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U.S. House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 9:40 a.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema, [chairwoman of the subcommittee], presiding.

    Present: Chairwoman Roukema; Representatives McCollum, Bereuter, Metcalf, Kelly, Fossella, Vento, C. Maloney of New York, Bentsen, Kilpatrick, Kanjorski, and Sherman.

    Chairwoman ROUKEMA. All right. I think without further delay, we should begin this hearing. It is an important one and one that we are all very anxious to begin.

    Today, as we all know, we are beginning consideration of what has become a perennial issue for this subcommittee, and really indeed for the Congress. In fact, there have been various names applied to reinventing Government or devolving Government.

    What it comes down to, in my opinion—and I hope this hearing will be a major stride forward to reducing and giving rational interpretation to what is necessary and what is unnecessary in terms of regulatory process—is I think this is a very important issue. Despite the passage of several regulatory relief measures in the last couple of Congresses, there is obviously more work to be done.
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    This subcommittee has primary jurisdiction over financial institutions and the regulatory processes that are applicable to them. The subcommittee has a responsibility and a duty to assure that Federal banking laws and regulations and the supervisory system promote the safety and soundness of the banking system.

    However, in fulfilling this responsibility, it is also important to review on a regular basis the legal requirements that have been imposed to assure ourselves of the continued efficacy of the program. Clearly, the financial markets and the banking industry are evolving at a tremendous pace. Everyone in this room understands that. As changes in the industry occur, old approaches may or may not be appropriate, and new rational regulations need to be in place.

    It makes little sense to continue to impose requirements that do not promote safety and soundness or provide consumer protection but result in unnecessary regulatory burdens, which by their very nature have the effect of undermining the ability of the banks to operate efficiently, effectively, and competitively in the interest of all the consumers.

    The proposal which we are considering today, which is a clearly marked discussion draft, covers a wide variety of issues. There are 33 separate sections and six different titles, and so forth. I won't go into that. Some of the provisions, however, are controversial. Others are obvious. We intend to stimulate discussion with this draft on the issues to see if consensus can be reached and legislation moved forward and expedited.

    As with most legislative proposals, the discussion draft can and will be improved with your help and the help of those on the panels today.
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    I do not intend to go into great detail on all 33 sections, but I would like to highlight some of the important provisions and then briefly identify major differences between the discussion draft and the Senate bill.

    There are four significant provisions included in the draft. The four provisions are Section 101, the payment of interest by the Federal Reserve Board on sterile reserves; Section 102, the payment of interest on business checking accounts; Section 103, payments from BIF and SAIF ''net income'' to the Financing Corporation; and sections 501 and 502, a new privilege for documents and information gathered from financial institutions by regulators in the supervisory process.

    On the subject of sterile reserves, financial institutions are currently required by law to maintain a certain amount of vault cash or reserves at the Federal Reserve banks. Financial institutions are not paid interest on the reserves they maintain at the Federal Reserve banks. Section 101 of this draft would authorize the Federal Reserve Board to pay interest on reserve balances held at these banks. It would apply to both required reserves and excess reserves.

    I want to recognize my colleagues, Mr. Metcalf and Mrs. Kelly, who will hopefully join us. Certainly Mr. Metcalf is here on the first panel. They have introduced legislation on this issue, and they will be most informative in helping us understand their different perspectives.

    Reserves play a very important role in how the Federal Reserve conducts monetary policy. As we will hear later, reserves have plummeted in the last ten years from approximately $38 billion in 1987 to just $16 billion today. And the major reason for this drop has been the rise of sweep accounts; that is, computer programs that permit financial institutions to sweep idle cash out of business checking accounts into overnight instruments which earn interest.
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    While this dramatic decline has not affected, and I repeat, has not affected the Federal Reserve's ability to conduct monetary policy, a further decline in reserves could affect that ability. It is my understanding that the Federal Reserve Board and the banking industry support the payment of interest on reserves. It is further my understanding that the Federal Reserve has earned approximately $20 billion in interest over the last ten years or an average of $2 billion annually.

    It is an important issue, and I am sure those with us today, and certainly the Fed, will be instructive in terms of helping us to evaluate this issue and come to a conclusion.

    Financial institutions, on the subject of interest on business checking, are prohibited by Federal statute from paying interest on business transaction accounts. Financial institutions have circumvented statutory provisions in different ways. Some financial institutions pay what is called ''implied interest,'' through the provision of additional services at little or no cost, reduced fees or lower interest rates on loans. Other larger institutions utilize sweep accounts and other technologies to actually pay interest.

    Section 102 of the discussion draft provides alternatives for addressing the prohibition on the payment of interest on business checking. One approach would be an immediate repeal of the prohibition. Another approach would be to permit financial institutions to immediately offer 24 transactions a month money market deposit accounts to their business customers, and phase out the payment of interest prohibition over a period of time.

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    Our job is to seek a way of accommodating the different concerns here. The business community, including the NFIB, and the Treasury Management Association, will be testifying here today. They support repeal of the prohibition.

    The banking industry, however, is somewhat split and our job here is going to be to seek a consensus on this issue. Good luck. Yes, well, I am hopeful.

    Then, of course, the third issue is Financing Corporation payments. I don't want to spend a whole lot of time on this now, but we have a very important issue here. Banks and savings associations are currently assessed a total of about $800 million annually by the Finance Corporation. And these annual payments make interest payments to investors who purchase FICO bonds, which were used to recapitalize the FSLIC in 1987.

    Section 103 of this draft would direct the FDIC to make payments to the FICO out of net income earned by BIF and SAIF if the fund is above 1.35 percent.

    The payments would be limited to 25 percent of the fund members' annual obligation to FICO, or a maximum of $200 million annually. The FDIC will be prohibited to make any payment total FICO if the fund drops below 1.35 percent or the payment would drop a fund below its previous year-end balance.

    This is an issue that has to be gone into in depth. We will be reviewing this in detail and asking rather precise questions during this panel discussion here today. I believe that we will be most interested in hearing not only what the industry, but what the FDIC has to say on this subject.
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    Going now to the bank exam report privilege. The fourth and final item under discussion today, Sections 501 and 502 of the discussion draft, is entitled Bank Examination Report Privilege Act.

    This title would establish a privilege for correspondence, materials, and information which regulators collect from banks, savings association, and credit unions during the supervisory process.

    The Vice Chairman of the Banking Committee, Mr. McCollum, introduced this as H.R. 3003. It is my understanding that this bill is supported by all the Federal banking agencies, as well as the Banking Committee of the American Bar Association. We will learn more about that today, and certainly we look forward with great anticipation to Mr. McCollum's testimony. This provision enjoys bipartisan support, including our colleague, Mr. Vento, the Ranking Member of the subcommittee.

    The discussion draft contains many of the same provisions as can be found in the Shelby-Mack regulatory relief bill on the Senate side. We have added seven new provisions to the discussion draft. And, in addition, I would like to note that we have dropped some 22 of the more controversial sections from Shelby-Mack. While many of these provisions have considerable merit, the fact is that they are quite controversial. Controversies which seem to be less capable of consensus. However, that does not mean that we will not take them under consideration at some point.

    But the main purpose here today and from here through to September is to expedite consideration of this legislation, and hopefully we can have a full markup before the August recess. Certainly that is our intention here. And if that is accomplished, then it is conceivable that before the recess of Congress for the November election, in October, we could actually get something signed into law this term. That is certainly my hope.
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    We will make a good beginning on it today. And with that, I will turn the spotlight over to my colleague, Mr. Vento.

    Mr. VENTO. Well, thank you, Madam Chairwoman, for convening the hearing and for outlining many of the provisions in the draft measure. I am grateful that staff, on a bipartisan basis, has been able to work together to come up with this tentative draft. And I commend my colleagues, Mr. Metcalf, Ms. Kelly, and Mr. McCollum, for their work on some aspects of this draft. And, of course, the regulators who have been working and seeking some things.

    Some of this is codification. Some are technical changes. Others are provisions that have been eclipsed by events. And some, of course, are substantive. And even though there has been significant modification from the product of our colleagues in the Senate, there still are some of these provisions that will require additional work.

    I would note that regulatory relief in the past, in those thrilling days of the 104th Congress, was a lot of effort that did not come to fruition until the final days of the session when it was really—many of the controversial issues had been compromised out. I hope we don't have to go through that drill again.

    I think that time is short, really, and that a lot of our energy would be not well spent in terms of that effort. So I am optimistic that we can limit ourselves to dealing with issues where there is broad consensus.

    I noticed even in the testimony, as I read the regulators' testimony this morning or last night, that there are some provisions, such as the sterile reserves, which have to be reconciled in terms of scoring. And there are concerns upon the part of the Administration. So some of these provisions may prove to be difficult to write in.
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    But I think this measure is different than what we have done in the past, and I am hopeful that in the short time that we will be able to move ahead. There is some controversy, certainly, in some aspects of it, but I think there is general consensus. But, more importantly, I think that there is a positive attitude on the part of the subcommittee Members and certainly the Chairwoman and our staffs to work together to try to craft a regulatory burden relief measure that holds promise.

    There are many boundaries I can outline about it, but I think most of us know the areas that are most sensitive in terms of the consumer; some consumer provisions, other provisions that deal with scoring, others that deal with the prerogatives of the various regulators and other matters.

    I would like to request, Madam Chairwoman, that we would move this bill hopefully and the community development financial institution reauthorization bill forward. And as we do so, we can have some positive and proactive proposals introduced by our colleagues, and we can continue to work together on it.

    There are some other issues, obviously, that we could consider for inclusion in it, including privacy issues, debit card issues, unsolicited loan check issues, and other provisions. Many of them, of course, if presented, are very controversial. But I do think that they are issues that are timely, that there is a lot of interest in it, that would also give some impetus to provide for some interest.

    I know that Senator D'Amato certainly has some interest in some of these matters, and others on our subcommittee. So we should look at that menu of measures such as those as we have before us today—but some of the other issues on perhaps the consumer side that need to be and could be resolved or at least we could get a start on some of them.
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    In closing, I hope that we can move forward, as I said, on a bipartisan issue as we have done to date, trying to maintain this with as little noncontroversy as possible and with the hope of enactment and signing in to law by President Clinton.

    Thank you, Madam Chairwoman. I look forward to the testimony and I welcome my colleagues and the witnesses that are here today that have worked to help review the provisions that have guided us in a sound quality path.

    Chairwoman ROUKEMA. Thank you, Mr. Vento. Are there other opening statements?

    Mr. Bereuter.

    Mr. BEREUTER. Madam Chairwoman, I have a long and intense interest in the subject, but I look forward to my colleagues' comments, and I will not go into lengthy comments.

    Chairwoman ROUKEMA. I should note, Mr. Bereuter has been one of those who has propelled this issue to the top of the agenda over time, and has a deep and abiding interest in regulatory reform.

    And with that, we will welcome the Members of Congress who form our first panel. All are Members of this committee. We are pleased to have them here. They have taken initiatives in their own right, as was noted in my opening comments. Both Congresswoman Kelly and Congressman Metcalf have legislation introduced relating to interest on sterile reserves. We are most anxious to hear their comments. And, of course, Mr. McCollum, the Vice Chair of the full Banking Committee. He has an intense interest in all banking matters, in this particular case the bank examination report privilege.
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    With that, we will begin with Mr. Metcalf.


    Mr. METCALF. Thank you. Madam Chairwoman, Ranking Member Vento, and Representative Bereuter, thank you for the opportunity to testify today on an issue important to me and to small businesses across the country. I am specifically referring to the inability of small business to earn interest on a checking account at a bank and the competitive disadvantages community banks on Main Street face in comparison to non-bank competitors on Wall Street.

    To address these problems, I have, in both the 104th and 105th Congresses, introduced legislation to allow banks and savings institutions to pay interest on business checking accounts, which is now prohibited under law. I am pleased to say that this legislation, H.R. 2323, enjoys bipartisan support. And I express my deep appreciation to our colleague, Paul Kanjorski, for his original cosponsorship and support of it the bill. I also want to thank Chairwoman Roukema for including H.R. 2323 in the regulatory relief discussion draft being considered in the subcommittee today.

    By lifting the current prohibition against banks offering interest-bearing business checking accounts, H.R. 2323 will allow banks the option of giving small businesses this critically needed product. It also allows banks the opportunity to better address the business concerns of their local communities without having to undergo costly cumbersome procedures.

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    But don't take my word for it. Listen to a few of the hundreds and hundreds of comments supporting my bill that I have received from community banks across the Nation. And I have them in a packet here. If anybody wants to go through them, I would be happy if you did so.

    Chairwoman ROUKEMA. Without objection, we will include them in the hearing record.

    Mr. METCALF. Thank you very much.

    A small community banker in Texas wrote:

    ''Our bank is hampered by Regulation Q, which prohibits the payment of interest on commercial demand deposit accounts. Just in the last three months of 1997, our bank lost several millions of dollars in existing deposits and loans to investment banks like Merrill Lynch and Paine Webber. This law is restricting community banks from competing in the financial service area. Small businesses have a right to earn interest on their money, and banks should have a right to offer them this service. Instead, small businesses are opting to move their accounts to large brokerage houses that are permitted to offer interest-bearing demand deposit accounts. When it comes down to lending money, these big banks will not even consider offering these small businesses a revolving line of credit or a loan for the purposes of working capital.''

    That letter is from the Southern National Bank of Texas, Sugar Land, Texas.

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    The president of a Florida bank wrote me last year:

    ''With all the mechanisms now in place to transfer funds from a regular deposit account to another type of account or investment simply to generate interest income, how much easier it would be if we could simply pay interest on a principal operating account. With the regular account analysis programs all of us have, we can build in the appropriate amount of profitability and pay a competitive rate of interest at the same time. I am serving on the board of directors of the Community Bankers of Florida; and at a recent board meeting, the majority of the board overwhelmingly voted in favor of the right to pay interest on demand deposits.''

    That is from the Bank of Tampa, in Tampa, Florida.

    A banker from a $37 million institution in Iowa wrote:

    ''There seems little reason to continue to prohibit interest-bearing checking accounts for businesses or corporations. With the advent of sweep type accounts and the use of computers, businesses are essentially able to conduct themselves as if they had an interest-earning checking account while still complying with the regulation against such accounts. Further, small community banks such as ourselves must either spend additional dollars to offer a sweep type product or lose a small business customer's accounts.''

    That is from the Farmers Savings Bank in Walford, Iowa.

    A banker from a $29 million institution in Nebraska summed up his view about the bill even more succinctly: ''The sooner the better.''
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    That is the Nebraska Security Bank of Deshler, Nebraska.

    A banker in North Carolina wrote:

    ''Allowing the paying of interest on business checking accounts would save maintaining a separate sweep money market account and expense related to tracking numbers of sweeps per month to assure compliance.''

    That is from the Blue Ridge Bank of Sparta, North Carolina.

    A banker from Wisconsin wrote:

    ''Small banks are now required to use creative repurchase agreement accounting in an attempt to compete. Why are our customers being disadvantaged? Please level the playing field.''

    From the Citizens Saving Bank of Loyal, Wisconsin.

    Listen to the views of Federal Reserve Chairman Alan Greenspan. In expressing his support for this legislation, Chairman Greenspan wrote:

    ''It would eliminate a significant distortion in financial markets that places small businesses at a particular disadvantage. Moreover, it would assist us in our implementation of monetary policy. Permitting depository institutions to pay interest on demand deposits would eliminate a constraint that serves no purpose and imposes unnecessary costs on both businesses and depository institutions. The current prohibition, a form of price control, leads depository institutions and their business customers to bear considerable expense in order to earn effective interest on transaction balances by investing funds in market instruments such as repurchase agreements.''
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    Chairman Greenspan went on to write that the bill: ''Should be of particular benefit to small businesses, which often find sophisticated cash management techniques too expensive and consequently are unable to earn market rates of interest on their transaction balances.''

    In a 1996 joint report, the four Federal banking regulators stated that they believed that the statutory prohibition against paying interest on demand deposits no longer serves a public purpose. Now is the time to act on their sound policy recommendations.

    Finally, listen to the voices of those who represent businesses across the Nation and who have endorsed my bill: The Treasury Management Association which represents over 10,000 cash management professionals within the corporate sector; the National Federation of Independent Business which represents over 600,000 small and independent businesses; T. Rowe Price, the mutual fund company; and America's Community Bankers. The list goes on.

    For example, the U.S. Chamber of Commerce, the world's largest business federation representing an underlying membership of more than three million businesses, wrote in support of my bill: ''By allowing for more open competition, your legislation offers an important opportunity to small business owners to establish a more complete relationship with their financial service providers.'' I couldn't have said it better myself.

    In closing, this is the chance to do something tangible, to help every small business in every congressional district now, not six years from now, but now. America's small businesses cannot afford for Congress to further delay lifting this outdated and anticompetitive prohibition.
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    Thank you again, Chairwoman Roukema, for the opportunity to testify here today.

    Chairwoman ROUKEMA. Thank you, Congressman Metcalf.

    Congresswoman Kelly.


    Mrs. KELLY. I want to thank you, Chairwoman Roukema, Ranking Member Vento, and our other colleagues on this subcommittee, for the opportunity to testify today about the regulatory relief package that we are developing and for including my provisions in your discussion draft. Most of all, I want to thank my friend, Congressman Jack Metcalf, for his tenacity and hard work for bringing the issue of payment and interest on commercial checking accounts to the point where passage seems so certain.

