1980's and the early 1990's tended to have geographic or product concentrations.

    Consolidation of the banking industry does pose certain risks, however. For example, the deposit insurance funds would face larger potential losses from the failure of a single large consolidated institution. In addition, insurance is based on diversifying risk. If an institution gets too large relative to the industry as a whole, it becomes increasingly difficult to diversify risk.

    Further, larger institutions are complex and tend to be involved in more non-traditional activities as well. Moreover, mergers that create larger banking companies increase the economic impact should the new institution fail and may raise the possibility of a systemic risk determination.

    The statutory enhancements of the last decade, together with sophisticated supervisory oversight, should assist the FDIC in maintaining safety and soundness in the banking system and in assuring the financial integrity of the insurance funds.
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    The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, instituted prompt corrective action to strengthen the hand of regulators in forcing banks to address problems while there is still value left in the institution. The risk-based premium system introduced by FDICIA provided an important economic incentive for financial institutions to manage risk prudently.

    Also, FDICIA greatly expanded the FDIC's access to bank and thrift capital through regular and special assessments on insured institutions. While the capital of insured institutions available to pay assessments can fluctuate depending on the financial condition the industry, capital currently is substantial, totaling approximately $450 billion at the end of 1997.

    In addition to these statutory changes, the recent implementation of risk-focused examinations by the Federal banking agencies and the programs already in place for coordinated oversight of large, complex institutions provide a strong foundation for addressing the challenges of industry consolidation. In this approach, regulators ensure that proper controls and practices are in place and we assess management's ability to identify, measure, monitor and control risk within an institution.

    Mergers between banks and other financial service providers raise an issue that mergers between banking organizations do not raise: a potential for expansion of the Federal safety net to non-banking activities. Enforcement of safeguards to separate the insured institutions from other parts of the organization, such as the principles contained in sections 23A and 23B of the Federal Reserve Act, are the keys to containing expansion of the safety net beyond the insured bank or thrift.
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    Mr. Chairman, my written testimony also discusses other important issues such as the implications of these mergers for community banks, for small businesses and for consumers.

    In conclusion, I just want to say that, while financial modernization legislation is necessary to provide a rational framework for the market evolution we are experiencing, the FDIC is in the best position we have ever been in to manage the risk created by market developments.

    Thank you. I look forward to your questions.

    Chairman LEACH. Thank you, Mr. Hove.

    Ms. Williams.


    Ms. WILLIAMS. Mr. Chairman, Ranking Member LaFalce, Members of the committee, I appreciate this opportunity to testify on the recent proposed mergers of a number of large financial institutions.

    The size and scope of the transactions we are discussing today raise important questions about their impact on consumers and local communities, about the preparedness of regulators to oversee resulting organizations, and about the implications of these combinations for domestic and international competition. I commend the committee for convening this hearing to focus attention on these important public policy issues.
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    From the consumer perspective, these transactions raise worries that large banks are impersonal and indifferent to local financial needs, especially in smaller localities. A particular issue in this regard is the application of CRA to large, complex, and geographically diverse institutions.

    CRA implementation does indeed become more logistically challenging for the bank and its regulators as a bank increases its size and branches across States. Congress anticipated this situation. As a result of the Riegle-Neal legislation, the OCC rates multi-State banks not only for their performance overall, but also separately for performance in each State in which they are located and each multi-State Metropolitan Statistical Area in which they operate. These safeguards assure that CRA performance of large multi-State banks will be assessed across the entire organization and in more local markets.

    Consumers also express concerns that some large banks charge higher fees for certain services than smaller locally based institutions. The pricing of bank products and services is complex and it is not always easy to identify the precise reasons for differences in bank product prices. This is an area that the OCC will watch closely. We will pay particular attention to the impact of fees on access to financial services for low- and moderate-income consumers.

    Additionally, some consumers worry that cross-selling of products will not be conducted appropriately in large financial companies. Consumers are also concerned about issues of personal privacy because, as financial firms get bigger and engage in more types of activities, they also gain more and more information about their customers, including medical, credit and investment information. These are both issues to which the OCC will be devoting increased attention.
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    The OCC and the other agency members of the FFIEC are, in fact, currently reexamining the Interagency Statement on Sales of Non-Deposit Investment Products to assess whether that statement should be embodied in a regulation and whether it should include insurance in its coverage.

    The OCC's approach to regulating and supervising the proposed organizations that we are discussing today is based on two things: our experience overseeing many large bank mergers in recent years, and our fundamental supervisory philosophy, supervision by risk, which has been developed over the past five years and which is uniquely suited to address the special challenges posed by bigger, more complex banks.

    Our experience with previous mergers demonstrates the importance of several key elements. My written statement discusses these in detail. They include a tightly controlled transition process that includes clear business plans, lines of authority, and accountability in the combination process; the need for bank management to assure that core business activities remain viable throughout the transition; and plans to ensure that the merged institution is ready for the year 2000.

    If the announced mergers become reality, our ongoing supervision of these large organizations will be based on our supervision-by-risk approach. OCC examiners will assess a banking organization's existing and emerging risks across product and services lines and evaluate whether management has effective working policies to identify, measure, monitor and control risks throughout the entire organization. A particular focus will be to ensure that management efforts to cut costs to achieve post-combination operational savings not be allowed to weaken essential bank internal controls and audit functions.
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    The OCC's resident examiners at each of the institutions involved in the recently proposed transactions have already begun to coordinate their supervisory strategies, identifying each institution's strengths and weaknesses. We are also planning a special meeting of examiners who are most experienced in large mergers and combinations to review the issues they have seen in those transactions and to identify ''best practices'' that were used by banks and the OCC to deal with these issues.

    Mr. Chairman, a third question raised in your letter of invitation was whether legislation is necessary to provide smaller banks and financial services firms with the ability to compete on a level playing field with these newly proposed entities. In order to compete effectively in the financial services marketplace of the future, banks of all sizes need to have the ability to choose the organizational structure that will best enable them to operate efficiently and compete effectively. Particularly when faced with the prospect of competing against conglomerate financial titans, banks of all sizes should not be subject to artificial constraints on their ability to compete.

    This is a concrete illustration of why it is crucial that financial modernization allow banking organizations the ability to conduct new financial activities in bank operating subsidiaries as well as bank holding company affiliates, depending upon which is more efficient for the particular organization.

    In conclusion, Mr. Chairman, these mergers raise a number of important issues. I believe we have the right approach and the right tools to supervise these large institutions and others that may be formed in the future. But we are not complacent. The scale of these transactions does present challenges, real challenges, as I have described above. We will need to be vigorous in our approach to supervision and very sensitive to the emergence of any familiar, and certainly any novel, supervisory issues. Given the size of the organizations being formed, problems must not be allowed to fester. One of the compelling lessons of the past is that we must never relax our supervisory vigilance.
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    Thank you for the opportunity to present the OCC's views, and I will be pleased to answer any questions you may have.

    Chairman LEACH. Thank you, Ms. Williams.

    Ms. Ghiglieri.


    Ms. GHIGLIERI. Thank you, Mr. Chairman. I am pleased to be here today to present the views of the Conference of State Bank Supervisors.

    Mr. Chairman, as you wrote in your letter of invitation, developments in the financial services marketplace are reshaping America's financial services industry. We endorse the principle that regulation should follow the marketplace, not dictate it, and we commend you and Members of this committee for pursuing legislation that acknowledges this principle.

    At this stage in time, it is difficult to say how the fast-moving changes in financial services will reshape the industry and the delivery of services to the consumer. The most powerful force of change is technology. Its ability to deliver financial products to the consumer inexpensively will revolutionize the industry. The vision of the financial supermarket is already a reality. That virtual supermarket is the Internet.
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    You asked what smaller banks need to compete. The answer is a healthy dual banking system that allows the States and their chartered institutions to respond creatively to the needs of consumers and small business. Large financial services conglomerates can pursue their business vision without harming competition, as long as we have a healthy and competitive community banking sector.

    To foster that competitiveness, we suggest that Congress consider easing some of the requirements of the Section 24 process. We also suggest that Congress consider clarifying the authority for an insured State bank that is part of a bank holding company to engage in activities through a subsidiary, provided that such activities are permissible under Section 24. These changes will allow State-chartered institutions to innovate in ways that enable them to compete with the new financial conglomerates.

    As we have learned all too well, the key to expanding powers is effective supervision. Therefore, State and Federal banking agencies must supervise any banking organization that engages in additional activities from the top down and the bottom up, and CSBS is pleased that H.R. 10 as passed by both the House Banking and Commerce Committees recognizes this principle.

    We reiterate our conviction that comprehensive supervision at the top of an organization, whether it is a bank or financial services company, is absolutely necessary to protect insured deposits, consumer interests, and for very large organizations, the stability of our financial system. CSBS believes that the Federal Reserve, with its joint responsibilities of protecting the safety and soundness of the banking system and promoting stability and growth for the economy, is perfectly suited to serve in this umbrella regulatory role. Achieving adequate control systems to monitor the far-reaching scope of these new organizations provides challenges to both bank management and their supervisors.
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    At the same time that all of the regulators have been encouraging banks to adopt a risk-based approach to their business activities, we also have applied these principles to supervision. We are using a risk-focused approach to examining and supervising an organization's business activities, and we believe this program will sharpen supervisors' focus on areas that pose the greatest threat to the safety and soundness of a banking organization and on management's ability to identify, measure, monitor and control risks.

    As Director Seidman has indicated, CSBS does have some concerns about the course that financial modernization will take without the input of Congress. For example, the rush to the unitary thrift charter by non-financial companies that intend to deliver financial products through non-traditional delivery systems, how should these be regulated?

    In conclusion, the health of the predominantly State-chartered community banking industry is essential to ensure that financial conglomerates do not control the delivery of financial services. Financial legislation that liberates State banking regulators to allow their institutions to deliver innovative financial services, while strictly maintaining safety and soundness, will help ensure a competitive and thriving financial sector.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much. I appreciate all of your comments, and most of them addressed in the abstract rather than with regard to any of the specific mergers, but the mergers basically accentuate or underscore some of the issues before the committee.
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    For example, we have a very stark difference of opinion between the Treasury and the Fed on two issues. One is the issue of whether, as we look at these larger institutions particularly, that the operating subsidiary should be empowered to offer virtually anything in the financial services arena, or whether there should be a separation out and that if a merger like Citicorp's goes through, that this be done through an affiliate structure.

    The second issue on which there is a very large difference between the Treasury and the Fed is that the Treasury maintains that we ought to have a much larger commerce and banking component, that banks ought to be able to invest in commercial enterprises.

    As I look at some of these mergers, it looks to me, with the new size, that some of the larger combinations would allow banks under, say, a 15 percent basket, to buy companies as large as, say, Sprint or 3M. What I would like to do is ask Mr. Hawke if he could articulate why the Administration favors commerce and banking, and second, why he believes that there will be better protection for the consumer and for the competitive environment by allowing all of these new activities to unfold in an operating subsidiary?

    Mr. HAWKE. I would be happy to, Mr. Chairman.

    First of all, on the banking and commerce issue, I think it is not correct to say we favor banking and commerce. In the proposal that we sent up to the Hill a year ago, we proposed two alternatives with respect to dealing with that. One provided for a modest basket of non-financial activities, which we were content to leave to the Congress to decide, and the other was that if Congress did not see fit to grant any basket of non-financial activities, we thought the existing thrift charter and unitary holding company format should stay in place.
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    There is no force in the marketplace that is pushing for broad elimination of banking and commerce. We certainly have not proposed that. But there are a couple of considerations. One is to accommodate the existing non-financial activities in the existing financial services firms that we are trying to bring into the tent. The other is to take account of the fact that it is increasingly difficult to determine what the difference is between commercial and financial activities.

    But that has been much less of a concern than the operating subsidiary concern, and I am pleased to have the opportunity to address that just for a few moments.

    First of all, we think that if the ground rules are such that there is no regulatory bias in favor of one format over the other—that is the operating subsidiary and the holding company affiliate—then management will be left to choose based on business considerations. That is the way it should be.

    We fashioned our proposal, and the proposal that came out of this committee was fashioned, with protections that would assure that the safety and soundness of the bank would not be threatened by the operating subsidiary format. They included limitations on the amount that could be invested in the subsidiary—a capital ''haircut'' for the parent bank if it choose to invest in the subsidiary—so that any amount that was invested in the subsidiary could not count toward the bank's meeting its own very high capital requirements. We think that the superstructure that was created there provides perfectly equivalent protections for the bank whether the activity is carried on in an affiliate or a subsidiary.

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    Now our colleagues at the Federal Reserve have pointed out some of the differences with respect to financial accounting and consolidated financial statements, but what is really at issue here is what the bank's economic interest is, what economic interest is at stake in the operating subsidiary. If the bank cannot lose in an economic sense more than it has invested in the subsidiary, and if it must maintain its capital at the highest level of regulatory capital, then the bank is fully protected even though consolidated accounting conventions may require some different reporting for those purposes.

    Chairman LEACH. Let me ask Mr. Meyer to respond briefly, if he would.

    Mr. MEYER. Well, thank you, Mr. Chairman. I am delighted to do so.

    Let me start with banking and commerce first and then go on to the op sub. It is our view that this would be an inopportune moment to further mix banking and commerce, when we have such rapid change going on in the financial sector, considerable consolidation, and diversification of financial services that would be going on under H.R. 10.

    We don't believe the synergies in banking and commerce are nearly of the same scope as the synergies across financial services that are driving financial modernization legislation. We believe that further mixing at this time would increase risk to depository institutions, further spread the Federal safety net in a way unwarranted, and create a greater challenge for the supervisory and regulatory framework when other changes are going on at such a rapid pace.
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    Let me address the issue of the operating sub. In my remarks earlier, I talked about two of the reasons why the Federal Reserve has supported so strongly the holding company framework and insisted that the expanded activities take place in holding company affiliates. Let me go over those and expand upon that and give you a third reason.

    The first reason is that banks can fund their activities more cheaply than the affiliates because of the access to the Federal safety net. We believe that in the interests of a level playing field between those non-bank activities that are operating in a banking organization and those that are outside a banking organization, that it would not be appropriate to allow that cheap funding source to be available to these non-bank activities.

    The second issue goes to the very heart of safety and soundness, and we have a very profound difference with Treasury on this. We believe that, particularly at this time of rapid change and larger institutions and diversified institutions, we have to be very careful to provide the best insulation of the depository institution from the risks of the expanded activities. We believe very strongly that the holding company framework provides that, and the op subs, notwithstanding the Treasury provisions, do not do so. We believe it is an illusion to believe the bank is protected from rapid losses that can be generated in a fast-changing environment in the bank subsidiary.

    I want to get to the third issue. Sometimes, it is thought that this issue is really just a turf battle and that there are no substantive issues. I believe there are very powerful and profound issues involved. Just to highlight that this isn't always an issue that has separated the Federal Reserve and Treasury, I have a somewhat yellowed copy of an a statement in 1983 by the then-Secretary of the Treasury, that I thought I would read a portion of it.
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    ''The unique status of depository institutions enables them to raise money in the private financial markets at a lower cost than most other borrowers. The institutions should not be able to use the lower cost of funds to directly engage in activities with non-depository institution competitors.''

    Additionally, the Secretary went on to say, ''The investment that they make in these op-subs would be at risk if the subsidiary's activities would default.''

    I quote that as a preface, because I am going to add a third reason why we are concerned about op-subs. And this one often, I think, might be viewed as just a turf battle and I want to emphasize that it is not. It is also a very profound issue.

    I don't think there is any question that if banks had the opportunity and were given the choice of where to locate activities, that they would locate the activities where the cheapest funding would occur. I don't think we have any doubt that if they were allowed to locate the new activities in op-subs, that they would do so. One of the implications of that is that the bank holding company vehicle would no longer have any sort of usefulness. Everything would be done through op-subs.

    Of course, you are saying, ''I know where you are headed. You are headed to the fact that the Federal Reserve is the exclusive supervisor of bank holding companies and that would reduce your presence in supervision.'' Well, that is exactly where I am headed, Mr. Chairman. That is exactly where I am headed.

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    As I am sure you are all aware, the Federal Reserve is the primary Federal supervisor for only a small fraction of the Nation's large, complex and internationally active banks. We stay engaged in the supervisory process and we maintain information and dialogue about risk profiles and risk management systems primarily through our role as a bank holding company supervisor.

    In the absence of that, we would be, if not blind, certainly in a position where our sight would be severely limited if the financial system moved into a serious problem where systemic risk was present and where crisis management was important.

    I believe this committee and I believe Congress over the years has looked to the Federal Reserve and given it a very special role in guarding against systemic risk, protecting against financial crisis and managing those crises. I hope you will think twice about taking actions that would reduce our ability to do so.

    Thank you.

    Chairman LEACH. Thank you, Governor Meyer.

    Mr. LaFalce.

    Mr. LAFALCE. I have a host of questions in my mind, but I think the Chairman has asked a very important one. And before I go onto my questions, I wonder if the Comptroller of the Currency, Ms. Williams, might add some further light to this subject.

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    Then, also, I would like very much if Ms. Ghiglieri could explain to me what the corporate governance provisions are with respect to State-chartered institutions, whether or not activities that we are discussing could be conducted under subsidiaries of State-chartered institutions—generally speaking, we have 50 separate States, I know—and whether or not there might be some competitive disparity between State-chartered institutions and national banks were we to adopt a holding company structure as desired by the Fed.

    Ms. Williams, you can also comment on the subject, too, if you would like.

    Ms. WILLIAMS. Congressman, thank you very much. I appreciate the opportunity to comment on some of Governor Meyer's concerns, because there are actually a number of very simple answers to them.

    Mr. LAFALCE. I am also wondering if the Comptroller of the Currency might even be able to have greater supervisory authority over operating subs than the Fed would under the Fed, like provisions of H.R. 10.

    Ms. WILLIAMS. I am happy to address that as well.

    One of the key concerns that Governor Meyer identified was the concern about cheap funding. The issue of cheap funding and the transference of cheap funding, to the extent that that is a problem that we face, is addressed in the holding company context through the imposition of safeguards and standards under sections 23A and 23B of the Federal Reserve Act. Those standards can be imposed on transactions between the bank and its subsidiary. So the very same standards that prevent the migration of the advantaged funding that the Fed is concerned about can be imposed on transactions between the bank and its subsidiary.
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    The concern about risk and insulation of the bank from the risk presented by these activities I think requires us to take at least one step back and look at the activities that we are talking about here. These are financial services activities. These are activities that are conducted today to a very substantial degree in foreign-based subsidiaries of national and large State banks. We are not talking about activities that are alien to what is occurring today in subsidiaries of banks overseas and in subsidiaries of some State banks.

    There are safeguards that can be imposed in connection with any concerns about exposure to those activities, and the Treasury's proposed legislation has a number of significant safeguards to guard against any damage to the bank as a result of the particular activities that might be allowed to be conducted. But the starting point is that these are activities that occur today. They are conducted safely. Studies indicate that they are actually helpful and provide a benefit in risk——

    Mr. LAFALCE. Are you saying that you really don't want to allow anything new? You want to simply allow subsidiaries of banks to do within the United States what they historically have been allowed to do through their subsidiaries abroad?

    Ms. WILLIAMS. That is substantially what I am saying. Yes, sir.

    With respect to the insulation of risk, as I mentioned, there are a number of safeguards that the Treasury has proposed and that were also in the Banking Committee's reported bill.

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    In a subsidiary, we also have probably more ability to follow transactions, and our oversight of transactions between the bank and the subsidiary can be very vigorous. There are aspects of H.R. 10, in the elements of Fed supervision of holding companies, that actually put the Fed in a position that gives it lesser oversight authority than it has today. So that I think is an issue that needs to be very seriously considered by the Congress.

    Finally, in terms of what the Treasury may have said at any one time, I will be glad to trade with Governor Meyer my old excerpts from quotes from Fed governors that said that doing new securities activities in bank subsidiaries was the way to go.

    Finally, with respect to the role of the Fed, unless the banking industry has completely changed its approach to things, it seems to accord a great deal of significance in keeping its options open, and it would surprise me greatly to see the holding company form evaporate in the financial services industry.

    Mr. LAFALCE. Ms. Ghiglieri, the State perspective on what State-chartered banks can do through their operating subsidiaries.

    Ms. GHIGLIERI. OK. Congressman LaFalce, there is actually disparity among the State banks, depending on if they are a member of the Fed or not a member of the Fed. And, basically, it is that some States allow the banks, the State-chartered banks, to conduct certain activities, but they are required to be in a subsidiary. The Federal Reserve has opined that they do not want those in a subsidiary, and, therefore, member banks are now allowed to do them, except in the second circuit where there was a court case that went against the Fed.

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    Mr. LAFALCE. The Fed is very concerned about the fact that they lost that court decision, are they not?

    Ms. GHIGLIERI. You'll have to ask Governor Meyer. I am not going to speak for the Fed.

    Twenty-one States, for example, allow their banks to underwrite municipal revenue bonds, but eight of those require them in a subsidiary. New York, for example, insurance must be sold out of a subsidiary. Again, if it is a member bank, they cannot; if it is a non-member bank, they can.

    So I think the answer to your question, as far as the difference between State and national banks, the State-chartered, non-member banks can do certain things in subsidiaries, while the Fed member banks cannot.

    Mr. LAFALCE. The non-member banks would be regulated by the FDIC, is that correct?

    Ms. GHIGLIERI. That is correct—and the State.

    Mr. LAFALCE. So we have the State and the FDIC.

    Mr. Hove, your perspective on this as the regulator of the non-member banks, the insurer of them, how effective has your oversight been of the activities of operating subs of the State-chartered, non-member institutions? What has your experience been?
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    Mr. HOVE. In our experience with the institutions that have activities in an operating sub and with those that have them in the holding company, there has not been any distinguishable difference. We have not perceived a difference in risk if the activities are in a sub of the bank, as opposed to a sub of the holding company.

    The provisions, as Ms. Williams mentioned——

    Mr. LAFALCE. So as far as you are concerned, you would leave it up to the druthers of the institutions, rather than forcing one specific type of corporate governance upon them, is that correct?

    Mr. HOVE. Precisely. Our position is it is a management decision, and it should be up to management.

    Chairman LEACH. Mrs. Roukema.

    Mrs. ROUKEMA. We will get back to the question of turf battles and oversight, but before we—I mean, and regulation, but before we do that, Mr. Meyer, Governor Meyer, I was not quite clear as to what you meant with specificity about the mixing of commerce—and I think you used language such as the inopportune time to further mix banking and commerce that would weaken the Federal safety net. That is not an implication that you don't accept the 5 percent basket, or is it?

    Mr. MEYER. We would have preferred less mixing of banking and commerce.
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    Mrs. ROUKEMA. Less than 5 percent?

    Mr. MEYER. Less than 5 percent. There are numbers less than 5 percent. Zero is less than 5 percent.

    Mrs. ROUKEMA. But I am serious about this. This is the first time I have heard a Fed person speak in that declarative term. I don't happen to agree with you, but that is why I asked for clarification.

    But I want to go back to——

    Mr. MEYER. Let me clarify first.

    Mrs. ROUKEMA. All right, go ahead.

    Mr. MEYER. There are two issues here. One is whether there should ever be a mixing of banking and commerce, and the other question is whether this is a good time to do so.

    The position the Board has taken with respect to H.R. 10 is this is not a good time for further mixing of banking and commerce, leaving open the question as to whether or not we want to come back later and reconsider the issue. That has been our position. And I believe that the Chairman's letter made clear that we understood that, in an attempt to craft a compromise, not everything that we would have preferred might be in the bill. We could live with the limited basket because this bill had the holding company framework and had umbrella regulation. That combination was acceptable.
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    Mrs. ROUKEMA. All right. Now, my real concern, my most fundamental concern, though, is the one that the Chairman and the Ranking Member have already presented, and that is the question of the regulatory structure, a bank holding company or a subsidiary.

    I am concerned, Governor Meyer, that you might want to come back and perhaps address it as how do we deal with it, regulatory—I mean, functional regulation or the Fed as the umbrella regulator or, as I believe the Fed Chairman has said, although not with precision in my estimation, that there could be a combination as to who is the key supervisor in one form or another or having access as a part of the functional regulatory structure. Is that a way of dealing with your what I believe are legitimate concerns regarding this subsidiary issue—I mean op sub issue?

    Mr. MEYER. I think this is, in some degree, a separate issue, the umbrella issue. I want to address that, and I think it is very important.

    Mrs. ROUKEMA. Thank you.

    Mr. MEYER. We believe H.R. 10 is a very constructive approach to a difficult problem, and shows a lot of balance between the need for functional regulation and, at the same time, the need for consolidated or umbrella regulation. We are talking about bringing inside a banking organization non-bank entities who have their own regulators. It is appropriate that, in that case, the overwhelming degree of regulation be put on an even footing between those non-bank institutions that are in banks and the same activities outside the banks, and that is what functional regulation does.
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    It is important nevertheless, for two important reasons to have umbrella regulation as well. Although placing these new activities in affiliates provides the best installation that we can inside the banking organization, even that is not perfect, so there is still some risk to depository institutions, and that is addressed by umbrella regulation.

    Second, every major sophisticated entity with diverse activities now manages itself on a consolidated basis. It is essential that the regulators and supervisors be as smart as the entities and manage that risk on a consolidated basis as well. So I think H.R. 10 has an extremely constructive approach and shows excellent balance in all these respects.

    Mrs. ROUKEMA. All right, thank you. I appreciate that.

    I do think—and I want to go back to the question that is always raised when there is a refutation of the Feds' position on this subject—and it is always raised—well, this is just a turf battle. I don't think it is just a turf battle; and, on both sides today, there has been a clear statement of your approaches; and I would have hoped we would have found the right combination.

    Mr. MEYER. I just want to raise one other issue in terms of functional regulation and the role of the umbrella supervisor. It is very important that, while the Fed relies as much as possible on the reports of functional regulators, it retains, as H.R. 10 does, the authority to examine those entities when there is material risk to the depository institution or grounds for believing so. That is also extremely important.

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    Mrs. ROUKEMA. Thank you.

    Secretary Hawke.

    Mr. HAWKE. Mrs. Roukema, I think you raised the question, and I must say that I find it refreshing that my colleague, Governor Meyer, has so candidly admitted that the major concern of the Federal Reserve is over preservation of their jurisdiction. I think everybody has known that, and a lot of the esoteric arguments that have been framed in terms of the subsidy and accounting conventions have been other ways of really getting at that same point, and it is certainly a legitimate concern.

    If there is a significant concern about the Fed's jurisdiction, then we ought to address that head on, but it shouldn't be addressed by an absolute prohibition on a particular form of doing business, because there are downside detriments to that.

    For one thing, if the only way a banking organization can carry on new activities is in a Fed-controlled affiliate, which is clearly what they would prefer, it means resources will have to be forced out of the bank in order to capitalize those new activities.

    If the option is provided of an operating subsidiary, the bank will be able to maintain those resources within the bank while still equally well protected from those activities. The bank will be able to experience the benefits of diversification and additional income flow from those activities, rather than having to force resources by way of dividends to the holding company to fund new activities. And dividends, of course, are as easy a means of transmitting any subsidy that might exist as capital payments downstream.
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    Another issue we are concerned about is the effect on Community Reinvestment Act enforcement. Today, the Comptroller of the Currency measures the Community Reinvestment Act obligations of banks, taking into account not only the size of the bank itself but the consolidated size of the organization. To the extent that activities are forced out of the banking organization to affiliates, it essentially diminishes the CRA target that the regulators will consider in assessing the CRA performance of that institution. So we think that there is an important consideration from that point of view in allowing the activity to be conducted by a bank through a subsidiary.

    But we think the protections for the bank are absolutely equivalent in either event, that there is no question about the safety net being extended to subsidiaries any more than it is extended to affiliates, that any question of any subsidy that might exist, and that is a highly debatable issue, is really not with any content, because any subsidy can be spread just as easily to other parts of the family as it can be to subsidiaries. So this comes down, as Governor Meyers I think very candidly conceded, to a question of concern about the Federal Reserve's jurisdiction from the point of view of the holding company regulator, and I think we ought to address that quite directly.

    Mr. MEYER. If I could respond.

    Mrs. ROUKEMA. I guess the Governor has to have the last word here.

    Mr. MEYER. If I could respond, it is just for reasons like this that we have been hesitant to make this point, because you see it belittled as an issue of turf and jurisdiction when what we are talking about is something very profound and important.
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    I hope the Members of this committee will believe that the Federal Reserve's role in guarding against systemic risk and guarding against financial instability and being an important player in financial crises is important. I don't believe that should be belittled as turf. I think that role is fundamental to the way our financial system operates, and to the effectiveness of the supervisory system that Congress has put in place.

    We do have fundamental disagreements, obviously, about whether there is cheaper funding at banks. We believe there is. We do have profound differences about whether or not it is equally safe to operate in an operating sub.

    My colleague says that we should leave choices to management, that this is a management decision. Time and time again, we impose regulation on banks because banks are different. Because of systemic risk, because of the potential call on the taxpayer, because of deposit insurance, banks are different. We do impose restrictions, and we must impose restrictions, where appropriate, to maintain the safety and soundness of our banking institutions.

    Mr. HAWKE. Mr. Chairman, I certainly didn't mean to belittle the Fed's position. I concur completely with the Federal Reserve that a strong role in holding company regulation is important. That is exactly why we proposed that the Federal Reserve continue to be the umbrella regulator of financial holding companies. We support that, and we would like to find ways to assure that the Federal Reserve's role is not diminished. But we don't think that questions of organizational structure should be subsumed in that and that we ought to address that head on.

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    Mrs. ROUKEMA. Mr. Chairman, do you think we could get these people in a locked room before H.R. 10 comes to the floor? Thank you.

    Chairman LEACH. Well, I appreciate this; and at the risk of presumption I would like to take 10 seconds. But let me just say that this extraordinary dispute between two extraordinary institutions of the United States Government, that we all respect the office of the Comptroller of the Currency is an extraordinary office with a great history, as is the Federal Reserve Board.

    One of the things, however, this committee has to be very sensitive to is that whether it is right or wrong, the Treasury, in one sense, has no treasury. That is, in the event of an emergency, the Fed is where one goes for resources, and that is why it is critical the Fed have some oversight.

    Whether it be exclusive oversight is something that all of us have to think through very seriously. My personal view is I can live with the compromise that came out of the Banking Committee, and I am hopeful the Treasury can. And I would like to ask Mr. Hawke, can you live with that compromise? Does that seem to you to be untenable?

    Mr. HAWKE. Well, Mr. Chairman, with great respect for what the Banking Committee did, I don't think it is appropriate for me to negotiate the Administration's position in an open hearing.

    Chairman LEACH. Fair enough.

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    Mr. HAWKE. I do want to make clear this issue is one that not only the Treasury but the Administration feels very strongly about, and the Secretary's communication to the Speaker several weeks ago made clear the strength of those feelings.

    Chairman LEACH. I appreciate that. And before turning to Mr. Vento, I would just like to say as strongly as I can, I hope the United States Department of the Treasury does not politicize one of the profoundest legislative issues, with enormous significance for the future of the financial landscape of this country. I am very deferential to some of your concerns, but not totally so and not to such an extent that the Federal Reserve Board which has, in the final measure, the pocket to deal with the systemic risk that does not ascribe to the Treasury, is taken out of significant financial regulation.

    Mr. LAFALCE. Can I have ten seconds?

    Chairman LEACH. I think that is fair.

    Mr. LAFALCE. The same clock that you used for those same ten seconds. Thank you.

    Well, first of all, I don't think it is fair to characterize the Treasury as being political or politicizing an issue when they attempt to uphold jurisdictional prerogatives of the Comptroller of the Currency that, from the beginning of national banks, has been the regulator for national banks. What H.R. 10 purports to do is infringe upon that existing authority. That is my first point.

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    Second, with respect to turf, you know, all sides could be accused of engaging in a turf war. That was nothing intended against Fed or the Comptroller or anybody else. This is something that could be utilized against everybody. The more we can remove the subject of turf war from our debate, you know, the better off we are going to be.

    But one question that I have to ask Dr. Meyer, because if we were to extend the logic of your argument, I am wondering if we should not amend H.R. 10 to preclude State-chartered institutions that are non-member banks from operating subsidiaries that conduct these type of activities. It would seem to me the logic of your arguments would necessitate that conclusion.

    So should we preclude State-chartered, non-member banks from operating through subsidiaries in the manner they have done historically and, according to Mr. Hove, in a very safe and sound manner?

    Mr. MEYER. Well, first of all, most of our experience with operating subs is with activities that could otherwise be conducted inside the bank. We are now talking about a fundamental change in our banking system. We are talking about operating subs engaging in activities that are not allowed in banking organizations today.

    Mr. LAFALCE. They are allowed in Europe and Asia, are they not?

    Mr. MEYER. Absolutely. A lot of things are allowed in Asia, and I don't know whether we want to use that. If you want to get into the Edge Corporation, I would be happy to address that issue if you would like.
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    Mr. LAFALCE. That is the issue. The difference is they are allowed to do it through subs, but you regulate the subs abroad, is that right?

    Mr. MEYER. I would be very happy to address that question. It is, again, an issue of level playing field.

    Congress wrote the legislation for the Edge Act that allows subsidiaries to carry on activities in their international operations that wouldn't be allowable in the domestic operations. Congress wanted, in its wisdom, to allow a level playing field between U.S. banks operating internationally and what is going on abroad.

    That same level playing field is exactly what we are talking about as operating in the United States. We want a level playing field in the United States for non-bank entities who operate inside a banking organization or who operate outside a banking organization. So it seems to me the position we have taken——

    Mr. LAFALCE. What about a level playing field between national banks and State chartered?

    Mr. MEYER. Between national banks and State-chartered, I think that, as a general rule, that it is desirable to have more uniform regulations. We have been working, as you know, to try to achieve greater consistency in the treatment of banks across banking agencies. So I think movement is in that direction——

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    Mr. LAFALCE. So you favor legislation which would preclude State banks from doing what they have been doing?

    Mr. MEYER. We don't view this as a very big issue. In the particular case we are talking about here, to our knowledge, that one legal case applied in one State.

    Mr. LAFALCE. But that was one case that applied to one State, but you have the laws of many of the States permitting these.

    Mr. VENTO. Mr. Chairman——

    Mrs. ROUKEMA. Mr. Chairman, excuse me, but I am going to reclaim my time here.

    Mr. VENTO. You have no time.

    Mrs. ROUKEMA. We are not going in order. We are not going in order here.

    Chairman LEACH. The hearing will be in order.

    The Chair has gone out of order and apologizes to the committee. I do believe that we should pay firmer attention to the regular order, and the Chair apologizes to the committee.
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    The Chair recognizes Mr. Vento.

    Mr. VENTO. I am glad you brought up this topic, Mr. Meyer. I am glad. I don't know if you are. I think that unless you can demonstrate there is a definitive difference in terms of the losses, which has been testified to the contrary here today by the FDIC, who, after all, is the first line of defense with regards to deposit insurance, unless you can demonstrate definitive studies that can portray these different, then it does come down to a turf fight and trying to go to court to overturn what is happening in the States.

    I appreciate the Feds' position, but the fact is—and I think Mr. Hawke's statement, when he said, with regards to the Fed, if there is a reason to have a regulatory role or monetary role over and above a holding company activity, I think most of us are willing to look at that.

    We are supposed to be talking about banking modernization here and mergers and acquisitions, not taking away and diminishing the corpus of the successful banking institutions in this country.