    As the Chair of the Small Business Subcommittee on Regulatory Relief and Paperwork Reduction, I drafted H.R. 4082 with the burdens in mind that face small banks and small businesses on a daily basis. My objective with H.R. 4082 was to create a consensus package that could bring together different sides who were in disagreement on the idea of payment of interest on commercial checking. Aside from technology matters, there are only three real differences between H.R. 4082 and Congressman Metcalf's H.R. 2323.

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    The first difference is that my legislation allows banks to conduct 24 sweeps in their accounts. The funds could be swept into an interest-bearing account daily, after all transactions have occurred in the commercial account. The next morning, the money would then be swept back into the commercial accounts with interest. Currently, banks are only allowed to do this six times a month. It would not decrease the safety and the soundness of banks to do this every business day of the month. This would allow banks to pay interest on commercial checking accounts with minimal change.

    The funds could then be swept into an interest-bearing account daily, after all transactions have occurred in the commercial account. The next morning, the money would then be swept back into the commercial accounts with interest.

    In my discussions with banks, complying with this provision would take a minimal effort, since I am only increasing their ability to sweep from 6 times to 20 a month to 24.

    The second difference is that I delay the ability of banks to directly pay interest on commercial checking accounts for six years to provide for an orderly transition. This delay is important for two reasons. The first is that many small businesses have existing arrangements with their banks in lieu of receiving interest on their checking accounts. The phase-in will allow the institutions to reprice related products.

    As an example, the local dry cleaner has a business checking account with the local bank. The bank cannot pay interest on this account. But in order to keep the dry cleaner's business, it reduces the percentage of interest charged on their outstanding business loan, and agrees to process the payroll for the dry cleaner at a reduced cost or at no cost. If full payment of interest on this corporate checking account were effective immediately, the bank would be paying interest on checking and giving the customer reduced interest for the remainder of the term of the loan, causing the bank to take a loss. Multiply this times the number of corporate accounts carried by the bank and you have a significant impact on the bottom line of the institution.
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    This six-year phase-in would also prove beneficial to banks from an operational standpoint. Banks are just developing significant resources to prepare for the Year 2000. Additional system adjustment may be needed after January 1, 2000 as well.

    Delaying implementation of paying interest on demand deposits will allow banks to concentrate on system updates for Y2K before they have to turn their attention to the system changes that would be required to pay interest on corporate checking accounts. It is the weekends in which banks have their only opportunity to test their computers for Year 2000 compliance, which translates to 75 times only that a bank can test for Y2K compliance before the turn of the century.

    We are all very aware of the problems that could occur with the Year 2000, and I want to make sure that we do not legislate anything that would cause significant distraction for bank computer programming resources from the Year 2000 preparations.

    The third difference is that my language allows for increased flexibility for the Federal Reserve in setting reserve requirements. In my communications with the Fed, they have made it clear that they have no present intention of either increasing or decreasing the reserve requirement ratios within the limits already allowed by law. However, it is impossible to predict contingencies that they may face in the future and this added flexibility may very well become a real advantage.

    In closing, I have worked really hard to craft a package that all sides could come close to agreement on. I have worked on this with Congressman Metcalf and other Members of this committee, committee staff, and the interested groups that we will soon hear from.
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    I want to ask unanimous consent to have a letter from Mr. Michael Smith, President of the New York Bankers Association, entered into the record.

    Chairwoman ROUKEMA. Without objection, so moved.

    Mrs. KELLY. Thank you, Madam Chairwoman. In this letter, Mr. Smith expresses the unanimous endorsement of my bill, H.R. 4082, by the New York Bankers Association Board of Directors. I also have worked with the Federal Reserve Board and received positive feedback on H.R. 4082. But I will let them discuss that with us when they come before us on the next panel.

    I appreciate being part of this debate and look forward to working with my colleagues on both sides of the aisle in the further development of this regulatory relief package. I hope you will keep my concerns in mind as we move this regulatory relief package in Congress. And thank you very much.

    Chairwoman ROUKEMA. Thank you.

    Both Congressman Metcalf and Congresswoman Kelly have given us a lot to think about here, and we shall see how this discussion between the two points of view plays out.

    Congressman McCollum, please.

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    Mr. MCCOLLUM. Thank you very much, Madam Chairwoman. It is certainly a different position to be before you in this role, and I am happy to do it because you have been kind enough to include, as you stated, a portion of your bill as part of one I introduced some time ago, H.R. 3003, which is I guess affectionately referred to as BERPA, the Bank Examination Protection Act.

    Chairwoman ROUKEMA. I purposely did not use that acronym. I don't think that is very complimentary to what we are trying to do here.

    Mr. MCCOLLUM. That is what my staff and yours have been calling it, so I guess we have to speak the truth.

    Chairwoman ROUKEMA. You and I have to come up with something better than that.

    Mr. MCCOLLUM. At any rate, in overall viewpoints of this matter, I would say that the regulatory relief that you have got in the draft is, overall, a very positive step in the right direction. We may debate the fine points, but we need to have significant changes in the various areas that are in this draft.

    Specifically with regard to what I have introduced that you have incorporated into the bill, it deals with the question of what kind of confidence we are going to have in the future, I think, among the regulators and the providers of financial services as well as us as policymakers. The question is confidence in the validity, accuracy, and confidentiality of the information that flows among the parties.
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    My bill that you have incorporated specifically would establish that all confidential supervisory information shall be the property of the bank regulatory agency that created or requested the information. The supervisory information would be privileged from disclosure to any other person. In addition, submission of information to a bank regulator would not be construed as waiving, destroying or otherwise affecting any privilege such institution may claim regarding the information under Federal or State law.

    Furthermore, the only access to this information would come through the banking agency that created or requested the information. Such agency would determine whether to disclose the information and may, without waiving any privilege, authorize access to confidential supervisory information for any appropriate governmental law enforcement purpose.

    The issue of privilege must be addressed. The fact that financial institutions may lose their claim of privilege by turning over information to bank regulators has made some of them reluctant to share relevant information. This makes it more difficult for banking agencies to thoroughly examine financial institutions and it makes our job at oversight more difficult.

    The submission by a depository institution under the provisions that you have put in your bill from mine of information to a Federal banking agency, a State bank supervisor or a foreign banking authority will not be construed as waiving, destroying, or otherwise affecting any privilege of that institution with claim to such information under Federal or State law. And the person seeking discovery or disclosure of confidential supervisory information may not seek such information through subpoena, discovery procedures or other process from any person, except the Federal banking agency that created or requested the information. And that agency will be the sole determiner of whether to disclose such information. Federal courts would have the exclusive jurisdiction over actions in which someone seeks to disclose confidential supervisory information.
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    I have the support, and we all do, of virtually all the regulators on this. And just as Congresswoman Kelly requested unanimous consent that a letter be put in the record, I would request that one I received dated, September 17, 1997, signed by five regulators, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, and Chairman Greenspan of the Board of Governors of the Federal Reserve System. I request unanimous consent that this be put in the record, Madam Chairwoman.

    Chairwoman ROUKEMA. Without exception, so moved. It will be accepted.

    Mr. MCCOLLUM. My last comment simply is to say that in addition to obviously supporting these provisions and encouraging their incorporation and continued incorporation in the bill that you have drafted, two additional items besides the interest question that Mr. Metcalf and Ms. Kelly raised which, in general, I am supportive of, though I know there is some conflict over what the term should be. I am generally supportive of provisions that you have made, I think, in this bill to do some of the things that Congressman Castle wants to do to strike a balance with regard to the CEBA banks, the non-bank banks with regard to securities activities.

    And I also, although it is not in the bill, would like to at least raise for the attention of the subcommittee an issue that is long been discussed in terms of bank regulatory reform, and that is officers' and directors' liability. I still continue to believe that it is indeed a very big stumbling block to gaining good officers and directors, people willing to volunteer to serve banking institutions. And I would hope that perhaps if not in the legislation at least during the course of the debate of this legislation, we can again address that subject which has come up from time to time but never been legislated.
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    And I thank you, Madam Chairwoman. I submit my testimony in its entirety for the record. That is a summary.

    Chairwoman ROUKEMA. I thank the panel. This has been most instructive and helpful, and I know you are going to all be intimately involved as we reach our conclusion and expedite the consideration of this legislation. Are there questions for our panelists? Thank you very much. We appreciate it.

    While the second panel is getting into place, I will excuse myself for two minutes, and we will be back shortly. If the second panel will take its positions, please.


    Chairwoman ROUKEMA. Thank you. We have a very auspicious panel of Administration officials, Treasury, the Fed, and the other regulators. I will introduce you individually in the order in which we will be hearing from you.

    First we will welcome our witness from the Treasury Department, the Honorable Richard S. Carnell, Assistant Secretary for Financial Institutions. He will be testifying on behalf of the Administration.

    The Banking Committee heard testimony earlier this year from Mr. Carnell on the subject of credit unions. We certainly know of his in-depth understanding of all these issues with which we are dealing. We look forward to hearing the Administration's views on the discussion draft. Welcome, Mr. Carnell.
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    Mr. CARNELL. Thank you.

    Chairwoman ROUKEMA. I will introduce each member in order of and prior to testimony. Thank you.


    Mr. CARNELL. Madam Chairwoman, Mr. Vento, Members of the subcommittee, I appreciate this opportunity to present the Administration's views on streamlining depository institution regulation and reducing its costs. The letter of invitation listed four specific topics. I will briefly discuss each of those topics and then also raise one other concern.

    My written statement includes detailed comments on each section of the bill. I want to say that we appreciate the effort that is evident in the draft bill to find common ground and develop a bill that can gain broad support. And I would note that we support most of the provisions in the bill.

    The first topic listed in the invitation letter is whether to repeal the prohibition against paying interest on business checking accounts. This prohibition is a case of old-fashioned price controls. The Government has set the interest rate on business checking accounts at zero.
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    Now banks and large business customers long ago figured out ways around the rule—such as by sweeping money out of the checking account into a savings account, or by giving the depositor other services without charge. Yet these ways around the rule create needless costs and are less feasible for small businesses.

    The Administration believes there is no good reason to prohibit banks from paying interest on business checking accounts. The prohibition is inefficient and anticompetitive. It has been on the books for 65 years and it deserves full retirement—complete repeal. If you do that, you don't need to expand NOW accounts or provide complicated transition rules.

    The letter of invitation also asks whether to pay interest on reserves that depository institutions hold at the Federal Reserve banks. In principle, we support paying interest. It would promote efficiency. But Section 101 of the draft bill would shift large sums from taxpayers to the banking industry. OMB estimates that it would cost taxpayers $800 million over the next five years to pay interest on the reserves that banks must keep at the Fed.

    Given the many high priority claims on scarce budget resources and the banking industry's current robust earnings, we see no sufficient reason to make such a change at this time.

    The second topic you identified, Madam Chairwoman, is whether to use income accumulated in the FDIC's deposit insurance funds to reduce the charges that FDIC-insured banks and thrifts pay to cover interest on the so-called FICO bonds.

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    In 1996, Congress required all FDIC-insured institutions to help make these interest payments on the bonds. It did so as part of legislation that put the SAIF fund on a sound financial footing. The taxpayers had spent $125 billion to honor the Government's guarantee of thrift deposits. All FDIC-insured institutions benefited from the Government closing insolvent thrifts and keeping its pledge to depositors.

    FICO costs spread across all FDIC-insured institutions are modest.

    Let's put this issue in perspective. Ninety-five percent of banks and 91 percent of thrifts are already paying the lowest insurance premiums in the history of the FDIC: zero. So we strongly oppose using earnings on the deposit insurance funds to reduce the FICO charge. Diverting money from the insurance funds would increase the risk to the taxpayers, and—by increasing the Government's borrowing requirements—it would effectively shift additional costs for the S&L cleanup from depository institutions to the taxpayers.

    The third topic is whether to create a privilege under the law of evidence to protect certain communications between depository institutions and their regulators from disclosure to private litigants. The goal would be to encourage frank and forthright discussions. We support the objective of these sections of the bill. We would be glad to work with the subcommittee to refine those sections so as to accommodate any concerns about how they might affect law enforcement.

    The fourth topic is whether to repeal the current requirement to establish a Special Reserve in the SAIF fund. In the 1996 SAIF legislation, such a reserve was required at least partly for budget reasons. We understand that it may now be possible to repeal the requirement without adverse budget consequences. Such are the mysteries of the budget. Now, if that is the case and Congress wishes to repeal the requirement, we would not object.
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    Finally, we want to raise concerns about Section 310 of the bill, which would exempt mergers of affiliated banks from the filing and approval requirements of the Bank Merger Act. Under the provision, the holding company would give ten days' prior notice and the regulator would then decide whether to require a full application. But one of the effects of this would be to eliminate required CRA review in many such cases and give regulators only ten days with which to decide whether to do an optional review. Accordingly, we must strongly oppose Section 310, just as we strongly opposed its predecessor in 1996.

    My written statement outlines an approach that would streamline current law significantly, yet also preserve an adequate CRA review. I believe it would avoid needless divisions over this issue.

    Thank you again for this opportunity to discuss these matters. We stand ready to work with the subcommittee to resolve the Administration's remaining concerns about the draft bill. At the appropriate time I will be pleased to respond to any questions.

    Chairwoman ROUKEMA. Thank you, Mr. Carnell.

    And now we are privileged to have Laurence Meyer of the Federal Reserve Board.


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    Mr. MEYER. Thank you. Madam Chairwoman and Members of the subcommittee, I appreciate this opportunity to comment on behalf of the Board of Governors on the draft regulatory relief bill. The Board welcomes this legislation, which contains many important reforms and recommends its adoption. I would like to highlight some of the provisions that the Board supports and note two areas with which the Board has concerns. My prepared statement details these matters at greater length.

    The Board strongly supports Section 101 of the draft bill which would permit the Federal Reserve to pay interest on required and excess reserve balances at Federal Reserve banks. Because required reserve balances do not currently earn interest, banks employ costly procedures to reduce such balances to a minimum. The cost of designing and maintaining the systems that facilitate reserve avoidance techniques are a waste of resources for the economy and place smaller institutions at a competitive disadvantage. The reserve avoidance measures utilized by banks also could complicate the implementation of monetary policy by leading to increased volatility in the Federal funds rate. The draft bill's authorization of interest payments on excess reserves would be a useful addition to the tools that the Federal Reserve possesses to deal with such contingencies.

    The Board also strongly supports Section 102 of the bill which would permit payment of interest on demand deposits made by businesses. The current prohibition of interest on demand accounts was enacted in the 1930's when Congress was concerned that large money center banks might bid deposits away from country banks to make loans to stock market speculators. This rationale for the prohibition is certainly not applicable today. Funds flow freely around the country and among banks of all sizes. Moreover, the prohibition imposes a significant burden both on banks and on those holding demand deposits, especially small banks and small businesses. Smaller banks complain that they are unable to compete for deposits of businesses precisely because of their inability to offer interest on demand deposit accounts. Small businesses which earn no interest on their demand deposits, because they do not have account balances large enough to justify the fees charged the sweep programs, stand to gain the most from eliminating the prohibition of interest on demand deposits.
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    For these reasons, the Board strongly supports the immediate repeal of the prohibition of interest on demand deposits. Section 102 also presents an alternative that would ultimately allow the payment of interest on demand deposits and during a transition period would authorize a fully reservable, 24-transaction money market deposit account. Although some transition period in the implementation of direct payments on demand deposits would not be objectionable, a relatively short period would be appropriate rather than the six-year delay proposed in the alternative. With a relatively short transition period, the alternative would be acceptable to the Board in preference to the status quo.

    The draft bill's alternative language also includes a provision granting the Federal Reserve increased flexibility in setting reserve requirements. At present, we have no intention of increasing or decreasing reserve requirement ratios within the limits that we already are allowed by law. But the added flexibility in setting reserve requirement ratios might be a useful tool in the future.

    The Board also supports most other parts of the bill. For example, the Board supports Title 5 of the bill, the Bank Examination Report Privilege Act. This title would protect information given by depository institutions to their examiners and safeguard supervisory information based on such disclosures. In addition, Section 312 would eliminate Section 11(m) of the Federal Reserve Act, which imposes an outdated ceiling on the percentage of bank capital and surplus that may be represented by loans collateralized by securities.

    Section 313 would eliminate Section 3(f) of the Bank Holding Company Act, which imposes a restriction on the non-banking activities of savings banks that does not apply to other State-chartered banks. Other provisions in the bill would relieve regulatory burden without raising safety and soundness, consumer protection, or other policy concerns.
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    I would like to highlight two aspects of the bill that cause us some concern. First, Sections 221 and 222 of the bill would eliminate limitations that apply to non-bank banks. Non-bank banks came into existence by exploiting a loophole in the law. When Congress closed the non-bank bank loophole it imposed a carefully crafted set of limitations on the activities of non-bank banks and their parents. We believe efforts to enhance advantages that owners of non-bank banks already possess over other owners of banks should be considered in the broader framework of financial modernization legislation where a more level playing field can be created for all financial service providers.

    The Board also opposes Section 103 which authorizes the use of ''excess net income'' of a deposit insurance fund to pay interest on Financing Corporation bonds. The proposal would divert resources from the deposit insurance purposes of the fund and would in essence establish a statutory cap on the size of the funds.

    The Board believes that it would be more prudent not to spend part of the funds at this time, but rather to allow the FDIC to determine whether the funds have grown to sufficient size to warrant a rebate. The Board would be pleased to work with the subcommittee to further the goals of this bill, and I would be happy to respond to any questions. Thank you.

    Chairwoman ROUKEMA. I thank you, Mr. Meyer. You both have given us a good deal to think about.

    Ms. Williams, the Office of Comptroller of the Currency. We appreciate your being here today. And I would like to officially welcome you. I believe this is the first time that you are testifying here since you became Acting Comptroller. You are welcome and we are eager to hear your testimony.
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    Ms. WILLIAMS. Madam Chairwoman, Ranking Member Vento, Members of the subcommittee, thank you very much. I appreciate this opportunity to discuss the subcommittee's continuing effort to reduce regulatory burdens on the banking industry. I commend you for your leadership in crafting legislation that builds on prior successful efforts to provide prudent and effective regulatory relief for the banking industry.

    Effective bank supervision necessarily imposes a degree of regulatory burden to maintain the safety and soundness of the industry, ensure that the credit needs of the public are served, and protect the interests of banking customers. However, it is our mutual responsibility to identify and eliminate unnecessary regulatory and supervisory burden. Excess burden makes banking unnecessarily more costly, inhibits the ability of banks to serve their customers, and thereby saps the long-term safety and soundness of the banking system.

    Since 1993, the Office of the Comptroller of the Currency has undertaken three major initiatives aimed at reducing unnecessary regulatory burden and improving the efficiency of bank supervision. First, we undertook our Regulation Review Program. This involved reviewing all of the OCC's rules and eliminating or revising provisions that did not contribute significantly to maintaining the safety and soundness of national banks, facilitating equitable access to banking services for all customers, or accomplishing the OCC's other statutory responsibilities. We completed our Regulation Review Program in December 1996.

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    We didn't stop there. During 1997, we conducted an evaluation of the results of our work with bankers, private sector banking lawyers, community organization representatives, and our own examiners and supervisory staff. Those who participated noted a reduction in regulatory burden and no discernible negative impact on the safety and soundness of the industry or on the ability of national banks to address community needs and consumer issues.

    A second initiative aimed at reducing burden and promoting efficiency has been the OCC's implementation of a supervision-by-risk supervisory approach. This approach directs our examination resources more efficiently by focusing examiners on those issues facing a bank that have the greatest effect on current and emergent risks at a particular institution. Examiners then form an overall conclusion about the institution's risk profile, which serves as the basis upon which they structure supervisory plans and actions.

    This enables us to proactively monitor areas of concern in the operations of particular banks, mobilize supervisory resources where they are most needed, and take the necessary steps to contain risk before it affects overall safety and soundness.

    Finally, our third major initiative has been a reduction in direct regulatory costs. After reviewing our assessments and corporate fees, we reduced charges to national banks to more closely reflect the actual costs of supervision. The total reduction in fees and assessments instituted by the OCC between 1995 and 1997 saves national banks roughly $88 million annually.

    Congress can be proud of the leadership it has shown over the last five years in the effort to reduce unnecessary burdens for the banking industry without compromising either the safety and soundness or the community and customer responsibilities of banks. And there are still opportunities to do more. The OCC therefore supports the subcommittee's efforts to provide regulatory relief and promote economic efficiency in the banking industry.
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    Madam Chairwoman, my written statement and attachments provide comments on some specific provisions in the draft bill. At this time, however, I would like to comment on a few of those provisions.

    Section 102 of the draft bill removes the statutory prohibitions that prevent banks from offering interest-bearing NOW accounts to businesses and paying interest on demand deposits. This provision is in accord with the recommendations of a 1996 interagency report in which the Federal banking regulatory agencies concluded that the elimination of these statutory prohibitions would promote competition and efficiency in the banking industry. We do have some concerns about the timing of these changes, however, and recommend that some transition period be provided for banks to make the necessary adjustments in their funding sources and pricing and services so as not to disrupt their ongoing efforts to prepare for the Year 2000 millennium date change.

    We are pleased to note that Section 201 of the draft bill would enable banks to streamline and modernize their corporate governance. By permitting the OCC to allow a national bank to have more than 25 directors, Section 201 would give banks more flexibility in determining the composition of their boards. Given the consolidations occurring throughout the industry today, this change will enable banks, large and small, to accommodate broader representation from the localities and regions served by the combined bank.

    We also support the Bank Examination Report Protection Act contained in Sections 501 and 502 of the draft bill. These sections will help protect confidential supervisory information and promote the cooperative exchange of information between banks and their examiners while preserving a process, including judicial review, by which third parties may seek access to supervisory information.
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    Finally, let me note briefly two concerns with the draft bill. The first centers on Section 310. This section would exclude mergers between subsidiary banks of the same holding company from the current filing and approval requirements of the Bank Merger Act.

    The OCC agrees with the goal of streamlining the process of merging bank subsidiaries of the same holding company. However, we do not support this amendment because it would impede the ability of the regulatory agency responsible for the supervision of the resulting bank to review the transaction for safety and soundness, and would unnecessarily reduce the role of the public in the affiliate bank merger process and hamper effective review of community-oriented issues, including compliance with CRA.

    The second concern I would note is with Section 103, which would transfer to the Financing Corporation, FICO, certain funds that would otherwise be part of the BIF or the SAIF. In view of the evolving international economic trends, the Year 2000 challenge faced by the banking and thrift industries, and concerns about credit quality recently expressed by each of the bank regulators, we do not support diverting income from the insurance funds.

    In conclusion, let me say that the OCC remains committed to the reduction of unnecessary regulatory and supervisory burden. We believe this can be done constructively and without compromising either the safety and soundness or the community and consumer responsibilities of insured depository institutions. We applaud the subcommittee for its efforts and support an overwhelming majority of the provisions in the draft bill. Thank you very much.

    Chairwoman ROUKEMA. Thank you. Thank you very much, Acting Director of OCC.
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    Carolyn Buck, our next witness, is the Chief Counsel of the Office of Thrift Supervision. It is my understanding that Director Seidman was unable to attend today because of a longstanding commitment. We certainly look forward to having the Chief Counsel here. Ms. Buck.


    Ms. BUCK. Good morning, Madam Chairwoman. Yes, indeed, the Director regretted she was unable to be here this morning.

    Good morning, Members of the subcommittee as well. Thank you for the invitation to discuss the Office of Thrift Supervision's views on draft legislation to reduce regulatory burden and streamline the regulatory oversight process for financial institutions.

    Eliminating unnecessary regulatory burden is an extremely important issue for insured depository institutions. Increased technology and quickening competition in the financial services industry compel institutions to improve their efficiency in order to survive. As regulators, we have the obligation to promote business flexibility for the institutions we supervise while maintaining prudent oversight for safety and soundness.

    Except for concerns we share with the FDIC on several issues involving the Federal deposit insurance funds, we support this legislation and thank Chairwoman Roukema for her leadership and the tireless efforts of her staff and others who have assisted in piecing together this legislation. The draft legislation includes many worthwhile burden reduction initiatives.
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    For example, the proposed legislation includes two provisions that will allow thrifts to more effectively provide financial products and services to their local communities.

    The first provision, which we strongly support, would remove the current requirement that a Federal thrift may only invest in a service corporation chartered in its home State. Historically, this requirement has impeded thrifts' ability to make community development investments outside the State of their home office unless they engage in the additional expense and burden of creating a second-tier service corporation. Removing this geographic limitation would enhance a thrift's ability to participate in community development activities wherever its business is located.

    Consistent with the purpose of this amendment to encourage community development investments, we also would support a provision to allow Federal thrifts to invest in first-tier service corporations jointly with other types of insured institutions.

    Currently, a Federal thrift cannot invest jointly, for example, with a national bank in a community development corporation unless it sets up a second-tier service corporation.

    We believe the expense of this process has discouraged partnerships between thrifts and banks in community developments and investments. We urge the subcommittee to include a provision in the legislation to ease this ownership restriction.

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    Another provision of the bill that we support would promote thrifts' ability to contribute to the growth and stability of their local communities by updating the thrifts' statutory authority to make community development investments. This provision would replace an obsolete statutory cross-reference to HUD's Community Development Block Grant program. As a result of changes in that program, thrift investment opportunities that meet the technical requirements of the statute are rare. And the OTS has found it cumbersome to authorize community investments as the statute is now written. To remedy this problem, the proposed amendment provides thrifts with community development investment authority that is equivalent to that of national and State member banks.

    In adopting the bank community development standard, however, the proposed legislation would reduce the amount thrifts are able to invest in community development programs from 5 percent of assets to between 5 percent and 10 percent of capital. While we would prefer the current thrift percentage, we would not object to the bank investment standard of 5 percent to 10 percent of capital.

    With respect to issues involving the Federal deposit insurance funds, let me first state that the OTS continues to support a merger of the funds. In addition, we urge that the legislation include a provision repealing the SAIF Special Reserve which would be funded on January 1st, 1999, with the amount of SAIF reserves that exceed the 1.25 percent designated reserve ratio. Funding of the Special Reserve would pare the SAIF to the bare minimum and would eliminate the capital cushion now available to the SAIF to absorb insurance losses. This could expose SAIF members to the possibility of increased premiums and, once again, a BIF-SAIF premium differential, even though SAIF members have already substantially overcapitalized the SAIF.

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    We also share the FDIC's concerns about the proposed use of the Federal deposit insurance funds to offset the FICO assessment imposed on BIF and SAIF members. This would tap the insurance funds for purposes unrelated to depositor losses, and reduce fund reserves when there are uncertainties about the appropriate fund balance to meet future deposit insurance needs.

    We support provisions in the draft bill designed to protect confidential supervisory information. The bank examination protection provisions are substantially similar to those introduced by Congressman McCollum last year. The legislation would codify various Federal court holdings that supervisory communications between regulators and regulated institutions are privileged and protected from disclosure.

    We also urge the subcommittee to consider another provision to protect confidential agency information. The amendment we seek would clarify that the banking industry whistleblower statute is intended only to protect persons who pass on confidential information to an agency that is in a position to address possible violations of law, and it does not protect persons seeking to alert others that they may be under investigation for possible wrongdoing.

    As for the other portions of the bill, we support either of the provisions set forth by Representatives Kelly and Metcalf to lift the statutory bar on interest payments on business checking accounts. And we support repeal of the statutory dividend notice requirement imposed on thrifts owned by thrift holding companies. We also support the provision permitting a thrift holding company to require or retain a 5 to 25 percent noncontrolling interest of another thrift or thrift holding company, subject to OTS approval.

    Finally, we strongly urge inclusion of an amendment to repeal Section 6 of the Home Owners' Loan Act, the so-called thrift liquidity provision. This provision should be eliminated because it no longer serves its original purpose and is redundant.
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    The OTS is committed to reducing existing burden wherever we have the ability to do so consistent with safety and soundness and compliance with law. I believe the proposed legislation is consistent with this objective, and we appreciate that many of the reforms that we have long desired are included in this bill. I would be pleased to answer your questions. Thank you.

    Chairwoman ROUKEMA. Thank you. Thank you very much.

    My colleague here and I are wondering whether we are having clarification or getting more intricate complications. But I am confident that we are going to still be able to expedite these matters. Thank you very much.

    We now have our fifth witness, the brand new Chairman of the Federal Deposit Insurance Corporation, FDIC Chairman, Ms. Tanoue. We welcome you here today. It is the first time testifying before the subcommittee, but it will be one of the first of many, I would expect. We are anxiously looking forward to your insights and testimony. Thank you very much.


    Ms. TANOUE. Thank you. Madam Chairwoman, Ranking Member Vento, and Members of the subcommittee, good morning. I appreciate the opportunity to present the views of the FDIC on the discussion draft. The FDIC shares your commitment to eliminating unnecessary regulatory burden while maintaining the protections established for consumers.
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    The FDIC supports many of the provisions in the draft bill, and we certainly appreciate this subcommittee's willingness to include the proposals we suggested.

    Our written testimony highlights a number of the provisions that we support, as well as some of our concerns. In the interest of time and brevity, I shall focus my remarks this morning on two issues directly related to deposit insurance. One, the diversion of deposit insurance funds to pay interest on FICO bonds is a provision that we feel should be eliminated from the bill. Second, the elimination of the SAIF Special Reserve is a provision that we feel should be added to the bill.

    First, I would like to discuss the FICO bonds. When the FDIC became responsible for insuring deposits of thrifts, it also became responsible for collecting and forwarding interest payments due on the FICO bonds. At that time, the mechanism for collecting interest for FICO was to give this obligation a first call on assessments collected from members of the SAIF. The Deposit Insurance Funds Act of 1996, very significant legislation, repealed the FICO claim on deposit insurance assessments. That legislation gave FICO its own assessment authority to meet its interest obligation. The draft bill would change this funding scheme by requiring that the FDIC, under certain conditions, make payments from the deposit insurance funds to FICO.

    The FDIC strongly opposes this requirement. Diverting deposit insurance resources to pay FICO interest is really no more than giving the banks a deposit insurance rebate. Because of the extraordinary health of the banking industry, the deposit insurance funds are currently above the designated reserve ratio of 1.25 percent of insured deposits. Although it may be tempting to use these funds for other purposes, including rebates, there is no guarantee that either banks or the economy will always be so healthy. Any consideration of rebates should not be made in a stand-alone fashion, but should rather be part of an overall assessment of deposit insurance premiums and the risks faced by the insurance system.
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    In addition, given the uncertain effects of the current economic difficulties in many Asian economies, and the Year 2000 challenge as well as the challenges posed to insurance funds by increased consolidation of the industry, it would seem imprudent at this point in time to divert resources from the insurance funds to other purposes.

    The second matter of concern to the FDIC is the SAIF Special Reserve that Congress created in 1996 as part of the Funds Act.

    Ideally, the BIF and the SAIF should be merged, eliminating the concept of a SAIF Special Reserve. However, absent an immediate merger of the funds, the FDIC strongly urges this subcommittee to include language in the draft bill to repeal this provision. The reason for elimination of the Special Reserve is very simple. It could lead to an assessment rate disparity between BIF and SAIF members, precisely the problem that the Funds Act was originally designed to eliminate.

    Under current law, on January 1st, 1999, the FDIC must reduce the SAIF reserve ratio to 1.25 percent by setting aside in a Special Reserve all SAIF funds above those required to meet the 1.25 benchmark. By current estimates, the Special Reserve will be between $884 million and $1.35 billion. Funds in the Special Reserve will remain available to the SAIF and cannot be used for any other purpose. Thus, the practical effect of the Special Reserve is to artificially set the SAIF's reserve ratio below its true level. On the other hand, the BIF reserve ratio will remain at its actual value, which the FDIC expects will be above its current value of 1.37 percent on January 1st of next year.

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    The FDIC is required to raise deposit insurance premiums if a deposit insurance fund's reserve ratio falls below the DRR. Since it would be starting from a lower value, the SAIF's reserve ratio would likely drop below the 1.25 percent benchmark before the BIF, if after January 1st of next year there are unanticipated bank or thrift failures or faster than expected growth in insured deposits. Thus, it is likely that the FDIC would be required to raise SAIF assessments before instituting a comparable increase in BIF rates and we would have, again, the rate disparity between the two funds.

    Differences in deposit insurance assessments among institutions should be based upon differences in risk posed to the insurance funds, not upon artificial distinctions. Our recent experience with different assessment rates for the BIF and the SAIF and the resulting deposit shifting which occurred provide an example of the kind of market distortion that can occur when regulation imposes artificial distinctions on insured institutions.

    Once again, notwithstanding these major concerns with the bill, I would like to emphasize that the bill does include many important provisions that the FDIC does support. And we look forward to working with you and the subcommittee to reduce regulatory burden. Thank you very much.

    Chairwoman ROUKEMA. Thank you, Ms. Tanoue.

    Our sixth witness on this panel and the final witness on the panel is Mr. Timothy McTaggart, the Banking Commissioner of the State of Delaware. Thank you, Mr. McTaggart. Mr. McTaggart is here speaking on behalf of the Conference of State Bank Supervisors, and we welcome him.
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    I would like to note that you were at one time, at least from the notes that I have received, you were at one time a Senate Banking Committee lawyer. So you are somewhat familiar with Capitol Hill. I don't know whether that commends you to us or compromises your objectivity. Mr. Vento is going to be on his guard, he tells me. We welcome you here today.


    Mr. MCTAGGART. Thank you very much. Good morning, Chairwoman Roukema, Congressman Vento, and Members of the subcommittee. I am Tim McTaggart, the Bank Commissioner for the State of Delaware, and the Legislative Committee Chairman of the Conference of State Bank Supervisors, CSBS. Thank you for asking us to be here today to share the views of CSBS on regulatory burden reduction.

    We applaud your commitment and efforts to reduce the burdens imposed by unnecessary and duplicative regulations. The State banking departments have always sought to measure each regulatory requirement against its benefit to the public. In supervising State-chartered institutions, we have seen how the cumulative effect of the regulatory requirements can have a detrimental effect on the public by diverting banks' resources from lending and other financial services and instead devoting them toward regulatory compliance.

    Over the past few years the States, independently and in conjunction with our Federal counterparts, have focused their efforts on reducing the burdens on State-chartered institutions. Technology has played a large part in this regulatory relief effort. Through the use of technology and the development of automated examination tools, State and Federal banking agencies have been able to improve the quality of the examination product while making the process less intrusive for financial institutions.
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    Coordination and cooperation have been hallmarks of the State banks' supervision system in the 1990's. With the Riegle-Neal enactment in 1994, CSBS undertook a project to create a seamless supervisory system for State-chartered banks operating on an interstate basis. CSBS formed with the FDIC and the Fed the State and Federal Working Group, the goal of which is to minimize conflicts and duplication among the State and Federal bank regulators and supervising interstate State-chartered banks.

    In addition, under the Riegle-Neal Amendments Act of 1997 that you, Chairwoman Roukema and Congressman Vento, were so helpful in passing, home State law now applies to State-chartered banks when they branch across State lines. This new law reduces the burdens on State-chartered institutions that operate in more than one State.