    On one side we have H.R. 10 redefining product lines—the SEC is defining what is a banking instrument, and on the other side it is insurance and nature of concept that is defining it. And, meanwhile, the regulators in between the banks are fighting and diminishing what has been the national bank charter, and that is the effect of it.

    I don't need a response. You can provide the definitive study with regard to that, and I would appreciate it.
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    You know, getting back to this concern in terms of talking about the merger and acquisition issue here, it doesn't sound like to me we have any sort of fire in the belly type of regulator here that is going to go out and challenge these types of mergers in the way they need to be challenged. In fact, most of the testimony seems to me to be a rationalization to pass judgment positively on it. That is what it seems like when I read it.

    But then we find differences in mergers, that banks have higher costs to the consumers, but that is not significant. I thought this was supposed to benefit consumers. You know, where are the consumer advocates on this particular panel, those protecting the general public with regards to these interests?

    You know, certainly the Justice Department, I hope they have a new attitude with regards to some of these mergers. Yes, we put 10 percent in the law. Little did I expect it was going to be 8 percent three or four years later and going toward 10, so we will end up with a half dozen big banks and a lot of small ones.

    And the one function, the one issue with regard to this op sub that is a major issue is that it permits the smaller institutions to be able to do some of these activities in banking modernization that some seem so eager to shortchange them on. It is the smaller institutions that can form that type, but that isn't what this panel—mostly what is happening here is an argument over even permitting them to do these activities so that they can compete and have some of these modernizations. We have vertical integration. It is the horizontal that is being limited here.

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    Ms. WILLIAMS. Mr. Vento, you raise a number of very important concerns. Let me just describe briefly what we do generically when we review merger transactions. The issues and the concerns that you raised are issues that are taken into account and reviewed when we do our review of bank mergers under the Bank Merger Act.

    When we have, for example, in connection with an application process, concerns expressed by people in a particular community about the level of products and services that are provided by one of the constituent banks, if we don't have information on that particular issue, we will go in, even though we may have done a regular CRA exam, and we will do a targeted exam to see what the performance of the bank is. We will get specific information in order to address those concerns and be able to make a conclusion as to whether there are those types of problems. And if we conclude that there are deficiencies, those will be addressed in any action on an application.

    Mr. VENTO. Well, the issue is that, obviously, smaller financial institutions use the form of an operating subsidiary, do they not, that would permit them to at least participate in some of the activities being assumed in terms of a greater banking modernization, is that not correct?

    Ms. WILLIAMS. You are exactly right. The operating subsidiary is a very important structural option.

    Mr. VENTO. So they would be able to compete with the mega-banks that are being created, is that correct?

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    Ms. WILLIAMS. That is correct.

    Mr. VENTO. And the same would hold true, Ms. Ghiglieri, for the State-chartered institutions, is that correct?

    Ms. GHIGLIERI. As long as they are not in the Second Circuit and they are Fed members. I mean, the Fed member banks in the Second Circuit in the State. Non-Fed members can do things in op subs.

    Mr. VENTO. How do we justify the fact there are these studies, Mr. Hawke, with regards to demonstrating that larger institutions in more concentrated areas actually have higher fees for consumers? Is there any way I can assure the consumers I represent, when these mega-banks merge, whether it is the ones in my neck of the woods, U.S. BanCorp and others, that there is going to be some recognition they are going to get some of the benefits from this, other than just the stock options that go to some of the CEOs?

    Mr. HAWKE. Mr. Vento, that is a concern that we share, and we have looked at the numbers and really are quite puzzled why that phenomenon seems to be happening, why larger mergers seem to result in higher costs. One would think with concentration ratios in local markets staying constant, as they have, over the last 20 years, that local market competition would continue to be vigorous, particularly with all the new banks that are coming into the system.

    There are over 400 new banks that have been chartered in the last six or eight years alone, so it is not at all clear what is happening in the marketplace with respect to higher fees on deposit products. We do know that larger banks are charging lower rates on loans than smaller banks, and maybe there is an offset in that respect.
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    Mr. VENTO. Well, I think there is a case here, too, for a more assertive type of regulatory regime with regards to what is happening. Many of the ATMs and other types of equipment aren't even owned by banks anymore.

    Someone said to me, we need to grow this big because we are going to be competing with Microsoft, in terms of they claim they are not a financial institution. So you are sitting back here fighting over the scraps. Meanwhile, the economy is rolling along in a different place, and we are not addressing or tackling the big guys.

    Finally, the Justice Department is going after them in terms of some of their activities, but I think they could use some help, and I don't see it coming in terms of what has been stated here, in terms of this written testimony, and I am reading it.

    Mr. Meyer, Governor.

    Mr. MEYER. Could I address a couple of issues?

    One, I think it is worthwhile to try to look carefully at the impact of mergers on bank fees, so I think that is quite interesting. There have been——

    Mr. VENTO. I read your testimony.

    Mr. MEYER. Well, I am going to give it to you again then. There have been studies that suggested that large banks charged higher fees than small banks when adjusted for the fact that large banks operate predominately in urban areas and that costs are higher in urban than rural areas. Those studies do not provide any conclusive evidence that size alone raises fees. I did want to point that out.
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    Mr. VENTO. There are some studies out of the Minneapolis Fed which indicate concentration in the California market and other places do raise it, so I have gone beyond your testimony in other instances.

    Mr. MEYER. That is absolutely right, but size is different from concentration. That is why we emphasize the fact that local market concentration is not increased during this period from 1980 to 1997, during which the consolidation has been ongoing. You are absolutely right. Concentration does tend to have an effect of lowering deposit rates and raising loan fees. I think that is why we want to be on guard against it.

    Mr. VENTO. I think we need to have something in place to deal with it. And I would also say we completely missed the discussion here about the horizontal integration of financial institutions and the subsuming of investment banking by insurance and commercial banking which is taking place and what the effect of that has on the economy.

    That is not totally your thing. I should be talking to the economists and so forth, but you have to have that at your fingertips. You are the regulators, and you are in a position to do something about these particular problems.

    We talked about the overall scope of the economy. I would feel a lot better, Governor, if the Fed were advising us with regards to that, as opposed to trying to deal with the simple issue in terms of the operating sub, because I think these types of problems are much more profound in terms of what is happening with the Microsofts and the others as well.

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    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Vento.

    Mr. Bereuter.

    Mr. BEREUTER. Thank you, Mr. Chairman.

    I can't help noting with surprise and regret how few of our colleagues are participating in what is one of the most important hearings of the year and expressing some frustration that our colleagues who have opening statements don't even stay for the first panel, and it seems to me a collegial courtesy would suggest we might need a change in that direction.

    I have a few very specific questions I would like to direct to the distinguished panel.

    First, perhaps for Governor Meyer, what restrictions or authorities does the Fed have now over Citicorp during the two-year divestiture period if H.R. 10 is not enacted?

    Mr. MEYER. The Bank Holding Company Act gives a company who applies to become a bank holding company, and who would have impermissible activities, two years to divest. There are no restrictions on permissible activities during the two-year period, but they have to be in a position where they could reasonably divest and where the merger would make sense under those circumstances, and they are required to be moving in the direction and being in compliance at the end of the two-year period. There are opportunities, obviously, to extend that a year at a time.
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    Mr. BEREUTER. And the Fed makes that judgment?

    Mr. MEYER. At each point along the way.

    Mr. BEREUTER. Thank you.

    I am told that Travelers has insurance underwriting operations, and my understanding is insurance underwriting is prohibited activity for bank holding companies. What divestiture requirements would apply to those activities?

    Mr. MEYER. That is exactly right, and those activities would have to be divested under current law.

    Mr. BEREUTER. Mr. Hove, does the FDIC have the authority now and, if not, should it have the authority to prevent insured deposit institutions from merging if the resulting merged institution will hold a significant portion of the deposits insured by one of the FDIC funds?

    Mr. HOVE. The FDIC has a very small role in the mergers that are being dealt with today. The issue of the——

    Mr. BEREUTER. Could you prevent them if you reached that judgment? Do you have the authority to prevent the merger?

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    Mr. HOVE. Only if they exceed the limits that have been established for the institutions with respect to the size of deposit concentrations.

    Now, the concern we have is that we still maintain two separate funds. We maintain two separate funds that are both well-capitalized, in fact higher than the required 1.25. My recollection is that the funds are at 1.38 and 1.36. We have two industries that are well-capitalized, so I would urge the committee to address the issue of merging the funds, and I realize that there are other issues involved in that. But, clearly, with the concentrations we are having, it raises the issue of the merger of the funds, and we would urge this committee to start addressing those issues.

    Mr. BEREUTER. What happens if we have the mergers but the committee does not address this issue on the merged funds? What is your authority and what are your responsibilities then?

    Mr. HOVE. We still would have to address the failures of the institutions in each separate fund. As was mentioned earlier today, the concentrations in both the thrift industry and the banking industry are growing. Diversity, as we mentioned, is an important issue. The merger of the funds would give us the diversity that I think is important to the FDIC.

    Mr. BEREUTER. Earlier, Mr. Hove, you referred to international—you made this comment, quote, it is questionable whether it would be appropriate to maintain insurance funds that are large enough to address the worst-case scenario. Can you elaborate on that a little bit, briefly, at least?

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    Mr. HOVE. We have the ability, with the size of the insurance funds that we have today, to address failures, even of the large institutions. The FDICIA gave us the authority to engage in prompt corrective action, to close banks before there is zero capital, in fact, to close banks at 2 percent capital, and there are a number of other issues that today reduce the cost of failures. Therefore, it is our opinion that we can handle the failures should they occur.

    However, if we see an economic downturn that would impact the entire country and cause several large banks to fail, it would probably exhaust the insurance funds, and I am not sure that we could realistically maintain insurance funds that would prevent that. And I must say, and I address that in my written testimony and in the oral testimony, that today the banking industry has over $450 billion of capital that really comes before a loss to the insurance funds.

    Mr. BEREUTER. Thank you.

    Mr. Chairman, I ask unanimous consent to have one additional minute for the opening statement I didn't make.

    Chairman LEACH. You may have a long minute.

    Mr. BEREUTER. Thank you, Mr. Chairman.

    Governor Meyer, you made reference to the joint form on financial conglomerates; and, in fact, Ms. Williams, in her written testimony, has further comments about that. In light of the globalization of financial matters and financial institutions, it seems to me that what is coming out of the Basle effort is very important to us; therefore, I am wondering to what degree there is transparency in what the United States Government's institutions are doing in that international effort. It seems this Congress needs to have some confidence that this joint international forum is doing what needs to be done in a very difficult and emerging area.
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    Mr. MEYER. Well, I think you are correct. This has become a quite important forum because it brings together banking supervisors, security industry supervisors and insurance supervisors to talk about how to manage and regulate and supervise financial conglomerates. And it is extremely useful to share information internationally in this respect.

    In terms of capital regulations, we do have to achieve international agreement for these standards so they are applied equally around the world, so this international dialogue is very important.

    I might point out that one of the most important roles right now has been to encourage a good flow of information among supervisors, to make sure there is a legal basis for supervisors to provide information to each other which would be relevant in a functional regulatory framework.

    Mr. BEREUTER. Just a brief follow-up. To what extent are the products and the subjects of your deliberations, at least the categories you are looking at addressing, available to us?

    Mr. MEYER. There are reports that are published. I can certainly bring you up to date with whatever information is available about the joint forum. I would be happy to do that.

    Mr. BEREUTER. I would say to you, Mr. Chairman and Mr. LaFalce, even though we had some departure from the regular order, I thought the discussion and debate among the panelists was worth the effort in this instance, and I thank you for that initiative.
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    Chairman LEACH. Thank you, Doug.

    Mrs. Maloney.

    Mrs. MALONEY. Thank you.

    I would like to ask Mr. Hove. You talked about the need to merge the two funds and the problems we could have with an economic downturn, but with all of these huge mega-mergers, couldn't just one failure wipe out the FDIC? Say BA-Nations failed. Wouldn't that wipe out your holdings?

    Mr. HOVE. No. Not under our current assessment of it, it would not. Typically——

    Mrs. MALONEY. So you could absorb one failure. What if we had two mega-bank mergers that failed? Would you have the funds to absorb it?

    Mr. HOVE. It is hard to speculate, because you don't know how much loss there would be.

    You are correct. The Nations Bank-BankAmerica combination would increase the amount of insured deposits in one single institution. The Citibank or the Citigroup-Travelers merger doesn't increase the amount of insured deposits beyond what Citibank already has, so that doesn't present the same issues. But it is hard to speculate on what would happen in the event we would have one or more large failures, because at this time you don't know how much capital would remain in each institution.
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    These institutions are currently well-capitalized. Our capital in the banking industry today is higher than it ever has been before. So, there is capital there to absorb losses ahead of the insurance funds. And, typically, the larger banks have a smaller percentage of loss in a failure than do the smaller banks. So that, even if you apply a significant rate of loss to a failure and assume there is no capital or assume there are no assets to cover losses, it is highly unlikely that one failure or even more than one failure would exhaust the deposit insurance funds.

    Mrs. MALONEY. There has been a lot of discussion on regulation. Yet if you read this week's Business Week, it basically says that it is moving so quickly and fast that it is impossible to regulate.

    And I would like to first quote William Isaac, the former Chairman of the FDIC. He basically declared that Government agencies cannot keep up with the actual changes in the financial market. And to use his exact quote, he said: ''Federal regulation systems are ten years out of touch'', end quote.

    Chairman Greenspan, in the same article, said very much the same thing. In fact, he believes the bureaucracies may simply be incapable of adequately monitoring modern financial activities and that the market itself should play more of a role as a regulator.

    And here, with two regulators basically saying that is what is happening, it is just too big and changing so quickly that it is impossible to regulate, I would just like to ask again, Mr. Hove, to what extent do you believe that market forces can help banks avoid these kinds of losses in the future?
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    Mr. HOVE. Well, market forces clearly are important in judging the quality of the bank, and it is one of the things we look at in assessing risk in the banks. I must also say that the FDIC, along with other regulators, is adapting to new regulatory challenges that we have. We are changing our regulatory methods.

    Mrs. MALONEY. Before we get into the changes, I would just like to respond to or question what two regulators say in this article, that you can't regulate at this time. So I would like to ask you, do you think we should look at shifting more of the risk of failure to private investors, thereby encouraging the free market to police itself more?

    Mr. HOVE. A lot of the risk already is on the private sector. The capital that is in the institution is that of the private sector.

    There has been some suggestion that there be subordinated debt in addition to the capital that is already there, that would stand ahead of the FDIC insurance. A few months ago, we had a symposium in which we addressed FDIC insurance, and one of the issues that came out of the discussion was the amount of subordinated debentures that each bank could be required to hold, that would come ahead of the loss that we might see in the deposit insurance funds. That is one of the issues that we are looking at and, in fact, in our written testimony, have agreed to furnish the proceedings of that symposium to you.

    Mrs. MALONEY. Would Mr. Hawke or Governor Meyer or anyone like to further comment?

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    Ms. WILLIAMS. I would like to comment on the premise that these proposed organizations cannot be regulated, because I would beg to differ with the folks that were quoted in that article. There are approaches and tools that we have today to regulate very large and very complex organizations, and the basic approach of supervision by risk, in fact, is uniquely oriented to try to cover the different types and the more complex types of risks that these larger organizations can present. So the methodology that is used is key.

    How it is implemented in practice is also critical. We have resident examiners in these large organizations. They are there every day checking on the systems, checking on what issues are coming up, checking on what management is doing about them. They go overseas. We have had people in Singapore. We have had people down in South America. We will go to where there are potential risk centers and look at them.

    And, third, we are continuing to enhance the talent that we have in very specialized areas so we can do the type of complex and sophisticated modeling and stress testing that needs to be done in order to adequately regulate these large, complex organizations. So I disagree that these types of organizations, by their nature, cannot be regulated.

    Mrs. MALONEY. Since it is an important point, I would like to quote Alan Greenspan. He states, quote, rapidly changing technology is rendering obsolete much of the old bank examination regime, end quote. That is a powerful statement when you combine that with the former head of the FDIC basically saying, Federal regulatory systems are ten years out of touch, end quote. And I would like to know if anyone else would like to comment on this. You have two of the top regulators saying it is not working.

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    Mr. HAWKE. Mrs. Maloney——

    Mrs. MALONEY. He is saying we are ten years behind, today.

    Mr. MEYER. If I could address some of the issues that I think lie behind that.

    First of all, consolidation is not coming as a surprise to the Federal Reserve or to any of the other banking agencies represented here or to Treasury. We have long made projections that the consolidation would be continuing.

    Consolidation is very much being generated by the relaxation of geographic barriers to expansion that this Congress played such an important role in. And we haven't been waiting for it to take place. We have been altering supervision approaches along the way.

    We do not believe that our previous regime would have been up to the demands here. We needed to go to the risk focus kind of examination process—that was one of the major innovations. We had to increase coordination among supervisors. That was critical. We are anticipating and moving.

    The issue about the ten years out of date is likely in reference to concerns about the risk-based capital standards which were put in place in 1988. Those were a very important improvement in capital standards internationally. They played a very, very important role.

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    We do believe, however, that it bears some further consideration today; and supervisors around the world are working to focus on that problem to keep pace with rapid change.

    Mrs. MALONEY. But, basically, what the article says is that if you would shift the risk of failure to the private investors, you are thereby encouraging the free market to police itself. Thereby you don't need so much regulation.

    If you are going to make a lousy loan, you are going to pay for it. You are not going to be bailed out for it. If you are going to take a risk, you are going to realize you are taking the risk and you are going to have to pay for it.

    Which is basically what a lot of my colleagues are saying about the International Monetary Fund. I support funding the International Monetary Fund, but a lot of my colleagues are saying, hey, if you take a risk, you have to pay for it. As long as you cover everybody's mistake, they are going to continue making mistakes, which was the whole S&L problem. We started covering mistakes, allowing them to do more things where we covered their mistakes, and we ended up with the biggest scandal in the history of this country, costing taxpayers roughly $250 billion when you add in the interest.

    So my question really is, do you think we should look at shifting it to the private investor so that the threat of a failure, if we have a regulator who is not as up to speed as they should be—we obviously had many regulators during the S&L process, yet they did not stop it. We did insure them. Should we take the risk and shift it to the private investor so that whether or not you have the regulator there or not, if you make a mistake, if you squander money, take all these outrageous risks, then you are going to have to pay for it, not the American taxpayer?
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    One of the problems is that everything is too big to fail. Everything is too big to fail, and you get these mega-mergers, and it is really too big to fail. One of these things goes down and the American taxpayers are going to have to be the ones that are going to have to bail it out because they are too big to fail.

    So do you think we should shift more of this risk away from the American taxpayer and to the person who is initiating the risk and making them realize they will have to pay for it?

    Mr. MEYER. That is an excellent question. Let me respond this way.

    There will always be a blend between Government supervision and market discipline, and the question is getting that blend right. Moving all the way away from Government supervision, all the way toward market discipline may sound good, but you do generate increases——

    Mrs. MALONEY. I am not suggesting that. I am suggesting a little bit of a shift.

    Mr. MEYER. I quite agree, precisely for the reasons I think you pointed to, because of inherent difficulties of dealing with very large and complex institutions that we need to find ways to better engage the market to make market discipline work better, and I think we are precisely engaged in those kinds of activities.
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    Mrs. MALONEY. Could you be specific? In what ways are you trying to get the private market to work——

    Chairman LEACH. Let me interrupt for a second. I would like to give you 30 seconds to respond. We have other witnesses.

    Mr. MEYER. Let me just give an example that is within current practice, and it comes right out of the FDIC Improvement Act and the Basle Accords—increasing capital in the banking sector. The whole point of that was as a way of internalizing risk to the bank, making the managers of banks be subject to market discipline more than they otherwise would be. Prompt corrective action is another aspect of that.

    Chairman LEACH. If I could ask, Mr. Hawke wanted to respond briefly.

    Mr. HAWKE. Just very briefly, because I am very anxious to find an opportunity to agree with the Federal Reserve.

    I think Chairman Greenspan had it absolutely right, and I completely agree with Governor Meyer when he talks about market discipline.

    The Federal Reserve bank of Minneapolis came forward recently with a very interesting proposal that would have worked very much in the direction of market discipline, and it would address the too-big-to-fail issue as well. And that is to have written into law a requirement that would prohibit the bailing out of uninsured depositors in banks when they failed. If we can establish credibility in advance that uninsured depositors are going to have to feel some pain when a bank fails, that should go a long way in avoiding the expectations that cause the too-big-to-fail doctrine to be applied.
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    Mr. VENTO. Mr. Chairman, can I have just five seconds, and I mean five seconds?

    Chairman LEACH. Yes, sir.

    Mr. VENTO. I paid close attention to the testimony of Mr. Hawke and others, but the FDICIA Act is untested. And inasmuch as I admire Gary Stern from Minneapolis, it simply begs the question in terms of moral hazard.

    I think we would all like to do this, but I think the last time we checked we had as many as four $100,000-dollar accounts or something at least. So it is a disparate view. It is untested in terms of how it deals—and the larger the institutions get, it is more difficult to answer that question.

    Chairman LEACH. Thank you. That was very appropriate.

    Mr. Ney.

    Mr. NEY. Thank you, Mr. Chairman.

    I understand the Citicorp-Travelers deal would contemplate combining banking insurance underwriting through a holding company structure. The question I guess I have of Governor Meyer, if I could, is what do you think the position of the Fed Reserve would be if, for example, there was an amendment entertained for H.R. 10 that would prevent insurance underwriting to take place in an operating subsidy of a national bank? Do you have a position on that?
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    Mr. MEYER. Well, first of all, I really don't know what the intent of those organizations is about the location of those activities. The fact of the matter is that insurance underwriting is simply not permissible under current law, and that is the way we will evaluate this proposal of course, subject to a two-year period in which they don't have to divest.

    But in terms of all the other issues I have talked about, we believe insurance underwriting, particularly casualty and property underwriting, needs significant insulation from the depository institutions. That one really cries out to be restricted into an affiliate of the holding company.

    Thank you.

    Mr. NEY. Governor Meyer, if such an amendment would be considered, what you are saying is it would have to be looked at extremely carefully?

    Mr. MEYER. If there was an amendment to allow that to operate within an operating subsidiary of a national bank? Yes, I think that would have to be looked at very, very carefully.

    Mr. NEY. So you don't have a clear-cut yes or no?

    Mr. MEYER. I think that is an extremely bad idea.

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    Mr. NEY. OK. That answers it. Thank you, Mr. Chairman.

    Chairman LEACH. Mr. Ney, you have not used your full time. You get a special star.

    Mr. NEY. I am sure somebody will grab it. I am shocked, Mr. Chairman, nobody has yelled ''yield.''

    Chairman LEACH. In a short period of time you have asked and gotten answers to extremely important questions.

    Mr. Kanjorski.

    Mr. KANJORSKI. Thank you very much, Mr. Chairman. I would like to make an observation, something similar to my colleague from New York, Mrs. Maloney, when she questioned whether or not the regulators were actively engaged in defining all the potential risks here or what the downside would be.

    It seems to me, listening to the testimony today, everybody is satisfied these mergers go through and there is no risk here. I don't know why we are having the hearing. Maybe it is a done proposition. But I wanted to make a couple of observations.

    You know, we recently passed 1151 to allow the enlargement of credit union membership, and being intimately aware of the assets of credit unions, all 12,000 in the United States only have assets of $350 billion. We spent an inordinate amount of time in the Congress and with all the regulators as to how to accomplish and to cure some of the problems in the credit union movement.
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    In both instances of the Bank of America merger with NationsBank, that will be 50 percent larger in assets than all 12,000 credit unions in the country, and the Citicorp merger will be twice as large in assets as all 12,000 credit unions in the country.

    I heard much more wailing from the regulators and the banking community, those community banks, independent banks and large banks, in regard to that. As a matter of fact, still a lot of their employees are running around Capitol Hill crying about allowing more than 3,000 people joining a credit union. Got forbid, that could be catastrophic to the banking industry in this country.

    I am just wondering whether or not, observing the turf wars that exist here between the regulators and the psychology of ''it is OK if the big boys do it,'' and nobody raises any questions, I haven't heard any of the regulators really talk about the consumer out there, the small businessman out there. Are we going to have provisions in place that a very large bank that monopolizes a good portion of the financial services of a relatively large industrial State, is going to be imposing unreasonable fees, and what are unreasonable fees, just for applications for loans?

    What happens if the small drugstore on the corner wants to borrow $100,000 for inventory and the fee is set at $3,000, knowing full well there isn't any other taker? What is going to happen with the ATMs if an inordinate number of ATMs are owned or controlled by a single large entity? What if they put their fees at $7? What if they put them at $209? Are we talking about anything?

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    I recall several years ago a Republican administration came to the Congress with the idea that we should restrict at 10.5 percent the amount of interest allowed on credit cards, and I heard the comment that banks are so well-funded today, they are better than they have ever been funded. But isn't that directly the result of the fact that we did not impose, on the State level or on the Federal level, the usury fees? If we had really brought down and contained the 10.5 percent on the credit cards in this country, a lot of these major corporations that are swollen with cash assets would not be that swollen.

    As a matter of fact, I think when the Democratic side of the Congress protected the financial service industry at that time in not imposing regulations, it was a subtle understanding, ''Well, we're going to refinance the banking industry of this country,'' and actually did. I mean, the reason why it is so well off today certainly can be attributed to the extraordinary profits made on credit cards from average Americans, and the economy that is so strong. But have we tested or sensitized ourselves to what happens if we have a major downturn?

    I would like to really know, and I haven't heard anybody suggest, what happens if Japan goes in the tank? What happens if Asia fails, and what happens if that infects and spreads around the world? We talk about, oh, they are so well capitalized they can't go down. I think that is ludicrous. If we had a 20 or 25 percent drop in business activity in this country, that it wouldn't impact extremely negatively on our financial institutions?

    I am sort of disappointed today that we came here to hear about the mergers going on now under present existing bank laws, and a large part of the discussion has been on H.R. 10. I suspect they know something I don't know as a Member of Congress: Obviously H.R. 10 is going through, and they are going to have the advantages of whatever they ultimately determine to be in that act, or maybe they wouldn't be involved in these mergers.
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    I would rather look at these mergers consistent with existing law today; and anticipating that nothing is changed in the future, what is the impact? What should we be looking for and what are our regulators doing about it, if anything, or do you just feel this is just the greatest thing?

    Someone here said, well, they are not too large to fail, in answering Mrs. Maloney. How about the next guy that puts the trillion dollar deal together? How about $2 trillion? How about $5 trillion? Are you telling me there is no size financial institution in the United States that is going to be too large to fail? That isn't going to put the system at risk, isn't going to be a disadvantage to consumers and small businesses in this country? I can't believe that.

    I believe there are, and I am not sure they are not starting to chase those parameters right now. The one institution being put together is going to make that bank the largest bank in the world. Suddenly there was, just a few years ago the largest American bank was 27th in the world, and in a matter of a few years, we have now come to number one. I don't think our economy has grown that greatly. I think it is concentration, acquisition, and I am talking to business people in Florida, I am talking to business people in Pennsylvania, and consumers, and they are sort of worried. Banks are disappearing.

    I represent a relatively, they have a new word for it, ex-urban district, I call it a rural tertiary district, in Pennsylvania. There isn't adequate banking services for startup businesses, small businesses or average people. They could care less about somebody's $1,000 checking account or a small business loan for $25,000 or $50,000 or $100,000. That sort of annoys those elite large banks, to have to bother with that, as a matter of fact.
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    I think it is the obligation of this Government and the regulators to analyze whether or not we are giving fair access to average consumers, average business people, of these financial conglomerates. And if we are not, I have to ask the question, why are you not all out there screaming to help out the credit unions and the community banks? Somebody has got to take care of these people.

    It almost seems like I don't see a lot of philosophical or political difference here between the right and the left in this Government or in this city. We are all on board in buying our ticket to enlarge, enlarge, consolidate, consolidate. I didn't live in 1926, but, boy, I don't know, sometimes I hear the echoes of 1926. Nobody is assuming the worst of the downside.

    Yet, in my mind, and particularly we are talking about the mixture of banking and commerce, in my mind I think we ought to watch what is going to happen in Japan and what is going to happen in Germany, and whether or not the experiments of mixing banking and commerce are really going to be that successful in the trying times. Not in the good times. Anybody that is not succeeding in business today, in any business, it is just a bad businessman.

    There is no test out there. I think we ought to start testing whether these mergers are good in bad times and what happens when a recession hits, and particularly what happens if a depression hits, unless there is some new formula that we are never going to have those times of cyclical conditions again, and I don't happen to believe that.

    Thank you, Mr. Chairman.
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    Chairman LEACH. Thank you.

    Mr. HOVE. If I could respond to a couple points Mr. Kanjorski raised, and I didn't mean in my response to Mrs. Maloney we were not concerned about the size of the institutions and the impact it would have on the FDIC. We certainly are, and are paying a lot of attention to the impact of large institutions and how we are going to address these things.

    The second thing that I would point out to you, sir, is that there still are 6,000 banks in this country that are under $100 million. So there are still a lot of community banks that are still supporting your communities and your small businessmen.

    Chairman LEACH. Ms. Carson. I apologize, we have called on a lady at an inappropriate time.

    Let me turn briefly then, if I can, to Mr. LaFalce.

    Mr. LAFALCE. Ms. Seidman, I feel as if we have neglected you, and I want to apologize.

    Ms. SEIDMAN. That is quite all right.

    Mr. LAFALCE. I want to make amends for that. On page 13, not of your testimony but of the testimony of Ms. Ghiglieri, she poses four questions, all directed toward the appropriate role of the Office of Thrift Supervision. Are you familiar with those questions?
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    Ms. SEIDMAN. Yes.

    Mr. LAFALCE. I would ask you to comment on them, and then I do have a follow-up question with respect to the issue of operating subs.

    Ms. SEIDMAN. Thank you very much, Mr. LaFalce. I appreciate becoming part of the debate here.

    As I mentioned, the questions that Ms. Ghiglieri raised were also raised in a letter to us from Mr. Milner of CSBS which we have responded to and which I ask to be put in the record.

    Let me just make a couple of points that I think are particularly important.

    One is this whole question of thrifts, banking and commerce, and a spate of commercial entities that are interested in thrift charters. As I mentioned in my testimony, the ability of a thrift to engage in commercial lending is extraordinarily small. Only 10 percent of the assets of that thrift can be used for commercial lending, except that an additional 10 percent can be used for small business lending.

    This is not a way to create what has happened in Japan. This is a very specialized consumer-oriented charter, and when the Congress made the changes to enhance the charter in 1996, it stayed consumer-oriented. As a matter of fact, the kind of loans that Mr. Kanjorski was just talking about are exactly the kind of loans, the small business relationship loans in a community, that our institutions are slowly beginning to get into.
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    Only 20 thrifts, a total of 20 thrifts, are now owned by holding companies that are engaged in any sort of commercial activity. I will tell you in many of these cases, either the thrift is very large and the commercial activity is tiny, or the commercial activity is very large and the thrift is very small. This is not a real mixing of banking and commerce.

    Of the existing 43 pending applications for thrift charters, only three are from manufacturing firms, and in many of the cases we have seen recently what they are asking us to do is to convert State-chartered institutions of one sort or another to a Federal thrift. They are in the banking business already.

    So that is a first point.

    A second point has to do with OTS's oversight of these kinds of institutions where the holding company is, for example, an insurance company.

    As of the start of 1997, there were 13 insurance companies that owned thrifts already. Insurance companies have owned thrifts for 20 years. They have owned thrifts through bad times and through good times. No thrift that was owned by an insurance company was part of the savings and loan debacle.

[The following information was supplied by Hon. Ellen Seidman at a later date:

[It should be noted that a thrift owned by an insurance company, The Statesman Group, Inc., did fail during the late-1980's. However, the problems at the institution preceded Statesman's ownership of the institution. In fact, Statesman's acquired control of the institution in a March, 1988 supervisory acquisition of four troubled thrifts that were combined to form the institution that ultimately failed.
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[It is worth noting that Statesman did, at the time of the acquisition, infuse substantial funds ($8.4 million in cash and $12.6 million of its own preferred stock) into the resulting institution. As a result of the provision in the 1989 FIRREA legislation that required goodwill to be written off, however, Statesman made the determination to let the institution fail and sued the Federal Government to recover its initial investment. (As of September 30, 1989, Statesman's thrift had capital of $52.4 million (representing 7.69 perecent of assets) before the deduction of goodwill.) Excluding goodwill, the thrift had tangible capital of negative $4.6 million (representing -0.67 percent of assets). Recently, the Federal Government settled the Statesman suit, returning to the company the amount of its original investment in the institution that resulted from the supervisory acquisitions.]

    In the past, in part because of the way thrifts have been operated, we have not really looked at consolidated risk management issues. One of the things that I have done since coming to the OTS, is to recognize that changing times and changes in our applicant pool require us to pay a good deal more attention to consolidated risk management oversight.

    We have set up a task force using our very best, most experienced regulators, to begin to really focus in on the maybe 5 percent of holding companies where this consolidated risk management issue is critical, this is an issue we need to focus on from the holding company down as opposed to just from the thrift up.

    We also have opened up very serious discussions with the State insurance regulators. One of our senior people was at the NAIC just these last two days. I will be speaking to the NAIC in June, and we are speaking with them all the time. We are attempting to develop memoranda of understanding so that all of us really understand the full interrelationship among the entities.
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    In terms of how we will go about dealing with product confusion, one of the things that we have done already in all of the pending applications that we have recently granted where there is a securities or insurance entity involved in the holding company structure, is to say that the interagency statement on the disclosure of whether something is an insured deposit product or non-insured deposit product applies wherever the product is sold. If an insurance agent is selling a deposit product out of the agent's office, the disclosure statement applies.

    Mr. LAFALCE. Because of time constraints, I am going to ask you to further expand upon your answer in writing. We are just about to conclude this panel, I believe, and I want to go back to one issue. I want to see it in context.

    Dr. Meyer, the question I want to ask, that I am going to explain the context I want it in, is whether or not you do want Federal legislation that would preclude State-chartered non-member banks from conducting activities under their operating subsidiaries. Because if you want that legislation for national banks, I don't know why you would not want it for State banks. It seems to me that is the rationale. I don't think you answered that.

    I want to make sure that I understand the dichotomy and the context. The State bank supervisors are desirous of legislation that would not only codify the Second Circuit decision but apply it to all the circuits, that is, apply it nationwide. That is, the Second Circuit held that the Federal Reserve Board had no legal authority to insist that State-chartered member banks not operate through subsidiaries, but operate through holding company affiliate structures.
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    The Fed wants legislation that would reverse the Second Circuit opinion and, therefore, give them explicit legal authority that they believe they have already and have been exercising with respect to member banks.

    But the question I have is not so much which side should we take on that issue, but wouldn't the logic of their argument with respect to member banks and to national banks also make them argue the same with respect to State-chartered non-member banks?

    I need to keep in this context, out of this total universe of deposits, what percentage of deposits are in State-chartered banks, member and non-member, and what percentage of deposits in national banks? And of that universe of State-chartered banks, what percentage of deposits are in non-member and what percentage in member? So I could see the consequence of the answer that Dr. Meyer is going to give me.

    That is it.

    Mr. MEYER. OK. First of all, right now, State banks can invest in any type of company that is permitted by State law, provided that the FDIC finds that it doesn't create a risk to the FDIC. So that is the current law.

    I think it is worthwhile to point out, nevertheless, that this authority has been used pretty sparsely, number one. Number two, that it doesn't apply to insurance underwriting and merchant banking, which are expressly prohibited.

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    It seems to me this issue is a rather moot——

    Mr. LAFALCE. Where is it expressly prohibited with respect to State-chartered institutions?

    Mr. MEYER. The FDIC Improvement Act prohibits insurance underwriting for State banks and merchant banking.

    Ms. WILLIAMS. But those activities are grandfathered for a number of banks that are based in Delaware, so those activities are in fact being conducted.

    Mr. LAFALCE. In fact, one of those banks is held by the Citibank combination, is that correct?

    Ms. WILLIAMS. That is correct.

    Mr. LAFALCE. Thank you.

    Mr. HAWKE. There are also a number of States that allow State-chartered banks to participate in securities underwriting, both debt and equity underwriting, through subsidiaries. That would potentially be at risk if one applied the ban against operating subsidiaries to State-chartered banks.

    Mr. MEYER. Since the FDIC Improvement Act prohibits the insurance underwriting for State banks, H.R. 10 prohibits security underwriting inside State banks, too.
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    Mr. LAFALCE. I don't want all of this to interfere with, number one, an answer to my question; and, number two, a presentation of the context that I requested.

    Mr. MEYER. Well, we support H.R. 10 precisely because it——

    Mr. LAFALCE. I know you support H.R. 10. You drafted it in large part. That is not my question. My question is what about State-chartered non-member? What is your position on that? You never answered it, and I am asking it again. That is why I am coming back.

    Mr. MEYER. No, I think that——

    Mr. LAFALCE. If you have no position, you can say that. That is OK.

    Mr. MEYER. I think the position I have indicated is that the fact that you get this uniformity is a positive aspect of H.R. 10, and that is what we support.

    Mr. LAFALCE. H.R. 10 does not apply to State-chartered non-member banks. All right. What about the context of this, what percentage of the deposits?

    Ms. GHIGLIERI. I am going to have to get the statistics and give them to you later, because I don't have them off the top of my head. We have tracked generally the State-chartered banks versus national banks by total assets. I would have to go back——
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    Mr. LAFALCE. Give it to me by assets if you don't have it by deposits.

    Mr. HOVE. OK, I have the numbers, I think, Mr. LaFalce. The staff is giving me numbers, and I think they are going to concur with the OCC. The national banks comprise about 55 percent of the total assets of U.S. banks, the State member banks about 25 percent, and the State non-member, about 20 percent.

    Mr. LAFALCE. Repeat that?

    Mr. HOVE. Fifty-five for the national, 25 for the State and member, 20 percent for the State non-member banks.

    Mr. LAFALCE. Thank you.

    Chairman LEACH. Thank you. Let me bring this panel to a conclusion. We have drifted to some degree off of the circumstances of the events before us. To some degree these questions are relevant to the future landscape of regulation. But what we are seeing is a market-driven regulator-approved circumstances of vast change in American finance, and I would simply like to stress two circumstances.

    One, the Congress would expect all regulators to abide by current law and to apply the law vigorously. There is no assumption or presumption that law will be changed. Second, there is an enormous competitive circumstance that exists that is of enormous interest. If regulators allow certain types of activities to occur for a few, that disadvantages the landscape for the rest of the American financial community. So you are dealing with questions of competition that are extraordinary.
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    For instance, one can make an argument that new types of combinations in general are pro-competitive, but if those new types of arrangements are not themselves competed with, it can be very anticompetitive. And that, in my view, is one of the most vigorous reasons that one needs to look seriously at changes in law.

    In any regard, I wanted to bring this to an end, but I understand Mr. Hinchey, if I can, at the risk of great presumption, just take a minute or two, because we have gone quite long.

    Mr. HINCHEY. Yes, you certainly have, Mr. Chairman. I will not unnecessarily prolong it. But I just wanted to make two points.

    Most of the discussion with regard to the concentration in the industry has focused on the number of institutions, and to some extent that is appropriate. But there is another form of concentration, of course, that is even more important, and that is the concentration of assets. I think that this is something that deserves more attention than the concentration of numbers of players in the industry.

    If these mergers go forward as they are proposed, there will be an astonishing concentration of assets in the industry. I would appreciate if the panel would address that particular point.

    Second, in accordance with my admonition from my Chairman to be brief, there was a time back in the 1980's after the Reagan Administration recommended the deregulation of the savings and loan industry when this committee held hearings on that subject both in Washington and in other places around the country. The regulatory community made some rather sanguine statements at those hearings with regard to how this deregulatory process would play out and what the repercussions might be. At the time, they were proposed to be very negligible indeed. However, in the course of time, the bill to the American taxpayer was $150 billion and by the time the bonds are paid off, the bill will rise to probably $250 billion.
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    Based on that experience, we ought to be looking for some indicators of what might ensue from the present round of mergers. My very respectful admonition to the regulatory community would be to heed the lessons of the savings and loan catastrophe and embark upon a program of regulatory administration which would attempt as best as humanly possible to avoid the very serious consequences of the failure to foresee the problems that came out of that deregulatory process.

    Mr. HAWKE. Mr. Hinchey, I would say that we have a lot to learn from the experience of the 1980's, but I think principal among the things we have to learn is that you can't deal effectively with an industry like the savings and loan industry when it is already insolvent. That was the problem that Congress faced. The industry was insolvent by 1980, and we were all pretending that it wasn't. We tried to deal with remedies that were intended to gamble on an insolvent industry pulling itself out of insolvency.

    I think the congressional response in later years, putting emphasis on the maintenance of high levels of capital, putting emphasis on prompt corrective action and on better disclosure, is a marked change from what happened during the experience of the 1980's.

    When an industry or institution is insolvent, it is too late to try to bring remedies to bear, and regulation and supervision should be aimed at preventing insolvency and bringing market forces to bear, so that we are not dealing with institutions that have no net worth left. That was the problem of the 1980's.

    Mr. HINCHEY. It was also a problem of the deregulation which followed from that and the consolidations which followed from that. There was a whole rash of buying up of savings and loans and combining them in a variety of creative ways, and serious problems that flowed from that process. It was initially what you have described it to be, Mr. Hawke, but it went far beyond that ultimately.
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    Mr. HAWKE. I think that is absolutely right. When Congress expanded the powers of S&Ls, there was no incentive for the owners or managers of S&Ls to be at all prudent. If you have already lost everything and you are presiding over an insolvent institution that is allowed to continued in business, then you have nothing but an incentive to take risk and gamble because the Federal Deposit Insurance Fund ultimately stood behind the interests of depositors.

    Ms. SEIDMAN. Can I make an additional point, because it is important to remember that Congress took very important actions in both FIRREA and FDICIA to close up much of what had been open in the early 1980's. And, yes, we have got to be enormously vigilant, and we are all trying our best to be, to identify other new problems that might arise that we haven't thought of yet. But I will say that Congress has given us a tremendous number of tools and has taken away opportunities by regulated institutions to misbehave. We are in a far better position to be able to do what you want us to do now than we were in the early 1980's.

    Chairman LEACH. Thank you.

    Mr. VENTO. Mr. Chairman.

    Mr. HINCHEY. Do you have any comment?

    Mr. MEYER. Only on the issue of the savings and loan crisis. I think we should recognize that these institutions had a fundamental problem in terms of funding long-term loans with short-term deposits. When you get in a situation, as in the 1980's, where there was an extraordinary historic and dramatic increase in interest rates, they were an accident waiting to happen.
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    The deregulation you are talking about compounded that problem, on top of institutions that were already insolvent, as has been pointed out. That certainly blew up the situation even more. But I think what has to be put into perspective is the kind of economic forces that were in play and set that up.

    Mr. HINCHEY. Although you may choose not to address it at this point, in your testimony you talked about the great variety of institutions that will remain. You may want to at some point address the question of concentration of assets, which is the biggest implication of these mergers.

    Chairman LEACH. Thank you very much.

    Mr. VENTO. Mr. Chairman, I think we have to go to written responses to some of the questions, but I did want to at least orally put on the record my concern with the legislation that puts in place a non-bank bank such as in H.R. 10 and takes out the growth-led, and puts in place and keeps in place the unitaries, which, of course, if we are radioactive, it is radioactive to be partially involved in terms of commercial activities, it seems this bill, which has such great enthusiasm on the part of some individuals and regulators, also has its problems.

    What are we doing different in this particular area, I think to Ellen Seidman, not to answer now because we don't have time, but what are we doing different in terms of the regulation of that as we go ahead? Because certainly the unitary thrift is one outstanding example of direct investment in commerce, involvement where there is no regulation, much less the disparity that exists with regard to 5 and 15 percent.
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    Finally on the op-sub, it seems to me parity, we would say we want parity abroad, we don't say parity within the States, Governor. I think that is a mistake.

    Thank you.

    Chairman LEACH. Well, I appreciate your intervention, and would only say that we all have to recognize in the commerce and banking industry that Mrs. Seidman's office just approved the British tobacco company owning a thrift.

    Ms. SEIDMAN. May I just say that they had previously owned a thrift. That thrift was taken over by Marine Midland. The umbrella regulator there is the Canadian banking authorities. Yes, it raises the issue, but I really want to put it in some context.

    Chairman LEACH. Does anyone else wish to be recognized for this panel?

    Mr. KENNEDY. Mr. Chairman.

    Chairman LEACH. Yes, Mr. Kennedy.

    Mr. KENNEDY. Thank you very much, Mr. Chairman. First of all I want to thank you for holding this important hearing, and I appreciate the regulators being here this morning.

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    I would express just some concerns in general terms about the benefit to ordinary Americans, depositors, as well as just citizens of this country and their ability to actually utilize banks and the services that they are supposed to give the American people.

    I would like to cite the 1997 U.S. PIRG study on bank fees that concluded that consumers at big banks paid 15 percent higher bank fees; that the gap between big and small banks is widening; that the average required balance to avoid a monthly checking fee is 34 percent higher at big banks than at small banks. In the 1997 Federal Reserve study, it concluded that big multi-State banks charge ''significantly higher fees than smaller single State banks.'' ATM fee increases, according to the Fed, for large banks was particularly sharp.

    I think if you include with that the fact that a Boston Federal Reserve Bank study in 1995 found that small business lending declined after 8 out of the top 11 mergers that it studied, and a November 1995 GAO report identified many concerns about CRA enforcement, including CRA exam inconsistency among different examiners, the incomplete or inaccurate data supplied by institutions, the lack of public information about the CRA exam process, and the insufficient examination time that was provided.

    There are additional concerns that I have regarding fair housing and the ability of banks to actually make certain that discrimination is not taking place. In 1996, a GAO report concluded that the regulators were not doing an adequate job of enforcing the Fair Housing Act. I quote it, saying Federal agencies lack the means to detect discrimination prior to filing loan applications. Fair lending exams were made more difficult by poor quality HMDA data, examiner inexperience and insufficient time allowances.

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    Now, it seems to me what we have got here is a fairly well-studied case in the basic areas that ordinary citizens are concerned about—community lending, fair housing, bank fees—that these bank mergers have not necessarily or the case would be made that they are worse off as a result.

    I wonder whether or not each of you could assure the committee that you believe that these mergers will in fact be better off in those areas that I have identified, which, according to I believe Mr. Meyer's testimony, are in fact the areas that exactly the Bank Holding Company Act gives you the unfettered discretion in acting on such proposals.

    Ms. SEIDMAN. As the person who got left out the last time, can I try this one first with respect to the Washington
Mutual-Home merger.

    Mr. KENNEDY. I don't want to talk about one particular case.

    Ms. SEIDMAN. I agree.

    Mr. KENNEDY. Thank you.

    Ms. SEIDMAN. We have had a couple of mergers recently, and we have looked very carefully at a number of these issues. I will submit for the record our most recent order in the case involving Glendale Federal, which is a situation in which there was serious concern that, for example, small business lending was going to be diminished. That order explains very carefully what GlenFed needs to do and exactly how it needs to make that information available to the public through its CRA files.
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    Mr. KENNEDY. How big is Glen Federal?

    Ms. SEIDMAN. I think it is about $16 billion. It is quite large. I also believe that this is a really good opportunity to just put on the record what is in my written statement with respect to choice.

    To the extent that institutions have a choice to operate as credit unions, as thrifts——

    Mr. KENNEDY. Wait a second. Mr. Chairman, what I don't want to have happen here is have us say, listen, we can go ahead and allow these biggest institutions in America, go ahead and merge them with one another, they can create these incredibly monopolistic forces, but, boy, we don't have to worry about it as regulators, we don't really have to care because there is a whole bunch of community banks out there or credit unions that all these poor people can go to.

    Wait a second. Ms. Seidman, that is exactly what underneath your statement you are driving at, and I don't think that that is the right way for you to look at this. I want to make it clear to the regulators that that is not the right way to look at it.

    You have a responsibility to make certain that working families, that blacks, that ordinary people in this country, benefit. They pay taxes. You are using their dollars when you back up these institutions, and they have a right to expect that if these powers are going to be provided to these companies and all of these people are going to be able to make hundreds of millions of dollars, that they have some benefit out of this, other than just simply ignoring them and going to some institution.
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    Ms. SEIDMAN. I understand. That is why I opened with an example of what we have done.

    Mr. KENNEDY. Do you believe you have the capability right now of going into each one of these mergers, and any that you might be aware of that we are not, that you may be feeling might be coming down the line, and give us the assurances that, in my original question, that in community lending, in fair housing and in bank fees, the American people are going to be better off?

    Ms. SEIDMAN. Mr. Kennedy, we take these mergers one by one. We work through them very, very carefully. Some people complain that we take too long.

    Mr. KENNEDY. Ms. Seidman, you know who doesn't say that? The GAO doesn't say that. The GAO says you don't know what you are talking about. That is what these studies demonstrate.

    Ms. SEIDMAN. I understand the GAO may say we don't know what we are talking about.

    Mr. KENNEDY. That is the Government Accounting Office, ma'am.

    Ms. SEIDMAN. I understand. And I will just tell you what we have been doing and what we have done. We will submit that for the record.

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    Mr. KENNEDY. I appreciate that.

    Mr. Chairman, I know I have taken up too much time, but could I get a yes or no answer from the rest of them in terms of whether or not they feel they can provide us with that guarantee?

    Chairman LEACH. Mr. Kennedy, I think that is fair.

    Mr. Hawke, yes or no?

    Mr. HAWKE. Mr. Kennedy, you have raised important, enormously important questions. I can't give you that guarantee. I wish I could. I think it is fair to say that much in present law doesn't allow those kind of considerations to be taken into account. I don't know what the right answer to it is, except to try as hard as we can to maintain a highly competitive marketplace where we have got institutions competing against each other, both in terms of fees and in terms of service and location and equal credit access as well.

    Ultimately it seems to me that is an enormously important objective. But how we reach those objectives in the context of passing on individual transactions is, I think, an enormously difficult question to answer.

    Chairman LEACH. Mr. Meyer, it is your opportunity to agree with the Treasury.

    Mr. MEYER. Oh, yes, I am delighted to agree with the Treasury on that aspect. These are difficult issues. We do believe that competition is very important, but we do very much analyze carefully the community records of the firms who are involved. That is extremely important to do.
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    I just want to take up small business lending as an example, because in one sense it reinforces your concerns, but in another sense maybe there are some offsets that I could bring to your attention. You get two banks that merge. There is evidence that the larger bank may not make as many small business loans as the two banks that merged. There is also evidence, because that is a profitable line of business activity, that other banks in that community tend to make more small business loans than they used to, and new banks come in specializing in small business lending.

    So we do have to take into account market responses. That is part of the competitive atmosphere. You have to hold us particularly accountable to ensure we enforce the antitrust laws and maintain choice through competition, because this is a very fundamental part of it.

    In addition to that, I think we have to look specifically at areas like community reinvestment obligations and to make sure that they are being fulfilled.

    Mr. KENNEDY. You recognize the community reinvestment dollars will shrink in each one of these mergers.

    Mr. MEYER. Well, I don't know——

    Mr. KENNEDY. Just the amount of assets covered under CRA is going to shrink whenever these big banks get together. Mr. Hawke can tell you that. He is the one that brought it to my attention a couple of years ago.
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    Mr. MEYER. If they shrink, they shrink because oftentimes the firms lose deposits.

    Mr. KENNEDY. No, no, that is not why. I am amazed that is what you think it is. The reason why is because right now all the assets of all the affiliates are covered under CRA, and once you center these banks——

    Mr. MEYER. That is not right. That is absolutely wrong.

    Mr. KENNEDY. Ask John Hawke about that. This is an issue that has come up time and time again. It is one of the major concerns all of us have had about these big mergers, is the shrinkage of the number of dollars that are going to be available under the Community Reinvestment Act.

    In any event, my yes and nos are getting longer and longer. But anyway, if——

    Chairman LEACH. Let's go to Mr. Hove.

    Mr. HOVE. I would certainly agree with what the Treasury has said and what the Fed has said.

    Chairman LEACH. Excellent.

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    Mr. HOVE. We are going to be diligent in looking at the performance of each of our institutions. I have committed that to you before, Mr. Kennedy, and we are going to continue that.

    Chairman LEACH. Ms. Williams.

    Ms. WILLIAMS. I can't guarantee that individual customers are going to get exactly the same services at the same fees, Mr. Kennedy, as a result of these transactions or after the transactions. But I think the kinds of questions you are asking really do point up the importance of CRA and vigorous enforcement of CRA, and making sure the regulators are looking at the lending and investment and services provided by institutions subject to CRA, so there is no diminution in the overall performance that is provided in the localities that these institutions serve, both before and after the transaction.

    Ms. WILLIAMS. The issue on CRA, I think, is really an issue with H.R. 10. Because to the extent that you don't allow the bank, which is subject to CRA, or the bank subsidiary, whose assets count when we look at the resources available for CRA, to grow and evolve its business and you say that all that new business has to occur in holding company affiliates, those holding company affiliates are not subject to CRA, and their assets don't count when we evaluate resources for CRA performance. And that is a big problem.

    Addressing the kind of concerns that you raise highlights the importance of making sure that CRA is strong and vital and that there are substantial resources available for institutions to perform their CRA obligations.

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    Mr. KENNEDY. I appreciate that very much. Maybe I misstated what Ms. Williams said, but the point she was making was the one I was trying to make.

    Mr. HAWKE. That was the point I was making.

    Mr. MEYER. We absolutely disagree that the resources in the subsidiary are treated just the same as in the bank. A bank can ask for its activities in its subsidiary to be covered under CRA, and an affiliate can ask for its activities to be counted under CRA.

    Mr. KENNEDY. Do you think they are going to?

    Mr. MEYER. That is the point. They are symmetric. That is the point.

    Mr. HAWKE. It is not a question of what they can ask for. It is a question of what the regulators do. And the fact is that the Comptroller of the Currency takes into account the resources of subsidiaries of the bank; and that is not done by other regulators and particularly not the holding company regulator, who doesn't have CRA responsibilities to enforce it.

    Ms. WILLIAMS. This is an issue in the CRA regulation. It talks about the performance context. In that context, you consider the resources that are available to further the institution's CRA obligations. Only with the bank and the resources in the bank subsidiary do you cover those assets.
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    Mr. KENNEDY. Well, I would have rather have Mr. Lawrence's instinct be accurate, but I am afraid your reality is going to be.

    And I think that, Mr. Chairman, this is a critical issue, and it is why you are going to lose an enormous number of Democrats in the end on this bill. Because people think, and it is my distinct impression, that CRA is going to be severely diminished in terms of its capacity and the number of dollars that are going to flow into the poorer communities as a result of H.R. 10.

    Mr. MEYER. The reality is the CRA law, and you can apply CRA within the banks to the way you want to apply CRA.

    Ms. WILLIAMS. But you can't.

    Mr. MEYER. That is your legislation. I am saying to use this——

    Mr. KENNEDY. You are saying they can opt in. You are saying they can voluntarily opt into CRA. So can securities firms and insurance companies, and they don't.

    Mr. MEYER. So can op-subs.

    Chairman LEACH. Let's try to bring this to an end.
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    Mr. Kennedy has made a fine point. Although, you know, with regard to H.R. 10, for the first time we expand CRA to a newly created institution which will be part of the securities industry. But, having said that, there are differences of judgment that are well reflected, and I don't know if we need to continue much longer on it.

    Did Mrs. Ghiglieri——

    Ms. GHIGLIERI. I don't have anything to add for State charters.

    Mr. KENNEDY. Come on, Mrs. Ghiglieri.

    Ms. GHIGLIERI. I don't want to get in any more trouble.

    Chairman LEACH. Let me first ask Mr. Baker, did you want to add anything?

    Mr. BAKER. I hope these people didn't have other plans today. I can't believe they are still here. I have no questions, but I admire your long-standing suffering.

    Chairman LEACH. Well, let me thank you all. I appreciate very much your enlightened judgments, even when enlightenment clearly has more than two spotlights. Thank you.

    Our second panel consists of representatives of institutions involved in the recent proposed merger transactions.
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    Our first witness will be Mr. John J. Roche, who is Vice President and General Counsel of Citicorp. Our second witness after Mr. Roche will be Mr. Charles—Chuck—Prince III, who is the Executive Vice President and General Counsel and Secretary of the Travelers Group. Our third witness will be Mr. Paul Polking, who is General Counsel of NationsBank Corporation. The fourth witness will be Mr. James N. Roethe, General Counsel of the BankAmerica Corporation.

    The next witness will be Mr. Steven A. Bennett, the General Counsel of Banc One Corporation; who will be followed by Mr. Sherman Goldberg, Executive Vice President of First Chicago NDB Corporation. He will be followed by Mr. William A. Longbrake, Executive Vice President and Chief Financial Officer of the Washington Mutual Corporation. And our last witness will be Robert F. Elliott, Vice Chairman of Household International.

    Chairman LEACH. We will begin as introduced, with Mr. Roche. Do I pronounce that correctly, Roche?

    Mr. ROCHE. That is correct. Thank you, Mr. Chairman.

    Mr. Prince and I have a joint statement, and he is actually going to read it.

    Chairman LEACH. Well, you could do it together.

    Mr. PRINCE. We will try to do a responsive reading.
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    Chairman LEACH. Mr. Prince, fair enough. Please proceed.


    Mr. PRINCE. Good afternoon, Mr. Chairman.

    Chairman LEACH. I don't know if there is any semblance in this merger arrangement, but please go right ahead.

    Mr. PRINCE. Good afternoon, Mr. Chairman. I am Chuck Prince, General Counsel of Travelers Group. My partner, Jack Roche, General Counsel of Citicorp, and I are pleased to be here this afternoon to talk about our new company, Citigroup.

    There are three basic objectives in the creation of Citigroup: increasing customer value and convenience, enhancing our financial strengths and stability, and meeting the rapidly growing competitive challenge. I will discuss each of those briefly in turn.

    Mr. Chairman, the ultimate test for our new company will be simple: Will we provide a high level of value and convenience to our customers? We believe we will be successful because of the qualities and breadth of our products and services and because of our company's greatly expanded and innovative distribution channels.

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    Financial products ''manufactured'' in various parts of our company will be distributed through a broad range of methods from the Internet and other technology-based methods to branch office locations in 100 countries around the world to fully individualized, in-home service.

    Citigroup will also have the resources to rapidly design new products and services in response to changing customer needs and to invest the funds necessary to keep up with the technology revolution sweeping across our industry.

    Of course, the test of whether or not we succeed will be in the hands of our customers, who will decide whether the products and services we provide, at the prices charged, ultimately satisfy their needs and preferences.

    The size, resources and diversity of operations of the new company will provide the financial strength and stability necessary to survive and grow in today's rapidly changing world. It is clear that the financial services company of tomorrow and its customers must have the ability to withstand shocks. A company which is larger and more diverse will be better able to serve as a source of strength and stability, not only for its affiliates but, most importantly, for its customers. This is what we will do for the customers of Citigroup.

    There is perhaps no other industry in the world as competitive as the financial services industry. Whether it is intra-industry competition among banks or insurance companies, or inter-industry competition between banks, mutual funds and securities companies, whether it is between domestic companies or increasingly active foreign companies, and whether it is between traditional branch office networks or the latest Internet web site——
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    Chairman LEACH. If you could pull the mike a little closer, I think it would be helpful.

    Mr. PRINCE. Do I have to start over?

    Chairman LEACH. No. Other than we could ask Mr. Roche to read the first part. No, please proceed.

    Mr. PRINCE. In the new family of companies known as Citigroup, we will combine individual business units that are strong companies, but not dominant or even the leading company in their respective industries. Citibank is not the largest bank in the United States. Salomon Smith Barney is not the largest securities firm. Travelers insurance is not the largest insurance company in the United States. We will combine these businesses in a way that will strengthen their competitive position. It is important to recognize there is no significant overlap among our businesses. There is no increase in concentration, which is why we expect no layoffs of any magnitude as a result.

    The effect of foreign competition on the financial services industry is particularly striking. While we debate the details of financial services and modernization, massive consolidation of financial services firms is rapidly taking place overseas. Unhampered by outdated and inefficient financial services laws, these new mega-competitors could have a competitive advantage over U.S.-based companies in the next century if we are not prepared to compete on a global basis. Our country must not squander a leading market position through inattention and neglect. It is in our national interests to be well prepared for this challenge.
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    In addition to customer value and convenience, strength and stability, and meeting competition, there are three other issues to mention briefly.

    The first is the legislative framework, both current and as proposed to be changed. It should be emphasized clearly the creation of Citigroup is expressly permitted by current law and regulations. At the same time, we strongly support financial modernization and strongly support the passage of H.R. 10 with improvements designed to increase the number of banks and other companies that can support the bill on a broad, industry-consensus basis.

    The second issue is regulatory oversight. We believe strongly in functional regulation. Indeed, virtually every aspect of our various businesses is, and has been, heavily regulated. Since we are not engaged in any commercial activities that can escape effective regulatory oversight, our regulators all will be very familiar to you, from the Federal Reserve world and other banking authorities to the SEC, to the 50 State departments of insurance.

    The third issue I would like to mention is our commitment to our communities. We believe both companies have been good corporate citizens and have done an excellent job in meeting our Community Reinvestment Act obligations. We intend to build on this record and do even more in the future. The combination of our two companies will give us the opportunity to increase the access to credit, deposit investment and insurance offerings for customers of all income groups, and we intend to do just that.

    In closing, Mr. Chairman, let me reemphasize the importance, the necessity, of maintaining a leading U.S. position in financial services in the new global economy. Emerging markets, privatization and dramatic growth in savings and investments worldwide present a serious, competitive challenge to our industry. We believe the Citicorp Travelers Group merger will create a leading U.S.-based and U.S.-regulated global competitor.
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    Thank you for the opportunity to be here today. Jack and I will be happy to answer any of your questions.

    Chairman LEACH. Thank you, Mr. Prince.

    Chairman LEACH. Mr. Polking.


    Mr. POLKING. Thank you, Mr. Chairman, Members of the committee.

    I am Paul Polking, General Counsel of NationsBank Corporation. On behalf of NationsBank, thank you for the opportunity to appear before you today.

    In the interest of time, I will summarize my written testimony.

    Mr. Chairman, I would like to thank you for the tireless leadership you have displayed in draft crafting H.R. 10. We at NationsBank believe strongly in financial modernization and have been strong supporters of H.R. 10.

    It is my understanding that the committee is focusing today on two basic questions which have been triggered by the spate of so-called mega-mergers in the financial services industry. The first question is whether the current regulatory and legislative framework is adequate to properly regulate the combined companies. The second question is, what will the impact of these transactions be on consumers and the economy? Also, how will these mergers affect competition vis-a-vis small banks and also on an international scale?
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    In assessing the adequacy of existing regulatory framework, bear in mind that each of the mergers before the committee today is a unique animal. With respect to the NationsBank-BankAmerica merger, the resulting bank will continue to offer the same sorts of products and services as the predecessor institutions, only in a more streamlined and efficient manner.

    Accordingly, the fact that the two companies are being combined does not, in our opinion, necessitate additional regulation. If anything, just as the two companies can be operated more efficiently as one, so, too, can they be regulated more efficiently. The combined companies should require fewer, not more, regulators, as the number of books and records will be cut in half, thereby greatly simplifying the examination process.

    Not only that, the combined company will have enormous resources to develop the most advanced, up-to-the-minute management information and risk management systems. These systems will provide regulators with broad windows through which to view the inner workings of the company on an almost real-time basis.

    Just as the merger plays to our strengths in consolidating and streamlining banking operations, so, too, will it play to the strengths of our regulators in supervising a strongly capitalized and well-managed bank holding company.

    In assessing the adequacy of the existing legislative framework, far from jumping ahead of current legislation, the real question that should be asked about this merger is why didn't it happen sooner? This merger is the sort of transaction contemplated by and is fully consistent with the Riegle-Neal Interstate Banking and Branching Efficiency Act passed nearly four years ago.
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    I would now like to turn to the important policy questions that I mentioned earlier, namely, how will these mergers impact consumers, the economy and the competitive environment.

    In the case of our merger, we believe that the consumers are the real winners. We will have the ability to offer customers a new level of services with coast to coast branches and ATMs.

    Also, scale and efficiency translate into lower prices. NationsBank has recently passed on the advantages of scale by eliminating certain fees and freezing others through the year 2000, saving our customers more than $20 million in fees in the first year alone. These changes have also resulted in increased customer retention and new accounts.

    Just as importantly, the combined company will have the financial resources to sponsor the development of superior technology to make banking increasingly convenient to our customers through telephones, personal computers and even interactive television.

    Customers and the communities in which they live will also benefit from the most comprehensive community investment program ever to be offered. Both NationsBank and BankAmerica have outstanding CRA ratings today, and this merger will permit the resulting bank to expand upon those outstanding ratings.

    As for the impact of the merger on the overall economy, the combined company will act as a powerful engine. At the same time, the combined company will have tremendous stability as a result of its capital position and economic and geographic diversification.
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    The last point I would like to cover is the impact of our merger on competition, both relative to small banks and in the international arena. Last year, over 200 new bank charters were granted. Many of these banks are community banks, capitalizing on the opportunity to provide an alternative to the kind of companies represented here today.

    In short, there is room in this vast economy for both large banks and small.

    Internationally, consolidation is happening all around us. U.S. banks must be allowed to keep pace in order to maintain the preeminence of the U.S. financial services industry and to fuel economic growth.

    This concludes my remarks. Mr. Chairman and Members, I thank you for the opportunity to appear before you.

    Chairman LEACH. Thank you very much, Mr. Polking.

    Mr. Roethe. Am I pronouncing that correctly?


    Mr. ROETHE. You actually got it right. Not many people do. I appreciate that.
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    Mr. Chairman, Mr. LaFalce, and Members of the committee, my name is Jim Roethe. I am the General Counsel for Bank of America and BankAmerica Corporation. I am pleased to be here this morning to discuss the merger of two great banking organizations, BankAmerica and NationsBank.

    We strongly believe the merger of BankAmerica and NationsBank will be good for our customers, the communities we serve and good for the U.S. economy. The geographic and economic diversity, risk management expertise and $45 billion in shareholders' equity of the combined organization will provide great stability and safety. This will be a strong organization, capable of weathering significant economic storms.

    Powerful economic and financial forces are driving our merger and others like it. Here are some of the important ways that the marketplace has changed:

    Today, customers have many more ways to borrow, invest, raise capital and manage cash and are looking for financial services providers that understand their needs and can help them solve problems.

    Convenience is paramount. Customers are using traditional bank branches less, as banks offer products and services around the clock via ATMs, at the point of sale, at retail outlets and at the home and office through the telephone and PC.

    The market is far less segmented geographically. Banks have had to compete with non-bank financial services providers who operated nationwide for many years. Now, finally, the interstate branching legislation in 1994 has made national banks possible.
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    More than ever before, our business customers' financial services needs cut across national boundaries. We must be in a position to serve these global needs.

    Finally, electronic commerce, including the emergence of new payment systems, is becoming a reality. These new systems promise to make life simpler and safer, but bringing them to market will require substantial investments.

    Staying competitive in such a fast-moving marketplace is a challenge, and financial institutions are pursuing a variety of strategies to try to meet that challenge.

    No one type of institution and no one strategy will dominate anytime soon. Banks like Bank of America and NationsBank have chosen to offer a full range of banking and financial services to their clients as conveniently as possible and through a variety of access channels.

    To be competitive in this role requires massive investments in people, systems and technology. The merger will put us in a better position to make the investments needed.

    Bank of America is also firmly committed to the communities we serve. Much has been made of the fact the new holding company headquarters will be in Charlotte. This will not undermine or diminish our commitment to serve our customers in California and throughout our markets. The new BankAmerica Corporation will strive to balance its presence to reflect the nationwide scope of its businesses.
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    Both Bank of America and NationsBank have outstanding CRA ratings, and a significant commitment has been made by both organizations to philanthropic activities. Bank of America recently announced a $140 billion goal for community development lending over the next ten years, the largest multiyear goal ever established by a bank. We remain committed to achieving that goal. We also plan to continue our philanthropic and community involvement State by State, community by community, at current levels or higher.

    In response to the claim that we might gouge the public with excessive fees, I would point out the banking business is extremely competitive in every market in which we operate. Our fees must be responsive to the market and to the value our customers get from doing business with us. We have always tried to offer our clients the best value in the marketplace, and we think our merger will enable us to do so even better.

    Finally, much has been made already of the ''too-big-to-fail'' problem.

    First and foremost, our merger will create an extremely well-diversified banking organization, with substantial capital resources and strong risk management capabilities. Second, we expect to become one of the most closely supervised financial institutions in the Nation. And, third, we do not believe that any financial institution is or should be ''too big to fail.''

    In sum, our goal is to offer our customers a broad range of banking and financial products, delivered by the best people, through the most extensive distribution system in the Nation.
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    Thank you very much, and I look forward to answering your questions.

    Chairman LEACH. Thank you, Mr. Roethe.

    Mr. Bennett.


    Mr. BENNETT. Mr. Chairman and Mr. LaFalce, ladies and gentlemen, I am Steve Bennett, the General Counsel of Banc One Corporation; and I am pleased to be representing the company in the critical discussions you have initiated with the industry today.

    I understand from the Chairman's kind invitation that there are two main topics to be addressed: first, the potential legislative implications of the recent announcement of mergers between financial services institutions; and, second, the capability of the current regulatory structure and agencies to oversee the exponentailly increasing size and complexity of these new institutions.

    Given the number of speakers not only on the panel but on all of the panels presenting dialogue with you today, my remarks will be brief and, I hope, to the point.

    The Banc One/First Chicago NBD merger appears rather modest compared with the august combinations represented here today.
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    For many years, the regulators have played a critical role in overseeing the management, safety and soundness, and compliance responsibilities of large bank holding companies operating in multiple States. There is no reason to believe that this will change. Although the Banc One-First Chicago merger is within a single geographic area, the Midwest, the only significant market overlap existing between our two institutions is in the State of Indiana, and we plan to handle those structural issues with the adroit sensitivity incumbent upon any experienced and enlightened institution which intends to maintain customers and community goodwill.

    It would be a mistake, however, to deem the new Banc One Corporation merely a Midwestern bank, given our significant assets and growth in Texas, Arizona, Louisiana, Utah, Oklahoma and Colorado.