    With respect to the draft discussion this morning, discussion bill, we would like to thank the subcommittee for considering our views in developing the draft of the Financial Institutions Regulatory Streamlining Act of 1998.

    In particular, CSBS commends you for extending the Administration's initiative on plain English to all Federal banking agencies. Although regulations may still be necessary after this bill passes, plain English will help make those rules less mind-numbing and will go a long way toward reducing regulatory burden.

    Also, we strongly support the bill's provisions to repeal Section 3(f) of the Bank Holding Company Act. Section 3(f) was intended to be a special grant of authority, not a restriction. Repeal of these provisions would bring the regulation of savings banks in line with the regulations governing all other financial institutions in a bank holding company structure.
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    We would also like to commend you for in including the Bank Examination Report Protection Act, originally sponsored by Representative McCollum as he testified this morning, in this discussion draft. The free flow of information from a financial institution to its regulators is critical for the effectiveness of the supervisory process. It is important for financial institutions to have confidence that their disclosure of confidential information to regulators will not be used for unrelated actions.

    One suggestion that we would have for the subcommitte's consideration relates to Section 302. Section 302 of the draft bill requires the Federal banking agencies to jointly develop a system under which insured depository institutions and their affiliates may file call reports. Since more than half of the insured depository institutions are State-chartered banks, we ask that you include a provision requiring the Federal agencies to consult with State bank supervisors when developing this system.

    In conclusion, the quest to streamline the regulatory process while preserving the safety and soundness of our Nation's financial system is critical to our economic well-being and the health of our Nation's financial institutions. We commend you Chairwoman Roukema for your efforts in this area. We appreciate this opportunity to testify on this very important subject and look forward to any questions that you and the Members of this subcommittee might have. Thank you very much.

    Chairwoman ROUKEMA. Thank you. Thank you very much. We will try to move this along. Hopefully we won't run into votes on the floor too soon. But I will assure you that I for one will be going over your testimony very carefully.
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    There have been a lot of, not necessarily unreconcilable conflicts here, but considerable rationales and documentation for your positions. And they are somewhat in conflict and perhaps too much to absorb on an oral basis. I will be going over that. And by the way, I do think I see here a very ready compromise between Ms. Kelly's approach and the approach of our colleague, Mr. Metcalf. At least I would hope that is what I am hearing. I will leave those more perceptive questions up to my colleagues here.

    But I am not quite sure, I thought I was listening carefully but if one or two could clarify for me the questions on the FICO bonds and the differences here with respect to the BIF and the SAIF here. I am not quite sure I have understood the reasons for the differences here.

    Let me ask the question my way in plain English terms. Are you suggesting that we let this grow indefinitely? Or what do we do? I don't know whether it is rank to even suggest that Treasury just wants it as a bottom line budget amount or what, but it seems to me that there has to be a rational cap to it and that it should not be growing indefinitely and that there should be some return to the industry, to the banks and the savings group, the ACB.

    Mr. Carnell, would you like to clarify your position on that?

    Mr. CARNELL. Certainly. Our focus at the Treasury is on protecting the taxpayers here, and not on any budget effects. Let's put this issue in perspective. For a long time—including the 1970's and mid-1980's, the FDIC paid rebates on premiums that were going to be due from banks that year but hadn't actually gone into the fund. And what we found by the beginning of the 1990's was that that money was not excess after all. That money was needed to cover future losses. The net result of the rebates was to leave the bank insurance fund in the red by the early 1990's.
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    Now we hope that with the reforms that were put in place in 1991, we are not going to be in that position again, but we don't know if that will be the case. We don't know whether this money is excess. Now the target of having $1.25 in reserves for every $100 of insured deposits was established somewhat arbitrarily in the 1989 legislation. It codifies FDIC practice over some years. But again, we do not have a lot of experience in going through the ups and downs of the economic cycle with this rule in place.

    This brings us to something that is very important to keep in mind when dealing with insurance fund reserves over the course of the economic cycle. Bank failures tend to be clustered together in time, are not like traffic accidents, which are reasonably well spread out over time. It is not like most traffic accidents are clustered in one out of every seven years.

    Now, bank failures by contrast, are clustered in times of economic stress. They tend to occur at about the same time. That is how in the late 1980's the bank insurance fund went in just a couple of years from being the largest deposit insurance fund in the history of the world to being found insolvent under the GAO audit.

    So the basic point here is that we don't know whether this money is going to be excess. We think that having the fund grow by accruing interest on its reserves is reasonable.

    And it is worth noting again that 95 percent of banks and 91 percent of thrifts are paying no premium right now. We don't think that continued buildup of interest is unreasonable or overly burdensome. We think that is a prudent taxpayer protection measure.
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    Chairwoman ROUKEMA. But you are suggesting, you or anyone else that would like to comment on this, you are suggesting that it grow indefinitely.

    Mr. CARNELL. No, not indefinitely, Madam Chairwoman, but we are not at the point where the build up should be worrisome.

    Chairwoman ROUKEMA. OK.

    Mr. Meyer, I see you shaking your head. Do you wish to comment, or anyone else, please?

    Mr. MEYER. I agree with that. There is a degree of arbitrariness in the initial ratio. There is some uncertainty about the appropriate level of the reserves. But I think it is also the case that one could imagine hypothetically a situation where the funds continue to grow in which it would be appropriate to do a broader assessment of what the appropriate level is and determine whether or not the rebate was appropriate.

    Chairwoman ROUKEMA. Can that not be done in the context of this legislation?

    Mr. MEYER. I think it would be an inopportune time now, for a variety of reasons. I can imagine that in light of the developments, for example that are going on in the turmoil of Asia, in the light of Year 2000 problems, in light of the fact that we are in a particularly virtuous part of the cycle today, that this is probably not the time to make this consideration. I think I would prefer to talk to you on the other side of Year 2000, on the other side of the resolution of the problems in Asia, and when the economic times are not as exceptional as they are today.
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    Chairwoman ROUKEMA. Ms. Williams. Anyone else wish to comment? Yes, Ms. Tanoue.

    Ms. TANOUE. I would like to make the point that in terms of the FDIC, we are not against rebates per se, but what I would like to stress today is that we believe strongly that the rebates should not be looked at singularly, that they should be considered as part of an overall assessment of deposit insurance premiums and risks to the fund.

    We have made certain studies. One of the biggest questions, I think, that the FDIC faces is, ''is the 1.25 percent benchmark sufficient?'' Is it adequate in today's world? One of the studies that we have conducted does show that the 1.25 percent designated reserve ratio is sufficient, but it is based on what one person at the FDIC characterized as ''the world as it used to be.''

    We are currently undertaking another study which I think would be much more valuable to the FDIC as well as the subcommittee. That study is taking a look at the effect of the megamergers on the viability of the fund at 1.25 percent. As part of that study, we may want to consider the issue of rebates.

    Chairwoman ROUKEMA. I am sorry. I am sorry. Your last statement?

    Ms. TANOUE. I was just mentioning two studies, one study that has been undertaken by the FDIC recently and one that is undergoing analysis currently. The second study, Madam Chairwoman, is a comprehensive study that takes a look and factors in the effect of the megamergers on the viability of the fund at 1.25 percent. Perhaps as part of that study, we might incorporate an analysis of appropriate rebates.
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    Chairwoman ROUKEMA. All right. I believe that in here it would go up to 1.35, not 1.25, but 1.35. But there is some clarification. We will have to have further discussion on this.

    It seems to me, though, that you are requesting really total discretion in terms—and not changing the law at all, or not having a qualification in the law. But we will take this under advisement.

    Anyone else on this subject? My time has long run out. I will turn now to my Ranking Member. Yes Mr. Carnell.

    Mr. CARNELL. One thing. I think most Americans would be astonished to learn that the fund is thought to be fat and happy when it only has $1.25 in reserves for every $100 in insured deposits. Just by most people's mental notions of what is a reasonable set-aside, it is not obvious——

    Chairwoman ROUKEMA. My question is, though, do we let it grow indefinitely, whether it is 1.35 which would be permitted here or beyond? I wanted to know what those parameters of limitation were. And certainly we are all very mindful that we have to evaluate what is really determined to be ''excess,'' in quotes. And that is the heart of the question, I suppose. And I just don't like to see that discretion be there with an unlimited amount. But we will discuss this further.

    I will turn now to my colleague, Ranking Member, Mr. Vento.
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    Mr. VENTO. Thank you, Madam Chairwoman.

    Chairman Tanoue, what is the status? What is the projection for the future in terms of the fund based on your economic or at least the projected economic analysis? Can you give us any type of—it is 1.25 now, it is 1.3. In fact, it would be 1.35 at year end. And this particular provision as proposed would kick in, I guess, in the next year, is that correct? If this proposal were—that is, the payment to the FICO?

    Ms. TANOUE. Could you rephrase the question?

    Mr. VENTO. Sure. What is the projection for the growth of the reserve in the FDIC fund for BIF and SAIF?

    Ms. TANOUE. Currently the SAIF is at 1.36 percent and would be projected to grow. And BIF is currently at 1.37 percent.

    Mr. VENTO. So they actually exceed the 1.35 now, which is the threshold question of payment, for a 25 percent payment of FICO bonds.

    I think that the testimony with regard to mergers and stress tests and so forth are very much in order in terms of the status of the funds at this time. So I think taking a second look at that is an appropriate idea. I think many of us were concerned about rebates in the first instance with the fund, especially in light of the events that had occurred in the last decade.
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    There is one provision that hasn't received much attention and that was, Mr. Meyer, the provision, Governor Meyer, on the elimination of the floors with regard to the capital requirements or reserve requirements. And did you testify to that? On page 9 of the bill, it talked about striking the 3 per centum ratio, in other words, permitting it to go down to zero, or the 8 percent down to zero. Do you have any comments on that?

    Mr. MEYER. Yes. I did mention in my testimony that we have no intention at this point of altering the required reserve ratio up or down, but that we certainly would appreciate the language that gives us more flexibility, because that is a tool that could conceivably come in and be useful at some point in the future. But we have no intention of exercising that flexibility at this time.

    Mr. VENTO. Well, I am a little bit concerned about it, frankly. I mean, apparently it isn't an important provision for the Fed, and I guess I would like to hear more rationale as to what is going to—you don't have to do it now.

    Mr. MEYER. We didn't suggest it. It was not at our urging.

    Mr. VENTO. So somebody else is trying to help you here. But my concern would be that without a floor, obviously, you know, people or individuals may look—if it is not a tool that is necessary, I think, then it provides a floor, and that is translated into stability. I would suggest that if there is a need to change it, I would like to know what it is. I am not so certain that I understand why it needs to be changed. So whoever is responsible for this, I think, ought to give some explanation rather than changing it for the sake of change.
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    One of the other provisions that is receiving a lot of attention in here, of course, is Section 310; almost all the regulators, except I don't know what the Fed said, I don't remember. I read all of this, but sometimes it kind of flows together after you have read it, as you might imagine. And I didn't see any statement.

    But, I thought one of the better points was made, I thought, by the FDIC chairman; and that is, this really would not tell an applicant what they would need to do ahead of time. They would have this ten-day period which some suggested, I think in the Comptroller's office, that that is not an adequate amount of time, and the applicant then wouldn't know what they had to do ahead of time.

    In fact, isn't there a great deal of harmonization already with regard to the implication and other requests that come from the regulators with regard to acquisitions and mergers? I turn to Mr. Meyer.

    Mr. MEYER. There is, by operating procedures. Let me give you an example. It seems to me that the case that motivated this provision was one where a bank holding company would acquire a bank and then simultaneously propose to merge it into an existing subsidiary. And what happens in that case is that there are two agencies that have a filing and approval authority: the Federal Reserve, under the Bank Holding Company Act, and whoever is the primary regulator of the bank to which the other bank is merged under the Bank Merger Act. That seems to us to be an unnecessary duplication of approval and filing requirements.

    And the fact of the matter is that we handle this today in the following way. We, by longstanding practice in such a case, waive our application under the Bank Holding Company Act in favor of the approval and filing requirement exercised by the primary bank regulator under the Bank Merger Act. So that is an example where, by regulation and by longstanding practice, we have avoided an unnecessary duplication. And the spirit of this bill is to try to find other ways to reduce this duplication where possible.
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    The situation that some of my colleagues on the panel would perhaps refer to is a situation in which there is a corporate reorganization within the existing bank holding company in which two banks are merged. And I think in this case, because it is a simple corporate reorganization, some streamlining of the procedures involved in the approval and filing might be in order. And again here, that is what I think the provision of this bill would suggest.

    There are some other cases which are more complicated. If it was a more complex acquisition of the bank holding company, involving multiple banks and non-bank interests, then the Federal Reserve, under the Bank Holding Company Act, has to be involved because of the non-banking component. And now there is a question of how we should handle the various duplicative roles that other banking agencies might exercise as well. In those cases, for example, would it be appropriate for the Federal Reserve alone to administer this filing and approval requirement, or should there be duplication?

    Mr. VENTO. Well, I don't know if we are quite there yet, but I did want to give you an opportunity to explain, because I think your principal opponent on this, Mr. Carnell, has proposed some additional language in this area.

    Assistant Secretary Carnell, can you explain to us? I think it gets there, and hopefully it will be useful to us in modifying this.

    Mr. CARNELL. I would note at the outset that you could get rid of any potential for duplication here by just repealing the provision in the Bank Holding Company Act that the Federal Reserve hasn't been implementing anyway, and just make it clear that there is no duplicative application.
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    Mr. VENTO. I am sure they would like to keep that particular provision.

    Mr. CARNELL. Again, I want to emphasize that this is a provision that——

    Mr. VENTO. They want what all regulators want, all the Administration and flexibility they can get, all the power and flexibility.

    Mr. CARNELL. OK. I want to note in the Fed's defense that it has a longstanding and correct interpretation that in such a case the Bank Holding Companies Act does not require an application.

    Now our approach would be to build on existing law where the Bank Merger Act applies. We would require publication of a notice, as is done now, and provide an opportunity for comments on CRA issues. Now if a timely and substantial CRA protest were received, then a full application would be required. But the application would be limited to CRA issues. It wouldn't have to deal with competitive issues because the merger wouldn't affect competition. It wouldn't have to deal with other things. Our approach would significantly streamline the existing system, it would get rid of any potential for duplication and at the same time it would preserve meaningful CRA review.

    Mr. VENTO. I don't know that that does it, but I don't think it gets to the uncertainty question.
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    Acting Comptroller Williams maybe wants to make some comments. I guess my time is almost up.

    Ms. WILLIAMS. I am completely supportive of the objective of trying to streamline the process. But I think this particular provision has way overshot the mark in terms of the particular circumstances that it may have been directed to. What it would result in is any transaction where you have banks that are subsidiaries of the same holding company being removed from the Bank Merger Act process entirely. So, unless the regulatory agency leaps in within the ten-day window, the regulator of the resulting institution doesn't have the opportunity for a safety and soundness review, in addition to the issues that have been mentioned about public involvement and consideration of CRA issues.

    Because of a number of factors that have been mentioned in other contexts by the panelists this morning—the challenging economic times, Year 2000 issues—that we look at very closely as the regulator of the resulting institution in a combination, we would be very concerned about being deprived of the opportunity, or having that opportunity truncated, to look at all of the safety and soundness as well as CRA factors that transactions involving affiliated banks present.

    Mr. VENTO. And I don't think this helps with the merger and acquisition issue, because if someone is waiting on ten days, even publication, and they just have to do a CRA thing, but it isn't just CRA as has been indicated here, it is safety and soundness. And, actually, I think I have been borrowing from the testimony of the Chairman of the Federal Reserve Board in terms of pointing out the uncertainty question, but I think that is really what we are getting after. I think, in fairness to Assistant Secretary Carnell, that his proposal really doesn't deal with the uncertainty aspect. But as you approach it, you are going to do this, you need to know ahead of time what you are going to do. It is easier to face the full menu or the full agenda of what you need to do as opposed to having this uncertainty. So this doesn't take that away.
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    So I think we can maybe look at that, but I think it isn't just a CRA issue according to the FDIC and the Comptroller here that have testified this morning.

    Now, each of these provisions here, I picked on some that are a little more controversial. There are others. I noticed specifically, Madam Chairwoman, the whistleblower problem that has been pointed out by the OTS, which had a different effect. I think that sounds like something we ought to learn a little more about, and maybe just call on Carolyn Buck for a moment.

    Chairwoman ROUKEMA. Yes. I am going to have to note the time, because I do understand there will be a vote coming up rather shortly. So if we could proceed here.

    Mr. VENTO. That is my last question.

    Chairwoman ROUKEMA. Go right ahead, and then we will go on to the next questioner, please.

    Ms. BUCK. Our concern with this provision is, as it stands now, the banking whistleblower statute which allows employees of insured institutions or of banking agencies to provide information about possible violations of law to certain banking oversight agencies or the Attorney General, states that the employee can do this either directly or through an intermediary.

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    Our problem is really the intermediary portion of this bill or this statute, because what it allows is that the employee can use someone else to pass on information. And there is really no control over who that intermediary might give the information to, no matter if the employee instructs the individual even to pass it on, say, to the FDIC or to the Attorney General.

    We have a particular case that has occurred in which an employee ended up giving the information to the officer of an institution when the institution was in trouble, and the OTS was considering whether to close the institution. The employee asked the officer of the institution to pass on this information to whomever might be able to help the institution. One entity to which they passed the information was the FDIC, but they also passed it to the trade association and it eventually became public.

    We are concerned and all we wish to do is eliminate the ability for a whistleblower to use an intermediary. What we would like to be able to do is have the whistleblower be able to provide the information directly to the agency that is able to enforce the law and not have it go through a third party.