    Our experience in merger activity to date is that the regulators are tough and the competition, especially from the smaller community banks, is even tougher. You cannot help but notice that each announcement of a merger is reported in local newspapers along with an attendant article outlining how smaller banks and their people are preparing to cannibalize the merged institution's retail and commercial customer base, both during and after the transition. They mean it. And, similarly, we mean to hold onto those customers equally. We win some and we lose some and that is how the free market works.

    Although this merger may look like more of the same to regulators and our competitors, it does represent some historic changes for Banc One. First and foremost, it means moving our headquarters to Chicago from Columbus, which means we will be a powerhouse in the financial center of the Midwest, but such a move saddens some of us who are now and always will remain loyal to the State of Ohio. It will give us a high-profile opportunity, however, to demonstrate our commitment to our non-headquarters marketplaces.
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    Our chairman, John B. McCoy, will become the president and CEO, while First Chicago NBD's chairman will become the chairman of the new Banc One. We will be the fifth largest bank in the country, the second largest credit card issuer, the second largest commercial lender, the top ATM network and one of the top small business lenders in the country.

    All in all, we think the merger makes great sense for our current and future customers, our employees and our shareholders. John McCoy has already expressed optimism about additional mergers and acquisitions following the successful integration of Banc One and First Chicago, but we are not certain, should the Congress pass financial services modernization, that our next partner would necessarily be a bank.

    Philosophically, Banc One is wholly committed to tearing down the walls between banking, securities and insurance. We very much want those industries in our business, and we want to be a strong player in theirs. We believe modernization will give the consumer more choices, better choices; and we are eager to compete in providing the choices to them.

    Our people have worked hard with both this committee and the Commerce Committee, trying to devise legislation that has some support from all three industries as well as the Members of Congress. As of April 1, we weren't there yet, but we remain dedicated to Glass-Steagall reform and very much appreciate the time, effort and energies of each of you in devoting your efforts to the process of passing a good bill.

    I look forward to your questions and, again, thank you for the opportunity to be here.
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    Chairman LEACH. Thank you, Mr. Bennett.

    Mr. Goldberg.


    Mr. GOLDBERG. Mr. Chairman, I am Sherman Goldberg, Executive Vice President and General Counsel and Secretary of First Chicago NBD Corporation, headquartered in Chicago, Illinois. My background includes some 30 years of experience in the banking industry. As general counsel and corporate secretary, I have been directly involved in bank mergers, including the 1995 transaction that created First Chicago NBD Corporation and the recently announced agreement between our company and Banc One Corporation.

    I appreciate the opportunity to appear before the committee today to address the subject of merger activity in the financial services industry and its effect on the customers, employees and the communities served by the financial institutions. We believe that each of these constituencies will benefit from larger, stronger banks and that, ultimately, the Nation's economy in general will be strengthened as excess capacity in the industry is reduced.

    I would like to begin my remarks by observing that just two-and-a-half years ago, First Chicago NBD Corporation was created in a merger of equals transaction between NBD Bancorp in Detroit, Michigan, and First Chicago Corporation in Chicago. At that time, NBD and First Chicago were the largest banks headquartered in Michigan and Illinois respectively.
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    The First Chicago-NBD merger has been, we believe, a real success story for our customers, our employees and for our communities. Our experience in that merger gives us confidence that the Banc One/First Chicago NBD proposed merger will be equally beneficial to these valued constituencies.

    Let's begin with our customers. In the final analysis, virtually everything we do as a business must be considered in the interest of our customers as being primary. If they don't find our products and services important and valuable, our businesses cannot succeed. In the case of bank mergers, it is not the size of the institution, per se, that is important, but, rather, how that size helps a bank to serve its customers better.

    The ability to deliver a broad array of banking products and services more efficiently and across a broader geography is at the heart of the issue. Over the years, our customers needs and preferences have changed dramatically, and we expect they will keep changing in ways that none of us can yet predict. Today's consumers want choices: a variety of checking and savings accounts, home mortgages, automobile loans, credit cards and investment and insurance products. One size in our view definitely does not fit all.

    And they want the convenience of banking by telephone or by personal computer, in addition to brick and mortar branch offices. They want access to their money wherever they may be, through worldwide ATM networks and debit cards.

    Convenience and choice are vital to our business customers as well. Even the smallest businesses are demanding more sophisticated cash management services and financing alternatives. Small and midsized businesses are becoming more global and increasingly look to their banks to help them manage multiple currencies and conduct global currency transactions.
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    What enables banks to serve these needs in large part is technology. Certainly technology is an important driver in bank mergers. The systems and technology infrastructure needed to serve our customers today, and in the next century, is enormously expensive. It requires vast economies of scale that can only be achieved by efficiently combining the resources and earnings potential of companies like First Chicago NBD and Banc One.

    Now let me turn to our employees. In most mergers, a key objective is to reduce costs, and invariably there will be some job losses. In the First Chicago-NBD merger, we eliminated some 1,700 redundant positions, yet many of these positions were eliminated without layoffs. How did we do this? Because merger-related changes took place over a period of one to two years, many of the reductions were accomplished by normal attrition, which is about 20 percent in the banking industry, and by reassignment as people whose jobs were eliminated found new jobs in our new corporation. In fact, the growth of our corporation has been so strong that many new jobs have been created since our merger in 1995.

    The growth of our business and its enhanced earnings power also benefit the communities we serve. Our commitment to our communities has not only been unflagging but has increased substantially since the First Chicago-NBD merger. For example, in the Chicago area alone, we have invested more than $1.3 billion in low- and moderate-income neighborhoods, businesses and families in the first 30 months of a six-year, $2 billion commitment to the community.

    In addition, after our merger, our corporate philanthropic activity increased from $16.8 million in 1995 to $19.9 million in 1996, an 18.5 percent increase. And in 1997, we increased this activity to $22.2 million, an additional 11.6 percent increase. These increases in giving were made possible by the increased earnings of a larger and stronger corporation.
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    Equally important, thousands of First Chicago NBD employees devote countless hours of personal as well as company time to civic, cultural and charitable organizations in the communities where they work and where they live. It is an important principle for us that we are not just in a community, we are part of the community. In other words, based on our experience, we think families, businesses and neighborhoods can greatly benefit from mergers, such as the pending Banc One/First Chicago NBD proposed transaction.

    We are especially proud of our record of community service, as shown in the Community Reinvestment Act ratings of our banks. NBD Bank in Michigan, NBD Bank N.A. in Indiana, and FCC National Bank in Delaware, all have earned an outstanding CRA rating from the regulators; and the First National Bank of Chicago, which was rated satisfactory before the merger with NBD, has just been examined. We are eagerly awaiting the results of what we believe was a favorable examination.

    Finally, there is somewhat less tangible but nonetheless important benefit to the broader geographic presence that results from combinations such as the proposed First Chicago NBD-Banc One merger. Our organization, particularly in its consumer small-business and middle-market businesses, has been solidly grounded in the Midwest. We, along with our customers, have learned how to manage through the Midwest's business cycles. But we believe there is a real advantage to our institution, our customers and indeed to the banking system from the greater financial and economic diversity associated with a larger geographic footprint. In that sense, the same forces that will allow customers to access our services over a wider area also will serve to help protect our franchise in the overall safety and soundness of the banking industry.

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    In conclusion, Mr. Chairman, we believe that our proposed merger with Banc One Corporation will contribute to the continued health of the financial services industry in the United States and that our combination will serve to benefit our customers, our employees and our communities.

    Mr. Chairman, I would be pleased to try to respond to any questions.

    Chairman LEACH. Thank you, Mr. Goldberg.

    Mr. Longbrake.


    Mr. LONGBRAKE. Mr. Chairman, Mr. LaFalce and Members of the committee, it is indeed an honor and a privilege to be here today.

    I am Bill Longbrake, Executive Vice President of Corporate Finance and Chief Financial Officer of Washington Mutual Incorporated, which is headquartered in Seattle, Washington.

    Washington Mutual is a financial services provider organized as a thrift holding company. We have been dedicated for more than a century to serving individuals and families. More recently, we have begun to serve small to midsized businesses. The company's subsidiaries, which include both Savings Association Insurance Fund and Bank Insurance Fund insured depository institutions currently serve nearly four million households throughout the Nation.
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    As of March 31 of this year, Washington Mutual and its subsidiaries reported consolidated assets of $103.1 billion and operated more than 1,600 consumer banking branches, loan offices, community commercial bank branches and consumer finance locations. We currently employ more than 22,000 employees.

    Washington Mutual has grown substantially through mergers, having completed 21 transactions in the last decade. Last year, we merged with Great Western Financial Corporation in a transaction that expanded our presence in California and enabled the company to enter the State of Florida.

    On March 17 of this year, we announced the signing of an agreement to merge with H.F. Ahmanson and Company, the parent of Home Savings of America. The combined companies will have consolidated assets exceeding $150 billion.

    Washington Mutual's commitment to serving our communities—and primarily consumers—dates back to 1889, when the company was founded to help families rebuild their homes and lives after a fire destroyed a great part of Seattle. Since then, our company has been a leader in serving financial needs of consumers. Our business strategy is simple, and it is quite different from the strategies implemented by nearly every other large financial institution.

    Let me explain. Our employees focus the majority of their attention on serving individuals and families—consumers—and delivering a high level of personalized service. We promote our branches and loan offices as consumer-friendly places where customers are free to come and talk to our employees without being charged a nuisance fee. And although we stress the personalized touch, Washington Mutual also offers our customers the convenience of technology—we just don't force them to use it.
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    As a result of this truly unique strategy and the hard work and dedication of our employees, more than 242,000 net new households voluntarily chose to do business with us during 1997. This was an increase of 17 percent in the number of households, and I should point out that this figure excludes any households that we acquired from the Great Western transaction.

    This kind of growth is happening in virtually all sectors of our business.

    For example, the popularity of our free checking account, which features unlimited check writing, no monthly service fee and no minimum balance or direct deposit requirements, has been overwhelming. Between January and March of this year, we opened more than 130,000 new accounts in our newest markets in California and Florida.

    Free checking is just one example of our efforts to make access to free or low-cost financial services available to all our communities.

    In addition, we are deeply committed to increasing access to safe, clean and respectable, affordable housing. We are a portfolio lender. Our ability to hold loans in portfolio allows us more underwriting flexibility than other lenders that sell the majority of their loans that they originate on the secondary market. That flexibility is often valuable in meeting the needs of first-time home buyers and others who might not meet the rigid requirements of the secondary market. And, last year, we originated nearly $30 billion in loans and were the largest single family residential lender on the West Coast.

    In conjunction with our merger with Great Western last year, Washington Mutual made a ten-year, $75 billion community reinvestment pledge. Of that amount, we committed $50 billion in affordable housing loans to minority racial and ethic borrowers and borrowers in low to moderate income neighborhoods, with $25 billion of that amount specifically targeted for borrowers earning less than 80 percent of median income.
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    In 1997, Washington Mutual closed nearly 30,000 loans, totaling $2.3 billion for borrowers earning less than 80 percent of median income; and those loans accounted for 21 percent of the number of single family loans we made in 1997.

    In light of our proposed merger with Home Savings and in consultation with a wide variety of community-based organizations, we have already begun to discuss ways this commitment can be expanded.

    Equally important, Washington Mutual is preserving access to banking services for low-income individuals. As an example of our efforts to expand our branch network in underserved communities, we recently opened a branch in the Watts area of South Central Los Angeles. Over 650 families and individuals have opened accounts during the financial center's first three months of business.

    Obviously, our communities are instrumental to our success. This is one of the reasons why we strive to return 2 percent of pretax earnings to our neighborhoods. With an emphasis on underserved areas, these funds are targeted to affordable housing, consumer education, including funding for credit counseling programs, and the improvement of K through 12 education.

    We believe that our proposed merger with H.F. Ahmanson will create an institution which is financially stronger than either of the two companies would be on an independent basis. Consequently, the combined companies should be in an even better position to serve the financial needs of hundreds of communities throughout the country.

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    Thank you very much, Mr. Chairman.

    Chairman LEACH. Well, thank you very much for that advertisement, Mr. Longbrake.

    Mr. Elliott.

    Mr. ELLIOTT. Mr. Chairman, Members of the committee, I am Robert Elliott.

    Chairman LEACH. Excuse me. Let me just ask, if I can, will you be more than several minutes? I assume you will be.

    Mr. ELLIOTT. About five.

    Chairman LEACH. We have votes pending on the floor. I think, to be fair to you, sir, we will begin with you when we return, rather than begin with you now.

    Mr. ELLIOTT. Fine.

    Chairman LEACH. We will recess until about ten minutes before the hour. The committee is in recess.


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    Chairman LEACH. The hearing will reconvene.

    When we recessed for the vote, we had just come to the last witness in this panel, Mr. Elliott. Would you proceed, sir.


    Mr. ELLIOTT. Mr. Chairman and Members of the committee, I am Robert Elliott, Vice Chairman of Household International.

    Household, through its subsidiaries, is a leading provider of consumer finance and credit card products in the United States, in Canada, and in the United Kingdom. HFC, one of Household's core businesses, is the oldest consumer finance company in the United States. Household Credit Services and Household Retail Services are two of the Nation's largest issuers of general purpose and private label credit cards.

    Household engages in a relatively simple business. We make loans to average Americans. We make our loans either person to person in the communities where our customers live or via credit card transactions where they shop.

    We fund our operations by raising money in the financial markets, not by taking consumer deposits. Furthermore, while we are subject to Federal law and the regulations of such agencies as the SEC, the FTC and the OTS, the individual States in which we operate are the primary regulators of HFC's activities.
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    The pending Household-Beneficial merger will combine two major brand names in consumer finance, creating one of the U.S.'s leading consumer companies. As I will explain more fully, the merger should benefit U.S. consumers by permitting the merged company to provide more customers with more financial product offerings. At the same time, the merger will not have any measurable impact on the economy in general or on the international competitiveness of U.S. firms.

    With respect to the impact of our merger on the U.S. economy, the consumer financial services business is highly diversified and characterized by a very large number of companies, both local and national, competing to provide consumer financial products. The industry's recent history displays rapid and successful entry of new firms into the market and expansion into new product lines. The speed with which companies have opened new offices, coupled with innovations in telemarketing and direct mail, have essentially created a large, diversified, national consumer finance market.

    For all of these reasons, our conclusion is that the merger will have negligible impact on the macro U.S. financial services industry.

    On a micro basis, the merger presents Household and Beneficial with a number of economic positives, such as a strengthened capital position, an improved balance in our portfolio mix, an improved credit profile, an expanded market presence and product offerings, significant cost savings and efficiency opportunities, and additional opportunities for future growth.

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    Household has operations in Canada and the United Kingdom. In both countries, we provide consumer loans and private label credit cards. Beneficial has comparable operations in the United Kingdom. Our operations in Canada and the U.K., while important to our corporate profitability, are small compared to domestic commercial banks. The Household-Beneficial merger will therefore have minimal impact on international competitors.

    The merger of Household and Beneficial is compelling because it is an amalgamation of two complementary companies. Household is recognized for its efficiency as one of the lowest cost financial services providers, with superior technology and product delivery capability. Beneficial is recognized for its high contact customer service. Our companies are an excellent fit, and we hope to retain the best of both worlds.

    An expanded branch network will bring new products into new neighborhoods and provide a personal touch that Household had, in many cases, lost. With personal contact comes greater customer service, loyalty, and long-term customer relationships. Long-term customer relationships are crucial in financial services, and we can only retain our customers by serving them well and giving them products that fit their individual needs at prices that are competitive.

    It is our view that existing safety and soundness, consumer protection, and antitrust laws are sufficient to deal with mergers such as our own. As a diversified financial services company, however, Household has long supported efforts to modernize the American financial regulatory structure and support this committee's efforts to enact financial modernization legislation.

    As a unitary thrift holding company, we had some concerns about the initial direction in which the debate was headed. In our judgment, the need to modernize the financial services regulatory structure does not dictate a common Federal depository institution charter. We are pleased, however, with the compromise reached on Title IV of H.R. 10 and are happy to work with the Members of this committee for enactment of that legislation.
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    Household appreciates the opportunity to present its views to you, and I appreciate the opportunity to appear before the committee today, and I would be happy to answer any questions. Thank you.

    Chairman LEACH. Well, thank you, Mr. Elliott.

    I thank all the presenters for their perspectives.

    Let me just begin with a question to our twosome, Mr. Prince and Mr. Roche.

    The two of you, or at least one of you, with an echo, suggested the reason you are merging together, among other things, is concern for mega-competitors. Mr. Bennett commented, don't look at his company, that you guys are pretty big. But it is an interesting thesis because you will be the largest American financial corporation.

    On the other hand, it strikes me that around the world there are a number of companies that are both large but are more empowered than American companies, and I am wondering if you can speak to the capacities of a merger such as your own to be more competitive abroad and to use the good name and beachhead of both of your companies to advance a greater international position for America's financial community. Is that a valid assumption? Is it a strategy of your institutions? Would you argue this is in the American interest or would you present a different perspective?

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    Mr. Roche.

    Mr. ROCHE. Mr. Chairman, I think you are precisely right. We do see this as enhancing our competitive ability overseas for both of our companies.

    As I think you know, Citicorp has operations in 100 countries and has consumer business in 45. Solomon Smith Barney has operations in something like 26 countries abroad. We hope to bring our origination ability in emerging markets in developed countries with Solomon Smith Barney's ability to distribute the securities in the United States and Europe, to improve capital market efficiency, aid American customers, and our foreign customers as well.

    Chairman LEACH. I would like you, Mr. Prince and Mr. Roche, to put a little more definition into a statement that I have, frankly, doubts about.

    Mr. Prince asserted very strongly that this merger is expressly permitted by law. I think the initialness of the combination might be tolerated under current law, but I see no basis whatever in any American law that allows an American commercial bank to be intertwined with an insurance underwriter. Do you see that differently?

    Mr. PRINCE. Mr. Chairman, as we have heard a number of times this morning, the law permits a company which applies to become a bank holding company to operates its businesses for two years and then come into conformance. We intend to be in compliance with the law on the day we close, and we intend to be in compliance with the law two years after that. If that means that we have to change the businesses we are in, then we will do that at the appropriate time.
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    Chairman LEACH. But you are not implying that insurance underwriting with a commercial bank is under law today?

    Mr. PRINCE. Not beyond the period within which we can come into conformance, no, sir.

    Chairman LEACH. Do you view this as a competitive leg up, not just with an international competitor, with which an American legislator might be somewhat sympathetic, but with all other competitors in an American environment, in which case an American legislator might be somewhat unsympathetic?

    Mr. PRINCE. If I may, I don't think that we have any unique competitive advantage at all. A number of banks already distribute insurance products, as you know. The key difference here is that the ownership of the manufacturing of the insurance product would be affiliated, but the practice of selling insurance, the practice of distributing insurance products, I believe is already done by a number of banks. So the competitive advantage that one might see from that would not be true, in our case. I don't think we are going to have any unique competitive advantage.

    Chairman LEACH. Well, one of the things that strikes me as awkward here is that I am not convinced, if Citicorp requested this, that Citicorp gets an approval, but a new company asking for a new holding company arrangement comes under this. Is that correct, Mr. Roche?

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    Mr. ROCHE. Yes. Were we to acquire Travelers, for example, that would mean that the Federal Reserve Board could not approve that transaction. You are exactly right.

    Chairman LEACH. So one of the competitive implications of this is that it means that if an insurance or securities firm which is in nonconformance with law agrees to purchase a bank, it has a period of time with what I would describe as a competitive leg up. Whereas if a bank wanted to attempt to get into these businesses, either acquiring the reverse direction or starting de novo activities, it would be unqualified for under current law. Is that valid?

    Mr. ROCHE. Yes. It depends on the form of the transaction.

    Mr. PRINCE. But if I may, sir, I think inherent in your question is the notion that we are somehow purchasing Citibank, which is not true, of course. We are merging. Our company is the survivor in the merger, but it is a merger of equal companies, and I think any company could go through that same process.

    Chairman LEACH. Well, what I am really getting at is something a little different than that. And that is that if current law allows Citigroup to proceed in this fashion, there is a strong competitive argument that those that I believe may be disadvantaged ought to have like powers; and I personally think it is a possibly compelling reason to consider a change in legal framework that allows that sort of thing.

    In any regard, I do have a rather lengthy question for all of the panelists, and it relates to one of the disadvantages when one has a series of panels, and one group from one side and another from another, that one follows the other, and the groups that are going to follow are going to raise a series of questions, several of which were addressed by one or two of you, but I would like to just throw these on the table.
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    Groups that will follow argue that mergers mean higher bank fees for consumers. They will argue that mergers result in branch closings. They will argue that the availability of multiple products under mergers may result in abusive sales practices. They will argue that mergers endanger the survival of small community banks. They will argue that small businesses may have a harder time gaining credit. They will argue that this may lead to a too-big-to-fail phenomenon. And, finally, they will argue that mergers don't necessarily result in purported benefits, that they could simply result in more ability of these institutions to make money to the advantage of the company but not to the consumer.

    Would each of you like to respond to these questions? And I think it would be too long to ask each of you to, but maybe we ought to start first with Mr. Elliott, and will your combinations end in higher fees for consumers? Well, you are not a bank. Let me go to Mr. Longbrake.

    Mr. ELLIOTT. Well, I can address some parts of it, I guess.

    Let me just step back for a second. You have to understand what you are buying here. The purpose of doing this was not to limit our reach to consumers but it was to expand it. And so while there are cases where we overlap in branches in relatively small communities, there are far more cases where we are picking up new territory, and we have no desire to close out branches which have viable customer bases.

    Most of the cost reduction that is—will be engendered in this transaction will come in back-office functions and they will come because, over the years, Household has spent a lot of money on building technology to make ourselves a lot more efficient in the back office.
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    But let me give you a demonstration of why it is so important to keep a customer. We have gotten our back-office costs down so low now that they represent the same amount that it costs us to acquire a customer. So say—in other words, it costs us as much to acquire a customer in the first place for a home equity loan, for example, as it does to service that customer over the entire life of the transaction, including providing for its ultimate charge-off, if one occurs. Therefore, it becomes very, very important to retain customers.

    And the reason that this combination works well is we have brought that back-end cost down low, and we grab onto an additional 6 million customers who would be very loath to turn loose.

    Now somebody mentioned before, this is an extremely competitive market. I will readily admit to you, ten years ago, consumer finance companies looked like oligarchies, and they didn't get in each others way, but they are dead competitive now.

    Somebody mentioned earlier that when you announce that you are going to be merging, all of those competitors who are unsuccessful bidders in that same merger are now out with the knives looking for the customers in those markets where the mergers will occur because they know there will be disruption. So it is really incumbent upon the acquiring institutions to do everything they can to see to it that customers don't get away, and the communities that we bought into in this transaction are the communities we are meant to serve.

    Chairman LEACH. How about Mr. Roethe? How do you respond to the higher fee issue?
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    Mr. ROETHE. On the higher fee issue, first of all, I would suggest that we can't increase our fees simply because of the merger, simply because we're bigger, and expect to keep our customers. The merger between BankAmerica and NationsBank is not a merger in which we have significant overlapping areas, where we have branches and facilities; and so we are not going to see an increased concentration or increased market power that we may have in any market. The only two markets where we do have a concentration issue are in Texas and New Mexico, and it is possible we will be required to divest some of our assets in those two States.

    In the other States, there is really no overlap, so, therefore, no increases in our concentration or in our market power. We are going to be competing against the same institutions in those markets that we presently compete with, and we are going to have to keep our fees at levels that our customers will be willing to pay. And if we don't, we are going to lose those customers.

    I would also point out, there will be the added convenience to our own customers for whom we build these branch and ATM systems, in that they will be able to travel across the country and use our ATMs and go into our branches in all 22 States where we will operate and they won't have to pay fees. Keep in mind, we only charge fees with respect to ATMs in those States and for those customers who are not actually customers of our bank.

    Chairman LEACH. Well, I tell you what. I have this long list of questions, but I think out of respect to the other Members of the committee I will come back to them in a second round.

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    Let me turn to Mr. LaFalce.

    Mr. LAFALCE. Thank you, Mr. Chairman. I, too, have a long list, but we will go from left to right, and we will go as far as we can in five minutes. That means you first, Mr. Roche.

    Mr. ROCHE. OK.

    Mr. LAFALCE. Did you handle the case before the Second Circuit dealing with the legal authority of the Fed to require something other than a subsidiary or State-chartered member institutions?

    Mr. ROCHE. Not personally, but I am familiar with——

    Mr. LAFALCE. It was your office, though?

    Mr. ROCHE. Yes.

    Mr. LAFALCE. Could you explain exactly what the Court held in that case and could you explain to whom the Second Circuit holding is applicable? Is it institutions headquartered within the Second Circuit, institutions doing business within the Second Circuit, the subsidiaries or the banks themselves? And is there a circuit court decision that in any way differs from that or is that the only judicial pronouncement on the subject?

    Mr. ROCHE. Well, if I could make just one clarification. It really deals with a non-member bank.
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    We have a subsidiary in Delaware. It is a bank. It is chartered by the Delaware Banking Department. It is insured by the FDIC. And Delaware law permits a bank such as that to own subsidiaries, including one engaged in insurance activities.

    We applied to Delaware and to the FDIC and got approval to do that. The FDIC permitted it. The Federal Reserve was unhappy because it thought its jurisdiction and power extended down through Citicorp, the parent, down into this subsidiary of a State-chartered bank.

    Since Citicorp is in the Second Circuit in New York, the case went there, and we won against the Fed. The Court said you, the Federal Reserve, as the regulator of bank holding companies, cannot dictate what State banks can do. There is no other contrary——

    Mr. LAFALCE. And this was a non-member bank?

    Mr. ROCHE. A non-member bank.

    Mr. LAFALCE. Has the Fed been attempting to dictate with respect to non-member State charters?

    Mr. ROCHE. They were under the Bank Holding Company Act. Were it a member bank, they would have direct authority the way they have over Bankers Trust or Morgan or other State-chartered members.

    Mr. LAFALCE. Well, then that answers the question—I mean, I was under the assumption that the holding was applicable to a State-chartered member bank, and so when the Fed is seeking a reversal of the Second Circuit opinion, they are, in fact, seeking legal authority over State-chartered non-member institutions.
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    Mr. ROCHE. Well, I can't comment on that, but I was shaking my head in the back row there when the lack of clarity was at issue.

    But if I can go on for a moment, then the Congress decided that this route would not be open any longer, and so our subsidiary is grandfathered because it had been in existence for a while and we today underwrite, manufacture, if you will, annuities and some life insurance in Delaware. We are actually in that business, and we sell it in conjunction with our branches.

    Mr. LAFALCE. Well, now what is the—when was the decision of the Second Circuit, and is there now law that renders that virtually irrelevant?

    Mr. ROCHE. Almost, because the FDIC act was amended, I believe, to say that you couldn't do this any longer in the future. But it did grandfather the companies that had applied and were in existence on a specific date—I'm sorry, Mr. LaFalce, I don't remember the date.

    Mr. LAFALCE. OK. But we certainly did have a lack of precision with respect to this technical legal issue.

    Let me go onto something else now.

    Mr. ROCHE. Yes.

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    Mr. LAFALCE. I am going to ask both Mr. Roche and Mr. Prince, or either of you, you are the attorneys now for Citicorp and Travelers. What do you advise them?

    The law right now says you will have to divest at least certain activities at the end of a two-year period. I suspect it is your hope that, A, the law will be changed or, B, at the end of the two-year period, you will be able to get a one-year extension and one-year extension and one-year extension.

    But you are the attorneys for them. What do you advise the decisionmakers with respect to strategic game plans, to lay the foundation over the course of the next two years for these synergistic type of activities? Or do you advise them to begin preparations for divestiture or something in between?

    Mr. ROCHE. May I help, sir, by just explaining the economic rationale? Since I think some people could be confused about why two companies would merge like this if they thought that they would have to divest these two important parts of the business. Because what this merger is really about is distribution. It is distribution of insurance products along with banking products and mutual funds for the benefit of the consumers.

    We believe we can retain the insurance distribution side, even if we are not able to manufacture it internally. And should the day come when we need to conform and the only choice is to divest those insurance manufacturers, if you will, underwriters, then we will do that, a spin-off or some sort of divestiture for the benefit of the stockholders. Obviously, you know, you don't give it away. They will get the benefit of that. And we hope we can continue with them or with others to get product we can distribute through the channels.
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    Mr. LAFALCE. I understand that. I was still going to the question of what counsel advises. What advice do you give?

    Mr. ROCHE. What we advise them to do is to keep the two insurance underwriting companies separate and distinct. They today are quite independently run. They have their own staff and their own operating systems. They are separately capitalized. Indeed, the P&C company is a public company listed on the New York Stock Exchange. Travelers owns about 83 percent of it. There is a public holding. So these things are run very separately and very independently.

    And as I said, should the day come, that divestiture is what has to be done, then it has to be done. So, as Mr. Prince said, we are not asking for and not relying on a change in the law.

    Mr. LAFALCE. In this total universe of Citigroup, what percentage of the profits would be attributable to the legal entities that would have to be spun off at the end of the two-year period if there is no change in law and if there is no extension?

    Mr. ROCHE. We think that number in the combined company would be less than 20 percent.

    Mr. LAFALCE. Thank you very much.

    Mrs. ROUKEMA. [Presiding.] Thank you.
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    I believe I have a question or two, but at least one.

    As you have heard, the questions I focused on earlier had to do with regulatory authority and the structure of regulations, so the one that I am concerned with here relates to that; and that is, we have been talking about prompt correction action as being the essential of a proper regulatory climate here and that people have pointed to that as the safety valve, so to speak.

    Mrs. ROUKEMA. My question is, and I don't know who would want to take it first, because I think it applies to almost everyone here. But if anyone has a strong feeling on the matter or will be precise in their answer, not general but precise in their answer, when we get to PCA, prompt corrective action, it usually kicks in, as I understand it, at about the 2 percent level. If that is wrong, then please correct me. But there is a little discretion here. But it is my understanding that that is the level at which prompt corrective action triggers a regulatory intention.

    Now, given the sizes of these new banks, these mega-banks, do you think that it should be a higher percentage so that we get to the—we diminish the too-big-to-fail risk?

    Do you have any suggestion as to how you rate that? Do you have it on the basis of whether it is a $100 million or more bank? Or do you use a different measurement? What is your best, good-government, sound financial practice on this subject? See, prompt corrective action, just loose out there, I don't think is enough to give the regulators really tight authority here.
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    Mr. ROCHE. Let me hazard something.

    Mrs. ROUKEMA. People are looking at me, but——

    Mr. ROCHE. We are all lawyers, so we are all reluctant to just jump in here.

    But I will say that the regulators actually have levels that are higher than 2 percent for many other purposes. Unless a bank is well-capitalized, for example, it is not going to be able to do a lot of things, even in the traditional banking area.

    Mrs. ROUKEMA. Is it totally discretionary?

    Mr. ROCHE. No. They must act when the levels get to a certain point.

    Mrs. ROUKEMA. Based on the size of the bank?

    Mr. ROCHE. Yes. All of the banks here are very large, but they all have very high-capital ratios. For example, Citicorp's tier 1 ratio is over 8 percent.

    Mrs. ROUKEMA. That is at their own discretion?

    See, I am asking for what should be a minimum national standard for the regulators to apply so that we recognize—we as responsible Members of Congress and responsible to the taxpayers, at what level should we establish or require the regulators to comply? They can go over that, but there should be a decided minimum.
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    Mr. ROCHE. I confess I haven't thought about it. As a practical business matter, we decided that 8 percent was the level that we had to attain and keep at. So we haven't thought about how low we would go to before risking having the regulators move in.

    Mrs. ROUKEMA. Anyone else want to volunteer?

    Mr. GOLDBERG. I would just say, and I don't mean to speak for Mr. Hawke or anybody else who commented earlier in the day, but I think Mr. Hawke made a fundamental, sound point, that when it is too late, then you are in trouble as a regulator and, indeed, as an institution. I think there is an overlay, not to speak for the regulators, but the overlay is safety and soundness.

    In the case of the national banking associations as large as the ones around this table, we have resident examiners in place. They understand, if they are doing their job—and we believe they are in our institution. They understand what our strategies are. They understand what our directions are. They understand some of the fundamental driving forces in our business.

    And when they see things which are not in sync with fundamental safety and soundness principles, they have the right and I suspect they would ring the bell. They would bubble it up to Washington. There would be a review, and there are all kinds of mechanisms that can be put in place, from jaw boning, to memoranda of understanding, to something far more severe than that.
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    So I don't think it would be appropriate to lose sight of the safety and soundness overlay that pertains here.

    Mrs. ROUKEMA. Do I understand correctly—I certainly agree with that, but you are then saying it has to be essentially the judgment call of the regulator, but you are not putting that into a defined full time?

    Mr. GOLDBERG. No, I would defer that to the regulators. But I would say, fundamentally, a judgmental issue is important to the regulatory process. I suspect we would all concede that.

    Mr. LONGBRAKE. May I have a comment, please?

    Mrs. ROUKEMA. Yes, please do.

    Mr. LONGBRAKE. By way of background, I served for 18 months during 1995 and 1996 as the chief financial officer of the FDIC, so I have some familiarity with the regulatory approaches.

    There actually is a very precise set of procedures. It starts when you fall below 5 percent capital, which is the well-capitalized level. At 4 percent you are adequately capitalized, and it goes down in steps to 3 percent and 2 percent. The 2 percent level that you referred to before is actually the level where very severe action commences to shut down a bank.

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    Mrs. ROUKEMA. Should that be set on the basis of the size of the bank that could apply as a standard? Under $100 million, for example.

    Mr. LONGBRAKE. From my experience, I don't think that is necessary. What happens is regulators do not wait until 2 percent is reached. As you fall below the 5 percent level, there are increasingly severe steps that are taken. By the time you are at 3 percent, you are basically under very strict supervision. So 2 percent is not a place where the regulators ever want to get to, because that means they have to close the institution, if it is not corrected within 90 days. So supervisory activities actually begin very intensively, and I would add also that there is extra deposit insurance premiums once you fall below 5 percent, as well.

    Mrs. ROUKEMA. An important point. That is fine.

    Anyone else? I still think it is an open question as to whether or not those standards or those levels, whether it is 5 percent or 3 percent, may have to be reviewed in terms of the sizes of the mega-banks we are talking about. But it is an open question. Thank you.

    My colleague, the gentleman from Minnesota, Mr. Vento.

    Mr. VENTO. Thank you, Madam Chairwoman.

    Mr. Prince, the merger of CitiBank and Travelers, the horizontal merger, what type of regulatory requirements do you face in terms of the insurance side? Travelers, I assume, is in most States. I don't know where you were registered principally.
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    Mr. PRINCE. We do operate in all 50 States. Our principal companies are in Connecticut, in New York, and Illinois.

    Mr. VENTO. What is the regulatory threshold that you have to satisfy in terms of this merger through these entities?

    Mr. PRINCE. If I understand your question correctly, we will have to secure approval from the home States of the insurance companies within the Citicorp group of companies. There are four States for that. We do not expect that we have to have any special approvals in the Travelers' States.

    Mr. VENTO. What is the impact—I don't know much about this, and I don't think most of the Members of the committee do, perhaps—but in terms of the risk pools and other types of capital requirements that are maintained for the annuity or insurance in force and effect, what type of safeguards or requirements do you have to satisfy in regard to that?

    We are concerned, obviously, from the standpoint of the FDIC, as you might well understand. But I am interested in looking at it from the other perspective, too.