    Mr. VENTO. Not through the trade association, which obviously would be of considerable concern. And they are using this statute, as defined by the court, to, in fact, immunize them against any type of discipline. Is that correct?

    Ms. BUCK. That is correct.

    Mr. VENTO. Well, I am a big advocate for employee rights and so forth. But I think that is of concern, so hopefully we will be able to do something about that. Thank you.
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    Chairwoman ROUKEMA. Thank you, Mr. Vento. And I thank the panel.

    Mr. Metcalf, please.

    Mr. METCALF. Thank you, Madam Chairwoman. Governor Meyer, I thank you for the support of H.R. 2323, and appreciate that. You spoke about the need to implement interest on checking and payment of interest reserves. Some have recommended a phase-in over time of that. What kind of a timeframe do you envision as in the best interest of the Nation and the banks?

    Mr. MEYER. Well, we think a relatively short period of phase-in at most would be required. This is a bill that removes a restriction. It authorizes, it does not require anything. Banks can implement this at their discretion and, of course, as the market will require. So we would support immediate authorization.

    On the other hand, a relatively short period would not be objectionable, and in the written Treasury testimony, they talked about a period of up to 180 days. That seems perfectly satisfactory. And I do note that in the Treasury testimony, it suggests that in a short period like that, it would probably be appropriate not to include, in addition, the 24 transaction MMDA account as part of that. So my first choice would be immediate authorization. And my second choice, I think, would be to have a short transition period along the lines of what was suggested by the Treasury.

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    Mr. METCALF. OK. I had hoped you would say that. Can you outline briefly, for those who may be unfamiliar with the issue, just how a sweep account works and how the option of paying interest on business checking by banks will help economic efficiency?

    Mr. MEYER. All right. There are really two forms of sweep accounts. One type we call wholesale sweep accounts and were introduced in the mid-1970's. And in a wholesale sweep account, typically a large bank, on behalf of a large business client, will invest the funds in the client's demand deposit account at the end of the day in open market interest-bearing assets, with the funds returned the next morning.

    This is a way to, in effect, pay interest on otherwise non-interest-bearing demand accounts. The problem with this is twofold. This is a very inefficient way of paying interest on demand deposits. It is a very costly transaction and significant fees are therefore imposed by the bank and paid by the business customer.

    Second, it involves a significant degree of competitive inequality, because this is something which larger banks and larger business clients can take advantage of. But it puts smaller banks and their small business customers at a competitive disadvantage.

    Mr. METCALF. Thank you very much. That is part of my next question. I have heard that many banks require minimum balances in the range of $25,000 for their sweep account customers. On top of that, they charge what I would call huge monthly fees. As a small business person myself, there is no way I could afford those kinds of balances. Is there a solution to this problem for the smaller businesses?

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    Mr. MEYER. Clearly there is. And the solution is to lift the prohibition of direct payment of interest on demand deposits.

    Mr. METCALF. OK. Thank you very much. A particularly large bank claims that by allowing financial institutions the option of paying interest on business checking accounts is not needed as a competitive tool. And I would like to have you comment on that. You already have, but I just wanted to——

    Mr. MEYER. I suppose I could point out for this large bank that they probably do not need this as a competitive tool. But the smaller banks that need to be able to compete with them do.

    Mr. METCALF. What are the Fed's reserve requirements right now?

    Mr. MEYER. Well, right now, there is a marginal 10-percent reserve requirement on demand deposits. There is a small amount, right now it is $4.7 million on which the requirement is zero. Then between that and $47.8 million, it is 3 percent; and above that it is 10 percent on transaction balances of any kind.

    Mr. METCALF. OK. My last question is, wouldn't allowing banks to pay interest on business checking accounts be a revenue raiser? And if you can, explain how the Fed sees the interest on reserves and business checks as a positive revenue raiser for the Government; or is it?

    Mr. MEYER. Two parts to that. First of all, the payment of interest on demand deposits would be a revenue raiser. And that would occur because it would lead to increased demand deposits and therefore increased reserves. I am assuming we are also paying interest on reserves, but we earn a higher interest rate on that portfolio of securities than the interest we would pay on reserves; and therefore we would earn what we call a spread profit on those higher reserve balances.
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    On the other hand, the payment of interest on required reserves would be a revenue loser. And combining those two, the net effect is somewhat uncertain, but we expect that on balance there it is a revenue loser. CBO, when they scored this, scored only the revenue loss associated with the interest on reserves, and they didn't offset it with any benefits from the higher reserves associated with increased demand deposits, in part because they were very uncertain about what the impact of payment of interest on demand deposits might be on the growth of demand deposit balances.

    Mr. METCALF. OK. Thank you very much. I think that is all the questions I have.

    Chairwoman ROUKEMA. Thank you.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Madam Chairwoman.

    Mr. Carnell, in your testimony, you talk about, in Section 101, in the question of interest on sterile reserves and the cost to the Treasury and thus the taxpayers, an OMB estimate of about $800 million over the 1999 to 2003 period, not including excess reserve balances and required clearing balances. Those are not required reserves but reserves against—for clearing house services—wire transactions and things such as that.

    Mr. CARNELL. That is correct. Governor Meyer could speak best to how those work. We are not meaning to suggest that paying interest on clearing balances or the like would necessarily increase the revenue loss, because the Fed does have arrangements right now regarding those.
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    Mr. BENTSEN. Would it be legitimate, and perhaps Governor Meyer can answer this, would it be reasonable, because I have supported in the past the payment of interest on sterile reserves, but would it be reasonable in the case of—if there was a fiscal concern—in the case of excess reserve and required clearing balances, that you are in fact getting an additional service, whether it is the Fed wire or the clearing house, and therefore, putting a reserve up for collateral would be a fair exchange for that service?

    Mr. MEYER. There would be no impact of payment of interest on required clearing balances because it would substitute for earning credits that banks already obtain. So there would be no impact. It is a nonissue.

    Mr. BENTSEN. OK. All right.

    Mr. MEYER. Could I also point out, because you did raise the issue of excess reserves, and I do want to make very clear that the Federal Reserve has requested authority to pay interest on excess reserves. We would have no intention at the outset of paying interest on excess reserves, but that would be in reserve, as it were, in case it was needed at some future time.

    Mr. BENTSEN. With respect to Section 103, Mr. Carnell, you comment that this would be shifting the additional costs from the S&L cleanup from the bank and thrift industries to the taxpayers. Is that based upon how we score the BIF and the SAIF for budgetary purposes? And you mentioned elsewhere that it raises the Government's borrowing costs. Is that the basis that have because of the transfer?
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    Mr. CARNELL. I was making a point there about cash flow. You are taking interest income on the FDIC funds which would otherwise be credited to the funds and which is within the Government and——

    Mr. BENTSEN. Which is unsecured asset.

    Mr. CARNELL. Right. And you are paying that money to the depository institutions in question.

    Mr. BENTSEN. Or an unencumbered asset. Excuse me. That is how we score it.

    Mr. CARNELL. So it does increase the Government's borrowing requirements.

    Mr. BENTSEN. Assuming we are borrowing.

    Mr. CARNELL. That is correct.

    Mr. BENTSEN. Which we are. But otherwise, if I understand this, and I apologize for not having read this bill before this hearing, but by making the transfer, if you clip off excess reserves above 135 and at a maximum of 25 percent of the FICO obligation, and then you transfer that to pay the FICO obligation, I have two questions if that is how it works. One is, do you know the quantitative difference in the assessment per type of institution? Does this greatly reduce the cost to the banking industry vis-a-vis the thrift industry for instance? Is that part of the problem with that? It is not addressed in here. I know we talked about Asia and Y2K and all of that. Is that part of the problem?
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    And the other, which I personally don't think is part of the problem and I would like to get a response to: Does this in any way, does this shift in any way affect the credit quality of the FICO?

    Mr. CARNELL. OK. It should not affect FICO credit quality because the money is going to get paid one way or another. It is just a question of where are you getting it from: Are you getting the money entirely from an assessment on depository institutions, or are you getting part of it from interest on the deposit insurance fund that would otherwise help build up the fund? So FICO credit quality is not affected.

    I am not aware that using interest on the insurance funds to reduce FICO payments would make a significant relative difference between BIF and SAIF at this point, since the funds have roughly similar reserve ratios. So leaving aside the question of the SAIF Special Reserve, which is dealt with in another section of the bill, and just looking at this, I don't think a relative difference is the issue here.

    So the basic choice is between having the money used to build up the insurance funds or having it used to reduce the FICO assessment that depository institutions would otherwise pay. We believe that at this point it is appropriate for the money to continue to go into the insurance funds. We don't believe the insurance funds are too large. And we don't believe that the assessment costs on depository institutions are too high. On the contrary, they are the lowest that they have been in the history of the FDIC.

    Mr. BENTSEN. Thank you. Thank you, Madam Chairwoman.
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    Chairwoman ROUKEMA. Yes.

    Congressman Fossella, please.

    Mr. FOSSELLA. Thank you, Madam Chairwoman. To follow up on Congressman Metcalf's question with regard to Section 102, I am reading all the testimony and other testimony with respect to when the interest should be payable.

    Mr. Carnell from the Treasury, you suggest six months. This is no compelling case for extending that period beyond that length of time.

    Governor Meyer, you seem to agree or, with the compromise there from the Treasury, immediately or six months.

    And, Ms. Williams from OCC, you say 2001.

    And, Ms. Buck, I don't know if you addressed in your testimony if you suggest a phase-in period.

    And then there are others who say six years is a reasonable timeframe and that there seems to a compelling case. I am just curious as to how we can have such a disagreement from almost immediately to six years to address this issue.

    Mr. CARNELL. I can't account for others' disagreements, but I would like to discuss the rationale for our own position. We believe that there never was a good reason for prohibiting interest on demand deposits. There is a lot of history to indicate that the prohibition was enacted not for a real policy reason, but as part of horse trading over the establishment of Federal deposit insurance. It just happened that the amount that the big banks were paying in interest on demand deposits just about equaled the amount that they would have to pay in FDIC insurance premiums.
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    The big banks didn't want deposit insurance. They didn't think they needed it or would benefit from it. The small banks wanted deposit insurance. So this was sort of a trade. That history is hardly a good policy basis for retaining this very outmoded Government price control now. We believe it is appropriate to remove the restriction.

    Now, some have raised the idea of a lengthy transition period. I would note paying interest on demand deposits has been debated for some years. Mr. Metcalf has had a serious proposal on the table for three years. So, it really should come as no surprise if Congress were to repeal the prohibition this this year. People have had a chance to arrange their affairs in a way that would take account of the possibility that the law would change here. So we think that six months is a perfectly reasonable time.

    Ms. WILLIAMS. I suggested a somewhat longer period for two reasons. One is to allow the basic business adjustment itself to occur. And the other is a concern about wanting to see the industry keep very focused on getting ready for the Year 2000. To the extent that there are systems or programming changes that would be connected with this particular shift, I really don't want the industry's attention to be distracted from the Year 2000 challenge. So my suggestion of a date was just to get over the Year 2000 hump. I don't have any disagreement with the merits of making the change ultimately.

    Ms. BUCK. At the OTS, also, we favor a transition provision. We haven't focused quite on what the length of time would be, but we are going to look at this a little more closely. Certainly six months would be reasonable, but there maybe needs to be a look at the Year 2000 issue to determine how this would affect the thrifts' ability to change their systems and whether this would adversely impact their ability to get ready for the Year 2000.
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    Mr. MEYER. I would just note that while we would prefer immediate authorization, zero to 180 days, that we would find a longer transition period—but still much shorter than the six-year transition period—something along the lines that the OCC has suggested, preferable to the status quo.

    Mr. FOSSELLA. Just in general, again, the other side of the argument—some say, in many instances pricing on loans may be affected, and a result more time is necessary to sort of work these things out. Does anybody on the panel support that argument? Or do you feel that is not a compelling case to warrant waiting six years?

    Mr. MEYER. Well, certainly not for six years. Six years is a delay, not a transition period. Let's be honest about that. I think that this again is the elimination of restriction. It doesn't require anything. And if some banks need time to do it, they can take time. Obviously the market will put some pressure on them to move ahead, and perhaps that is quite appropriate.

    Chairwoman ROUKEMA. All right.

    Mr. FOSSELLA. Thank you.

    Chairwoman ROUKEMA. Thank you. We are ready to go over to the floor for a series of votes. But our colleague, Mr. Kanjorski, does want to say a word or two and then we will dismiss this panel and be waiting upon the second panel right after the votes. Mr. Kanjorski.
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    Mr. KANJORSKI. Madam Chairwoman, thank you very much. First of all, I want to congratulate you on the record for doing an excellent job in putting this together and putting these important issues before the Congress. I also want to compliment Mr. Metcalf's leadership in something that I have joined him on as a cosponsor. And I think it is the enlightened approach to give, particularly small banks in America, a sufficient competitiveness. We have been rather harsh on them lately in the Congress in some regards. We won't mention certain numbers to give them goose pimples. But we have affected their competitive edge. And now we certainly want to work with giving them some advantage.

    Finally, I think from the testimony I would gather clearly that when we find the Fed and the Treasury together on the same issue, we should clap our hands and be very pleased.

    From their testimony, I suspect that Mr. Metcalf's approach is the simplest, most effective, the most efficient and the fairest and most equitable approach. And since it allows the marketplace and competitive forces to do the job, I certainly want to commend my colleagues to support that effort.

    Finally, Madam Chairwoman, when we come back, and I won't be able to be a part of the panel because I have a meeting with the President over in the Senate, but I have the outstanding pleasure of having Lee Barrett, who is the first Vice Chair of the American Community Bankers Association, who is also chief executive officer of a major installation in my district in Hazelton, Pennsylvania. I am really going to miss hearing her testimony because she is so intelligent and forthright in her analysis of these problems as they affect small community institutions. But I commend her to my fellow Members on the subcommittee and to the listening audience, and I am sure that they will agree, after they have heard her, of her enlightenment on these issues. So I welcome an 11th District constituent from Pennsylvania. Thank you, Madam Chairwoman.
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    Chairwoman ROUKEMA. Thank you, Mr. Kanjorski. We do appreciate our colleague, Mr. Sherman, coming here today. We will recess now. We thank this panel. I think you have clarified some issues. I know that I am going to have at least one or two follow-up questions perhaps in writing. And we will certainly be conferring as we deal with this. But you have been very helpful today. Thank you. And the second panel we will welcome when we return from the series of votes. Thank you very much.


    Chairwoman ROUKEMA. Everyone is under time constraints today, and I appreciate the fact that our panelists are being so patient and understanding. But we will have to move along. I know there are people on this panel that need to move along. And the second panel, they have another problem, and I don't know—the third panel. I don't know where that third panel is, or fourth panel, whatever it is.

    I will introduce this next panel. Our third panelists we welcome here today, and we are most anxious to hear your responses from the industry point of view. We have first in order of appearance and testimony here today, Mr. James E. Smith, who is President and CEO of Union State Bank and Trust in Clinton, Missouri. Mr. Smith is testifying here today on behalf of the American Bankers Association. And it is my understanding that he is Chairman of the ABA's Government Relations Council and a member of the American Bankers Association Board of Directors.

    Mr. Smith, we welcome you here. Thank you very much.
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    Mr. SMITH. Thank you, Madam Chairwoman. I want to say thank you for your efforts to roll back unnecessary regulation. The many hours you have spent benefit all consumers of financial products. Representative Vento has also been tremendously helpful in these efforts and Representative Bereuter has been instrumental in developing and passing legislation.

    But there is more to be done. Regulation continues to cost banks, our customers, and our communities billions of dollars every year. It also puts a big strain on manpower, especially at small banks. My bank has 50 employees. We simply do not have the personnel to run the bank and to read, understand, and implement the thousands of pages of new and revised regulations, policy statements, directives, and reporting modifications we receive every year. In fact, it seems like every day I receive something from one of the regulatory agencies that demands my attention.

    This situation is repeated in virtually every small bank in the country. And there are nearly 4,600 banks with fewer than 25 employees, and 1,300 banks with fewer than 10 employees. The bottom line is that too much time and too many resources are consumed by compliance paperwork, leaving too little for providing actual banking service. The losers are my customers and my communities.

    For these reasons, the ABA supports action on legislation to reduce unnecessary regulation along the lines of the discussion draft we are here to discuss today.
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    I would like to focus on two issues. First, the proposal to create a new type of interest-bearing account that would allow up to 24 transfers per month. And second, the proposal to use excess deposit insurance reserves to pay a portion of the FICO obligation.

    First, the 24-transfer account. Madam Chairwoman, there is no consensus within the banking industry to repeal the prohibition on payment of interest on checking accounts. However, there is a broad consensus for an alternative approach that would create a new 24-transfer account. This account would allow the transfer of balances between a checking account and an interest-bearing account each business day of the month. The 24-transfer account is a middle ground. It will help banks meet the needs of business customers. ABA supports this approach.

    Representative Kelly has proposed to combine the 24-transfer account with the elimination of the prohibition of interest on demand deposits after six years. While there is no consensus within the banking industry for repealing the prohibition, if Congress decides to take such action, a significant transition period such as that proposed by Representative Kelly should be provided. This transition would allow time to unwind contracts and other arrangements banks had developed to pay implicit interest on business checking accounts. A transition is also very important in light of the tremendous resources being devoted to the Year 2000 problem. In the interim, small businesses can earn interest on transaction balances using the 24-transfer account.