    Mr. PRINCE. Each of the insurance companies is regulated, I will not say heavily but certainly seriously. The insurance regulatory structure is quite complete and is regulated not only for market practice, which is what people think of normally, but also safety and soundness, financial strength and capabilities of the insurance companies. Each of our companies has a rating for that sort of analysis. I would be happy to send that to you separately.
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    Mr. VENTO. Yes. I think that would probably be helpful.

    What I am trying to drive at, there are other considerations that you have to satisfy with regard to the insurance in force and effect and that they have a certain amount of capital requirements set aside, because we all, of course, know various insurance companies in our own States that failed.

    Mr. PRINCE. Correct.

    Mr. VENTO. I am just interested in the sense that you have to have certain reserves and you are a participant in various types of programs written the States that, in fact, do guard against or pay for failed insurance companies, is that correct?

    Mr. PRINCE. Indeed, that is correct. But, again, if I may say, the regulatory structure is very detailed on our reserving strategy. The amount of reserves you have to have and the various categories, the various investments there can be, is quite detailed. Each of the States looks at that very carefully. I would be happy to send you that.

    Mr. VENTO. Your merger is based on a holding company model, is that correct?

    Mr. PRINCE. Yes.

    Mr. VENTO. So you would be regulated by the Fed.
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    Are you voluntarily going to comply with CRA requirements? Because we have heard, of course, this explanation earlier here by the Governor about you could voluntarily comply with it if you would like to.

    Mr. PRINCE. We would like to think of ourselves as good corporate citizens.

    Mr. VENTO. I think of you that way, but that is not my question. I like the red umbrella.

    Mr. PRINCE. I will see you afterwards.

    We are in the process right now of formulating our CRA plan. We think it will be available sometime next week. I think it will reflect the serious responsibilities we have in the CR area and the unique nature of our business. Yes, I think we will have a very interesting plan.

    Mr. VENTO. I hope I was clear in my opening statement so you all understand what I was saying in terms of where we are going in terms of public policy here and what the expectations are from constituency groups. I think the list of questions that the Chairman ticked off earlier were sort of telling in terms of some of the questions that we have to answer back home.

    The issue with regard to CitiBank-Travelers, as an example, CitiBank today I guess has some insurance activities they sell within subs, maybe, within subs or holding companies. I am thinking of my own holding company banks back home in the Midwest. Both of you are probably selling some sort of insurance now, banks are. Is that correct, Mr. Roche?
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    Mr. ROCHE. That is true.

    Mr. VENTO. Others would agree with you. So now when we see insurance sold at the CitiBank sites on the East Coast of the United States or throughout the United States, we will see a choice of different insurance products?

    Mr. PRINCE. I think the choice of the Travelers product is going to be pretty apparent. I think it is the best product around.

    Mr. VENTO. I have no doubt about that. But I think that begs my question. I don't think you want to be quite that—what I want is an answer as to what else will be offered in that financial institution in terms of other insurance products. Has that issue been visited, or will it be?

    Mr. PRINCE. I don't think the strategic plans for those details have been worked out yet, sir.

    Mr. VENTO. I mean, I think this sort of puts a little point on it, Mr. Chairman, in terms of where the concerns are, whether there will be competition. The same might be asked of any of the different products that we are being offered as we go into dealing with these and how it could be dealt with.

    Mr. Longbrake, I was looking—and we wanted to pay a little attention to that unitary thrift holding company. I note that you are merging. Do you undergo a CRA requirement with regard to the merger of the thrift in Washington and in your parent company?
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    Mr. LONGBRAKE. Absolutely, Mr. Vento. We are subject to CRA. Home Savings of America is also subject to CRA.

    Mr. VENTO. Are all of the holding companies then subject to that, as well?

    Mr. LONGBRAKE. The thrift holding company is not. The banking subsidiaries are.

    Mr. VENTO. Banking subsidiaries are. So you have both banking subsidiaries and a holding company structure under the unitary—you have both?

    Mr. LONGBRAKE. Yes.

    Mr. VENTO. Those that would be subsequent would be those that would not. So you could choose not to be, I guess, according to the explanation I heard from one interpretation here this morning.

    Mr. LONGBRAKE. I suppose so, but, practically speaking, 99 percent plus of our business is in the banking subsidiaries.

    Mr. VENTO. I noted your concerns about the disposition of H.R. 10 and the issue with regard to the direction it goes. You were concerned not because of your own charter, which would be in force and effect. You have various activities. All the activities under unitary thrift charter would be permitted.
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    Do you have any words of advice about this dangerous mixture of commerce and banking that you potentially could be involved in? Are you greatly involved in that now?

    Mr. LONGBRAKE. We are not currently involved in any commercial activities. We actually did own a travel company a few years ago, but we sold that, so I think that was the only real commercial activity we were involved in.

    Mr. VENTO. Do you have any thoughts about doing this in the future? I will not force you to answer that question.

    Mr. LONGBRAKE. Part of our concern, as it has been noted here by many today, the financial services environment is just changing so rapidly it is really impossible to foresee what turn it will take next, and particularly on the technology side, with the developments in personal computers and so forth.

    Mr. VENTO. You heard my question about Microsoft.

    Mr. LONGBRAKE. They are in our backyard.

    Mr. VENTO. Half of the ATMs are owned by non-bank entities. They could all be choke points in terms of competition.

    Mr. Elliott, you are directly involved. You are involved to a little extent in commerce and banking, are you not?
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    Mr. ELLIOTT. Well, as I noted, we are a thrift. We also have special purpose charters for issuing credit cards, which is essentially what we do.

    Mr. VENTO. I know you don't think of yourself in commerce. Most of us do not, but necessarily about 90 percent of your business probably is considered, you know, commerce, is it not? I mean, if it is not regulated as a financial institution, as an insurance company or as a bank or as a thrift, then it has to be something else.

    It is hard to think of Household Finance as having a commercial entity, but I suppose——

    Mr. ELLIOTT. We are purely financial services and have no other entities other than financial services. The regulation on the consumer finance side is mostly State regulated.

    Mr. VENTO. And SEC. I did read your activities. This has not been a problem, I guess, in terms of what has occurred.

    In any case, I appreciate the responses. I see my time is up, Mr. Chairman. Thank you.

    Chairman LEACH. [Presiding.] Thank you.

    Mr. Foley.
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    Mr. FOLEY. Thank you very much, Mr. Chairman.

    Let me ask first, Mr. Roche, with Citicorp, several weeks ago we were considering H.R. 10 in committee. Citicorp took a rather aggressive stance against that piece of legislation. What we are viewing today is a merger between Citicorp and Travelers and Smith Barney Salomon, which, in essence, would do pretty much what H.R. 10 would allow.

    Can you tell me what happened overnight to change Citicorp's adamance against it, to come before us now and support a similar combination?

    Mr. ROCHE. Sir, we are in support of financial modernization. There were aspects of the H.R. 10 bill, particularly as amendments were proposed, that were of concern to us. Clearly once the merger was announced we thought it was appropriate to relook at it. But we are still in favor of financial modernization but think it important, for example, that the bill be broad enough to meet the demands of others to get support for its passage.

    You heard this morning the comments by Governor Meyer and Secretary Hawke and Ms. Williams on subs, for example. That is not of terrible significance to us now, but it is of importance to many banks and smaller banks in the country.

    To the extent that the legislation can deal effectively with that, it will have broader support. So we were concerned about some aspects of the financial modernization legislation as it went along, but it is fair to say that we, in conjunction with our new partners, took a hard look at it again.
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    Mr. FOLEY. One of the concerns that I have had, and some fears have been allayed, but when I look back, Citicorp in the early nineties, as a result of lending practices in Latin America, found their stock value at about $9.50. It was quite an opportunity, in reflection.

    Travelers, obviously, being a successful insurer, has certain liabilities that may occur from time to time: El Nino, hurricanes, earthquakes, and other disasters. Add to that the Smith Barney Salomon Brothers component, the financial services arm, which if we take a 10 or 15 percent hit on the Dow, people may stop trading, may sit on their wallets and not trade. So you have Asia and Latin America showing some signs of a weakening market and ultimate earnings being reported now are showing a weakening effect on corporate America.

    So Citicorp may be struggling—and I am not suggesting it will, but it could be struggling—and Travelers now with the event of several catastrophic disasters that pulled down its balance sheet, and then Smith Barney, operating as the investment side of the business, has declining sales volume. It was not so long ago we had that kind of situation in America—banks closing their doors, FDIC caving in, taking over Southeast Bank, First American. I can name a litany of institutions that were taken over by the FDIC.

    How do we now situate ourselves to feel comfortable that these firewalls truly will exist, that the businesses cannot, you know, immerse themselves in opportunities that could cause the demise of all three together?

    Mr. ROCHE. We will be closely regulated by the Federal Reserve, as the regulator of the parent bank holding company, the umbrella regulator, if you will. Each of these companies is highly regulated. The insurance companies are highly regulated. They are quite well-capitalized. They have lots of reserves. They reinsure some of these risks that you mentioned.
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    The total capital of the combined institution will be about $44 billion. At Citicorp alone, we have almost $6 billion of reserves. There is lots and lots of financial strength there, and it is being added to. Because it doesn't always happen that El Nino, Asia, and the market all decline at once; and the diversity in scope, we would hope, will help us enormously and, in fact, make the institution a stronger one.

    So we enter this thing feeling more confident about the future success than less, because we really view these two companies as quite complementary in terms of risk. These are in some ways different risks, and spreading different risks is always better than concentrating risk.

    Mr. FOLEY. I am not disparaging your corporate parents, because they have all shown great strength and resilience in coming out of the 1990 market, which I think was precipitated by Government's Tax Reform Act of 1986, which caused the financial services and banks and others to suffer from buildings being handed back to the banks. But I do think there are a number of people in America that are quite concerned, because they hear the size of these deals. Those of us that sit on this committee understand that there is some concern as FDIC may be called in to create another fund, if you will, to bail out these too-big-to-fail institutions.

    Mr. ROCHE. I am sympathetic to that concern. All I can point out is that, perhaps uniquely on this panel, the Citicorp-Travelers merger is truly across industries. It is not a simple consolidation of banking or consumer finance; and, therefore, we are spreading the risk. We are not consolidating it.
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    Mr. FOLEY. Let me turn to the bankers, if I could, for a few moments.

    I just held a town hall meeting in my district. Typically, I get about 75 to 100 people attending. We had well over 200, to talk about banking mergers. The major banking groups who participated were NationsBank and the Florida Association of Bankers. The credit unions were also involved.

    We handed out a survey to the groups that attended. I guess, let me just read from my list of tabulation.

    Obviously, financial services rated high as excellent service, 63 percent; 28 percent, very good; 8 percent, fair; 1 percent, poor. So we were encouraged by that.

    But when it got to, do you think bank mergers which are taking place in Florida and throughout the Nation are good for consumers, only 9 percent suggested they would be, and 82 percent suggested it would be bad for consumers, and 9 percent remained undecided.

    I think one of the concerns from my standpoint, as a small business person, is the access you will have to a bank's lending opportunities, loaning for my small business operations, maintaining a checking account that may not have outstanding, huge balances, as some large corporations would have.

    What happens to that customer? How do we provide for access to capital, to have a checking account in a bank of large size? Are the large banks going to want those accounts?
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    Mr. POLKING. Mr. Foley, I am with NationsBank, as you know, and we have been heavily involved in the mergers in the State of Florida. We are the number one small lender, lending bank, in the country, and the number one small lending bank in Florida. Since we have acquired Barnett, we have increased our small lending. We intend to continue to increase our small lending. It is a very profitable product for us, and there is no reason why we wouldn't want to continue to do that.

    Mr. FOLEY. What about in fees? How do you see the fees? I know NationsBank stressed that they would freeze fees for a year on the Barnett Bank customers that were acquired in the merger.

    Mr. POLKING. We did impose a freeze on fees. Both Barnett imposed a freeze on their fees prior to the merger and NationsBank imposed a freeze on its fees prior to the merger. Those freezes were imposed for a period of a year. Since then, we have frozen monthly fees across the board in Florida for the company on our two most popular checking accounts, and we are committed to do that through the year 2000. I indicated that in my testimony.

    We have also cut fees on two of our products across the board, our counter items fees and our debit card fees. We have eliminated those fees completely.

    We are looking at all of our fees throughout the bank in hopes that we can further either freeze or cut those fees. We really think that we can and we will be able to pass on the benefits that we receive from these mergers, economies of scale, pass them on to the consumers. We are dedicated to try to do that.
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    Mr. FOLEY. Does anybody else have any comment?

    Mr. ROETHE. I would only say, on the small business side, $80 billion of our $145 billion commitment under CRA is for small business, either SBA guaranteed small business loans or other small business loans. This is primarily in the States in which we are currently operating, and we do intend to both continue to fulfill that pledge in the future.

    I am sure as we deal with Nations, who is the leading small business lender in the country, as I heard the gentleman say, we will be a formidable force in the small business area. This is a profitable area of business for us. There is no reason why we would shoot ourselves in the leg by either increasing our fees beyond that which small businesses are willing to pay, or taking some other steps that would alienate that group of customers.

    Mr. FOLEY. What is your threshold for small business? What would be your lending criteria?

    Mr. ROETHE. Let's see. I think we are generally talking about loans that are $1 million or less.

    Mr. FOLEY. You mentioned SBA. Are you calculating that in the total worth of the Government insurer, where you have some safety in the loan?

    Mr. ROETHE. About $10 billion of the $80 billion is Government-guaranteed SBA loans.
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    Mr. FOLEY. Thank you. No further questions.

    Chairman LEACH. Ms. Waters.

    Ms. WATERS. Thank you very much. To Citicorp and Travelers, is it true that you sought an informal opinion from Mr. Greenspan prior to announcing your merger and he gave you informal support for the merger?

    Mr. ROCHE. We did speak with him before the merger was announced. We have a long relationship as Citicorp, obviously, with the Federal Reserve, and we thought it only courteous and sensible to tell them about it before it happened. He gave us no informal assurance of any kind.

    Ms. WATERS. What did he say?

    Mr. ROCHE. It was a long conversation, Representative Waters. I don't think I can really remember.

    Ms. WATERS. Did he say, I think it is a good idea; I would support that; go right ahead with it; I will be with you all the way? Anything?

    Mr. ROCHE. I believe he said it was a decision that the full Board of Governors would have to make.

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    Ms. WATERS. OK. What about Travelers? Were you a part of that conversation?

    Mr. PRINCE. There was only one meeting.

    Ms. WATERS. Were you in the meeting?

    Mr. PRINCE. I was not in the meeting, no.

    Ms. WATERS. You have had no conversation with Mr. Greenspan?

    Mr. PRINCE. I have had no conversation with Mr. Greenspan. That is correct.

    Ms. WATERS. You are not privy to any information about his response to the idea about the merger between you and Citicorp?

    Mr. PRINCE. I am not.

    Ms. WATERS. Thank you.

    To Citicorp, CitiBank, are you under investigation by the Justice Department for alleged money laundering?

    Mr. ROCHE. I don't think any allegations have been made, Representative Waters. We are cooperating with an investigation by the Department of Justice into certain matters involving a customer of ours named Raoul Salinas.
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    Ms. WATERS. Thank you very much.

    I want to ask you, in your presentation, Citigroup, to staff members and others, under long-term possibilities you have listed ''integrated high net worth private bank,'' and you list all of your services under the private bank.

    I have been trying to learn what private bank services are over the past year, and I have learned an awful lot about private banks. Do most banks—do all of the banks that are involved in these requests for mergers have private bank systems inside their banks?

    Would you just kind of raise your hand if you have a private bank in your bank?

    And those who do not, could you just kind of—thank you very much. That is the quickest way to get at that.

    Now, I want to get back to CitiBank. In researching and trying to find out everything that I could find out about your private banking system, I discovered that you allow your clients to use fictitious, false, or assumed names to open and maintain accounts. Could you explain that to us? Why would you do that? What is the reason for that?

    Mr. ROCHE. I am not aware that we do.

    Ms. WATERS. Is there anyone here with you who could be aware or could tell us how it works?
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    Mr. ROCHE. I don't believe so.

    Ms. WATERS. Is there any way that you could ever respond to this or I could get someone to respond to this question, tomorrow or the next day?

    Mr. ROCHE. I think I am saying to you that we don't follow that practice. I am certainly not aware of it. I will go back, and we will be happy to write you a letter and be more precise.

    Ms. WATERS. OK. My specific question is, why does CitiBank allow clients in their private banking system to use fictitious names or assumed names to open and maintain accounts? So if you would get that information back to me, I would appreciate it very much.

    Also, keeping with the private bank, CitiBank's private bank uses something known as a business account or concentration account to pull money from selective accounts. Are you aware of that?

    Mr. ROCHE. We did use those in the past. It was an administrative convenience.

    Ms. WATERS. Do you still have any concentration accounts?

    Mr. ROCHE. I don't believe so.
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    Ms. WATERS. When were they discontinued?

    Mr. ROCHE. I don't remember.

    Ms. WATERS. As I understand it, the money in the concentration account is not attached to anyone's account. Account numbers and names are cutoff from the money upon transfer, being transferred into the account. Is that what you understand about the way they worked?

    Mr. ROCHE. No. I think that very detailed records are kept, and you can trace every dollar that goes in and out of those concentration accounts.

    Ms. WATERS. What was the need for the concentration account where you don't attach anyone's name to the account that goes into the concentration account?

    Mr. ROCHE. It was entirely internal administrative convenience, as I understand it.

    Ms. WATERS. Could you explain what kind of convenience it was for you? How did it help you?

    Mr. ROCHE. I am sorry, it is a business matter, Representative Waters. That is the way it was explained to me.

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    Ms. WATERS. I see. Is that a question I could ask you and get a response back in writing, as I try to learn more about private accounts and concentration accounts?

    Mr. ROCHE. Yes, certainly.

    Ms. WATERS. All right. Both of these questions I will put in writing so that you can respond to them directly.

    Mr. ROCHE. Thank you.

    Ms. WATERS. I am very pleased about the information that I am hearing from all of you about all the wonderful things you will be doing for the community and the way that you will be welcoming CRA responsibilities.

    In H.R. 10 I had something called lifeline banking that was opposed by most of you. Have you changed your mind on that also? It is very important to me, and I just thought this would be a good time to ask.

    Mr. ROCHE. Is that addressed to me?

    Ms. WATERS. To each of you, yes. Yes, you could start.

    Mr. ROCHE. I am sorry, I am just not knowledgeable enough about it to state a position.
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    Ms. WATERS. May I put that in writing to you also, and you could give me a response?

    Mr. ROCHE. Certainly.

    Ms. WATERS. The next bank?

    Mr. POLKING. We at NationsBank have always supported H.R. 10, as you know, and included the lifeline banking provision.

    Ms. WATERS. Thank you.

    Mr. ROETHE. I am honestly not sure I can respond to the question. We have certainly been participating in some of the testing, of how we are going to deal with the unbanked customer.

    In one of the test cases going on in San Bernardino County, we are trying to determine how we will bank the unbanked customers, whether through a lifeline account of some sort or otherwise. But specifically on the lifeline issue, I am not sure I can respond to that.

    Ms. WATERS. All right. Anybody else?

    Mr. BENNETT. We have supported H.R. 10, Representative Waters; and we have understood that support to extend to the lifeline banking amendment.
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    Ms. WATERS. Thank you.

    Mr. LONGBRAKE. I am not familiar with the details of your proposal, Representative Waters, but we do have a free checking account that is available to any person of any income, of any age, and as long as they keep a balance in it, it can be $1, there is no charge.

    Ms. WATERS. I would like to put the question to you in writing also, so that we can find out.

    Mr. LONGBRAKE. Certainly.

    Mr. ELLIOTT. We don't take consumer deposits.

    Ms. WATERS. OK. My absolute last question is this: I have introduced legislation that would prohibit any bank that is under investigation for laundering money, and I am particularly concerned about drug money, from being considered for a merger. Included in that legislation is a provision that would not allow banks to merge if they are found guilty of laundering drug money.

    Would any of you support that legislation?

    Mr. ROETHE. I am sorry, could you clarify? I thought the legislation would prohibit approvals while an investigation into money laundering was pending and until it had been satisfactorily concluded.
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    Ms. WATERS. That is the essence of it, yes.

    Mr. ROETHE. I certainly would not support legislation that, in effect, assumed that there was guilt before a determination was made.

    Ms. WATERS. No, no. You are right. Mine does not assume anything. It basically says that until that is cleared up, you should not be considered—you should not go forward and be considered.

    Mr. ROETHE. Unfortunately, there are many situations where investigations are undertaken which can go on for years. To the extent that such investigations would prohibit institutions from following through with strategic options that are really good for them, for their customers and for their shareholders, I am not sure that that would be a possibility.

    Ms. WATERS. Ours has a three-year limit.

    Mr. ROETHE. That is a long time, in this world, in today's age.

    Ms. WATERS. What would you consider to be a good time limit?

    Mr. ROETHE. First of all, I want to make clear that BankAmerica is certainly not involved in any drug laundering investigations at the moment.
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    Ms. WATERS. I am not accusing you of that. I am not accusing anybody. I am just trying to seek the wise counsel of some of the top bankers in America.

    Mr. ROETHE. I really do think that it is poor public policy to have any kind of a prohibition that would say that, if you are under investigation for something, that that should preclude an application from being processed in the normal way. I think that there may be circumstances where, if you have actually done something, something has been found, that there might be room for action that should be considered by the regulators, but while you are under investigation I don't think that is fair.

    Ms. WATERS. Do you think it should be part of the criteria that is used to evaluate mergers?

    Many things have been listed today. I listened to the regulators carefully. I have also said to Mr. Greenspan that I thought that it should be part of the criteria that is used when considering a merger. Do you think that that should be part of the criteria? Anybody?

    Mr. ROETHE. I am not sure how I got into this; but, again, I think that the Federal Reserve can consider basically anything it wants in determining whether we have met these five basic criteria.

    Ms. WATERS. That is not what I asked.

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    Mr. ROETHE. I don't think we should be having subparts under the basic criteria. There ought to be discretion within the review of the five basic criteria, and they ought to be able to consider anything they feel is important, and this may be important under the appropriate circumstances.

    Ms. WATERS. Thank you very much.

    Mr. Chairman, I am going to close, but I think it is very important for our guests here today not to feel as if I am going down a road to simply embarrass or deny, and I just say this to you so that you can understand my reasons for concentrating in this area.

    As you know, illegal drugs, crack cocaine, methamphetamines, marijuana, they are a problem in America. In the inner cities of America, they are devastating. We have people whose lives are being lost, and a lot of crime around drugs in our community. There is some concentration on small drug dealers. The prisons are filling up. The problem continues. Your banks are being robbed by people who need drug money, and on and on and on.

    So I have made it part of my work to eradicate drugs in this country and in these inner cities, in particular. I am very serious about it. It is the number one priority of the Congressional Black Caucus. As the Chair, I have made this the number one priority.

    I intend for us not only to deal with street-level crime, but I am going after crime in high places. I am going after the big boys. I say ''boys.'' I am going to do this, and I want you to know about it. I am not going to pick on anybody, but we are going to send a message to our communities in this country that nobody is too big to be dealt with. Because we cannot continue in this country to have the level of drug activity. I want you to be aware of that, and I am going to be death on this issue.
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    Thank you very much.

    Chairman LEACH. Thank you, Ms. Waters.

    Let me just say as Chair, because I think it is very important what Ms. Waters has just articulated, that she has talked to me in advance, and I have talked to several of you in advance about her concerns. This committee takes very, very seriously the responsibilities of its jurisdiction and the institutions it oversees, everything to do in the drug-laundering area. It is one of the few ties we sometimes have to law enforcement.

    I am appreciative of the responses I have gotten from several of you that your institutions intend to cooperate completely and fully with any investigation that is undertaken and that we have laws in this area, as you know, that are sometimes intrusive and sometimes involve record keeping that is an expense to your industry.

    On the other hand, this country is confronted with a crisis of serious proportions. Ms. Waters has led with great courage this issue. Whether this particular prescription fits at this time is another matter; but, as a general proposition, this committee is very serious and will work with as much comity as possible and advance this.

    Mr. Ackerman.

    Mr. ACKERMAN. Thank you, Mr. Chairman.

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    I just wish we would have known about these fictitious or anonymous named accounts when we had our whole House banking thing going on.

    One of the concerns I have is from a consumer point of view, and I saw a published report concerning credit card interest which stated that after the present round of mergers are all approved, that about ten of the credit card issuers will own about 70 percent of the market.

    Presently, with so much of that market at over 18 percent interest to the consumers, would these mergers—and if these mergers continue, what will its effect be on consumers who have that much credit out there?

    I know just two of the mergers at this table alone, when finalized, will account for over $120 million of consumer interest out there. So there is a concern with the narrowing. And maybe you can start in the middle and work your way out or something.

    Mr. ROETHE. I will just start. I don't think that the NationsBank-BankAmerica merger is going to make that significant—it is not going to bump us up very far in the ranking of credit card issuers.

    After having lost a bid for the AT&T credit card portfolio to our competitors over here, CitiBank, I think BankAmerica is probably the number ten or eleven issuer of credit cards. So I really do not think there will be a significant impact in that area of the business.

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    Mr. BENNETT. I think, on behalf of Banc One, we have been a significant player in the issuance of credit cards; and with the joinder with First Chicago, we expect that to continue, Representative Ackerman. I am not sure that our joinder, our merger, will affect or impact the credit card market in any significant way. I am not sure whether your question goes to whether or not there would be constriction on the availability of cards.

    Mr. ACKERMAN. I think my question really is the impact of having so few issuers. With the number of issuers narrowing down, is it easier to up the ante for the consumers?

    Mr. BENNETT. I have to tell you, if you followed the developments in the credit card industry, what you have found is that the competition in the top ten for credit card accounts has resulted in ever better deals for consumers. I think it is fair to say that, to the extent there has been concentration in the top ten, it has not resulted in a substantial increase in fees.

    Mr. ELLIOTT. I think that is true. Household is a major player in credit cards. We are about sixth or seventh, depending on how you count. Consolidation will not affect us much, but I think the reason you are seeing so much consolidation is the fact that you have to have enormous scale in order to compete in that business today. The competition is fierce. Competition on the marketing side is enormous, and only large players with massive investments in technology can compete.

    The relative playing field has not changed much. It is—the scale of the top ten has——
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    Mr. ACKERMAN. I don't understand what you are saying. Are you saying when you have fewer choices of credit card issuers, the consumers get a better deal?

    Mr. ELLIOTT. The reason that you are getting fewer choices is because the cost of acquisition has been driven down because margins are coming down, so only big players are going to be left. That has been going on for years and years. This is nothing new.

    Mr. ACKERMAN. Anybody else?

    Mr. GOLDBERG. Representative Ackerman, I would say for the First National Bank of Chicago, really, through a special purpose banking subsidiary, FCC National Bank of Delaware, we have been in the credit card issuing business for over 30 years. I can't think of a year in a continuing stream where the competition has not been intense and more so, year after year. This is also a product line where the consumer can move very quickly into alternative products and services, so it is highly competitive.

    In our analysis of the Banc One-First Chicago-NBD proposed merger, we do not perceive this as being a constraint area at all.

    Mr. ACKERMAN. I think we might hear from people on later panels that the competition might be fierce, but when the competition is fierce among fewer competitors, it is fiercer at a higher rate of interest.

    That being said, I was curious about some of the things said about the CRA. I was happy to hear some of the things that we have heard. But let me try to understand.
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    City-Travelers, I believe you said that we are going to have an announcement soon about CRA?

    Mr. PRINCE. Yes, sir.

    Mr. ACKERMAN. We would be happy about that? Is that some kind of signal that you guys are willing to count the bottom line of the merged corporation as part of what the obligation might be to community lending?

    Mr. PRINCE. I think what I tried to convey was that we are in the process of finalizing our CRA plans. We hope to announce them very shortly. We hope that all of you, and especially you, Representative Ackerman, will be very pleased with it.

    Mr. ACKERMAN. I look forward to hearing from you on that.

    The Chairman had listed a group of concerns that many of us share. It started at one end of the table, and perhaps I can start at the other end of the table and ask you to address a couple of them anyway.

    One of them has to do with branch closings. I know that in your statement there would be few branch closings.

    Mr. ROCHE. I don't think we contemplate any.

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    Mr. ACKERMAN. With the merger, could you tell us about layoffs, losses of jobs, how you plan to handle that? Will there be anything of any great significance?

    Mr. ROCHE. No, not of any significance.

    Mr. ACKERMAN. And Chicago-Banc One?

    Mr. GOLDBERG. I think, with respect to closings, we have at least one geographic area where we believe, in order to comply with antitrust standards, we will be asked to divest a certain level of asset base. We hope that will be a minimal base, but that will require a visitation with the Department of Justice.

    What I would say beyond that, is that when those divestitures, if in fact they do come about, which I think they will, occur, we will have probably new entrants into that geographic market that will cause net-net more competition. So I guess that is where I would come out with respect to closures.

    Mr. ACKERMAN. Thank you very much.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Ackerman.

    Mr. Hinchey, have you asked a question yet?
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    Mr. HINCHEY. Mr. Chairman, with your permission, I would yield to Mr. Maloney.

    Chairman LEACH. Fair enough. Mr. Maloney.

    Mr. MALONEY. Thank you Mr. Chairman, and thank you, Mr. Hinchey.

    Mr. Prince and Mr. Roche, thank you for your testimony today. I appreciate your contribution to this hearing.

    As someone who voted for the Committee on Banking and Financial Services' version of H.R. 10, I want to tell you that I agree with your basic thesis of the importance of maintaining U.S. leadership in the financial services industry, particularly with the changes in the global economy. I very strongly agree with that point you have made.

    I also agree with the point you made literally one paragraph earlier in your testimony, which is that it is very important that this new institution maintain its commitment to our communities.

    Mr. Roche just commented that, in terms of branch closings, he didn't anticipate any major change. I happen to be the only representative on this committee from Connecticut, and the Travelers, of course, is a major employer, a major part of the Connecticut economy, and I have a concern that this merger, this proposal, does indeed provide all the benefits that I think potentially it can.
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    But I would be very interested to hear what the Travelers in particular, Mr. Prince, views as its impact on the Connecticut economy and the Connecticut employment structure of the Travelers operations.

    Mr. PRINCE. As Jack said about branch closings, we don't expect any branch closings. We don't expect any layoffs, really, of any magnitude.

    In terms of Hartford, in terms of Connecticut, we think it is going to be a big positive. The key to our transaction is the ability to cross-sell products in a way which is convenient and attractive to customers.

    Right now, the Travelers group of companies is a very well-known company, but it is basically in the United States. Citicorp is in 100 countries around the world. We would like to have the red umbrella in 100 countries around the world. If we are successful at that, then we would hope and expect that employment would grow in Hartford and Hartford would prosper.

    Some people have asked about what happens if the insurance companies have to be spun off at some point, the worst-case scenario. Even in that circumstance, the insurance companies would, most likely, supply product to us.

    Jack talked about 20 percent of the total. That is really combining manufacturing and distribution. So I think the actual manufacturing part would be much smaller that would leave the combined company, but I think it would be—we hope it is going to be a big positive for Hartford and help to turn around that city.
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    Mr. MALONEY. I think certainly we hope so, too; and we hope it is a big positive for the whole State. And I think that is worth reiterating, that what is at issue here is not only what is good for the two companies and what is good for the national economy but what is good for Connecticut, what is good for Hartford.

    Just to follow up on that, have you studied this in any way? Do you have any information, projections, that you can share with people that would go to that issue to give the folks in Connecticut some documentation that, aside from ''we all hope this works,'' but is there anything that we can point to as harder evidence to that effect?

    Mr. PRINCE. Well, of course, nobody has really accomplished what we have tried to do yet. We have no model to follow and no guidepost to follow. We have had some experience, some positive experience in cross-selling already within the existing Travelers group of companies, which I think has been positive for Hartford. But to compare those smaller efforts with the bigger efforts I don't think is going to really tell us much. So the short answer is, we don't have anything detailed that we can provide.

    Mr. MALONEY. I just close, as you go down through this process and there is opportunity for you to make that kind of analysis internally and to the extent you then can make it available to the public, I think that would be a very positive thing for the new organization to do.

    Mr. PRINCE. Thank you.

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    Mr. MALONEY. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you.

    Mr. Sherman.

    Mr. SHERMAN. Thank you, Mr. Chairman.

    Focusing first on Ms. Waters' remarks, I would hope that the institutions represented here, as you combine your computer systems, would use that as an opportunity to involve experts at the FBI and others in figuring out how those computer systems can more quickly detect evidence of money laundering, can keep track of those who are depositing $9,500 in cash every day in several different banks or several different accounts. And I will just make that as a comment, rather than asking each one of you to respond.

    I would also point out that, as far as Ms. Waters' approach that there should be a ban on mergers while an investigation is pending, we do have a couple of constitutional principles involved. One is that you are innocent until proven guilty. The other is that you have a right to petition your Government—in this case, presumably petition them to approve a merger.

    I would think it would be extremely unfair for a bank to be deprived of its opportunity to petition for approval of a merger simply because there were charges pending. In fact, I would expect and hope that, given your huge operations, that there are ongoing investigations everywhere. Certainly there are drug dealers trying to use one of your branches today, as we speak. I hope that is under investigation, and I hope we catch them.
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    I guess, moving from there, the other issue that has been brought up is the ''are you getting too big,'' and ''are you getting too big to fail.'' I would submit that, to the extent that doctrine exists, even before any of these mergers, you are all too big to fail, if there is a too-big-to-fail standard.

    Another concern people have is, are we losing the opportunity for borrowers and depositors to have a personal relationship with those in true decisionmaking capacity? I would suggest that all of you now are already too big to be fuzzy. I don't know any one of your customers that has a personal relationship with the president of the financial institution involved or with your directors. If you want that kind of relationship, you have to go to an institution far smaller than any of you are before the merger. You offer the efficiency of standardization in lieu of the warmth of having that close relationship.

    All of us shop at supermarkets; all of us shop at little grocery stores from time to time. It is a very different shopping experience. There is a benefit to both.

    If, for example, BankAmerica-NationsBank were trying to build a $570 billion institution by combining 570 community banks, each with deposits of about $1 billion, then you would be removing from our communities small institutions where that nostalgic experience might be available.

    Instead, you are combining two institutions that are already very large, where we expect the benefits of standardization and efficiency, we expect local community involvement, but local community involvement from branch managers who are operating according to national policy.
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    So I think you have briefed us on the benefits of the merger to international competition. I don't think we are actually losing anything as far as a close personal relationship with officers and directors at the very top level of a financial institution.

    Finally, though, I would like to address Mr. Longbrake about his lifeline account or low-no fee account, because you have recently acquired a number of thrifts in Southern California. I would like to know whether, if I have this right, that as soon as you digest these new acquisitions, people will be able to walk in with $100, $200, open an account and enjoy free checking as long as they maintain a positive balance in that account?

    Mr. LONGBRAKE. Mr. Sherman, that is correct, and we began that in your part of California on the first of October last year.

    Mr. SHERMAN. Free checking for everyone who does not overdraw their account?

    Mr. LONGBRAKE. Absolutlely.

    Chairman LEACH. Mr. Hinchey.

    Mr. HINCHEY. Gentlemen, during the decade of the eighties there was a lot of hand wringing in our country about the fact that our banks were no longer the largest in the world, that we had been surpassed by orders of magnitude by Japanese and European banks. Now we observe that those very big Japanese banks have made some very big mistakes and that, cumulatively, the Japanese banks are sitting on what they estimate to be approximately $600 billion in non-performing loans. If you extrapolate from the recent announcement by Daiwa, you might conclude that that figure is probably closer to $1 trillion.
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    My question is, are there any lessons in the Japanese experience for American banks as you proceed in the direction of becoming larger and larger?

    Mr. ROETHE. I will just take a quick crack at this.

    I think there are a couple of issues that hit home to us. One is that the regulatory framework in Japan was not as strong and that you do need a strong regulatory framework. I think that the regulatory framework we have here in the United States is probably the best in the world.

    Second, I think that we find that, in many countries, not just Japan but in Indonesia, Korea, just a couple that pop into mind, the transparency of their financial statements is not as clear, because the accounting rules that they follow are not always the same clear-GAAP type rules that we follow here. So you see a balance sheet and you think you have something, and it is not really there.

    Here the transparency is much greater, and as we are starting now to go into greater detail in financial statement footnotes with respect particularly to derivative products and other complex products, it is even getting better.

    Mr. ROETHE. So those are the two things I would take away from that experience.

    Chairman LEACH. Ms. Lee.
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    Ms. LEE. Thank you, Mr. Chairman. Let me just ask any of you to answer this very briefly. Can you tell me when banks become so big as a result of mergers, what happens to consumers who merely have small checking accounts or small savings accounts and may or may not be able to afford an increase in what is now, I believe, exorbitant fees?

    Also, what happens to persons, for instance, such as senior citizens or disabled individuals, who may not be in close proximity to these banks in terms of their locale? Because I am certain that based on how I have seen these mergers occur, they tend to not come back into the communities where we badly need such services, but tend to move out. So I am not sure what the criteria is in terms of how you determine where the branches of these new conglomerates will be.

    Anyone can answer that. It is OK. I am sorry, I don't have the list of witnesses in front of me.

    Mr. ROETHE. I don't want to be the only one commenting here, but we do try to continue to meet the needs of our customers, and I know there have been some issues in Oakland with respect to the closing of a couple of our Bank of America branches which has caused some problems for people who have to go a half a mile away from their prior branch location to visit the new branch.

    What we are finding is we try to meet our customers' needs through a combination of branches, ATM machines and other ways in which they can access their accounts, through the Internet, and so forth.
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    We are now finding that 55 percent of our services that we provide to our customers on the retail side are not being provided through traditional branches. It is a function partly of cost; and of our wanting to meet the needs of our costomers as best we can, but trying to do it through a mixture of branches and ATMs. We do try to have ATMs located in as many places as possible to meet the needs of people so they will not have to go long distances. They can make deposits there and withdraw money there.

    But it is a fact that there are fewer branches today, physical brick-and-mortar branches, than there were ten years ago. On the other hand, it is so much more convenient to bank today, because you can bank at an ATM, in a retail outlet or over the Internet. Many of our customers choose to do that.

    Ms. LEE. Well, many customers who have access to computers and the Internet may choose to do that. There are many people in this country who don't have that access to technology.

    Mr. ROETHE. They can do it over telephone as well. Many of our people are now banking over the telephone, paying bills over the telephone, and so forth.

    Ms. LEE. Do you anticipate then additional closures in communities where you have already closed in terms of geography?

    Mr. ROETHE. This particular merger, I don't believe, will result—the merger itself will not cause any additional closings, certainly in California. We will have the need to dispose of some assets, perhaps, in Texas and New Mexico, because we do have overlaps there, and our market concentrations will start to get higher than the existing regulations will allow.
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    But I don't see—when we do dispose of those assets, they really will not be closings, they will be for the most part sales of branches to other institutions.

    I don't really envision any branch closings on the Bank of America and NationsBank system as a result of this merger. Paul, perhaps you can add.

    Mr. POLKING. I think that is correct, other than the States of New Mexico and Texas, there wouldn't be any at all. There may be some situations in Texas and New Mexico where we will have branches right across the street from each other where they can be redundant. We can certainly keep one of the branches and still maintain the quality and level of services that each of us respectively have been providing. But this is really a market extension merger. It is not a merger involving banks in most cases located in the same State, the same city, same communities. So it would be very, very limited.

    I should say when there are branch closings, we, as a matter of practice, we have a review committee that reviews whether or not these branches that will be closed in low-and moderate-income neighborhoods, whether or not there are alternative branches available to them. We also publish notices as required by law, publish notices in the newspapers and local circulation newspapers. We give notice to the Federal Reserve or to the bank regulators prior to the closing of those branches. So there is a lot of opportunity for public participation in that decision to close the branch.

    Ms. LEE. Thank you.

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    Mr. ROCHE. If I could just comment to add to that, at Citibank 80 percent of our transactions are done over ATMs, telephones, including rotary phones, old-fashioned low technology, as well as PC. And we provide free ATM usage at all of our Citibank ATMs to our customers, regardless of balance. We provide free PC banking. We provide telephone service 24 hours a day, 7 days a week. We expanded branch hours, and we demonstrated to our satisfaction that an electronic banking center would work in an affluent area in California, and we are opening one this June in the Burnside section of the Bronx.

    So we really believe that technology and alternative distribution systems will be very effective in providing not only banking services, but, with our new partners here, other financial services to all of our customers, and our particular merger is not at all about cutting down on those distribution points. Quite the opposite.

    Ms. LEE. Mr. Chairman, may I just follow up with that very briefly?

    Chairman LEACH. Ms. Lee, you would be very welcome to.

    Ms. LEE. Given the increase in technology, does that then increase the fees for the services which consumers must pay for this increased access?

    Mr. ROCHE. No. In fact, we find that technology drives down our costs. In this competitive environment, that cost advantage can then be translated into increased service at better cost to our customers.

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    Ms. LEE. Thank you.

    Chairman LEACH. Mr. LaFalce.

    Mr. LAFALCE. One issue that hasn't been discussed today thus far, but it concerns me, and I don't profess to be very expert in this area, is whether these mergers will exacerbate or make easier to deal with the year 2000 problem? I either know or suspect that each of your institutions has been spending considerable time, effort and money in an attempt to ameliorate whatever potential difficulties you will have because of your own or because of the technology of others with which you must interface.

    If these mergers go forward between now and the year 2000, will you be spending so much time working on the merger that it will detract from your ability to deal with the year 2000 problem? Will it facilitate it, your ability to deal with it? Is this an issue that a regulator should be concerned with as they contemplate approval or not? Is this information that you intend to submit to the regulators, either because they request it or on your own volition?

    Mr. ROCHE. May I answer that question? It is a very good point, and we are quite engaged between Travelers and ourselves in discussing this, and really intend nothing until we get through the year 2000 in terms of consolidating those type of systems, just for that very reason.

    It is of concern to the regulators. We anticipated it, and we would, on our own, want to be very much on top of it. But they are looking at that very closely, and you are precisely right, you don't want to do anything that is going to interfere with the ability to make that year 2000 date, and presumably well in advance so you can test it and make sure that it actually works.
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    The merger itself occurs as a business matter. It does not require consolidation of these operating systems. Then we can get to that, the consolidation of our technological programs.

    Mr. LAFALCE. Given the specter of the year 2000, I was just wondering.

    Mr. ROCHE. Because we are in different businesses, it is a little less of a concern than when you are trying to put—maybe some of my other colleagues might answer.

    Mr. LAFALCE. Let's go to the colleagues in the same business.

    Mr. GOLDBERG. Let me speak for our institution. We have been keenly sensitive to the Y2K, year 2000, issue for a long time now. We have put in place technology people, specialists, if you will. They give regular reports not less than monthly to our most senior management. This is a matter which goes before our audit committee of our board and indeed before the entire board.

    As a matter of public document, in our merger agreement with Banc One, there is a mutual representation provision, if you will, regarding the importance of Y2K and our strong effort which is in place to get into full compliance. This is a very, very important topic.

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    Our institution is going forward on our Y2K initiative. I believe—I will not speak for Banc One, but I believe they are as well. We will run our businesses independently, if you will, and then we will, at an appropriate time, once we are mutually comfortable with our Y2K progress and compliance standards, then in effect merge the businesses.

    Mr. LAFALCE. So the actual merger of the businesses is not going to take place until either you are satisfied with your individual compliances, or until some time subsequent to the year 2000; is that correct?

    Mr. GOLDBERG. We will have, we anticipate, assuming all of the approvals that are required are given in a timely way, we anticipate and we hope that we will have a fourth quarter consummated legal merger. That has to be distinguished from systems conversions. I will not purport to be an expert in the technological sense of what will be required for conversions, but, yes, you are quite correct, that will be a different and a separate type of exercise.

    Mr. POLKING. On behalf of NationsBank and Bank of America, we are operating in very much the same way. Prior to the merger being agreed upon, we conducted due diligence of one another, including the compliance with—the status of compliance with the year 2000. We were respectfully satisfied that we were on schedule for that compliance. We are similarly, as Banc One and First Chicago, taking it very seriously. We would not jeopardize our ability to make sure we are in compliance with the year 2000 just for the sake of being able to merge the banks into a single bank, to merge the systems into a single system. We just simply cannot afford to do that. We understand that, and we certainly are advising the regulators of that.
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    Chairman LEACH. Thank you, John.

    Well, let me just say with regard to all the mergers except the Citigroup one, they are fully contemplated under law today. Citigroup is largely accommodated under current law, but it might be argued that we are seeing suddenly in a several-year time period what might be a natural evolution of over a century of banking practices. But I am extraordinarily impressed with not only the several-year time period, but the several-week time period involved. The notion that the Citigroup merger, the largest in financial history, came about over a three to six week period is simply stunning.

    May I ask on the BankAmerica-NationsBank merger, I understand you had serious discussions several years ago. My impression is this decision might have been in an even shorter timeframe; is that correct?

    Mr. ROETHE. I think that is correct, yes, sir.

    Chairman LEACH. Let me ask on Banc One, Chicago NDB, are we talking several months, several years; what is the timeframe?

    Mr. GOLDBERG. Congressman, I can recall at least 9 months ago having discussion, and I will not get into the confidences of what occurs in a boardroom, I think that is probably inappropriate, but when First Chicago NDB Corporation was looking at the landscape and looking at alternatives and synergies and the dynamics of what was happening in our industry, certainly the name Banc One was bubbled up. Then there became an evolutionary process where the two chief executive officers began a dialogue which took a period of time. I think they went through by any reasonable standards a deliberation. And then full discussion began. In our case we were keeping our board completely informed. This was not a rush type of job in our situation.
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    Chairman LEACH. I appreciate that. How about Beneficial?

    Mr. EHLERS. It was an auction. Beneficial put themselves on the market.

    Chairman LEACH. And Washington Mutual certainly had one well-publicized, lengthy circumstance.

    Mr. LONGBRAKE. We got very familiar with our recent partner last year when we were battling over Great Western together, but the current transaction took only 13 days from the first phone call to the announcement.

    Chairman LEACH. Let me just throw out a little small-town background to this. You talk Citicorp, Travelers, Washington Mutual with a multibillion-dollar California institution. In my State of Iowa, if a bank is considering buying another bank, due diligence takes weeks and weeks, and we are talking assets of $10 to $30 or $40 million, orders of magnitude that are one-hundredfold less than yours.

    To say that, you know, there isn't cause for lack of perfect confidence that everybody knows precisely what they are doing exists. And it also—from a regulatory perspective, there is a real question I have whether the regulatory circumstance is perfectly on top of all the creases. That is, frankly, one of the issues of bank modernization legislation, for good or for ill. It is three or four years in the making and has a lot of very subtle differentiation on how to go about regulation, with certainly a great emphasis on functional regulation, and certainly some responsibilities for each of various regulatory bodies that are fractionally different than exists today.
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    So I express some concern in this area, because the implication is—in fact, one of you today has suggested in almost an advertisement way again that you are looking for more partners, that there are many other mergers that are likely to occur involving others, and certainly also involving yourselves.

    So this is a rather extraordinary circumstance. This Congress is obviously in a sense being pushed into a corner by private sector actions, a corner that implies not necessarily that it must do something, but it certainly must make some very definitive decisions whether to do something or not to do something. And not doing something is not the end of the world, but it might certainly imply a less orderly circumstance for the future.

    Here I am obligated, because we have not talked to Washington Mutual. Your merger activity is unique on this table because you are a savings and loan largely, or maybe entirely, or virtually entirely, but you are also concentrating a large portion of this SAIF fund in one institution and one region, 11 percent.

    Do you think this is cause for concern for the United States Congress, or do you think this is a reflection of an institution that knows what it is doing, and, therefore, the fund could be in a more secure position?

    Mr. LONGBRAKE. Mr. Chairman, of course I believe what you just said, the latter point, that it is not cause for concern, obviously. But I do think from a public policy point of view that having two insurance funds for an industry that increasingly is not much different no longer makes sense. So the SAIF and the BIF, we are very supportive of merging those two funds.
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    I would also just add that our original charter was a Bank Insurance Fund charter. Those are our roots, that is our origin. It has been through our growth over the years that we have come to have such a large position in the SAIF fund.

    We are not a high-risk institution in terms of the types of lending we do. We make home loans, we make consumer equity loans, and we make multifamily loans. That is the predominant part of our business. Those are not the kinds of loans or kind of activity that creates enormous risk, even in bad economic times.

    So I would just suggest to you that I do think the fund should be consolidated. It would provide greater diversification. It would make no single company as dominant as is the case now.

    I might just add, if you ask the FDIC, I believe this to be correct, that the concentration now in both of the insurance funds among the top five, top ten organizations is about the same. We do stand out in the SAIF fund at 11 percent as you have pointed out, but if you look at the concentration among the top five or the top ten, you will find very comparable levels in both funds.

    Chairman LEACH. In this regard, since you started as a bank, you are returning to being a bank. One of the assumptions is that your industry is pushing for a consolidated fund, but a privileged legislative status.

    Do you have any objection to taking on a bank charter in return for consolidating the fund?
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    Mr. LONGBRAKE. Well, Congressman Leach, it has been our long-standing position that the thrift holding company, which is what you are referring to here, has been particularly well-suited and designed for the type of business we are in, namely consumer banking, and as the financial marketplace continues to change and evolve, having the kinds of powers and the flexibility that is in that charter for the kind of business that we do, we think this chartering option is important to continue.

    Chairman LEACH. Well, all I can tell you is there is a little bit of a rub if you are a competitor. As you well know, competitors that are commercial banks are suggesting that they have had to take on some of your obligations in the insurance fund, and they are looking at your industry, wanting to unite the fund itself and then remain with a charter that is privileged in certain ways. So there are more than a few of your competitors that have suggested that you are taking a rather large bite at the apple in terms of competitively. That is something that all of us, of course, it is our job to figure out.

    I will tell you it is an imperfect circumstance, as perfect a company as you may be hoping to lead.

    Mr. LONGBRAKE. That is the genius of our banking system. That is why it has done so well over the years.

    Chairman LEACH. Well, let me thank you all for coming, and thank you for your testimony. As you realize, the brave new world of finance is not something that is comfortable with all of the public, and one of my concerns is that people should recognize that all of this is happening without any legislative change, and one of the real concerns is going to be whether or not the proper regulatory structure is in place and the proper rules for competitive equity and fairness are in place if Congress doesn't act, with certain parties being given competitive advantages of one kind, other parties competitive advantages of another.
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    In addition, the public may or may not be in greater jeopardy unless certain kinds of both regulatory as well as insurance fund changes are made.

    Anyway, thank you very much.

    Ms. WATERS. Mr. Chairman, while the change is taking place, I have a number of letters I would like to submit for the record. One is a letter to the President dated April 9th, cc'd to Secretary Rubin and the Acting Comptroller of the Currency Ms. Williams. The second is a letter to Janet Reno dated April 9 regarding Citicorp. The third is a letter to Mr. Allen Greenspan about the criteria that is used to evaluate end mergers. The next is a letter to you dated April 9th about this hearing. The next is a letter to Janet Reno with further questions about the operations of Citicorp.

    Chairman LEACH. They are all of your origin?

    Ms. WATERS. Yes.

    Chairman LEACH. Without objection, they will be placed in the record.

    Chairman LEACH. Because of the hour, we are going to combine the third and the fourth panels. I apologize to the witnesses, because this can make a somewhat more discombobulated circumstance.

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    This panel will be composed of Mr. Ralph Nader, a consumer advocate; Ms. Mary Griffin, who is insurance counsel of the Consumers Union; Mr. John Taylor, who is President and CEO of the National Community Reinvestment Coalition; Dr. Randall Kroszner, Associate Professor of Economics at the University of Chicago; Dr. John Boyd, Kappel Chair in Business and Government at the University of Minnesota; Margaret E. Guerin-Calvert, principal, Economists Incorporated; Mr. Bill Greenwood, President-elect, Independent Insurance Agents of America and President of the Lawton Insurance Company of Central City, Kentucky; Mr. Mark A. Pope, Vice President and Director of Federal Relations, Lincoln National Corporation, on behalf of the American Council of Life Insurance; and Mr. Steve Judge, Senior Vice President, Government affairs, Securities Industry Association.

    Chairman LEACH. We recognize that Mr. Nader has an appointment that he has informed the Chair about and may have to leave early, and we will begin with Mr. Nader.


    Mr. NADER. Thank you, Mr. Chairman, Members of the House Banking Committee. I have an appointment with the U.S. Surgeon General regarding Princeton 55's global tuberculosis project at 5:30, so I appreciate coming on first. I hope if you will let me submit my entire testimony with attachments for the record.

    Chairman LEACH. Without objection, everybody's testimony will be submitted in the record. I have no objection to attachments, with the exception if someone has something extraordinarily lengthy. I want to reserve a little judgment just because I don't want a 500-page treatise. That gets a little difficult. But if someone would raise that at your own discretion, I would be appreciative.
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    But please proceed, Mr. Nader.

    Mr. NADER. Thank you.

    As we know, the financial landscape has changed significantly in recent weeks and seems destined for even greater upheavals and concentrations in the wake of onrushing mergers and consolidations. Many of the assumptions on which this legislation was based, particularly in the area of consumer and taxpayer protections, are no longer valid.

    The legislation needs to be brought back, reexamined, reworked and reconsidered against the backdrop of the massive mergers reaching across the Nation from coast to coast and across financial sectors. That is my principal conclusion.

    Mr. Chairman, there has been some reference to the conversations between the Federal Reserve and executives of the Travelers Group and Citicorp, and I would like to add two additional points to that.

    The letters which I have exchanged with the Federal Reserve are attached to my testimony. The two points are this: That in the The Washington Post, Mr. Sandy Weill of the Travelers Group stated that at the briefing, as reported in the The Washington Post, he said that Federal Reserve Chairman Allen Greenspan provided ''a positive response'' to the proposal. A positive response. That certainly needs to be followed up and investigated by this committee.

    The second point is that the letter from the Federal Reserve to me indicated that the Board staff ''outlined relevant principles'' relating to the legal issues.
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    These corporations are not devoid of legal talent. It does seem strange that they need the Federal Reserve Board's legal staff to ''identify relevant principles'' in the context of Mr. Weill's comment. There certainly is an ethical issue here as to whether the two companies who wanted to merge got a wink from the Federal Reserve, and it was obviously something more than a mere courtesy call.

    The The Washington Post article I will submit to the record for your perusal with your permission.

    Chairman LEACH. Without objection, of course.

    Mr. NADER. Thank you.

    Second, we are talking a lot about structure and not enough about behavior in this hearing today, and structure is very important. What we are heading for, clearly, is a cross-sectorial consolidation of the financial industry in the hands of five or six conglomerates. This is the prediction of Hugh McColl, CEO of NationsBank. He said there will be five or six conglomerates and 4,000 to 5,000 community or smaller banks—or boutiques as he calls them. That is what he sees coming.

    Now, what we are seeing here is something that can be called State capitalism or corporate socialism, depending on which phrase jars you the least. What we are seeing here is not only explicit ongoing, often subtle subsidization of the banking industry by Federal Government agencies, but we are seeing the ''too big to fail'' approach, the implicit guarantees, go beyond the too big to merge. These institutions are so huge that it is going to be very difficult to take a failing institution and merge it in the manner in which it was done with bailing out the savings and loans in the 1980's.
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    So we are dealing here in a sense with Uncle Sam, the ultimate guarantor of a supposedly capitalistic financial sub-economy. That has very, very important consequences.

    There are people in the financial industry who bank on this. They take imprudent risks, they do speculations, because they basically know that if all fails, they will have a variety of support coming from the Congress or the executive branch of the Federal Government.

    Second, it affects the FDIC. These are very profitable times for banks. This is sunshine time. This is their golden age. This is when they should be putting money into the FDIC fund.

    Now that insurance assessment on banks has been suspended, the FDIC fund is a mere $29 billion, which, given the potential risk of a major failure in the banking industry or the financial industry, soon to be, is a drop in the bucket. If and when there are failures, it is going to be very difficult to assess failing financial institutions or non-profitable financial institutions for the FDIC, and that means the taxpayers will make up the gap.

    Third, we are talking here, Mr. Chairman, not just about prophecy, we are talking about history. The Depression-era bank failures produced a lot of concern over a period of years. It went into the 1940's, 1950's, 1960's, 1970's. The failures in the late 1980's or early 1990's, or the near failures, have not had that lingering legacy of caution in too many sectors of our Federal Government. We should remember that the Federal Reserve in effect saved Citicorp and the Bank of America in 1990 when their foreign loans were such that they were technically bankrupt.
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    This is not something that is a controversial disagreement over prophecy or prediction. We have past examples, not only in the 1930's, but more recently, to warrant severe caution here along with the promotion of legislation that foresees and forestalls these kinds of excessive risk-taking.

    We are dealing here with really not the model capitalistic structure. We are dealing with large financial institutions that want to grow by buying, buying other financial institutions' customer lists. The capitalist model usually is not you grow by selling; by selling better, cheaper, more competent services than your competitor. What we are now seeing is the acquisition of market share by buying rather than by selling. I submit that has different consequences and different challenges to public policy.

    Given this kind of structure, we are seeing excessive financial concentration which will register in stage 2 of this mergermania. Right now, these banks are on their good behavior in terms of what the future is. They say they are going to open up more branches, more facilities, more time, more services, and so forth.

    I remember when the cable industry used to tell us how they are going to hire more local reporters, and they are going to be the only TV systems with local reporting, and they are not going to have advertising, and all you got to do is just pay once a month. Let's talk about the second stage.

    Once you get heavy concentration in a few hands of corporate power, then you get the basis for predatory power to then marginalize and drive out of business more and more the residual competitive segments, in this case independent banks, possibly credit unions, and so forth. So we have to also have legislation that foresees that kind of pattern developing.
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    Are the Justice Department and Federal Trade Commission antitrust budgets expanding? They are lower in real dollars up against a growing economy than at any time in their history. In fact, the combined budget of the Antitrust Division and the Federal Trade Commission is less than the revenues of Covington & Burling or Arnold & Porter, single law firms here in Washington. That is, they are operating under budgets of only $145 million. That makes the antitrust laws in terms of their enforcement a mirage in many instances.

    Now, let us just move briefly into behavior. You are dealing here with Federal Reserve studies, almost admissions against interests, that show that the bigger the banks, the higher the fees, the more proliferating the fees, the harder it is to avoid the fees, and lesser attention to small business loans; not just $1 million loans, but the $40,000 loan, the $70,000 loan, and so forth. The canary bird is the signal for gas in the coal mine, and the fees imposed by these giant banks is, in effect, the signal of their arrogance once they get the power.

    First Union Bank, for example, will charge you 50 cents if you call a human being in the bank more than twice a month. What if you call about a problem that isn't satisfactorily handled? You are in effect increasing their fees.

    You walk in with a U.S. Treasury check made out to you, and you have got a driver's license and a passport, First Union requires you to be fingerprinted to cash the check if you don't have an account in the bank. And, the charge can be $2 a check or 3 percent of the check, whichever is higher. These fees are changing and growing all the time.

    Most banks now charge you if you receive a check that bounces. I fail to see the moral culpability of a customer who takes a check and deposits it, and it bounces, and they are charged $5 to $10.
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    The arrogance of the banks in putting the computer and multitiered voice mail between you and a human being shows no boundaries. They even have three-tier: Press one, press two, press three now. It is almost impossible to get through some of these operations in a decent period of time. They are shifting the burden of time by cutting their own employees and putting the burden on the customer.

    In the Soviet Union, people stand in queues waiting. In the United States, we sit at the phone waiting. These mergers are not good for consumers, but they are very good for computers and computer software. They are very good for multitiered voice mail systems. All along they are saying, ''You are very important to us. You are a wonderful customer. We really care about you.'' Five minutes, ten minutes go on, and of course, it is not just banking, it is across the board. But the big guys tend to be more arrogant.

    You dial Southwest Airlines, you get a human being in two or three rings at the outset. I dial United Airlines at night in order to listen to classical music. It is New Age music for American Airlines, if you care to diversify. USAir provides you with advertisements.

    Now, it is ironic, indeed, that in H.R. 10 we would have a bill that would promote more of this high-priced arrogance. You were right on target, Mr. Chairman, when you said the Citigroup merger represents a conglomeration of activities not contemplated by the Bank Holding Company Act.

    But it is really sad that we have a bill called H.R. 10 that incorporates the kind of crony capitalism, the mixing of banking, commerce, the mixing of cross-subsidies between securities, insurance, banking, which has proven to be such a calamity in economies of Japan and Korea and other Asian countries. It is inconceivable that the Congress would push our financial system into this economic swamp with credit decisions that would be too often made on the basis of incestuous corporate relationships, rather than on an objective analysis of creditworthiness. You are to be commended for opposing the mixing of banking and commerce.
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    I think a lot of these mergers are driven by what might be called corporate ego. To be head of a bigger company is the dream of a CEO; to get higher salaries, bonuses and stock options is the dream of a CEO; and they retire after four or five years and they leave the risk pattern behind.

    I am not very persuaded by the rationales for these mergers. Number one, the globalization one doesn't persuade me at all. Anything can be done by mergers can be done by contracts between companies, by all kinds of non-merger relationships, as has been done with the merchant law for hundreds of years all over the world.

    The second is the myth that consumers are pining, pining, for one-stop financial services. They don't want to engage in comparison shopping. They don't want to pick and choose. They just want to put all of their financial services under the control of one corporate hand.

    I don't see much demand for this. The Nation's median family income is a little above $40,000. Do proponents of these mergers believe that the average American family with a mortgage, car payments, two children to educate has thousands of dollars of surplus funds and is in search of a one-stop shopping center where they can play the stock market and dabble in esoteric financial products?

    Most consumers are looking for something much simpler: A bank where they can maintain a checking account, access their funds, pay their bills, without being swamped by fees; a bank where they can talk to a teller or bank officer and not be left to cope with an electronic voice at the end of a 1–800 number; a bank willing to make mortgages, auto and education loans at affordable rates, without redlining; banks that understand and serve all areas of the community, small as well as large business borrowers, reaching out to low-and moderate-income consumers, not just the affluent.
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    The mergers, combined with the freewheeling financial service conglomerates proposed under H.R. 10, create a new generation of guaranteed entities. Unfortunately, the mergers and expansive legislation are being considered at a time of economic euphoria, record profits and a rising stock market, the worst possible atmosphere for prudent judgments that should take into consideration the worst-case scenarios. Like the Titanic, big banks and massive securities firms and insurance companies do sink, conventional and congressional wisdom notwithstanding.

    While Congress is talking about modernizing the powers of financial institutions, it is doing nothing to modernize or strengthen the regulatory structures. It is doing very little to strengthen the deposit insurance funds as well.

    With an already-overlapping Federal system, H.R. 10 would scatter regulatory authority further by farming out important regulatory powers over holding company affiliates to State regulatory bodies. The warning here came from former Comptroller General Charles Bowsher, who told this committee, as some of you remember, in 1993 about the need to modernize the regulatory system, which he called the patchwork of regulators and regulations, and questioned the ability of the current regulatory structure to effectively function in today's complex banking and thrift environment. This was before the wave of mergers that we have now observed.

    Pull the bill off the floor, Mr. Chairman. Pulling the bill off the floor would give Members of the committee the opportunity to consider and vote on changes in the legislation that have been made ad hoc behind closed doors by selected Members since the adoption of the bill in open session last June 20. Many of the changes, deletions and additions apparently are part of a great balancing act designed to bring along the core of the banking, securities and insurance interests.
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    Although it is becoming a pattern on the Hill to change legislation in ways that many other Members don't get advance copies of, it is certainly quite a serious situation here. The financial industry may be aware of these changes. It is time to take a careful look, to examine where these nationwide mergers are leading, and to decide what kind of regulatory system is needed to protect the public and deposit insurance funds.

    These mergers are attempting to stampede the Congress. The Congress is not a herd of horses. The Congress should be made of people who have foresight, who know how to foresee and forestall, and who represent the most defenseless, weakest and marginalized constituencies in need of fair, affordable financial service.

    In situations like this, Mr. Chairman, I always have a prophetic ending, because I want to be able to say, ''I told you so'', and here it is in brief: If Congress stampedes this legislation as the giants in the financial industry demand they do, the day will come when the corruption or speculative risks facilitated by H.R. 10 will materialize into gigantic taxpayer obligations to bail out these debacles. It will not go unnoticed who was responsible for laws that, even with the experience of recent bank failures, knowingly failed to foresee and forestall. Is anyone listening?

    The three bank trade associations who oppose H.R. 10, ABA, IBAA and ACB, need to be heard from again, Mr. Chairman, which would require more time for this committee to convene and deliberate.

    I want to end on the further request that the committee engage in certain searching questions and investigations. The year 2000 issue was not satisfactorily answered. By the way, imagine if the U.S. Government was to blame for the year 2000? Would the Wall Street Journal ever stop beating up on Uncle Sam? Instead, it was the private sector that was to blame for it, that overlooked it, that delayed attending to it. It is now going to cost something like $500 billion, including about $500 million for Citicorp, if they meet the deadline, to do something about it.
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    There are just a lot of questions that need answers, and you are a very deliberative Chairman, partly due to your Princeton education, Mr. Chairman. You are a very deliberative Chairman, and this is a time for deliberation. This is not a time for accelerating H.R. 10 to the floor, especially since we have three trade associations in the banking industry who have very serious reservations about H.R. 10.

    Thank you very much.

    Chairman LEACH. Thank you very much.

    At the risk of presumption, because you are apparently leaving, let me just say very quickly to you in terms of deliberation, this has been three years. In fact, the great criticism of this committee is it has taken so long.

    Mr. NADER. Except for new events.

    Chairman LEACH. Let me continue for a moment though.

    Mr. NADER. Yes.

    Chairman LEACH. What you have is two committees of jurisdiction, and each in public and open meetings has reached slightly different judgments. So the effort has been to adjudicate differences between the two. Before it is brought to the floor, all Members will have a very good time period to understand what is happening.
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    Having said that, let me say one of the directions has been in your direction. That is, this committee voted out a given set of baskets for commercial endeavors. We have whittled those down, not up, but down, so that is totally in the direction of your concerns. This is the first time, however, Ralph, that I have known you to come here and say you want to stand up with the bank associations. As you know, we have such a firm regulatory circumstance because of concern for the public interest that many of the banks are upset. But Republican and Democrat alike on this committee is very concerned that there be secure regulation in place, and that is one of the reasons that they are objecting, but I think it is a fair and honest objection.

    But I just raise this because I know you are about to leave.

    Mr. NADER. Thank you, Mr. Chairman. I agree with your proposal to eliminate those baskets altogether on the House floor.

    Chairman LEACH. Thank you.

    Ms. Griffin.


    Ms. GRIFFIN. Thank you, Mr. Chairman, and Members of this committee. We appreciate the opportunity to present our views and concerns about the recent wave of mergers in the financial services industry and its impact on consumers.
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    As you know, we have expressed alarm and dismay about changes made by regulators that stretch the letter and intent of the law to accommodate the demands of banks seeking to diversify and grow. These changes have not been accompanied by safeguards to address the needs of consumers in this rapidly changing marketplace.

    The current wave of mergers points out the need for Congress to step in and fill this void, to modernize consumer laws and ensure the financial services marketplace benefits all consumers, not just special interests and shareholders.

    As you proceed to fill this void, please remember that consumers do like some things big; big savings, big service and convenience, and big benefits. But consumers are justifiably leery when big just means bigger profits from higher and more fees for the banks. They are chilled about big diversified financial giants using information about them to engage in anticompetitive practices or mass marketing and coercion.

    While we, too, have concerns about safety and soundness and the lack of legislative authority or framework for the Travelers-Citicorp merger, on which we go into more detail in our written testimony, today I would like to focus on the needs of consumers if such a merger is permitted to proceed.

    First, protections against abusive and deceptive sales practices. While one-stop shopping and cross-marketing are touted as the panacea for consumers' financial services needs, history tells us that one-stop shopping can turn into a nightmare for some captive consumers who are misled and deceived into losing their life savings or pressured into buying overpriced products that they do not need or want.
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    I don't want people to forget a few years ago what happened with a number of people in the Keating scheme. Those victims still have not been completely made whole. That involved thousands of people who were misled about the types of products being sold out of banks.

    Safeguards include clear disclosures about whether the products are FDIC-insured or subject to risk of loss of principal before any solicitations regarding non-insured products are made. Consumers applying for loans should not be subject to unsolicited sales pitches for other products until after the loan decision has been made, to prevent coercion. Privacy, a major and growing concern for consumers, must be protected. Consumers should be able to say whether they want to be further bombarded with direct mail and irritating phone solicitations before all sorts of insurance and investment products are pushed on them. Most importantly, consumers should be compensated for any losses when these protections are violated by the banks.

    Second, these companies should make commitments to providing benefits to consumers and the communities in which they operate. These companies lack a stellar record when it comes to serving the needs of consumers and communities. Citicorp ranks at the bottom of the list for charging some of the highest fees in New York. Travelers has been the subject of discrimination complaints involving allegations of applying more restrictive rules to homeowners insurance applicants living in minority neighborhoods than applicants in white neighborhoods. Greater commitment to consumers and communities should be a condition of any approval, including passing along these promised cost savings by lowering bank fees and providing more affordable bank services and lifeline accounts. And all affiliates, including insurance and securities firms, should have specific obligations for investment and other services to the communities in which they operate.
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    We also suggest establishing some sort of financial services watchdog group. Some of the millions that are spent by the previous panel on lobbying for these changes could be diverted. Not even that much is needed to create some sort of financial services watchdog that can keep you informed about the consumer concerns as this merger moves forward.

    Third, before these companies are permitted to avail themselves of a loophole in the law, they must be in compliance with Federal and State laws and commit to complying with them in the future. This sounds very basic, but there has been a growing and disturbing trend among bank regulators to let banks ignore State consumer laws. As these companies grow, we expect them to apply more and more pressure to be exempt from important State consumer protection laws.

    There should also be functional regulation of the various businesses. Consumers deserve the protections available under Federal and State insurance and securities laws, regardless of where they purchase the products. One-stop shopping should not be used as a shield to escape consumer protection laws.

    Fourth, vigilant antitrust oversight is needed. This merger represents the biggest business merger on record. Mr. Nader pointed out the lack of resources. In some case there is even a lack of jurisdiction, particularly in the area of insurance. We suggest that as part of the merger, it be made clear that FTC and the Department of Justice have jurisdiction to police all entities involved in the merger.