    We appreciate the efforts of Representative Kelly in proposing this alternative. We believe it provides a framework for compromise and we would be pleased to work with the subcommittee on this approach.
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    My second point relates to the FICO proposal. We strongly agree with the goal of channeling excess deposit insurance reserves back to banks and back to our communities. Importantly, the proposal acknowledges that deposit insurance reserves have grown significantly beyond what is necessary to protect depositors. As a banker, I can put these excess funds to work in my community, a far better option than having them sit around in Washington.

    In fact, an ever-growing insurance fund is a waste of valuable private resources. The insurance fund is very large because of the high premiums banks have paid for many years. These funds should be used only to protect insured depositors, and any excess should be returned to the industry. This proposal does indirectly return a portion of the excess to the banking industry and we would support that. An approach that would cap the deposit insurance funds and directly return any excess to the banks would be even better.

    Furthermore, we also want to make sure that this proposal is not seen as a precedent to use excess deposit insurance funds for noninsurance purposes.

    Madam Chairwoman, we thank you and your subcommittee for your efforts to reduce the regulatory burden on banks. I would be happy to answer any questions you may have.

    Chairwoman ROUKEMA. Excuse me. We have a problem with time here. Have the other panelists arrived from the NFIB? No. We are still looking for those people. I was trying to accommodate someone's travel schedule, but I guess they are not here. All right. I thought perhaps the three gentlemen that just walked in were one of those that we were looking for.
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    All right. We will continue now. Tony Abbate—Anthony, I am sorry—Anthony Abbate. We know him as Tony back in New Jersey. He is President and CEO of Interchange Bank in Saddle Brook, New Jersey, and is appearing here on behalf of the Independent Bankers Association of America. Mr. Abatte has testified here before and he is a person of great knowledge within the industry, and we welcome him here again today.


    Mr. ABBATE. Thank you. Good afternoon, Madam Chairwoman and Members of the subcommittee. I am Anthony Abbate, President and CEO of Interchange Bank, a $667 million asset community bank located in Saddle Brook, New Jersey. I am pleased to have the opportunity to offer the views of the Independent Bankers Association of America regarding the proposed regulatory relief bill.

    Because IBAA has long advocated regulatory and paperwork relief for community financial institutions, we are pleased to see steps being taken to remove some of the competitive disadvantages that community banks have long endured.

    In your letter of invitation, you asked that we specifically address a number of important regulatory issues. IBAA supports Section 101, which would allow the Federal Reserve to pay interest on sterile reserves. With respect to Section 102, which would authorize the payment of interest on business checking accounts, there is a strong difference of opinion among community bankers on this issue. In recognition of these differences, IBAA endorsed the compromise proposed by Chairman Leach that would permit 24 unrestricted transfers from money market deposit accounts per month.
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    The discussion draft bill is unique in that it requires us to analyze two different alternatives found in legislation introduced by Representatives Metcalf and Kelly. In 1997, IBAA's board of directors voted to not support the Metcalf bill and our leadership subsequently endorsed a proposal advanced by Chairman Leach that I discussed earlier. We also have reviewed the Kelly proposal which would delay the repeal of the prohibition for six years, during which time banks would be permitted to make 24 unrestricted transfers per month from money market accounts. While we obviously would endorse the 24 unrestricted transfers per month because it mirrors the Leach proposal, we have problems with the sunsetting feature.

    IBAA's policymaking bodies oppose the outright repeal of the prohibition at any time. Payment of interest on business checking accounts will not create a level playing field, since the products will be offered disparately by everyone. Smaller banks will be hurt because they will have no control over the account, because they will be at the mercy of the marketplace, while larger banks which can afford to be predators will offer higher rates. Thrifts have always offered higher rates than commercial banks, treating deposit liabilities as assets.

    Also banks will not be able to repatriate funds from Wall Street with equivalent or higher interest rates because Wall Street is technologically advantaged and fee driven, which gives them a competitive advantage.

    The resultant effect will be the constriction of profit margins because the assets generated required to restore yield levels is an uncertainty. This will create a cannibalization of the existing base of deposits and the creation of internal disintermediation at a cost of capital.
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    Please note that the press release issued by Congressman Metcalf's office in support of the bill states, ''This legislation is strongly supported by America's Community Bankers and other industry groups.''

    Allow me to contrast the differences in institutions for you. The FDIC banking profile as of December 31, 1997 reveals that all commercial banks return 1.23 percent on assets and 14.69 percent on equity. For thrifts, return on assets was .93 percent and 10.89 percent on equity. In my State, New Jersey, taken from the compilations of Ryan Beck, an investment banker, commercial banks return 1.7 percent on assets and 12.11 percent on equity. While publicly owned thrifts return .79 percent on assets and 7.5 percent on equity, nonpublicly owned thrifts return .81 percent on assets and 8.72 on equity.

    The question that needs to be asked is whether Congress really wants to legislate financial performance. Who is doing the math? I have provided as an exhibit an analysis of the potential impact of paying interest on business deposits that could have on my institution. Because we are a publicly traded company, this analysis has significant relevance. On business accounts of $67 million in deposits at the prevailing rate for all money market funds as of July 9 of 5.14 percent, the cost would be $2,068,911 tax affected on an annual basis. This would reduce earnings per share by 29 cents and affect the stock price at the current earnings price multiple by $5.47, thereby decreasing the stock price by 28.82 percent.

    If we pay interest on all business accounts at the average rate for money market deposit accounts on July 9 of 2.48 percent, the interest cost would be $998,229 tax affected. This would reduce earnings per share by 14 cents, reducing the stock price by $2.64, and cause the current stock price to decline by $2.64, or 1.9 percent.
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    In the first scenario, we would have to attract $120,465,510 in business checking accounts and, in the alternate case, $30,114,679 to offset the impact on profits. I would like to know where these additional deposits are going to come from and how to satisfy shareholders and the investment analysts with reduced profitability.

    Congressman Leach's compromise is a win-win, a win for the customer and a win for the bankers. While the Kelly proposal mirrors the Leach proposal, the six-year repeal provision can become a hidden time bomb. However, if the subcommittee should decide to support the Kelly proposal, we recommend that the issue be reviewed before the prohibition is repealed to determine the potential financial impact on banks prior to the repeal's effective date.

    As to the remaining issues you have asked us to discuss in our detailed comments, I will contend with them in my long testimony. However, I would like to add that IBAA would welcome the addition of a number of issues currently not addressed in the bill, including the Federal Home Loan Bank reform provisions found in H.R. 10. We are encouraged by the fact that the Senate Banking Committee has agreed to mark up S. 1405, their regulatory relief bill. An agreement has been reached between Chairman D'Amato and Senator Hagel to attach FHLB reform legislation to the Senate regulatory relief bill. We therefore would like to request that the previously passed House FHLB language be added to your bill.

    We are making this request given the fact that we are moving into the closing weeks of this legislative session, and from our perspective the prospect of legislation moving through the Congress is enhanced if the House and Senate bills have somewhat parallel language.
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    In closing, I would like to reiterate the IBAA's support of the subcommittee's efforts to enact regulatory reform legislation, another step forward in helping community banks to commit more of their resources to the business of banking. The proposed discussion draft would remove duplicative, unnecessary restrictions that either no longer make sense or are now inappropriate and, taken as a whole, would enhance the competitiveness of all banks without jeopardizing the safety and soundness of the financial system.

    Thank you again for the opportunity to testify. I look forward to answering any questions that the subcommittee has on these very important issues.

    Chairwoman ROUKEMA. I thank you, Mr. Abbate.

    Our final witness on this panel is Ms. E. Lee Beard. You are President and CEO of the First Federal Bank in Hazelton, Pennsylvania, and I believe our colleague Mr. Kanjorski wanted to apologize for not being here today. He was here earlier on the panel but had an unavoidable conflict. But he acknowledged your presence here today. We welcome you on his behalf and certainly for the subcommittee. Ms. Beard is testifying on behalf of America's Community Bankers. We do welcome you here today.


    Ms. BEARD. Thank you. I appreciate it. And I appreciate the Congressman's nice introduction, too.
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    First Federal Bank is a $400 million stock savings bank located in Hazelton, as the Congressman said. We serve five counties in northeast Pennsylvania through 10 different office locations.

    I am testifying today as First Vice Chair for America's Community Bankers which, of course, is a trade association representing 2,000 savings and community financial institutions and business firms. I welcome the opportunity to speak to these issues today. We have provided for the record a detailed analysis of the bill's specific provisions as well as revisions and additions that we think should be considered. I won't review all of those in the interest of time today, but I would like to touch on two key issues pertaining to this bill which have been discussed by previous panel members but I think would bear some input from America's Community Bankers.

    First, I would like to speak about the need to eliminate the prohibition on banks paying interest on business checking accounts and to authorize the payment of interest on reserves held at the Federal Reserve banks, and second I would like speak about the need to repeal the statutory provision for a SAIF Special Reserve before it goes into effect on January 1.

    Madam Chairwoman, ACB commends you for including in this bill provisions giving banks the option of offering interest-bearing checking accounts and allowing the Federal Reserve to pay interest on sterile reserves. By lifting what we believe is an outdated and anticompetitive ban on such activities, your bill will benefit not only community banks and small business customers but basically all Americans.

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    Over the past five years, our institution at First Federal Bank has actively sought to develop increased business relationships with the small businesspeople who operate in northeast Pennsylvania, which is where we provide our services. The businesses in our communities, as Congressman Kanjorski recognizes, are primarily family owned and operated businesses and to these folks, every nickel actually counts. They are constantly looking for new sources such as our bank for the financial products that they need.

    In doing this, they expect and I believe they deserve to have the same services at their fingertips as they would have for multiregional banks, but they also deserve local decisionmaking and local staffing which we provide.

    One of the products that could mean the difference between a small business making a payroll or not making that payroll could be interest on business checking accounts. But because we are prohibited from offering this particular product, we had to resort to using more costly and cumbersome sweep accounts. We are slightly over $400 million in assets and yet we have had to go through the regulatory counsel work to provide that repurchase agreement. We have had to purchase new software and we have had to utilize additional staff hours to be able to provide this service. Our market wants and needs this service and knows that it is available. They are finding alternative ways to get this service, so we needed to be stepping to the plate to be competitive.

    We are grateful that the critical change in the law is a highlight of the bill before you today. ACB does oppose the alternative transaction approach, the so-called 24-transfer account that is included in this bill. We see no reason to delay for six years the adoption of a rational system and we see no reason to delay for six years—we don't see a reason to deprive small businesses of getting access to this interest in a simple way. One of the points made by Congresswoman Kelly in her testimony was that the timing of transition for six years was necessary in order to transition and to allow banks to reprice. Our institution reprices products on a very regular basis in much less than six years, in fact in much less than six months. So I think we can all agree that banks should have the ability to immediately offer to their business customers this newly authorized interest-bearing account.
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    ACB strongly urges the subcommittee to reject the alternative transition approach and its six-year delay of a change that needs to be made actually quickly.

    Another key and timely change that must be made to the bill involves the statutory provision which establishes a Special Reserve for the Savings Association Insurance Fund. ACB strongly supports the FDIC's position, as you heard it, that the legislative language is needed to prevent the creation of this Special Reserve, and we urge the subcommittee to include some language in this bill. If no legislative changes are made this year and any amounts in the SAIF exceed the statutory reserve requirement of 1.25 percent of the insured deposits, they will then be placed in this Special Reserve.

    I am a CPA and I find it hard to understand how this accounting would be necessary or appropriate. Under current law, the Special Reserve would need to be established even if the BIF and the SAIF funds are merged. Instead of being used to bolster the SAIF, which is what they should be for, the Special Reserve would actually be segregated from the fund. According to the FDIC, the SAIF reserve ratio will automatically decline from its current level of approximately 1.4 percent to the statutory minimum of 1.25 percent because of this Special Reserve. We think this would actually increase the chance that the SAIF Special Reserve ratio would actually drop below the required reserve ratio, especially if the FDIC has to add SAIF loss provisions for any unexpected reason. That could be a downturn in the economy or the Y2K issue or any number of things that might happen.

    We think it is likely that the FDIC at that point would also have to set aside provisions for losses to the BIF under such circumstances but similar excess amounts that would remain in the BIF would likely be sufficient to meet such contingencies without that fund actually dropping below the 1.25 percent. If the SAIF reserve ratio falls below the 1.25 percent, the FDIC would be required to assess SAIF premiums.
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    Our part of the industry paid additional SAIF premiums very appropriately and that was the right thing to do at the time. We don't think it is necessary to have to do that again. Under current law, this Special Reserve could be transferred to the SAIF only if its reserve ratio fell by half, to .625 percent, and remained there for four consecutive quarters. I think that is not unlike the ship crossing the sea and the ship actually is at the bottom of the ocean by the time you really provide resources to try to save the people on the ship.

    Let me stress the fact that fixing the Special Reserve problem would have no budget scoring implications, as I understand it. It was originally a device to generate additional revenues based on the then current CBO baseline and a six-year scoring horizon. Now that the CBO has recognized the economic reality that the Special Reserve has no such budget implications, Congress should use this opportunity to prevent the Special Reserve from being established.

    We are concerned that time is running out. We agree with the FDIC that a minor adjustment today can avert a potential loss of public confidence tomorrow and strongly we urge the subcommittee to include this change in this bill. I thank you, Madam Chairwoman, for the opportunity to testify before you and I look forward to answering questions you might have.

    Chairwoman ROUKEMA. Thank you. Is the IBAA representative here and ready to testify? No. All right. I am not going to ask a specific question now except—and I am going to turn it over to Mr. Vento for his questions, but I do want to observe that you are very obvious about the discrepancies, not discrepancies but differences in perceptions and approaches between yourselves and the regulators in Treasury, that that we heard earlier today.
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    Mr. Abbate, I particularly noted, I did not have the opportunity yet to go over your analysis as to the earnings and cost ratios in the stock price projections that you have made. We will go over that. I assume that in your testimony you have identified the source of your analysis and the figures that you have used.

    Mr. ABBATE. I think I have provided you with exhibits and the source materials.

    Chairwoman ROUKEMA. I assumed that you had but I haven't yet had an opportunity to go over it. But we will analyze them very carefully. We have a great discrepancy here between your perceptions and the perceptions of the regulators. I would like to say, however, that we are all in agreement that we are not going to be unfairly denying you sources of capital and investment. But I guess we also have to understand that we will be protecting safety and soundness with respect to the BIF and the SAIF.

    I pose the same questions to you as I do to the others, and, that is, you can't let it keep rising indefinitely. That is certainly not your position. Your position is a clear one and a very different one. We will leave that for later, but in the interest of time I will turn to Mr. Vento. And then, of course, Mr. Metcalf is here, and I am sure he will want to question you extensively on the issues as you related to his legislation and the six years. I have got to say, I think six years is out of the question. I have tried to listen objectively to your testimony.

    Mr. Vento.
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    Mr. VENTO. Thank you, Madam Chairwoman. I think there is some concern. I thought that the interest on demand deposits with regard to business accounts was going to be something that was going to be easier translated into this bill, but I can see from the testimony that it is not as simple a task as I assumed, that the marketplace had circumvented the law in terms of the sweep accounts and some of the other services you offer.

    I paid attention closely to your testimony so I need not ask questions about it. I assume you meant what you said. So I won't require you to repeat it, but Mr. Metcalf may. I think, though, just my own judgment is that something on this seems to be likely to occur. And so the question is, do we not do it until after the Year 2000 or something, so we don't get wrapped around the axle with regard to that and giving people an opportunity to repackage their services?

    I think what is happening with business loans and accounts is that you probably have given out various services and benefits that are not easily retractable, and I think even though you can obviously price things very quickly, as our witness Ms. Beard had pointed out, the fact is that it is not so easy to go out and take the check back. I think you need a little lead time in order to translate this. That may be whatever is reasonable along those lines, I think, that we could respond to.

    A number of questions. I think we have got a lot of agreement in the bill and I am hopeful that we can do something. Some of the other areas that I didn't hear anyone really testify about and I wanted to ask about because under TILA, I am sure most of your ears perked up when I said maybe we could add some consumer positives to this particular bill. By that I didn't mean opening up general war or piling on something here that would sink the ship. But, for instance, in this bill and in the Senate counterpart which has a lot more controversy in it, they have some changes in TILA, just dealing with advertisement on television and radio. If this means that we are going to do what the tobacco industry does in terms of how they present their flash disclaimer, I don't think I want to go for that type of disclaimer. I don't appreciate those ads. I am sure most of us don't. But I think what they are talking about here is how can we get better TILA compliance.
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    Most of you I suspect, don't sell on television or radio, but there are amendments in here—at least I don't think you do and you probably aren't too friendly toward or that concerned about this element, anyway—but, there is a segment of the industry in terms of making loans that continually communicates that way. Maybe I am wrong about some of your members communicating on that basis. But my question is that for TILA, there is a $25,000 threshold. That hasn't been changed for many years. The fact is that most of the transactions, if I go out and buy a sport utility vehicle—a Ford Explorer or something, that is made in my district—chances are it is going to cost more than $25,000. So what would be your attitude toward adjusting upward that limit to embrace, in other words, for the Truth in Lending Act to embrace loans, let's say, at $50,000 or $40,000? I don't know how controversial that is, but that was what I was thinking of when I was talking about adding something on to update those types of loans.

    Mr. Smith, do you have any comments about that?

    Mr. SMITH. Yes, there is some very definite regulation on advertising. I think the ABA would be interested in working with you on trying to develop some regulation that would be very positive in that respect.