    Last, but importantly, we hope as a result of these mergers, commercial activities will not be permitted. The new holding company and its affiliates should not be permitted to engage in commercial activities, regardless of how that is done.
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    Many of these concerns and requests point out the complicated and uncharted territory into which this merger will be heading. Are our laws and regulators able to cope with a change in structure of this size and scope without a major legislative overhaul to protect consumers and taxpayers alike? The devastating losses that could result if the answer is no is not a risk that our country should take. The public deserves more from Congress. We hope Congress takes the helm in a way that serves the public interest, and not just special interests.

    Thank you.

    Chairman LEACH. Thank you very much, Mary.

    Mr. Taylor, please.


    Mr. TAYLOR. Good evening, Mr. Chairman. Thank you for allowing me to appear.

    Mr. LaFalce, and other distinguished Members of the House Committee on Banking and Financial Services, my name is John Taylor, and I am the President and CEO of the National Community Reinvestment Coalition. NCRC is the Nation's trade association of more than 650 community reinvestment organizations from the inner city neighborhoods and rural areas of the country.
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    It is funny to be sitting here all day. And one of the things I have noticed, as Mary and others of us got up here, is we have had to rewrite portions of our speech as we listened all day.

    One of the things that really occurred to me as I sat here listening to the bankers and to the regulators is what this Congress has done to a lot of the folks that we really care about, and those are the folks who are trying to get up the economic ladder. I have to believe, regardless of what party anyone is from, that you have to care about them. I have to believe that, because I believe that that is a democratic principle.

    I look at the cuts to HUD and the cuts to HHS and the cuts to other departments that help people up the rung, the forcing of people from welfare to work and all of the efforts to try to cut the budget, balance the budget but also force people off of a system of dependency. For us, the only solution, the only safety net for those people is if we have an economy in which, regardless of your color, regardless of your gender, regardless of your religion, regardless of other factors, if you are a hard-working person and you want to prosper in this world, you can go to a financial institution and establish a relationship with them, a relationship that is going to evolve into getting a loan, getting credit, getting capital; something that is going to allow you to start to build equity and be part of this system.

    I have to believe, I really have to believe, that this is not just a Democratic principle with a large D, but it is also a Republican principle. It is a democratic principle with a small D. That is sort of the thought I had as I listened to the banks talk about all the wonderful things they were going to do.
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    But I would tell you this. They will not do it if you don't help them do it and help us help them do it. We have learned that from the ten or fifteen years or so of them ignoring the Community Reinvestment Act until you started having hearings, Mr. Chairman, and other Members.

    Until you started voicing your opinions on it, until you started listening to us and going, OK, so we are not asking them to micromanage the banks and throw the money out in the street. We are just asking them to invest in creditworthy people. Gee, that does not sound like such a bad idea. Until you started to get active on that, I am telling you, these banks did nothing. If you don't believe that, I can put the facts in front of you, dollar for dollar, every year, what these banks did and what they didn't do.

    None of this is in my speech, so let me quickly get to some of the points I wanted to make here about mergers. Because, too often, the benefits and the costs of the mergers have been shared unequally.

    On the one hand, mergers are worrisome and harmful of small businesses and residents of minority and lower-income neighborhoods. After mergers, bank fees increase, lending declines, branches close, and teller and other bank jobs disappear from these communities. On the other hand, mergers bestow gains on the shareholders and senior management of these banks.

    A number of studies suggest—and I was amazed to listen to some of the testimony of some of the regulators. Because the Federal Reserve themselves also have done enough studies to show what happens when these banks merge, and I was frustrated to sit back there and listen to how they sort of really did not answer some of the direct questions that a number of Members of this distinguished committee asked about what happens when these banks merge.
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    Let me just tell you, the Federal Reserve economists, Peek and Rosengren, examined the 11 largest mergers in New England that occurred in 1993 and 1994. They found that eight of the 11 mergers resulted in less lending for small business purposes in New England. That is what the Fed economists found. For some reason, Governor Meyer could not recall that fact to share with you.

    Community reinvestment lending shrinks after mergers because it is the type of lending that depends on an intimate knowledge of community residents and businesses that only loan officers and local branches possess.

    I mean, any of you who have spent any time with banks know for a fact that one of the problems we had in this country was this business of so-called character lending. You know, you might not have enough assets, you might not have enough money in the bank, but gee, if the lender knew you, you can go into that institution and he can say, well, gee, aren't you Joe Smith's son or daughter? I have known your family for fifteen years. Gee, well, I think I will make this loan. That is character lending.

    Now that we have finally begun to change what the character looks like. Instead of just being someone like me, a white male, it can be a woman, it can be a person of color. Now that we have changed that, we are starting to move away from character lending and using things like credit scoring. And these little institutions continue to absorb smaller and medium-sized and other big institutions, to the point where they don't even want to do that small business lending anymore. It is not on their radar screen.

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    So that is one of the problems, I think, when we see these large institutions merge.

    Mergers have contributed to a decreasing branch presence in underserved neighborhoods. A recent Federal Reserve study, again, documents—and I am giving you Federal Reserve stuff. We can give you the studies from the National Community Reinvestment Coalition, but I want to give you something that you think is unbiased. Unfortunately, we have to spend some time with you to see just how biased the Federal Reserve really is to its lenders.

    But one of the studies that ran from 1980 through 1995, they looked at branches in middle-and upper-income neighborhoods. Lo and behold, what happened in that period of time, 1980 to 1997, for branches? Branches in the suburbs in upper-income neighborhoods went up 8 percent. They decreased 14 percent in low-and moderate-income neighborhoods. What is that, a 22 percent difference in what occurred between cities and higher-income areas? And they sat here and told you there was no difference between what happens to branches in the inner cities and rural America. It is just not true, even from their own studies.

    I could cite a lot of examples from our own act, evidence of what has happened in a number of areas across the country. I will skip that in the interests of time.

    I would like to make a mention about bank fees.

    Residents of lower-income and minority neighborhoods may find they will have to pay more for less service after mergers. A Federal Reserve study states that, on average, large banks charge higher fees than small banks. For example, large banks, and this is a national statistic, large banks levy an average monthly fee of $10.12 on interest-bearing checking accounts, in contrast to smaller institutions that levy a monthly fee of $6.13. That is a 40 percent difference.
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    Again as an aside, I was talking to one of these lenders recently who was talking about the penalties they now have, and Mr. Nader talked about a $5 and $10 penalty fee on bounced check. I wish it was that now, because what we are finding now is $45 and $50 and higher bounced fees. Banks are looking at this as a real profit center, this business of charging people for making a mistake or not figuring out their account and overdrawing.

    Let me just say, small banks do outcompete their larger counterparts when it comes to lower fees on checking accounts and higher interest rates on savings accounts. Yet they face a significant handicap when it comes to the ATM networks.

    The inherent advantage of large banks is that their ATM networks are much more extensive than their smaller competitors. When large banks charge higher non-customer fees than competitors, they are attempting to steal their competitors' customers, not by providing better service but by increasing the costs of their competitors' bank services. This particular arrangement is an unfair advantage that large banks have over smaller, community-oriented lenders.

    Mr. Chairman, let me skip a little and really get, in the interests of time—and everyone has been so patient, and I think some of the points I would have made have been made. You have already accepted the written testimony.

    Let me just close by saying, since 1977, the enforcement of the Community Reinvestment Act has resulted in now $435 billion in CRA agreements, most of which were negotiated during the merger process. In the era of mega-mergers, two things become imperative: one is that the Federal regulatory agencies recognize their responsibility to ensure that mergers strengthen community reinvestment performance, rather than reduce it; two, we need to recognize that, as these mega-institutions approach a 10 percent ceiling size, that they—and once they have hit that ceiling, that 10 percent ceiling, they can't apply for any more mergers or grow any higher—their commitment to CRA is no longer relevant to that institution, because they will not have a bank application, and they will not have a regulator considering that application. They hit the ceiling.
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    There is no further concern on that institution's part, because they can get—they can get failed CRA ratings until the cows come home, and it won't matter unless there is a bank application that is going to be affected by that. Once you hit that 10 percent, as some of those mergers are heading toward, it simply will not matter.

    Let me state to this committee that NCRC urges policymakers to send a strong signal that critical public policy concerns must be addressed before the merger wave continues. We have called upon, and I think we have sent you a letter, Mr. Chairman, as well as Senator D'Amato and other Members of this committee, asking you to support a moratorium against mergers until the GAO has had an opportunity to see what is going to be the impact of these mergers, of H.R. 10, of the fact that the bank regulatory agencies—you heard it here today, the concerns about whether they have the capacity to even regulate, for CRA purposes, these institutions and look out for consumer interests.

    We are asking GAO to do a study to determine what is going to be the impact on working class citizens, on low and moderate income Americans. What does all this mean, before we go headstrong down this stream of mega-merger madness and H.R. 10?

    The last comment I will make is, if I was sitting up there, I would love to have asked these bankers—they are all talking about how much they want to make a commitment. I would ask the committee to join in this request and maybe send a letter to these institutions.

    If we really want to know if this their commitment is sincere to low-income and moderate-income people, to working-class Americans of all colors and races and genders, if we really want to know that, then these banks need to support the Federal Reserve's call now for whether or not we ought to collect race, gender, and income data on small business lending. Right now, it is prohibited.
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    Chairman Greenspan, in a moment of enlightenment, is now reconsidering that position about whether or not banks should report that information. Let me tell you, in the same way that number data served this committee and served the citizens of this country and helped us draw a very definitive picture of what these lenders were doing and not doing across America's urban and rural areas, that is exactly what we would use that information for. That is exactly what the usefulness it would have. It would remove the cloud of doubt or veil of secrecy about whether or not these lenders are, in fact, serving the small business needs of people across America.

    We urge this committee to join that request for a moratorium, to ask the Federal Reserve to reconsider that position.

    Thank you for the generous amount of patience and time you have shown me.

    Chairman LEACH. Thank you, John. We thank you for your testimony.

    Professor Kroszner.


    Dr. KROSZNER. Thank you very much, Mr. Chairman. I am delighted to be invited to speak before such a distinguished group of people and to be involved with such a distinguished group of people who have given testimony today on financial services regulatory reform and on bank mergers.
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    I believe that it is imperative that we modernize the regulatory system that has governed banking in the U.S. with little change since the 1930's. Each Congress for at least the last dozen years has tried to make a major attempt to revise our Depression-era regulation. Each attempt at fundamental reform has failed.

    As the proposed merger between Citibank and Travelers Group clearly illustrates, the markets simply cannot wait any longer for legislative reform and are taking deregulation into their own hands. Congress must recognize the inadequacy of the current system and address the issues raised in the financial services modernization legislation as we have been discussing in H.R. 10.

    I want to underscore is that I think the perspective that we have heard so far is that the current system is pro-consumer or, at least, if we have any changes in the system, it is going to become anti-consumer. I think it is exactly the opposite. The current system, the traditional regulations we have had, are anti-consumer: anti-consumer because they have not allowed consumers to have options. Allowing people to have one-stop shopping is not forcing them to have one-stop shopping. Currently, we don't allow that option for the class of consumers that might want to have that. That I think is fundamentally anti-consumer.

    Also, because of the geographic Balkanization of the financial system, which fortunately Congress has changed with the Reigle-Neal Act in 1994 and which went into effect in 1997, what we are now seeing are mergers that are allowing people to bank with the same institution in different locations.

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    What if you have a family that is in more than one city? Currently or under the traditional system, you could not bank with the same institution. If you had grandparents and children elsewhere, you would have to go through an arduous process to make a transfer. You would have to write a check, mail that check, wait for the check to arrive, wait for the check to be deposited. With the system where we allow mergers to occur, to create a truly nationwide banking system, now that can be done in one step. That is consumer friendly. That is not anti-consumer.

    I think that is very good for families that are around the country and also for businesspeople and pleasure travellers who now have a lot more options available to them. That is the other aspect, that is the merger aspect, that I think is allowing much more pro-consumer types of opportunities for people.

    While reform of financial services regulation is extremely complex, I believe that the general direction of the reform is clear. The Glass-Steagall Act of 1933 and the Bank Holding Company Act of 1956 should be fundamentally altered to permit commercial banks to engage in a wider variety of financial services, as well as to allow other financial services firms to engage in commercial banking. Allow both to get into each other's territory, increase competition in financial services generally, and tear down these artificial walls that separate the activities.

    So I think those should be eliminated, and the aspects of H.R. 10 that do that I think are exactly in the right direction. This is important not only for greater consumer convenience but also to keep financial institutions globally competitive.

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    Now, permitting commercial and investment banking under one roof does raise some very important consumer concerns, because there are potential conflicts of interest, as has been discussed by the previous three speakers, as well as concerns about stability and soundness of the financial system, which have been discussed throughout much of the day.

    What I am going to argue, and I argue in much more detail in my written testimony, is that competitive market forces have been very effective in the past and I think will be effective in the future at dealing with these types of potential conflicts issues, as long as the banks are sufficiently well-capitalized.

    That is extremely important and there has been some discussion earlier today with Governor Meyer about the capitalization of the banks. I think that is the key to making sure that the safety net really provides safety rather than undermines safety.

    In order to survive in the marketplace, the commercial banks have to develop a reputation for fair and honest dealing. Some of the research that I have donelooks at when commercial banks were involved in investment banking shows that people were not hurt when they purchased securities from commercial banks rather than from independent investment banks.

    We have gone back and looked historically at some of the data when people could buy securities from commercial banks, and we have found that, over time, those issues that were underwritten by the commercial banks, that people bought from commercial banks, did better, performed better, than otherwise similar securities underwritten by independent investment banks.

    So if we look back at the historical record, we don't see any evidence that people were taken advantage of, that the banks were bamboozling them, telling them, ''these are good securities'', when really they were poor securities. So even though there may be some incentive for them to try to do that, competitive market forces won't allow them to do that.
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    What we saw historically is that the commercial banks underwrote higher-quality issues rather than lower-quality issues. That is also true today under section 20 subsidiaries, if you look at them right now. They are not underwriting the shaky credits; they are underwriting the best credits.

    Also, it is very interesting that, historically, the banks voluntarily adopted a firewall structure. That issue has been a big sticking point in the debates over H.R. 10 and a lot of other financial services reform legislation.

    Interestingly, what the banks found in the old days is that there was no regulation requiring them to do this. They could do everything internally within the bank and in classic German universal banking-style structures. But in the period before Glass-Steagall, what they chose to do was actually separate out their operations from the bank itself into separately incorporated and capitalized subsidiaries.

    Holding companies were not very common back then, so these were actually operating subsidiaries of the commercial bank itself. They would put independent board members on these bank subsidiaries and, lo and behold, these things seemed to solve most of the concerns about credibility.

    If you look at the prices obtained for securities underwritten by the semi-independent affiliates, as opposed to the securities that were underwritten internally from the bank itself, you actually saw much better pricing for the ones that had a little bit more independence. That is what was driving the banks voluntarily to create separate affiliations. They saw that they could get better prices for the securities they were underwriting for others because they were more acceptable to the market. So it was pure market forces that were driving them to create the separate subsidiaries.
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    I think it is important to keep that in mind when thinking about what sort of firewall structures we want to impose on the banks. Instead, I urge the committee to allow some flexibility for market innovations, foreseeing that maybe in five years the types of firewalls that seem relevant may be just as much an albatross as Glass-Steagall is now.

    I quickly want to turn to some of the issues in mergers.

    Chairman LEACH. Dr. Kroszner, let me just interrupt for a second. We have a little bit of a time problem with the large number of witnesses. If I can give you another minute or so all of your statements will be submitted in the record.

    Dr. KROSZNER. Certainly. What I want to think about is the geographic consolidation that we have been seeing is actually a rationalization, creating a banking structure that, if we didn't have these artificial restrictions separating banks operating in one State from those in another, that we would have had the system we have now more than 30 years ago. We would have had the options of full, nationwide branching with some banks, as well as small banks existing alongside them.

    To see that small banks will survive, we can look at California, which has for more than a century had full intrastate branching. Some of the largest banks in the world there coexist with some very small institutions. And so I think we see that the small banks are not going to disappear.

    In the rest of my testimony I talk about some of the issues that have been brought up, here talking about whether the mergers are anticompetitive or not. I don't think they are. I don't think they have been reducing the services for the small consumer. I think they have been increasing the options for them.
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    Thank you.

    Chairman LEACH. Thank you, Professor.

    Professor Boyd.


    Mr. BOYD. Thank you. I am John Boyd. I am a Professor of Finance at the University of Minnesota. I am delighted and honored to be here. I will try and keep, in deference to time and the lateness today, my comments brief.

    The whole first part of my prepared testimony has to go. However, what I am going to be talking about in general, is what I would call ''myths'', things that are said often enough, but aren't true.

    One myth, one I don't have time to go into today, is that banking is a declining industry, and that commercial banks are losing market share to other forms of intermediation, or that there is ''excess capacity'' in banking. I don't have time to go into that verbally, but the research work I have done with Mark Gertler at New York University and others on that topic, if you would take a look——

    Chairman LEACH. Are you saying that those are myths?
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    Mr. BOYD. Yes. The banking industry is not declining. Over the last 4 decades, the banking industry's share of financial intermediation has been roughly constant. Over that same period of time, the financial intermediary industry, or the financial intermediary sector, has been a growth industry relative to the total economy, that is true, whether the size of that industry is measured by total employment, total investment in capital, plant, and equipment, or by contribution to GDP.

    Where does the misconception come from? The misconception comes from looking at balance sheet data, typically, the Federal Reserve System's Flow-of-Funds Accounts, all right? The problem with looking at balance sheet data is that it completely ignores all the off-balance sheet activities of banks which have been—I am thinking of things like consulting, data processing, loan commitments, options, swaps, forwards, futures growing at an explosive rate. Balance sheet data don't capture this. Professor Gertler and I found ways to, in effect, capitalize these activities and put them back on bank balance sheets. And, when one does that one reaches a very, very different conclusion.

    That research is cited in the submission; and I would also note that a very extensive unpublished study conducted at the Federal Reserve System, conducted, I am told at the request of Mr. Greenspan, fully substantiated those conclusions.

    Another point briefly. We heard several times this morning a statement about Fed research which was ''right,'' but I think to some extent, misleading. That is that, over the last decade or so, on average, bank markets in the United States have neither become particularly more competitive nor less competitive. That is true, but it is a little bit misleading, because that is ''on average.''
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    I should note that, for a long period of time, I was the antitrust person at the Minneapolis Federal Reserve Bank.

    Let me just read a little footnote out of my prepared testimony here:

    The bank competition picture has actually worsened in recent years, especially in small and rural markets, which is where it matters. Between 1984 and 1994, the average Herfindahl-Hirschman Index, the measure that the Justice Department mandates using, for all rural markets increased from 3500 to 3700, or 140 points. Over the same period, the average HHI for small urban markets increased from 1715 to 1810, or 95 points. 1800 is the threshold above which the Justice Department defines a market as being ''highly concentrated.''

    So it is true that, on average, U.S. markets have not gotten worse, but on average is not what you care about. What you care about is small markets; thinly banked rural markets, and small urban markets. Incidentally, these are recent Fed data that we are using here.

    Very briefly, it seems to me that the following question is most fundamental to Congressman Leach's concerns: Is consolidation in banking resulting in a safer and more efficient banking industry? There is no conclusive answer to that question. While we have heard a lot of people talk, I personally have some doubts. The most basic output of consolidation is that there are fewer and larger banks. The question is, do large banks perform better on average than small ones?

    There is a large literature in economics on this topic. The massive consensus of that literature is, yes, there are economies of scale in banking, but that they are exhausted at a relatively modest size. Once you get to a kind of medium-sized bank, beyond that size there are not further important gains or losses.
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    Bank size and safety. Very briefly—and, again, the research here is cited—it is widely believed that large banks are safer than small banks. Based on research that I have done several times, that is simply not true, at least not true in recent decades for U.S. banks.

    Over the period of 1971 to 1994, we computed cumulative failure rates for banks—and you can't break this out too many ways because there aren't that many bank failures—under $1 billion and over $1 billion. As ''failed,'' we defined certain larger bank bailouts. Technically, according to the FDIC, they had not failed because they were bailed out. For example, the FDIC did not define Continental Illinois as a failure. We did, OK?

    So when we throw the Federal bailouts back in over that period of time, for banks under $1 billion the cumulative failure rate was 12 percent; over $1 billion, was 17 percent. I am not arguing that small banks are safer than large banks. These numbers are not significantly different in a statistical sense. All I am arguing is that the common belief that large banks are safer than small banks is simply not borne out by the U.S. data.

    I am out of time. Just one last brief observation. Research that I have been working on over the last five or ten years suggests that German-style universal banking is a very poor idea for the U.S. I am very concerned by these developments in the savings and loan industry, and I see some of this approach slipping into H.R. 10, too, with its ''5 and 15 percent rule''. My personal view is that 5 percent and 15 percent is a ''little bit of a bad thing.''

    Chairman LEACH. Thank you for a lot of good comments.
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    Mrs. Guerin-Calvert.


    Ms. GUERIN-CALVERT. Thank you, Mr. Chairman and distinguished Members of the committee.

    My name is Margaret Guerin-Calvert. I am a principal at Economists, Incorporated, and it is indeed a great honor to be invited here today to participate in these hearings on the important developments and transactions that are occurring in the banking and financial services industry.

    As we have heard today, these developments have the potential to yield substantial efficiencies and gains for consumers, as well as to make fundamental changes in the mode of delivering financial services to them. At the same time, as evidenced, again, by the fact of these hearings and the comments today, the nature and fact of these transactions have raised issues about regulation, competition and the effect of these developments on both consumers and on the industry.

    In presenting views that are my own today, I do so from the perspective of having worked for almost the last 20 years in the public sector in the late seventies, eighties, and early nineties at the Antitrust Division in the Federal Reserve Board, as well as since then in the private sector, working on analysis and research on competition and bank mergers.
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    Because my specific area of expertise is bank mergers, I will focus specifically today in the time allotted on the bank merger issue.

    As an overall perspective, I see that there are two primary and actually complementary themes to the recent bank merger transactions that have been discussed today. First, banking organizations are continuing the trend of the last decade of expansion of the geographic scope of their operations from their initial region of operation. This entails more locations from which to serve both existing customers as well as new customers.

    Many of the country's banks indeed expanded in this fashion in the last decade in efforts to extend and diversify their operations. Many of those mergers involved primarily contiguous, rather than overlapping, branch systems. In large part and in particular, the NationsBank-BankAmerica transaction falls into this category; and in large part so does first Chicago-Banc One, although most are considerably larger than many of the prior mergers.

    A second point I want to make is that banks and other providers are undertaking efforts to expand the scope of financial services that they provide to consumers. This trend is fueled both by efforts to diversify products and risks as well as an effort to deepen valued customer relationships with more products, and in part the Citicorp-Travelers transaction is an example of that.

    Your invitation to us today asks us to address the implications of these mergers for consumers, competition and international competitiveness. I would like to address a few points from the perspective of bank merger analysis.
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    First, while these recent bank mergers are indeed substantially larger in size than those of the preceding decade, they are actually likely to raise relatively few new competitive concerns with respect to their traditional banking activities. While many concerns have been raised about the effect of multi-State banking mergers on local consumers, marketplace experience of the last decade shows that banking competition does remain vibrant.

    Most banking markets, particularly metropolitan markets, have a large number of bank, thrift and credit union competitors that are responding to consumers' concerns about services and fees. This both attracts consumers to institutions and puts pressure on all banking organizations to compete effectively.

    If you go back and look at the empirical data on mergers of the last decade, it also shows that the vast majority of these in substantial consolidation activity, which has typically involved well over a thousand transactions per year, have raised no competitive concerns.

    I think an important thing to note, particularly given the competitive concerns raised, is that, in the vast majority of bank merger transactions which did have significant overlap and significant concerns about concentration in local areas, competition issues were resolved by commitments to either the Department of Justice or the Federal Reserve Board, or both, to divest branches and assets to new competitors. These divestitures have become a very important part of antitrust enforcement policy, particularly since the early 1990's.

    More important recent research that has been begun at the Federal Reserve Board shows the divestitures have resulted in new entrants or acquisitions by smaller banking organizations, often local banking organizations, that have resulted in banks that have been successful in maintaining expanding locations.
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    A second point is that transactions such as Citicorp-Travelers reflect pressures to try to provide one-stop shopping. I think here a key point I want to make, is that the gains from having transactions of this nature require that not only can larger companies who can do it on their own be able to provide it but that smaller organizations and that those that choose not to diversify by merger can also offer a broader array of services to their customers if they have the ability themselves to offer packages of services by choosing freely from among many independent competitors, for example, from choosing from other brokerage services, if that is allowed, or other card products other than those from Visa or MasterCard.

    In the interests of time, let me move to the key point in terms of looking at the recent bank merger activity.

    Market forces, existing consumer protection and antitrust enforcement can provide to us assurances that banks will face pressure to provide competitive services.

    In the last decade, market forces and antitrust enforcement have done that. The proposed mergers will be subject to the same antitrust scrutiny for effects on traditional banking services and possibly for broader issues involving financial services competition.

    Proposed mergers, along with recent consolidations among major credit card issuers, give a few banks increased control over Visa and MasterCard, which are joint ventures of virtually all United States banks. Visa and MasterCard currently preclude member banks from issuing credit, debit or charge cards bearing either the American Express, Discover or any other competing brand. If a bank does so, it will be expelled from both Visa and MasterCard and their ATM networks.
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    The effect of these rules, I think again is in the context of one-stop shopping and multiple service providers, is to artificially restrict banking consumer choice in the credit card industry and limit the ability of banks to diversify. It is well publicized that competition in the credit card industry is under investigation by the Department of Justice. The proposed mergers will likely be subject to close review for their competitive effects as well.

    In closing, competition and enforcement have been a vital source of benefits to consumers. The current mergers, if given the current, careful antitrust review that bank mergers have typically received, are likely to promote gains while ensuring that marketplaces remain competitive.

    Thank you.

    Chairman LEACH. Thank you very much, Mrs. Guerin-Calvert.

    Mr. Greenwood.


    Mr. GREENWOOD. Mr. Chairman, I will be very brief. My abbreviated comments begin with good morning, which I marked through.

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    Good evening, Mr. Chairman. My name is Bill Greenwood. I am President-Elect of the Independent Insurance Agents of America. I am testifying today on behalf of the IIAA and the National Association of Life Underwriters.

    I think I bring a unique perspective on the merger issue as both an independent insurance agent and president of a bank holding company that controls a national bank. In my daily life, I must answer to the Kentucky Department of Insurance, the Fed and the OCC.

    If I would have been here representing insurance agents and brokers five years ago, I can tell you that we would have been unequivocally opposed to the Travelers-Citicorp merger. But we have seen how the financial services marketplace is evolving. We hold concerns that there are concentrations of financial power but none that leads us to oppose H.R. 10. In fact, the world has changed so dramatically that the board of the Independent Insurance Agents of America recently approved the accusation of a thrift.

    Mega-mergers will happen with or without H.R. 10. The legislation will not change marketplace forces that are driving these mergers. Therefore, the question for Congress, we believe, is twofold: first, who will set policy in this area, Congress or unelected regulators; and, second, how will these new entities be regulated, under the rational, structured approach of H.R. 10, or in a haphazard patchwork fashion determined by warring regulators concerned about their turf?

    Congress has a duty to ensure that new mega-companies are properly regulated and, in particular, that their various activities are regulated by the appropriate authorities. As we have heard many, many times today, the savings and loan crisis and the history of this, prompted by improper oversight, costs taxpayers billions of dollars. Congress cannot permit haphazard, back-door deregulation of the banking, security and insurance industries to result in another costly crisis.
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    Congress must establish the proper regulatory structure found in H.R. 10. Mega-firms, like small businesses, should be functionally regulated. If they are involved in security activities, the SEC and State security regulators should oversee that activity. If they are involved in banking, the proper banking authority should regulate that activity. If they are involved in insurance underwriting or sales, the appropriate State insurance department should regulate that activity.

    I will focus my remarks on insurance sales activities. There is tremendous uncertainty today as to the ability of States to regulate the insurance sales activities of banks. This uncertainty will only grow as banks affiliate with insurance companies.

    The Supreme Court has said that States can regulate national banks so long as they do not prevent or significantly interfere with their authority to sell insurance. But what does ''significantly interfere'' mean? State legislators and insurance regulators do not know, so they operate with a cloud over their heads and the OCC looking over their shoulders, threatening to preempt any State insurance regulation the agency finds oppressive, indeed, threatening to preempt State regulation altogether.

    This, to us, is an intolerable situation. Congress must act to clarify the boundaries of State authority.

    H.R. 10 takes a sensible approach. It safe harbors any State law or regulation that is no more restrictive than the consumer protection law recently enacted in Illinois. That law is the product of negotiations between the States, banking and insurance industries and was enacted by an overwhelming margin in the State legislature.
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    This is a very low hurdle. Many State insurance laws are more protective of consumer interests. But the Illinois law safe harbor is better than the current world of uncertainty; and it should be noncontroversial, since the OCC has said it views the Illinois law as not significantly interfering with bank insurance sales.

    Under H.R. 10, other State laws would be subject to a ''jump ball'' and any court challenge, no congressional presumption that they might be preempted.

    The State insurance regulator can challenge any Federal banking regulator in Federal court. Should the banking regulator decide that a State insurance law is preempted, the court would decide that issue, without granting unequal deference to the views of any regulatory. This creates a truly level playing field.

    If any of these provisions is changed, our support as agents of H.R. 10 will evaporate. If the recently announced mega-mergers mean anything, they highlight the need for congressional action now, before the marketplace and unelected regulators set the policy for the future without legislative input. H.R. 10 is a rational approach to ensuring proper regulation of an affiliated financial services industry.

    Chairman LEACH. Thank you, Mr. Greenwood, on behalf of the independent agents.

    Mr. Pope.

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    Mr. POPE. Thank you Mr. Chairman.

    Good afternoon, Members of the committee and staff. My name is Mark Pope, and I am Vice President and Director of Federal Relations for Lincoln National located in Fort Wayne, Indiana. I am testifying today on behalf of the American Council of Life Insurance, the principal trade association for life insurance companies.

    I appreciate the opportunity to appear here today to discuss the impact of the recent wave of mergers on the need for financial services modernization legislation. This marks my third opportunity to testify on financial services modernization.

    In my prior two hearings before Chairman Oxley's subcommittee, I asked Congress to decide the critical policy issues relating to financial modernization, rather than leaving those issues to be decided by regulatory agencies and the courts on an ad hoc basis.

    Events of the past year and certainly events of the last month have only served to underscore the urgency for Congress to act. These recent events tell us in Fort Wayne that if there is to be real competitive equity in the financial marketplace and if diversified financial services firms are to be regulated effectively, then Congress needs to establish the ground rules.

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    The very fact that current law may not permit the Citicorp-Travelers combination to retain its insurance underwriting component assures that there will be increasing pressure on lawyers and regulators to come up with loopholes to keep the newly merged firm intact.

    Other companies seeking to avoid getting left behind by market events will look to even more creative ways to do what the laws say they may not do. This is not a rational way to go about financial modernization. It will only create more litigation, uncertainty and competitive inequities.

    H.R. 10, as reported by the Committee on Rules earlier this month, is not perfect legislation, but it is rational, balanced and fair. It establishes a basic framework for modernization in which banks, securities firms and insurance companies, if they so desire, can offer the full range of financial services, guided by the principles of functional regulation. It creates no advantage for any one market segment over another, and it requires all companies to play by the same rules with respect to offering of particular services.

    Let me make one or two quick comments about the issue of operating subsidiaries versus affiliates. Comments were made earlier this morning and this afternoon about already H.R. 10 being a bank modernization bill. H.R. 10 is not a bank modernization bill. H.R. 10 is a financial services modernization bill.

    The approach advocated by the Department of the Treasury would give banks the discretion to organize their various financial services components however they felt was most advantageous to the interests of the bank. Using operating subsidiaries to house non-banking activities, they argue, could be accomplished without posing any risks whatsoever to the bank in the event the subsidiary were to fail.
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    Unfortunately, this proposal does absolutely nothing to protect the financial integrity of the subsidiary, for example, a subsidiary insurance company, if the bank becomes financially impaired. Indeed, it would make insurers and their policyholders responsible for the failure of any bank which had an insurer as an operating subsidiary, while overriding State insurance regulators charged with protecting company solvency and policyholder interest.

    H.R. 10's current form provides for an effective regulatory framework. It will benefit our respective industries and, more effectively, importantly, it will benefit our consumers. There are few industries where trust and confidence are more important, yet we are proceeding with combinations of those industries without established rules and guidelines. This situation as it currently stands will hardly engender further trust and confidence.

    You all have the ability to establish those rules and guidelines. You have the blueprint in the current form of H.R. 10. On behalf of my fellow employees at Lincoln National and my fellow customers at Lincoln National, I urge you to approve this legislation next week and send it to the Senate.

    Chairman LEACH. Thank you very much, Mr. Pope. Your institution as well as your association is well respected.

    Mr. POPE. Thank you, sir.

    Chairman LEACH. Mr. Judge, on behalf of the Securities Industry Association.
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    Mr. JUDGE. Mr. Chairman and Members of the committee, I am Steve Judge, Senior Vice President, Government Affairs, the Securities Industry Association. I appreciate the opportunity today to present SIA's views on mergers in the financial services industry and the effects H.R. 10 would have on the global competitiveness of the U.S. financial services industry.

    This is an historic and unique time in the financial services marketplace. Merger activity in the financial services industry has grown at unprecedented rates, both in terms of the number of mergers and the dollar amount involved in those mergers.

    It is important to note that the current wave of mergers in the industry is a direct response to forces driving change in the financial marketplace. The proposed Travelers-Citicorp merger, for example, reflects the needs of financial service providers to offer customers the full range of financial products and services that they desire.

    The most prevalent trend is intraindustry mergers, such as banks buying banks or securities firms acquiring each other. The benefits of such combinations are many: geographic diversification, economies of scale, more distribution outlets for products and services, and stable profits during economic downturns.

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    Still other mergers may reflect a desire to strengthen existing specializations; and, in other cases, firms need to grow in order to finance technology costs, compete internationally or devote greater resources to particular transactions.

    Fundamentally, though, these mergers are all being driven by market forces. They are occurring in spite of significant and anticompetitive regulatory obstacles to such mergers. For example, currently banks can acquire securities firms, while securities firms generally cannot acquire banks. For better or worse, experience has shown that the Federal banking regulators will go to great lengths to reinterpret well-established provisions of Federal law to accommodate the part of the financial service industry that they regulate at the expense of the other segments of the industry. For this very reason, SIA strongly believes that the financial services industry in general and the securities industry in particular needs legislation not to restrict acquisitions but to promote competition between all financial services firms and to give customers more choices.

    Due in large measure to your leadership and to the efforts of the Members of your committee, Congress has developed an excellent legislative proposal that achieves that goal. Although there are aspects of H.R. 10 that we would improve, SIA believes it would greatly benefit consumers in every sector of the financial services industry.

    H.R. 10 would require each financial institution to be functionally regulated, thereby ensuring investor protection and fair competition. In securities markets, all entities would be equally subject to the principles of full disclosure and regulation by the Securities and Exchange Commission and self-regulatory agencies.

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    Functional regulation ensures that investors understand the protections they are afforded and market participants understand their obligations. This regulatory structure is one reason that the U.S. capital markets have set the standard for integrity, liquidity and fairness. With or without legislation, the financial services industry will continue to respond to marketplace trends.