    Mr. VENTO. We are developing law here, though, to give some express consent to permit radio and TV to do something different in terms of how they address that. We are concerned about it, and you may not be aware, I am sure you are aware that TILA doesn't apply to large loans, because you assume somebody comes in that is making a loan for over $40,000, that they are able to protect themselves. But today very often that type of loan may be made for, as I said, for a sport utility vehicle. Do you have any comment or do you want to think about that?
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    Mr. SMITH. Obviously with rising prices, cost of vehicles and those kinds of things have changed tremendously over the years. There may be a need to move that threshold to a level that would compensate on that.

    Mr. VENTO. You did say ''may.''

    Mr. Abbate.

    Mr. ABBATE. I was looking for the title that you were referring to.

    Mr. VENTO. But you understand the genesis of what I am talking about, that there are some modifications in here whether you understood all—I don't necessarily understand them all, either.

    Mr. ABBATE. But if you want to make everything inflation ajusted, you are starting with Truth in Lending. Let's go the whole spectrum and differentiate between large banks and small banks on an inflation-adjusted premise, and we will take banks under $250 million and say because of inflation, 20 years ago, they were actually $50 million, so they really should be exempt. Everything is relative.

    Mr. VENTO. I wasn't trying to open up a major battle on this, just discussing about what would be useful to consumers in terms of today, because cars are costing more as an example, and could we be looking at that as well?
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    Mr. ABBATE. Do we really want to protect from himself or herself a person that is buying a $40,000 car? They certainly should have enough on the ball to know the extent of the transaction that they are getting involved in.

    Mr. VENTO. I know. In other words, you are not prepared.

    Ms. Beard.

    Ms. BEARD. I am not prepared to give a specific number. Obviously our staff is happy to work with the subcommittee staff on the issue, but I think the goal is just to make sure that any disclosures are simple and clearly understood by the consumer.

    Mr. VENTO. I know—obviously, flying into the face of TILA, saying ''do you want more TILA now?''—you are taking more medicine with this. Obviously the assumption is that somewhere down the road we are going to be able to get some improvement. There are some problems with TILA I think in terms of percentage, the average annual percentage type of computations and some of the Fed regulation of that, to me has made it more difficult rather than easy to understand and make it useful. I know that the goal would be to do that.

    Maybe it has to wait until we deal more comprehensively, but this bill does deal with some of these topics, so it wouldn't be inappropriate, for instance, to suggest that we deal with, for instance, that ceiling as we deal with liberalization or modifications to television and radio ads. But I realize that this isn't exactly where most of your institutions are coming from, unless you have an unusual institution that does a lot of television advertisement for loans and so forth. Maybe that is the case. Certainly that could be the case with some of the ABA institutions. But I think probably fewer than more.
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    Anyone else need anymore comments on this? I did follow the testimony carefully. I will yield back at this time, Madam Chairwoman, so that others may question the witnesses.

    Chairwoman ROUKEMA. Did Mr. Smith want to respond?

    Mr. SMITH. Just that the ABA would be very happy to work with the subcommittee in making some revisions in this area, to make them more workable, certainly.

    Chairwoman ROUKEMA. Thank you.

    Mr. Metcalf.

    Mr. METCALF. Thank you, Madam Chairwoman.

    My first two questions are to Lee Beard. I do apologize, I was out of the room during some of the testimony. You do agree with me that we should allow interest to be paid on checking and interest only reserves?

    Ms. BEARD. I certainly do. I think it is very important for our customers to have that, it is a part of the market that wants that, needs it, and is finding access to it now. We just need to provide this.

    Mr. METCALF. Thank you. And also based on your testimony, your bank offers sweep arrangements with your customers, but if I understand this right, you would much prefer the option to pay interest on business checking?
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    Ms. BEARD. Absolutely. It is easier for the customer to understand and for us to explain to that customer, and we already have systems in place to offer interest on a variety of deposit type of accounts. This would just be one additional type.

    Mr. METCALF. Thank you.

    Correct me if I am wrong, Mr. Abbate and Mr. Smith, but you want to keep in place the 65-year-old statute that the four Federal banking regulators and the largest small business trade groups in the Nation, the U.S. Chamber of Commerce and NFIB want to get rid of. You feel they should be retained?

    Mr. SMITH. No. The answer to that is no. What we are interested in is the 24-transfer program. Basically I think the six years stemmed from the fact that that was the phase-in for consumer interest when we went to that a number of years ago. I am pretty sure that is where the six years comes from because we needed a transition period to get that into place.

    We do need a transition period for a couple of reasons. Number one, unlike the thrifts or the savings and loans, banks have had business customers all these many years that we have been unable to pay interest on our business checking accounts. And so we have developed relationships with our customers to offset that, whether we are buying them checks, we are giving them a quarter of a percent break on their loans or whatever that may be. We need some time to unwind those relationships and set up a proper account that we can in the future pay interest on. We need to educate our customer so they will understand what we are doing and how we are doing it.
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    In addition, we are right in the middle of the Year 2000 problem and all of us are working on that diligently. In fact, my bank has a committee and they meet every week and they met this morning. We are right in the middle of that. To make these changes I think we just have to have some time to phase this in.

    For instance, this is my new account program that we give out to customers, which is printed on both sides. It takes some time to make these changes legally, get them printed, so that our staff understands them, our customers understand them, and get those things squared away. That is why we are asking for some phase-in period. Six years, I don't know if that is the right number, but we do need a phase-in period.

    Mr. METCALF. Thank you. So your problem with it is the timing, how soon it might go into effect that might cause a problem?

    Mr. SMITH. That is correct.

    Mr. METCALF. Is that your criticism also, Mr. Abbate?

    Mr. ABBATE. No. I think that although your legislation has merit, what has to be considered is the financial impact. I sat here and I heard all these regulators testify that there was no financial impact. But I am the only one who sat here and gave an exercise to show what would happen if we paid interest on business checking accounts.

    Now, I think it is interesting that the regulators talked about safety and soundness issues and that they wanted the reserve ratio on the funds to go up because they want their funds protected. We are in the same position. Who is protecting us? If we paid interest on these deposits, where is the profitability of the institution? There has to be replacement for the interest cost that is paid. Where do we get that? It is either by repatriating deposits if we are lucky, or we go out and have to increase the loan-to-deposit ratio to a dangerous level, or we go to asset generation and make risk-type loans to try to replace the profits that we lost.
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    So it seems to me that if you want to really move this off to a point where it makes sense for all of us, first, have the General Accounting Office study the issue, look at banks nationwide, see the impact on their balance sheets and their operating statements.

    Secondly, I think there is nothing wrong with 24 transactions a month. I cannot imagine a business account that couldn't live with that. In my bank, which is in one of the most highly competitive areas in the United States, out of 550 financial institutions of all types in the county I do business in, I am a heartbeat away from New York City and, guess what, I don't sweep any accounts out of the bank. My business accounts could live with the six transactions a month. They don't have a problem. So I don't understand why we have to substitute legislation for business judgment.

    Mr. METCALF. The American Banker Newspaper reported that 85 percent of ABA's community bankers councils supported eliminating the prohibition on paying interest on business checking accounts, and Alice Dittman, head of the ABA's Community Bankers Council said in regard to this bill, ''I think it's just right. Why should we encourage our customers to invest their money somewhere else,'' which I thought was an interesting quote.

    It seemed to me that many of your banks would like the option of paying interest on business checking accounts. Of course what you are saying is maybe they would, but you need time to—are you saying the same thing that Mr. Smith is, that generally it is a time factor, or you just don't like the idea?

    Mr. ABBATE. I think if you want to go to interest on everything, that you have to segue to it. You have to make sure that the financial impact is not going to create a tremendous amount of unprofitability. But more importantly, sir, the thing that you will find on this issue, and we found at the Independent Bankers Association, when you talk about it in its pure sense and say, ''Would you like to pay interest on commercial checking accounts?'', guess what? Everybody is going to say ''yes.'' And then you say, ''Did you do the math?'' They say, ''No, we didn't do the math.'' When we did the math, they realized the fact that this has a significant impact on profitability. If this subcommittee is concerned about safeness and soundness and the regulators are concerned about their reserve ratios against deposits, then I say to you we have to do this in a considered fashion.
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    Mr. METCALF. I have here an IBAA survey on this subject, and 71 percent do say they favor it. But again, it is optional. We are not requiring this in this legislation. This is optional. It seems to me that that is a very legitimate thing. If they don't want to do it, don't do it. How does that strike you?

    Mr. ABBATE. Because there are people that will take advantage of the so-called option, and from the very start out of the gate start to pay interest at amounts and rates that are going to be injurious not only to themselves and the banking industry but to the banks who are sound institutions and don't need to resort to the payment of interest, which is exactly what happened when Regulation Q was abolished and all of a sudden people started paying interest rates that were phenomenal, in double digits, and everybody got into trouble. So if you want to have history repeat itself, we can do that.

    Mr. SMITH. I think, if I may respond from the ABA, our position is in support of the 24 transfer with a time phase to phase in interest on corporate demand deposits.

    Mr. ABBATE. If I may, that particular survey of IBAA that you mentioned, the same exact number supported the 24 transfer option from MMDA accounts proposed by Chairman Leach.

    Mr. METCALF. I see my time has expired. I better stop here. Thank you.

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    Chairwoman ROUKEMA. Thank you. We appreciate the testimony here today and I am thankful we got it in in relatively short order before we were disturbed by another vote. With unanimous consent, I would like to note that there is a representative of New Jersey League of Savings Association here today who would like to have admitted in conjunction with Ms. Beard's testimony, a testimony supplement for the record, without objection.

    Chairwoman ROUKEMA. Is there any summary kind of final statement any of the panelists would like to make?

    Yes, Mr. Abbate.

    Mr. ABBATE. I think I would like to go back to the point, and I am in agreement with Ms. Beard on the FICO obligation and the fact that the reserve funds are escalating. My concern with that is what happens when it goes to 137, when it goes to 140, when it goes to 145? At what point is someone going to say there is too much money there, let's use that for affordable housing. Which was the case not too long ago when the fund was restored and there was something in a bill somewhere that they wanted to use the interest income from the BIF fund to use for some other purpose.

    They talk about the Asian crisis. Well, the Asian crisis is in Asia. It is not in the United States. If we as financial institutions under regulation have to go through an exercise to look at our potential losses and it is very well documented in the regulation and it is the comptroller's BCC 201, on that basis we know in our reserve ratio with some degree of certainty what the potential losses are in the portfolio. I am sure that the regulators that sit here go through the same exercise. If they haven't, then woe is them. And if there is a question, then let the GAO come in and look at their work papers and see why they need 135 or why they need 140 or why they need 150. There are their rules and there are our rules. Our concern is that if there is a standard we have to meet, they should be held to the same standard.
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    Chairwoman ROUKEMA. Thank you.

    Mr. Smith.

    Mr. SMITH. I would just like to add to that, savings on the FICO this year would mean $4,000 in savings to my bank. After the year 1999, banks' obligation rachets up and that will become $7,000 savings. If I could keep those funds in my community and spend those on products and services in my community, that money turns over seven times in my community. It does mean a lot to us.

    Chairwoman ROUKEMA. You will note that that was the nature of the questioning that I presented to the regulators, as to how would they want this to grow indefinitely or what would the cap be. I did not get a precise answer to that, but we will continue working on that problem.

    Ms. BEARD. Madam Chairwoman, you asked for a summary. I would just remind the subcommittee that January first is coming quickly and so we need to take action on the Special Reserve in particular.

    Chairwoman ROUKEMA. A very good point. I will repeat again that it is our intention, and certainly I hope that we don't get too many complications with the Senate bill, to push something through before the end of this Congress. I thank you for your help and your cooperation. We will continue to communicate. Thank you very much.

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    Will the fourth panel please come forward?

    Thank you very much. Mr. Hammock, I understand that you are Chairman of a publishing company in Nashville, Tennessee, and are representing NFIB, National Federation of Independent Business, here today. I also would like to thank you and express sorrow that you had to change your travel plans in order to be with us today. We had hoped to move this time period up. But we appreciate your cooperation.

    Mr. HAMMOCK. Depending on how long it takes, I may be able to make it.

    Chairwoman ROUKEMA. Let's get right to you then. You will be our first witness.


    Mr. HAMMOCK. Thank you, Madam Chairwoman, and other Members of the subcommittee. In the interest of time I would like permission to submit this testimony and just talk a little. I have discovered today that my little beef, my little gripe that I have had for a few years, is a part of a macroeconomic issue that, frankly, as a small business owner, I didn't realize.

    My company, as you mentioned, is a publishing company in Nashville, Tennessee. We have 15 full-time employees. I guess I should feel proud because we went from a company with six employees, in which I did all the bookkeeping, to one now large enough to have a sweep account. So I have been through the whole process of this issue. Today, I am not just representing myself as a small business owner, but the National Federation of Independent Business and the 600,000 other members than myself who are in every State in the Nation. Typically, NFIB members have about five employees and about $350,000 in gross sales.
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    When we started Hammock Publishing about seven years ago, we had six employees. I can still vividly remember going through the process of applying for a line of credit and checking account and being told that we couldn't earn interest on a checking account. I was sort of dumbfounded. I asked my banker why not. He said it was against the law. But he quickly told me how I could set up a separate account called at their bank, a liquid investment account, which is like a money market account. He explained I could simply have three accounts: a checking account, this interest-bearing account, and the line of credit.

    That is the way we operated for several years. I literally would call the bank at the end of the day and, depending on our cash needs for the next day, would transfer funds via the phone. I can remember several nights waking up in the middle of the night saying, ''Oh, my gosh, did I transfer the funds?'' I guess what I was doing is sort of a poor man's sweep account. I was doing it myself every night, sweeping funds from one account to the other, depending on our needs.

    Our company grew. We now have a bookkeeper. After years of complaining to my banker and griping about their sort of Stone Age approach to this, he finally suggested that we set up a sweep account. I think sweep accounts are great, although I have learned today some of the bigger issues against them.

    But, as a small business owner, I want to tell you that sweep accounts are not a panacea because they do involve a lot of paperwork. If you are a large company and you have bookkeepers that can handle all the paperwork associated with a sweep account, that might be OK. But if you are a small company and you have one bookkeeper, as we do, then it is a challenge to keep up with the over 250 statements we receive each year on our sweep account. I asked my bookkeeper to pull them out of her file. This is a stack of statements we received last year. Every night we receive a statement that we have to reconcile. That is fine, like I said, if you have a large department dealing with that. If you are a small business owner, a sweep account even has an expense associated with with the paperwork. Ironically I don't think one earns a significant amount, if you are the size company we are, on the interest you get from a sweep account. I would much prefer to leave my money in one account and earn interest on it.
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    I heard some of the bankers a few minutes ago saying, ''Gee, I (as a small business owner) am actually saving money by not earning interest.'' I would rather it all be out on the table. Tell me the fees I need to pay and then let me earn interest on it. Let's get it all out in the open is what I would suggest.

    In the interest of time, I will just say I commend you for addressing this issue. It has just been a little beef I have had for years and I didn't know it was this big issue of regulatory reform, and so forth. I made the mistake, I think, of complaining to a lobbyist of NFIB; the next thing I knew I am appearing before Congress to try to get this changed. Thank you very much for allowing me to speak out on that.

    Chairwoman ROUKEMA. Mr. Hammock, shall we ask you immediate questions and then you would be free to leave?

    Mr. HAMMOCK. I would really appreciate it if you could. It is my wedding anniversary, also, so my wife would appreciate it.

    Chairwoman ROUKEMA. That, too. All right. I hear you. Let me just ask you, I hear what you are saying with respect to the paperwork and the deregulation that is needed and that is what this bill is all about, but regardless of the number of years, would the 24-transaction-a-month deal with your problem, for a temporary period?

    Mr. HAMMOCK. As a lay person, I am going to have to admit, I don't understand the 24 transaction deal. If it refers to every day of the month, I don't make any more transactions than that. But I don't really understand it, to be honest.
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    Chairwoman ROUKEMA. I am sure Mr. Vento will understand this. I would just like Mr. Metcalf to ask you a specific question, if he might, as the author of the legislation dealing with this subject.

    Mr. METCALF. I have two very brief questions. One is what do you publish?

    Mr. HAMMOCK. We are a custom publisher of magazines and newsletters for companies. For instance, we publish a magazine for 250,000 truck drivers around the country for the Travel Centers of America, or newsletters for hospitals, different things.

    Mr. METCALF. Thank you very much. First of all, I would like to thank you for traveling all the way up here from Tennessee on your anniversary. What you are saying is that by removing the prohibition on interest on business checking, a lot of paperwork can be eliminated?

    Mr. HAMMOCK. That is a side benefit, definitely, but I think just the inequity of not being able to earn interest on that checking account is my biggest complaint. As I say in my testimony, smalll business owners break out in hives when we have to leave money parked in an account that doesn't earn interest.

    Mr. METCALF. It bothers me just on principle. Thank you.

    Mr. HAMMOCK. Could I mention just one thing?
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    Chairwoman ROUKEMA. Please do.

    Mr. HAMMOCK. And that is about this transition period. While the 24 transaction I don't understand, the transition period I certainly understand, I think that the banks certainly aren't letting the Year 2000 problem or their systems need slow down their merger and acquisition activities. They certainly can overcome the systems demands that those kinds of activities cause.

    Secondly, since my name has been associated with this issue in a couple of news articles including a national one, I have had dozens of stockbrokers call me saying, ''Listen, we can solve that problem for you with your interest-bearing checking account.'' They have tried to sell me an investment vehicle that would solve all this.

    So the fact of the matter is that banks are in the marketplace, and are coming after small business owners like myself, and saying,, ''We want to be your banker''; but at the same time they are saying, ''We don't want to pay interest on your account.'' At the same time, they have subsidiaries or competitors they are trying to merge with that are offering that kind of product. It doesn't make sense to me, but again I am a layman, I don't understand these things.