    A fundamental policy question for Congress is not whether these mergers should occur but what regulatory system govern the combined entities. SIA believes these combined entities should be regulated under a system such as that proposed in H.R. 10, which would establish a structure that enhances the competitiveness of all financial services firms and functionally regulates their financial activities.

    The advantage of creating a rational regulatory structure for financial service affiliations is that investors, depositors and other financial service consumers would be protected, while competition and not Federal regulators determine which affiliations will ultimately be successful.

    The U.S. securities industry is perhaps as competitive as any industry in the world. It is, in part, a result of that competition, including the ability to merge, that the U.S. capital markets are the world's largest and most liquid.

    In the securities markets, one need only look at the vast choices in products, services, providers and methods of compensation to see how competition has greatly benefited investors.

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    They can invest in stocks and bonds and thousands of mutual funds. They can choose a full service broker or financial planner to give them advice on managing their assets. More independent and knowledgeable investors can use a discount broker to execute their transactions or they can make trades electronically on the Internet or over the telephone for just a fraction of the cost of a few years ago. Investors can choose to compensate their broker on a traditional commission basis, on a flat fee basis, or as a percentage of assets under management.

    These changes greatly benefit investors and are a product of the highly diverse competitive industry that is willing and is able to invest the capital needed to meet the demands of its customers.

    In conclusion, I hope that the recent proposed mergers will provide the impetus necessary for Congress to pass H.R. 10. Although the regulatory framework governing the U.S. financial services industry has served the Nation well, its effectiveness has been eroded by changes unimaginable to its creators. Congress has the opportunity to enact much-needed reforms, and we at SIA offer once again to work with this committee, other House committees, and the House leadership to achieve enactment of H.R. 10. Thank you.

    Chairman LEACH. Thank you very much, Mr. Judge.

    The committee is in an uncomfortable position. We are going to have a vote, followed by a vote or a series of votes. Let me ask if people have a quick question.

    I would like to begin with Mrs. Roukema.

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    Mrs. ROUKEMA. No.

    Chairman LEACH. Mr. Vento.

    Mr. VENTO. Mr. Chairman, we have had the second bell ring. Are you trying to dismiss the panel?

    Chairman LEACH. I am willing to stay as late as anyone wants. If you would like to stay, that is fine.

    Mr. VENTO. I think we should come back. I think most Members maybe have a few questions. I think we can wind it up pretty quick.

    Chairman LEACH. I think the committee consensus is to ask you to stay beyond your dinner hour, if that is all right.

    Mr. VENTO. And ours.

    Chairman LEACH. If that is all right.

    Let me call upon you for a question if you would like at this time, Mr. Vento.

    Mr. VENTO. Thank you, Mr. Chairman.

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    The question—I, first of all, want to acknowledge the two Minnesotans that are here, at least an adopted State for Mr. Boyd and a natural State for Mr. Judge. I remember from my youth when he served on the committee as staff, and I am not going to ask him all those questions about concentration that he was interested in probably responding to.

    But I did notice the contrast in terms of testimony, at least between Mr. Boyd and—Professor Boyd and Dr. Calvert. I think it is Dr. Calvert, is it not?


    Mr. VENTO. The issue in terms of metropolitan areas and the lack of competition that exists, I think it was the lack of competition that Dr. Boyd implied. And you are obviously defining metropolitan area differently here. Dr. Boyd, can you quickly conclude as to or——

    Mr. BOYD. Where these issues come up is places like——

    Mr. VENTO. LaVerne, Minnesota.

    Dr. BOYD. Or Spearfish, South Dakota, to name a ''big'' town. This is rural and small. It is not Philadelphia, New York, or Chicago.

    Mr. VENTO. I think the definition difference here, if I can interject, is in terms of how broad you define the metro area. Because you are also talking about in some urban areas that there is also a lack of competition, is that correct?
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    Mr. BOYD. There are some, yes. I won't get into that right now, but, yes, there are some major urban areas that are much, much more competitive than others. That is true.

    Mr. VENTO. One of the impressions I had, Mary Griffin, I read your testimony more carefully, was that you implied that the CitiBank-Travelers merger actually has a—they have a two-year provision, but the presumption is that, within those two years, the two years that were being granted, would be for the divestiture of the activity that was incompatible with the existing law. Is that correct?

    Ms. GRIFFIN. Yes.

    Mr. VENTO. The impression I had from your testimony is that the Fed has to make some sort of finding that, in fact, they are going to enter in and approve of this particular agreement, that they are, in fact, preparing to sell the manufactured part of what they call Travelers Insurance.

    Ms. GRIFFIN. We believe that the intent of that provision was to provide for minor non-bank holdings—to give enough time for a holding company that was going to purchase a bank who was primarily interested in doing that——

    Mr. VENTO. I read your testimony, but what I am trying to point out is that they have a two-year grace period in order to sell, but there has to be—is it your contention or belief that there has to be an initial finding that they are actually involved in that?
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    Ms. GRIFFIN. As far as we know—I don't know if that is specifically required, but that is what we believe should be required, or else what you are allowing is basically a circumvention of the intent of the law.

    Chairman LEACH. Will the gentleman yield briefly? Just because we have a vote and a vote followed by a vote, I would like to come back and return to you, is that all right?

    Mr. VENTO. It is fine with me, Mr. Chairman.

    Chairman LEACH. We will recess pending the vote, and when we return Mr. Vento will still have the time. Thank you.


    Chairman LEACH. The hearing will reconvene. When we recessed for the vote, Mr. Vento was in the middle of his questioning.

    Mr. Vento.

    Mr. VENTO. Thank you, Mr. Chairman. Thanks for your willingness to reconvene the meeting and the patience of the panel to put up with our schedule and voting pattern.

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    We were just completing a question with Ms. Griffin. The comment, of course, is, you know, with regard to Citibank-Travelers, the issue is should or could or what would be the requirements of the Fed in terms of approving or beginning the consideration of that particular merger?

    The point the Chairman had made earlier in the hearing, much earlier today, was that, in fact, if this were going the opposite way, there wouldn't nearly be the time permitted. But in this case, there should be, as I think the intention that Mrs. Griffin with the Consumers Union had, was to, in fact, suggest that a plan should be submitted.

    Ms. GRIFFIN. We think that as a condition of the merger going forward, a plan for divestiture should be presented to ensure that what is going on is not using this to force Congress to act or play a betting game on whether Congress is going to act in the next two years, but, in fact, the comapanies' intent is to divest, because that is the whole purpose behind the pension. The purpose is to allow companies to merge with banks where their primary interest would be the banks; this provision was allowed to take care of any non-bank holding companies.

    We would also suggest when you think about a plan for divestiture, that now is the most appropriate time to get the plan. When you look at what is happening in the market, and that is what is going on with banks right now, it is looking like a pretty good market. It seems like it would be a pretty good time to get that plan in place.

    Mr. VENTO. I think we can ask the Fed what their intentions are along those lines rather than acting as basically a vehicle. I mean, otherwise, I think the other prospect, Mr. Chairman, is that we could have a series of these types of mergers that are proposed with the notion that they have a two to five year period in which they can attempt to apparently get the law changed, which I think obviously that was not the statement made today, but certainly I think it is what could be concluded as well as the prospect.
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    Mr. Taylor, the question I had is we heard this explanation today about CRA; that is, holding companies can voluntarily comply with it. Are you aware of any instances where holding companies do voluntarily comply with CRA?

    Mr. TAYLOR. No, I am not.

    Mr. VENTO. I just wanted to make certain I did not misunderstand that.

    One of the questions I asked of the last panel, Mr. Chairman, and I wanted to direct to Mr. Pope in terms of the insurance experience, and that is the issue with regards to what type of products might be sold in a Citicorp office. When I asked if any other products other than those that came under the red umbrella would be sold, they said they hadn't really reached a determination about that.

    Mr. Pope, what is your reaction to that? We have many, many different insurance companies. I am sure your insurance company would like to try to have your product sold out of Citibank facilities; is that correct?

    Mr. POPE. Mr. Vento, I sincerely doubt that Lincoln National products are going to be sold in the Citibank office. It is interesting, I was asking several people in Lincoln preparing for this testimony what they thought of the merger, what they thought of the situation, and how it would impact going forward, and several people told me that they felt that certain banks that are currently selling Travelers products in their bank would probably stop doing that also. So I don't know if there is a tradeoff one way or another. I do sense some concentration.
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    Mr. VENTO. Well, I think that, Mr. Chairman, these types of questions in terms of the products not being offered as broadly as they were and perhaps being in different markets does change the entire availability of various products. I think it is especially when we are dealing with these larger mergers. One of the points, I guess, was made by—in terms of just the concentration issue was that one of the executives pointed out that the banking profiles could look something like a dumbbell with—with 6 to 12 large institutions on one side and 4-to 5,000 on the other.

    I think the question is whether or not, Ms. Calvert, whether or not that would, in fact—and we are talking a little bit about the competition. Obviously your colleague Mr. Boyd has had to leave, but he has—and I think there have been a series of different studies I have seen which indicate that where there is a concentration and where there is less competition, that the services that are charged insofar as they are the measurable services—I guess we can't go through the whole plethora of services that are there in terms of what they charge for derivatives and hedges and some of the other services that he pointed out—they were actually more costly.

    Are you aware of any studies that indicate there have been any cost reductions or studies different than those that we have cited earlier?

    Ms. GUERIN-CALVERT. I think in answering your question, Congressman Vento, first of all, in terms of looking at what affects pricing, what most of the pricing studies have looked at—and they do in general show a relationship between concentration, very high levels of concentration in either higher prices for loans or other sorts of products—but in general what they have looked at systematically is concentration at the local level, because the products that have historically been of concern in bank mergers, even those involving the very largest firms, have been in both rural and metropolitan areas; small business loans, small business deposits, and then retail deposits and loans.
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    If you take your dumbbell of four to six——

    Mr. VENTO. It is not my word, incidentally.

    Ms. GUERIN-CALVERT. I am sorry. If you take a dumbbell of four to six at the top and 4,000 at the bottom, and look at even most moderate-size metropolitan areas, and this goes back to your earlier question, most of those markets usually have six to seven relatively good size banks. While a NationsBank or a Bank of America may be present there, in many markets there is one or more very sizable local community banks which are very similar in size just in that market. That is in terms of what is driving the price in there.

    Mr. VENTO. Of course, that is the vertical issue which I asked about in terms of concentration. The horizontal is whether or not they have the other type of services, whether the bank is, for instance, selling insurance. That is not unusual in Minnesota. In fact, about 60 percent of the insurance in Minnesota is sold out of banks. So, so far it has not affected us.

    I think you were talking about manufacturing, Mr. Pope, or the underwriting aspect of it, and I respect that and hope you understand the difference, but if they can't do this out of an operating sub or medium-size bank, that would then put them at a different circumstance with regards to competition.

    Incidentally, the concentration issue dealt with the entire State of California. In talking about concentration on a State-by-State basis, the costs were substantially higher there. You can always find anomalies in terms of any type of research looking at this, and you would rather have a much different model. Unfortunately, those were the basics we had before and after, and looking at that in that particular sense. But it was considerably costs were higher there, looking at, as I said, this range of consumer products, I think, which may again not be the total picture.
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    Ms. GUERIN-CALVERT. One part of it, too, is oftentimes in these studies what people are looking at is the prices that banks are offering or charging, and in a number of cases, if you look at the prices that are actually paid, you get a very different answer.

    For example, on the ATM side, there are a number of surveys that have been done that suggest that a relatively small proportion of actual account holders actually pay those, but, nonetheless, I think there is a concern about them.

    Mr. VENTO. That is fair.

    Ms. GUERIN-CALVERT. I would agree with you in terms of looking at local markets in California, there are a number that are among the more concentrated, and they have been the ones that in several of the recent mergers there have been very substantial divestitures required.

    Mr. VENTO. That is a Fed study I am referring to. But I think that, fair enough, I think maybe some of these ATM charges are punitive, and I think that is a point where they are really discouraging people from using a foreign ATM and they are actually not paid. Again, this raises all sorts of other questions.

    Mr. Chairman, I appreciate your calling the group back together.

    Chairman LEACH. Thank you for those very thoughtful queries.
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    Mr. Hinchey.

    Mr. HINCHEY. Thank you, Mr. Chairman. I came back in deference to the members of the panel who have been here all day. I was planning on asking a couple of questions.

    Chairman LEACH. Assemblance is very polite. It is the ultimate in politeness.

    Mr. HINCHEY. I have a couple of questions for Mr. Cross and Mr. Boyd, but I see they are gone. I will try to express my concerns, and maybe the rest of you might respond to them.

    I have been straining to find where the public benefit resides in these mergers, and it is very difficult, frankly, to find it. I haven't been able to. Maybe someone can help me with that.

    If I were the Chairman of Citicorp or Travelers or BankAmerica or NationsBank, I could quite clearly see where the benefit would be for me as Chairman, and for my Boards of Directors, and the officers, shareholders and others who are directly associated with these institutions. I can quite clearly see that there is very substantial financial benefit to be gained for those individuals. If I were there, I could understand how they feel about these mergers.

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    But it is hard to see the public benefit. Something that Mr. Boyd said, which, echoing what my colleague Mr. Vento said just before we broke, struck me as being so strongly in contradiction to what you said, Ms. Guerin-Calvert, it compels me to explore it further. He said that economies of scale seem to disappear at a certain level; that if you grow to a certain point, there are some economies of scale that come from consolidation and efficiencies and things of that nature. But after you get to be about $1 billion, I believe he said, these economies just sort of evaporate. You can't find many economies of scale after that.

    Then he went on to say that, in fact, there are more failures of the larger banks than there are of smaller ones, at a rate of about 12 to 7. Then he sought to diminish that difference a little bit with the margin of statistical error. Twelve to seven is almost twice as much. That is not a little difference, that is a big difference, 12 times as opposed to 7 times.

    So, where does the public benefit lie? What can the public expect to gain from these mergers?

    Ms. GUERIN-CALVERT. To try to answer your question in multiple parts in terms of the efficiency studies, this has been an area that has been the subject of a lot of research in two ways. One is just trying to estimate, are there economies of scale in banking. And in general a lot of economists find that there are real problems in trying to measure cost savings and economies of scale in banking, because banks offer so many products.

    There are some additional studies that Dr. Boyd did not mention that find that for the very largest banking organizations, if you measure things somewhat differently and take into account the fact that they have different products, you do find significant economies of scale.
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    That being said, I think the main question you are focusing on is what can consumers expect to see? And in general, in looking at the series of mergers that occurred, for example, as there were interstate banking compacts or there have been local mergers, I think it is important to remember that the vast majority of mergers involve smaller organizations, where it is a bank that has relatively few offices that is expanding into a new area. So what they are doing is trying to bring more products to consumers and to grow as a banking organization. In an effort to do that, they usually do try to enter new markets, to price competitively.

    There is a Fed study that suggests that the biggest gains from the large mergers are in consolidation of back office, computer consolidations, which should have, under competition, hopefully accrued to consumers in the form of lower-cost services or more services. But that is the basic focus, that is where the real savings are.

    Mr. HINCHEY. Just for the record, I have been informed that the numbers I used earlier are a little bit off. It wasn't 12 and 7, it was 12 and 17. Not as big a difference as I was suggesting, but still a significant difference in the rate of failures—17 percent for big banks, 12 percent for smaller banks, which indicates that the bigger you are, the more likely you are to fail, and if you fail, the more likely it will be that the public is going to have to pick up at least a part of the tab for that.

    When we talk about economies of scale, the benefits of those economies of scale accrue to the institutions themselves. What we have seen with mergers in the financial industry as well as other industries that have merged in our country over the course of the last two or three decades is that the economies of scale have resulted in higher profits for the companies, and mass layoffs for the people working for them. Large numbers of people lose their jobs as a result of these mergers.
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    You suggested that the consolidation of back office services and things of that nature is where most of the jobs are lost. They and middle management are among the first to go.

    So the benefits to the public remain very elusive. I am still unable to see them. Perhaps Mr. Taylor or Ms. Griffin might want to comment on that.

    I can't find the benefits to the public for these mergers. It seems to me that there are significant risks and there are significant disadvantages for certain populations, but I do not see the benefit for the general public, for the customer.

    Sure, they might get one-stop shopping for some services. I don't see this as a big deal to most people. Instead of walking across the street, you could be in the same building. I don't think that most people would regard that as a very substantial benefit. In fact, the exercise might do them some good.

    So, I am still at a loss. Somebody over here might want to interject.

    Mr. TAYLOR. Well, I think we have heard the benefits stated several times. I think we have to be fair here, Congressman Hinchey. I mean, you can leave Charlotte on a plane and fly to California for a vacation, and you can use your ATM card and not have to pay $2 at an ATM fee. Now, there is a benefit we are all rushing to change the banking industry over.

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    But otherwise, we have been looking a lot at this, and, you know, we have been waiting for that trickle down, too, to hit a lot of these neighborhoods, the trickle down effect that from all this prosperous industry, we are just not seeing it. What we are seeing instead, and we are really scared about it, frankly, is in the most prosperous times we have had in certainly my lifetime, we are seeing the bottom rung of our economic system, the bottom 20 percent, losing 16 percent of their net wealth and getting poorer.

    You know, God help the party or the President when this economy takes a downturn, because if we can't take care of people now, we can't find a way so that that profit, the incredible profit that the banking industry—and God bless them, they are making a profit—but if we can't find a way so that that profit inures to the benefit of the common citizen at a time of boom economic times, what in the heck is going to happen to people when—as a number of Members of this committee have pointed out, it is cyclical. We are going to have a turn-down. What is going to happen when we don't have the ability? God help the party in power and the President in the White House, because there is going to be some wholesale changes, because people can't go much further.

    Yet, you know, I mean we keep hearing about how the industry is doing fantastic, and, you know, our securities friends and insurance friends all wanted to be a part of it and want to compete fairly. Some of their arguments, I think, are fair arguments. But the point is, what are we doing and what is this Congress doing to ensure that the common folk who are not benefiting from this, other than, you know, being able to not pay an ATM charge when you travel 1,000 miles, what are we doing to ensure that they can get affordable, decent credit, access to capital, small business loans? What are we doing? We have been looking—I am looking for that benefit.
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    Ms. GRIFFIN. I would just say that there does seem to be evidence that there are not economies or efficiencies of scale at certain sizes, so then you have to ask what is really driving these mergers. A number of people are suggesting that it is the market and the price to shareholders, as well as just a desire for larger market share. We have seen this happen in the insurance industry as well, and it can often cause problems in the future.

    With regard to cross-marketing, I think there is a potential that if you have more players in the market, more players selling insurance, more players selling securities, that there can be added competition.

    The problem is the way in which these mergers are going to proceed. We think that if there aren't consumer protections, and if people don't know all the commissions and fees, what is going to happen is instead of having one or two players that you are concerned about, you are going to have even more players you are concerned about bilking consumers.

    I would like to also point out that a number of the regulators talked about high fees, which is obviously a concern for a lot of consumers. A few of them mention: ''it is interesting'', ''it is complex structure'', ''we are not really sure where fees come from and where they go'', and I think we would like to suggest there seems to be an obvious place where they go, and that is to bank profits. I do think there is a fundamental question of who should benefit from these increasing profits when you have a taxpayer-backed institution.

    Mr. HINCHEY. Thank you, Mr. Chairman.

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    Chairman LEACH. Thank you very much. Let me ask a couple of questions.

    One, Professor Kroszner of the University of Chicago suggested that we should bear in mind that the current system, to some degree, is consumer-unfriendly. So what you are dealing with is the question of whether a modernization approach is more or less consumer-unfriendly from his frame of reference.

    It strikes me that one of the interesting things happening that has just gotten so little attention is that in this mix of the big banks and the small banks, that one might argue larger banks have brought some innovative new products to the mix competitively nationwide. Smaller banks, from my experience from a small bank State, haven't been the first to offer the product, but they then do offer it, and they usually offer it at a lower price. So what is happening is the big banks have to some degree benefited the consumer by bringing new products. Smaller banks have then, not wanting to be the first to innovate, because it takes a lot of technical effort, have prospered competitively at—from the bottom up by offering lower prices.

    So one of the things that occurs if you are a consumer and you are, say, attached to a larger bank, or a bank that gets bought out by a larger bank, you have the option to leave and go to another bank. So we have this phenomenon that a lot of de novo banks are being formed. We also have a phenomenon that from the bottom up, that is in the local markets, the community banks are doing better than the big banks, and the growth is better in most markets.

    So if you just look at larger banks with higher fees, that is true. But from the consumer, they are leaving that bank for the lower fees, whether it be a credit union or community bank or de novo bank.
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    In fact, one of the most extraordinary phenomenons in banking today, partly because of the prosperity of the time and the value of the market, is that the only area I know of where there is a 100 percent return on investment within a year is someone that forms a de novo bank. The reason for that is let's say you have a group in this room can get together $5 million in capital, and with that they can have deposits of $50 million. If that bank can break even after a year, it is worth double book value. That is the new evaluation of banks. And literally within a year, that is 100 percent return.

    So a lot of people are seeing that around the country, and they are going out, and particularly when a large bank comes into a community, they are saying let's form a community-based bank. Not only are they doing it because there seems to be something in the public that likes locally held and controlled institutions, it is a great investment, if it works.

    But the only reason I say that is it comes back to the consumer. It is true larger banks have higher fees. It is also true that not all the consumers are hurt because they leave them, which is a phenomenon that I think has gotten little attention.

    In terms of the competition, one of the things being suggested is that the current law, current set of laws, has some very arbitrary features that some people can do some things others cannot, and some people are becoming, as has been argued by the securities industry and insurance industry, more empowered, while others are not. That is on an industry-to-industry basis.

    Then within the industries, we are seeing this phenomenon that the sophisticated or largely the large are getting advantaged sense?, while the smaller don't have that capacity.
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    So, for example, under the current regime, Citigroup has suggested they are operating within the constraints of law, at least for a period of time. Well, that is a huge competitive leg up over everybody else. I mean, I think it has to be considered truly significant.

    So if one industry, one party in industry, has a huge competitive leg up, one of the questions is, is it going to be as proconsumer than if there are a dozen others with the same structure? And I would argue you get competition when you have more than one.

    So if the current law allows a few of the big to do extraordinary things, but doesn't allow the smaller to take advantage of it, you have got almost by structural definition an anticompetitive situation.

    So as consumer advocates, I mean, Mary and John, I mean, I would ask aren't there some pluses to having greater competition within the new world instead of just leaving simply everything to a few?

    Ms. GRIFFIN. That is one of the things I had mentioned, that there can be greater competition, if it is structured in such a way to provide that. But I wanted to take one example you mentioned, because you talked about innovation in the market and how big banks can lead with innovation.

    And that may be true. So smaller banks offer it, so we all can benefit from that. But what is happening with those products when you have the market driven by a few players. And there are some examples, such as what is happening with Citibank, who now has 17 percent of the Visa-MasterCard market. Visa-MasterCard require the banks to only use Visa-MasterCard. Not only that, they have the ATM, as you pointed out, the Plus and Cirrus networks. What happens if you allow fewer players to start controlling all those different things? You can't just look at the banking. What are the other services that they are controlling? What are the other things they are going to be able to sell through these mechanisms to people?
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    I think when you look at it that way, there are a lot of other concerns that might not be self-evident when you are just looking at the banking services. The type of control they have over the market for these other products can be very detrimental to consumers.

    So what happens in that situation? The bigger banks have more ATMs. Yes, I think a lot of people are moving to smaller banks, and a lot of people are getting disgusted, but you have some fundamental problems with people getting access. You don't have access to these ATMs, because those who control the networks are saying you can't use them. And the Visa networks are even hooking up their debit cards. Merchants have to take both the merchant debit card and the Visa card.

    When you have this kind of concentration across the financial services industry, you start looking at it, and you have some problems with the ability of other players getting involved and creating that competition.

    Chairman LEACH. Let me interrupt you for a second here. You raise an aspect of the ATM issue that seldom gets raised. I mean, everyone is concerned about costs, but access to ATM systems, I don't just mean consumer access, but can there be an interaction of—my State of Iowa has one ATM system that is universed within the State. They are having problems that some other systems controlled by larger institutions will not let them interact.

    Is this an issue that your organization has addressed or feels worthy of addressing?
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    Ms. GRIFFIN. Actually this just came up, and I didn't realize it. But just in the context of Visa, when I just realized that Visa also controls Plus and Cirrus, which I think everybody knows is huge, that bank is saying, ''we will not give you your Visa and MasterCard unless you take this package.'' It's a problem.

    One problem is the whole tying issue, and it is completely illegal under antitrust laws. And two, what are the effects for competitors trying to get in the market—smaller banks, people trying to get in? I think it definitely needs to be addressed.

    Also, why isn't Citicorp, with 17 percent of the market, demanding that Visa not force them to do this?

    We also have to call on the players in the market to spur this kind of competition. They are just taking the deal. Citicorp has a huge market share right now. It could be very forceful in providing more competition for these other services.

    Chairman LEACH. Let me ask some industry groups.

    Mr. TAYLOR. Could I jump in on that last question? On the issue of greater competition, we obviously support greater competition, and that is why we have argued to preserve thrifts and community banks, and we think competition is healthy. So we are very supportive of that.

    But I don't think we should be misled by the new de novo applications, because I think what we really need to look at is what the asset base of those institutions is. My guess would be, if you look at the assets of those, you would say 2,500, 3,500 de novos, they probably don't add up to any one of the mergers that we are talking about, single institutions we are talking about.
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    Chairman LEACH. No, but most de novo banks lead the country in percent growth.

    Mr. TAYLOR. I understand that.

    Chairman LEACH. And they also—community banks at the community level are doing quite well relative to their competition within that community.

    Mr. TAYLOR. I am not sure you would be able to say they lead the country in percentage of growth once these mergers go through.

    Chairman LEACH. Listen, I think you have missed everything, John. The big are getting bigger only through merging. They are not getting bigger by taking greater market share in almost any market they are in.

    Mr. TAYLOR. I understand that. What I am saying is if you look at these de novo banks—I mean, look at the de novo bank, say, in the Philadelphia area. They are essentially niche bankers looking to fill the niche that the larger banks have moved away from. First Union now controls 40 percent of all the assets in the Philadelphia market. It is in one institution. That is going to grow. It is not going to shrink. The de novo banks are not going to be able to compete about that. They will compete in a niche.

    Yes, the consumer will get dissatisfied, and a particular product will be cheaper, and they will go there, but I think we have to take a little longer-term view of where does it leave to. When you have this disproportionate concentration and control in the market eventually it is very easy to make these other institutions expendable. If they are, if you don't make them expendable, the larger institution doesn't buy them out or underprice them or whatever they want to do to get rid of them, they become irrelevant because of market share. I am sorry if you think I missed the point on that.
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    Let me say also that I think this does raise the issue—you want to get to the industry, so I will—and people have been here a while, so I have answered that.

    Chairman LEACH. Is there any industry concerns on access to credit cards—excuse me, access to ATM machines?

    Mr. POPE. Mr. Chairman, I don't know a whole lot about banks, but I do know a little bit about insurance companies. Let me chat from that angle for a moment, although I can give you one case study of what happened to banks in Fort Wayne, Indiana. Several years ago there were three large—well, middle-sized national banks in Fort Wayne. Two of them were picked up, one by NBD and one by Norwest. The third one was Fort Wayne National Bank.

    I happened to run into the marketing fellow a few months afterwards and asked him how things were going. I had not seen much of his advertising lately. He said, we don't need to advertise. People are coming to Fort Wayne National Bank in droves and leaving the two banks that were picked up by these large conglomerates. Fort Wayne National asked them why. They said, we don't want to be part of a bank from another city, from another area. We want to be with a homegrown local bank. That may be a Fort Wayne parochialism, I don't know, but it was a very telling remark.

    So I think that the fee issue is certainly a big one, the competition angle is important, but I just have a feeling that we are not going to see such consolidation as to have three or four banks dictate terms to the American consumer. I don't think you would stand for that. I know we wouldn't.
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    From the insurance angle, the things we have been talking about really focus back on why something like H.R. 10 is so very important and why it needs to be crafted in a way that does provide for safeguards against one another when you have the three industries beginning to combine.

    It is why it is so important. The way it is crafted now, with the separately capitalized affiliates, set with the financial service holding company on top, each entity functionally regulated by the regulator that knows how to handle that, makes an important difference here. We allow no combination of entities where we would run into a real problem, where we have a regulator dipping into an open-subject affiliate to fund an injured bank. That could lead to some serious problems down the road, and that is why H.R. 10, in my opinion, is so well done.

    Mr. JUDGE. I am not sure I can speak to the bank issues as well, but there are a couple of things I think that are similar situations in the securities industry that might be insightful. The first is in terms of proprietary products, something that the securities industry sells, and I think it relates to Mr. Vento's question. It is kind of the same thing as the ATM situation, where the bank or insurance company controls the ATM, or an insurance company has a set group of products to make available. In the past, many securities firms only offered proprietary products that they developed or offered themselves, their own mutual funds or lines.

    My impression is the industry is moving away from that very dramatically. That is a result of competition. What they found is their customers can go to an on-line broker, they can go to a different broker, they can go to a discount broker and buy all sorts of mutual funds, or buy that mutual fund not offered by that securities firm from their own broker. They are better off keeping that customer and giving a wider choice of products for that customer to choose.
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    So what you are finding is they are not limiting their customers to the funds created by that securities firm itself, but they are giving them funds created by their competitors as well. They can purchase a whole range of products. I think competition brought that into the securities industry.

    The second thing is on your question that you talked about when you mentioned the return on investment and the profitability of regional banks, we see the same things in the securities industry. I think in my testimony I show that the return on equity of regional securities firms is the second highest of any in the industry, and it always leads—historically has led the large investment banks and the national full-line firms. There is a greater return on regional firm equity than other parts of the industry. They have done very well, and they are very profitable and very vibrant competitors with the national firms.

    I think the last thing to look at is the percent of market share controlled by the largest ten firms in the securities industry has pretty much stayed the same over the last 20 years, despite the fact of really large mergers, Morgan Stanley-Dean Witter, Salomon-Smith Barney, a lot of mergers over the last 20 years. The top ten firms control less than 50 percent of the marketplace, and that number has remained pretty much the same over the last 20 years. So despite the fact you have had mergers in the past, which have been common in the securities industry, there continues to remain a real place for the regional firms, the discount firms now, the e-trade firms now, that provide new competition to the markets.

    I think you are not looking at a situation in the securities industry where you are going to see an overconcentration of economic power in one place.
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    Ms. GRIFFIN. I just wanted to raise one point. A lot of people talk about the mergers and keeping the customer base. But apparently in the wake of mergers, which goes along with what you are talking about, people leave the big banks because they get disgusted or just want a community bank or something. Something like 20 percent apparently leave.

    But it is interesting, because one of the things that these banks have been arguing is that in a merger they want to keep their customer base. I think it raises the issue—what customer base do they want to keep? I think that is something that really needs to be looked at as we look at these fee structure schemes and who are they really trying to target? Are we leaving a segment of the market really left out?

    These are all issues that bring us back once again to the whole point of the Federal regulators. If they are looking at the merger, they have to look at the effects, we'd say not just short-term effects, but long-term effects, and not just on banking, but as I said, these other services, are the banks somehow controlling those which is going to affect banking services? I just wanted to make that point.

    Mr. TAYLOR. When I was listening to Mr. Judge, I mean, I think he is probably very accurate when he says that, you know, increasingly people will look to the computers and go on-line and look at mutual funds and other sorts of products. The population that we are trying to help that has been left out of the banking industry and left out of a lot of people's plans is not that group of folk. I suspect they are also not the folks that necessarily leave the big bank to go to a niche bank.

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    You know, B.F. Saul, who owns Chevy Chase Bank and B.F. Saul Mortgage, told me an interesting thing once. When he was under fire from the Justice Department, he mentioned how if it wasn't—he was trying to convince me how much he cared about people of color. And if it wasn't for people of color leaving their deposits in the institution when they were practically insolvent, they would have gone under.

    The sophistication level, you know, knowing that you could take it out and put it in a money market at the time and make a whole bunch of money and so on, working poor people, people of color in the urban and rural areas, they just weren't as quick to use the kind of mechanisms that people are talking about. So they are very much dependent upon the mainstream system, because they get swooped up and caught up in it, because they have been in the system, because that is the major opportunity for them to have any banking relationship.

    So when things change, I guess what this is coming down to is who we are really looking out for? Whether you and I disagree on this or not, I don't know, but, I mean, it seems to me I am thoroughly convinced that these mergers are not looking out for people who are traditionally underserved. The reason they come out with progressive products, Mr. Chairman, is not because they are progressive thinkers, but it is because they are the larger banks, and they are the targets of consumer groups who go up to them and say, you know, what are you going to do under CRA, and how are you going to serve this population? So they release a new product. Yes, the little banks see it and start competing. But it is not altruism, and it is not, you know, progressive thinking that creates these opportunities in the large institutions. It is having laws and regulations that require that these traditionally underserved people and working poor are not left out of the equation.

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    Chairman LEACH. I think you are partly right——

    Mr. TAYLOR. I am getting warmer anyway.

    Chairman LEACH. That is, the law is very important to protect the very poor, but I think many products are driven by competition, maximization of profit that in a competitive environment can help consumers. In a noncompetitive environment——

    Mr. TAYLOR. We agree on that.

    Mr. VENTO. I was just going to point out there has been a lot of discussion about our bubble economy, and obviously in that particular light, banks being formed in the last five years, you know, look good, and I agree with you, the profits on these de novo banks are good. But that doesn't say anything qualitatively about what they are doing. If they are only involved in these types of services, and they are dealing with this group of consumers—because I think all of us can think of instances in urban or in rural areas, especially where there isn't the corpus, so that you can gain the type of investment to justify the type of asset base that you describe growing and making that type of income.

    So qualitatively, it doesn't say anything about the nature of what the institution might have been doing in Laverne, Minnesota, before it got bought out by Norwest Bank in terms of agriculture loans, in terms of small business loans, in terms of basically the economic viability of a whole series of small businesses and others that are in that area.

    So we can come up with numbers here, but, John Boyd, what I was going to say is the average looks good, but nobody lives on the average. You live in a specific. So I think that is the point.
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    I think beyond that, of course, it gets into this whole culture of what is venture capital. I think the instance here is that we know that large institutions earn less money. Their stock returns are not there. They do not make the type of—maybe they make it on growth or speculation in terms of merging, but the fact is that they just have not had the kind of growth, as you have indicated, as smaller institutions actually are making.

    So there may be other factors involved, and I think, you know, again, Mr. Boyd's comments about the whole spectrum of services and what they are actually controlling and what they are doing is not always easily understood by us. I think the derivatives was a real eye-opener for me when we had hearings on that and discovered banks were responsible for two-thirds of the derivatives, all of which were more or less proprietary types of instruments.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Vento.

    Well, apparently the committee is exhausted.

    Mr. TAYLOR. We are ready to go.

    Mr. VENTO. I am just getting warmed up.

    Chairman LEACH. Anyway, let me thank you all, Mary and John representing one perspective, and is it Dr. Guerin-Calvert? I am not sure.
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    Ms. GUERIN-CALVERT. Ms. Guerin-Calvert.

    Chairman LEACH. Fair enough. And, Mark and Steve, thank you all. The hearing is adjourned.

    [Whereupon, at 7:45 p.m., the hearing was adjourned.]