    Chairwoman ROUKEMA. Very good observation. Mr. Vento.

    Mr. VENTO. Thanks for your testimony. It was very clear. The banks ought to be able to do whatever they want to do in this area. I don't think they ought to refer it back to the fact that Congress or a law is preventing them from doing something, which of course they want to be perhaps in some cases prevented from doing. In any case, I think your testimony is very clear. I wish you a happy anniversary.
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    Mr. HAMMOCK. Thank you so much. I appreciate it.

    Chairwoman ROUKEMA. Thank you.

    Our second witness is Mr. Arthur Cunningham. We are very fortunate to have him here. He is a Senior Assistant Treasurer for Pioneer Hi-Bred International, Inc. in Des Moines, Iowa. Mr. Cunningham is testifying here today on behalf of the Treasury Management Association. He is accompanied by Assistant Vice President of ULLICO, Mr. Patrick Montgomery. Can you identify what ULLICO is?

    Mr. MONTGOMERY. Actually it is a company here in Washington. It is an insurance and investment company.

    Chairwoman ROUKEMA. We appreciate your being here today and look forward to your testimony.


    Mr. CUNNINGHAM. Thank you. Good afternoon, Madam Chairwoman and Members of the Subcommittee on Financial Institutions and Consumer Credit. As you noted my credentials, Art Cunningham with Pioneer. I will tell you a little bit about us. We are based in Des Moines. We are the world's leading agricultural seed genetics company.
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    I am honored to offer this statement on behalf of the TMA today. I serve as a member of the board of directors of TMA and also as Chairman of the Association's Government Relations Committee. Again, you have introduced Pat, and I am pleased to have him as the Chairman of the Board of the Treasury Management Association.

    TMA represents almost 12,000 treasury professionals who on behalf of over 4,000 corporations and other organizations are significant participants in the Nation's payments systems and capital markets. They are significant users of financial services and have an active interest and a sizable stake in any changes affecting the prohibition of interest on demand deposit account balances.

    We strongly support provisions which would both end promptly the prohibition against payment of interest on business checking and allow the Federal Reserve to pay interest on depository institution balances required to be held on reserve.

    The alternative proposal delays the removal of prohibition for six years, while immediately raising the number of allowed transactions from the current 6 to 24. This is an unsatisfactory Band-Aid approach which merely constitutes stalling the march toward modernization of our financial services system.

    For most of TMA's membership, Regulation Q has become an annoying anachronism. Earnings on balances can for the most part be managed through other types of accounts, and transfers made possible by current technology and willing competitors to commercial banks. The practical effect of Regulation Q today is that it has spawned a myriad of demand deposit substitutes which obviate the long obsoleted intention of the Banking Act of 1933. Many smaller businesses, however, still suffer the effects of Reg Q because of lack of sophistication, access to technology, and/or insufficient deposit balances.
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    Even large businesses which use innovative procedures to employ balances profitably would benefit from the flexibility and simplicity in funds management which would follow from payment of interest on demand deposits. Cash management would be simplified for all businesses and banks through abolition of the ban on paying interest on business checking.

    As noted, Reg Q is an outdated regulation, but it has had the effect of freeing banks from incurring interest expense and, not surprisingly, some banks here have come out against the repeal. These banks are supporting an alternative measure which keeps Reg Q intact but creates yet another loophole. The plan offered by the ABA would expand from 6 to 24 the number of times a company can withdraw funds from money market demand deposits each month. Through daily transfers from interest-bearing accounts to checking accounts, a bank gives its corporate clients in effect checking account interest.

    This plan does not address a common problem for many corporate customers that cannot anticipate all funding needs and frequently would require multiple daily transfers from money market deposit accounts not permitted, clearly, under this jerryrigged approach. This plan does provide more flexibility in enabling customers to utilize idle funds, but it neither simplifies the customer's cash management procedures nor addresses the falling Federal Reserve's issues and outflow of funds from banks.

    Regulation Q should be abolished on the basis of its obsolescence alone. But there are other reasons as well. For one thing, reliance on the work-arounds that Reg Q has spawned puts smaller banks and bank customers at a competitive disadvantage. Often overlooked also as a casualty of the interest ban are the residual balances remaining in the accounts of companies who do use sophisticated cash management tools and who actively invest funds or utilize sweep accounts. These cumulative balances are substantial and fail to earn fair value. So, in fact, bank customers of all sizes are disadvantaged by Reg Q.
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    A free market scenario should present sweep and interest on demand options to all bank customers and banks. Ending this archaic regulatory device will not terminate aggressive cash management tools like sweeps, but the end of Reg Q will terminate the artificial environment which created the sweeps market. Products should not owe their existence to Government protection through price regulation. In other words, no interest on business checking accounts. Rather, they need to demonstrate their worth in a free market as another option the customer may choose.

    In conclusion, we at TMA support the proposed Sections 101 and 102 of the Financial Institution Regulatory Streamlining Act of 1998. Its provisions solve some fundamental problems for bank customers, banks and the Federal Reserve. The inability of depository institutions to pay interest on business accounts hurts all sectors of the economy but especially small businesses. However, even large businesses which have developed means to employ balances profitably would welcome the flexibility and simplicity in funds management which would follow the elimination of Reg Q.

    Thank you very much, Madam Chairwoman, for the opportunity to present our views.

    Chairwoman ROUKEMA. Thank you, Mr. Cunningham.

    Margot Saunders, representing the National Community Law Center. Ms. Saunders represents the National Community Law Center, as I have stated, and the Consumer Federation of America, as well, with the U.S. Public Interest Research Group. I believe that you have been before this subcommittee on previous occasions and at one time were associated as a staff member, is that correct?
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    Ms. SAUNDERS. The former is correct. The latter is not. I have always been a legal aid lawyer.

    Chairwoman ROUKEMA. Always a legal aid lawyer. All right. I misunderstood our prior conversation.

    All right. We look forward to your testimony. You have had extensive experience in this area from a consumer's perspective. Thank you.


    Ms. SAUNDERS. Thank you, Madam Chairwoman. I thank you very much for inviting us to testify today. We also thank you all very much for the shape of this bill. It is considerably better from our perspective than the Senate equivalent, Senate 1405.

    My purpose here today is, one, to congratulate you on that and to say that we hope that you don't change the bill to include any of the bad provisions that are very anticonsumer that are in the Senate bill. My written testimony has extensive rationales for why the equivalent provisions in the Senate bill should not be included in this bill and what we would say to you if they were included, but I won't go through that verbally today.

    I also have heard through phone calls from staff of other provisions, other House bills that have been considered to be added, especially regarding rent to own, and we strongly urge you not to include those provisions as well. My written testimony details extensive reasons why we hope that you do not include those provisions.
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    I wanted to focus the few minutes I have on two issues. One, the single provision in this bill that is still clearly anticonsumer is Section 401, and I wanted to talk about that and tell you why it is not good and how it might be improved. Section 401 amends the section in the Truth in Lending Act that requires disclosures for open-end home loans. Section 401's language tracks the language that was in last year's regulatory relief bill and essentially would require that open-end home loan disclosures regarding the variable rate feature be the same as those that were required last year for closed-end home variable rate loans.

    We oppose the change that was made last year, and we oppose the change that is made this year. Last year, you replaced the historical index with a simple statement, as is proposed in this bill, to the consumer that ''your loan payment may go up and down.''

    That doesn't work. I don't know how many calls I have had from—not from my clients, but from friends who are interested in getting involved in home equity loans, wanting to know how they can figure out what the payments might be really on this loan and what the worst-case scenario is. And it is virtually impossible under current law for someone to determine, based on the disclosures that are provided today, what the worst-case payments might be.

    I have proposed in our testimony on page two a way that you could rewrite Section 401, rewrite Section 127A of TILA by adding a few lines to the requirements of disclosures on open-end variable rate loans, which are home equity loans, you would require disclosures that would truly be meaningful to consumers. And those disclosures would be the actual worst-case payment that a consumer might have to make and the worst-case total of payments that a consumer might have to make if the interest rate went up as high as it could and the consumer withdrew the maximum amount of credit that would be allowed.
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    This would provide truly valuable information to consumers and is really very, very simple for a creditor to come up with. I can do it on my computer in about two minutes. I am sure a creditor, any creditor, would be able to do it on their computer in less than that, once they programmed them. So it is not regulatory burden to actually require a valuable disclosure like this.

    I also wanted to point out that it has been several years, many years, since anybody has asked the consumer community what we need in terms of updating the consumer laws to protect consumers around the country.

    Madam Chairwoman, when I come and speak to you today, I am speaking to you on behalf of many Legal Services lawyers and other lawyers who practice consumer protection around the country. And the suggestions that I make today come from many of these lawyers.

    One of the most urgent—I have listed many suggestions we hope you would consider. One of the most urgent suggestions is that you increase the jurisdictional limit of Truth in Lending Act and Consumer Leasing Act above $25,000. The equivalent of $25,000 in 1968 dollars would be $125,000. The Act was meant to cover all outstanding consumer credit except those loans that were truly expensive. But we have only requested an increase to $50,000.

    I heard before when a question regarding this was asked by Mr. Vento that a banker said, ''Why do we need to protect someone from himself who is a consumer buying a $40,000 sports utility vehicle?'' But many, many middle-class consumers are buying on time, or leasing on time, cars that are worth over $25,000. The Truth in Lending Act not only required ceertain disclosures, it also leverages State Retail and Installment Sales Act laws which are hinged to Truth in Lending. So, once you increase the jurisdictional amount in Truth in Lending, you are also increasing coverage under State laws as well.
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    Thank you. I will, of course, be available for questions.

    Chairman ROUKEMA. Thank you.

    I don't know, we have quite a disparity here, Ms. Saunders, between your perspective on 401 and certainly the Fed, Governor Meyer, who testified. And we will go over that. But I don't believe they should be so mutually exclusive. But there may be a case that can be made for further disclosure and updating the consumer law. I am not sure about that. But I do think that we should take very seriously the Fed's testimony that was so strong with respect to 401. And they were strongly supportive of it. But I don't know if you want to further remark about that.

    But I guess I have to—you observed that these are better than the Senate provisions. But I also have to tell that you we do have RESPA/TILA hearings coming up, and we are going to have to deal with RESPA/TILA in another context, but we were forced to address it because of the Senate's initiative.

    I don't have any further specific questions except to say to Mr. Cunningham that we have—I hear what you are saying, and I am very sympathetic to it. But we are going to have to look to see whether or not there is an economic case that can be legitimately made. You heard me reference the IBAA's accounting of the cost factors, both in terms of their reserves as well as their capital investment and the total cost of their industry and their stock prices. And as you know, the ABA strongly opposes immediate removal of the prohibition. But certainly I am sympathetic to your proposal for free market options and not having price regulation. But we will approach that.
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    I don't think we will go over the 24-transaction approach or whatever, unless Mr. Metcalf would like to again take that subject up in his questioning. But first we will go to Mr. Vento.

    Mr. VENTO. Well, thanks, Madam Chairwoman. And of course Pioneer Hi-Bred is a sign that is very familiar if you drive in rural Minnesota or rural Iowa. It feels like an old friend is here. But, obviously, he works in the capacity as the treasurer there who is responsible for and representing others in his organization that are responsible for managing the accounting for businesses that are subjected to this sweep account and paperwork and so forth.

    And it is important to come forth and say that I don't know how we can work it out. I think some transition period may be justified because of the contracts that are out and the programs that are in existence. But clearly, it just seems to me that both large and small banks are going to be eclipsed by the money market accounts and other instruments and tools that are available which may not have the convenience and, frankly, in terms of maintaining the viability of the bank franchise. I think the strength of their business is with small business today. I mean, most of you that are not larger businesses can't necessarily issue bonds to gain their credit. So you really do utilize and function through banks. And so trying to keep these accounts—I mean, they have the choice to pay or not to pay the interest, but to have in place a Federal law that mandates that you have to set up two accounts, as it were, in order to accomplish the goal is sort of surprising, I think, when you realize that this has happened.

    I think the downside of it is maybe some costs that have been absorbed by banks or financial institutions would no longer be absorbed by them, in the sense that they are incentives today for having a demand deposit account or leaving your money in it.
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    I don't have really any questions for Mr. Cunningham, but I do appreciate his patience today as we have proceeded over what is, well, not too long a hearing.

    I want to make it clear that with regard to Margot Saunders and the work here that she has done, the testimony is very useful in terms of pointing out some possible avenues where we could add some consumer provisions to—especially the one that I related to in terms of lifting the TILA ceiling on personal loan amounts.

    I think that it is my understanding with RESPA/TILA, Madam Chairwoman, that that is going to principally deal with mortgage loans. It isn't going to deal with the ''consumer'' or personal loans. So the TILA that we are dealing with here is dealing with personal loans. It isn't as though it is something that——

    Chairman ROUKEMA. It is overlapping.

    Mr. VENTO. But they—I think the principle that is going to come out of this task force, and we hope to get just the mortgage side of it, the real estate side. And so what you are dealing here with is personal loans. Some of them may be coincidentally, you are right, and you are wrong. But if you have a home equity loan, that could then—because many are borrowing through a home equity loan, they then get some coverage. There is some disclosure in terms of what happens in that case. They get some protections.

    But largely we are talking about here personal loans. And, as has been indicated, most of us can go out and buy a sports utility vehicle—I wish I could afford one—but the fact is that they do cost more. So, increasingly, it means that they are not receiving the disclosure benefits.
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    Now, the other question, of course, the Fed brought up, and I think this is a fair question to you, Margot, and that is that they say that they have had to have a 15-year payment projection. Do you have any comments with regard to that? In other words, the point that that has to be revised every year based on different interest rates, based on different down payments and the suggestion here is to say, ''Well, your payments may be variable.'' Well, that's not enough. But 15 years, it may be that we are choking the system with paperwork that may not be as useful here.

    Ms. SAUNDERS. Mr. Vento, I would like to respond to several things that you have said. First of all, I have been very involved in the RESPA/TILA negotiations between industry and consumers. RESPA/TILA reform has exclusively addressed mortgage reform. And there is plenty to talk about there.

    The Truth in Lending Act jurisdictional limit under current law has an unlimited cap if the loan is secured by one's home. So regardless of how much, if the loan is secured by the home, Truth in Lending applies. If the loan is not secured by the home, then the maximum limit is $25,000. So with all due respect, the RESPA/TILA hearing discussions won't deal at all with the jurisdictional limit on personal loans.

    As to the question of whether or not we should deal with Section 401 now, given the RESPA/TILA hearings, that disclosure is certainly one of many disclosures that will be the subject of discussions in the RESPA/TILA ongoing debate. And I would urge that it does make sense just to wait.

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    But under current law, in response to your last point, Mr. Vento, what lenders have to disclose is a historical index based on the past 15 years, which does have to be updated every year and, I will admit, is of limited value to consumers. I mean, I have studied them extensively and it is hard to figure out what is going to happen in the future based on what has happened in the past.

    Therefore, we have not advocated maintaining the current law. We are advocating changing the law to require a disclosure of the maximum payment that would actually be required for this loan. This can be done, we think, with a minimal amount of trouble by any creditor with a computer.

    Mr. VENTO. And I would quickly add that it would be more meaningful in terms of what is the information because it is 15 years. You have got interest rates that have been 18 percent for consumers and you have got interest rates that have been 8 percent. So I mean, trying to look at a 15 year record——

    Ms. SAUNDERS. That is right. And also any $25,000 loan or any $20,000 loan, any loan of any amount will always have the same maximum payment. So it actually doesn't even need to be specifically figured by any particular loan officer. It can be figured by the bank and just provided as a matter of form, because the interest rate is always set, the maximum interest rate.

    Mr. VENTO. This really only deals with the variable interest rate circumstance as well, because otherwise, if you have a fixed interest rate, this is set. So there is not the same problem. So it is a question of dealing with that category. And I expect that makes up a small percent of the total loans.
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    Ms. SAUNDERS. Well, actually, I think it is most home equity loans are variable rate.

    Mr. VENTO. Well, most home equity would be variable.

    Ms. SAUNDERS. Madam Chairwoman, if I could respond to the point regarding the Fed.

    Chairman ROUKEMA. If only briefly, because we do want to give Mr. Metcalf an opportunity to ask his question. We will have to be leaving. Very briefly.

    Ms. SAUNDERS. Very quickly.

    Chairman ROUKEMA. And then you can amplify in writing if you wish.

    Ms. SAUNDERS. I just would say, I guess the Federal Reserve Board is recommending this change because it will coincide with the change that was made last year. And it does make sense that variable rate disclosures for open- and closed-end loans be similar, a point that we have been advocating for a long time. But just because we made a mistake two years ago does not mean we should exacerbate it by making the same mistake this year.

    Chairman ROUKEMA. All right.

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    Mr. Metcalf. Please.

    Mr. METCALF. Thank you.

    I don't really have a question. I sort of have a comment. I know that Mr. Hammock is gone now. But I think the significant issue is, as Mr. Vento stated, that non-banks, brokerages, and money market businesses are targeting small business. And we need to look forward, move forward and bring a level playing field to the marketplace. So that would be my last comment.

    Chairman ROUKEMA. Thank you. I think we have done well today in terms of the quality of the information we have to work with. It is challenging, but we can; it is not beyond our ability to deal with. And I am sure that we are going to advance this legislation. And, also, we will be able to do our voting on the floor. Thank you so much. We greatly appreciate your attendance.

    [Whereupon, at 1:43 p.m., the hearing was adjourned.]