Page 1       TOP OF DOC


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

  The subcommittee met, pursuant to notice, at 1:08 p.m. in room 2128, Rayburn House Office Building, Hon. Marge Roukema, [chairwoman of the subcommittee], presiding.

  Present: Chairwoman Roukema, Representatives Metcalf, Kelly, Vento, LaFalce, Bentsen, Kilpatrick.

  Chairwoman ROUKEMA. I am going to make an executive decision as Chairman. Do I have to say ''chairwoman''? As the Chairwoman, OK? I don't have a gavel, but we are going to begin anyway.

  All right.

  We will bring the hearing to order and I do appreciate my colleagues on the subcommittee for being here today and I would hope that other Members will be joining us. But, in any event, we are most anxious to open this important hearing and hopefully it will initiate a fast track movement to legislation on the floor.
 Page 2       PREV PAGE       TOP OF DOC

  In any event, we are here today to hear the views of witnesses on a very important issue concerning the landmark Riegle-Neal Interstate Banking and Branching Act of 1994, a bill which I strongly supported. And as Chairwoman of the subcommittee, the matter was brought to my attention involving the implementation of this bill and its impact on the continuing viability of the State bank charter for financial institutions that wish to operate in more than one State.

  As a long-time proponent of the dual banking system, I believe that the banking system's preservation is necessary on both the Federal and the State levels. I also believe a strong State banking system is necessary for the economic well-being of any State. Especially in the last several years, the State component of the dual banking system has a proven track record in numerous State economies. However, it appears that there could be a dark cloud on the horizon, placing this success in jeopardy.

  As the law now stands, Riegle-Neal creates the unintended incentive, and I stress ''unintended'', for a State-chartered bank to switch to a national charter in order to enjoy the full benefits of interstate branching. Current law may disadvantage host State branches of State-chartered banks in the area of powers.

  As it stands now, a State-chartered depository institution whose home State authorizes powers comparable, or superior to, those of national banks must relinquish those powers when they branch into States where bank powers are more restrictive. When confronted with these situations, it is not difficult to imagine a State-chartered bank in the home State switching to a national charter in order to facilitate branching plans. Indeed, such a move would seem natural for a bank's business plan for greater financial certainty when operating in a multi-State environment.
 Page 3       PREV PAGE       TOP OF DOC

  A solution to this potential problem can be found in H.R. 1306, a bill which I introduced, with broad bipartisan support, I might say, that would allow a host State branch of a State-chartered bank to exercise home State powers to the same extent as a national bank or a bank chartered by the host State, whichever is greater. This would ensure that the host State branches of State-chartered banks would not be at a competitive disadvantage to the host State branches of a national bank.

  Fixing this anticipated problem in Riegle-Neal before the June 1, 1997, date for nationwide branching is vital, I believe, to the survival of the State-chartered interstate banks. That is why the introduction of this clarification legislation is so important. In its simplest form, the issue boils down to parity for financial institutions operating in an interstate environment and, ultimately, the well-being of the dual banking system.

  Some have argued that any action to achieve such parity is another example of the Federal Government encroaching on the economic rights of individual States, however, I could not disagree more. In contrast, I must say that this bill would give State banks the power to determine with greater certainty whether or not their branching decisions can be rendered within the autonomy of their own States. In essence, it protects the sovereignty of a State's laws over its own State-chartered institutions as they move into interstate branching.

  I would think that such reinforcement of States' rights is not only essential to the safety and soundness of the dual banking system but also reassuring to those institutions that compromise the State component that works within it.

 Page 4       PREV PAGE       TOP OF DOC
  With that said, I look forward to the testimony today and I hope that what we hear from our witnesses will help this interstate clarification legislation move to the House floor quickly and hopefully on suspension.

  With that, I will now turn to my colleague, the Ranking Minority Member, Mr. Vento of Minnesota. Thank you very much.

  Mr. VENTO. Thank you, Madam Chairwoman. I listened and paid close attention to your statement and thank you for holding today's hearing on the legislation.

  House Resolution 1306 seems to be a relatively straightforward proposal. However, as we move forward today, we will see that this legislation has, in my judgment, far-reaching ramifications. This hearing will hopefully allow us to consider those ramifications and make the necessary adjustments in the legislation before and if this measure is reported to the full House.

  As the Chairwoman is well aware, and my colleagues, she and other colleagues, Congressman Bereuter, specifically, and I were all involved in the drafting of the Vento-Bereuter Interstate Branching and Banking Amendment that was adopted by the full House by an overwhelming vote, 366 to 4. That amendment was the predecessor to the current law.

  During the process, we sought to uphold several broad principles. Number one, to provide an alternative to banks that would allow them to achieve greater efficiencies in their operations; Second, to retain the dual banking system by addressing interstate banking and branching for national and State-chartered banks; Third, to preserve State authority through the recognition of State laws and an opt-out option for the States to consider; Fourth, to protect the interests of local communities and consumers and; Fifth, to protect the deposit insurance fund.
 Page 5       PREV PAGE       TOP OF DOC

  It is those criteria upon which we should measure H.R. 1306. Clearly, H.R. 1306 and the Conference of State Bank Supervisors' agreement provides State banks with significant efficiencies. Following home State law when appropriate and dealing with one regulator will ease the ability of these institutions to branch to other States.

  The dual banking system has served our Nation well. Competition between State and national banks has led to improved services and benefits for consumers and local communities. The Riegle-Neal law was not intended to nationalize banking. I certainly understand the concerns that under the current law some State-chartered banks may decide to flip charters to a national bank. Clearly, we do not want such a mass exodus to occur.

  While the pending legislation meets the first two criteria I outlined of the five, its impact on the other three criteria is less than clear. The law in the Vento-Bereuter Amendment represented compromises. A lot of tough negotiation occurred and the give and take from all parties was required to enact this law.

  One of the points in greatest dispute was the role of the State law for out-of-State banks. The original House proposal provided that host State laws in specific areas applied to all banks, national and State-chartered. During the negotiations with the Senate, the provision was changed to provide an exemption in certain instances for national banks. The law also put in place a specific process to be followed before such a preemption could occur. I think most of us are aware of the rather surprising strength of the 1860's National Bank Act in terms of its court decisions and the comptroller's new-found authorities to exercise it. So I well understand, Madam Chairwoman, while some may be concerned, especially about the National Bank Act, we couldn't anticipate that at the time.
 Page 6       PREV PAGE       TOP OF DOC

  The final interstate law was equally specific on out-of-State, State-chartered banks. Those banks are subject to the laws of the host State. This is not an inadvertent error.

  I want to dissuade anyone from the notion that somehow Congress does not know what it is doing. This seems to be a popular theory, especially when things go wrong, that it wasn't our intent or we have the privilege to blame a bureaucrat. It actually occurs in State legislatures too, I might say, Madam Chairwoman.

  But, you know, quite candidly, it was a specific policy decision made by Congress. Perhaps Congress made an imperfect decision, if anyone could imagine that. But, nonetheless, it was a law upon which States decided to opt in or out of interstate branching and I would submit that this question is, in the end, a Hobson's Choice sacrificing host States' rights for interstate parity.

  Now we are called upon to change the underlying law prior to its full implementation but after the States were able to opt out. In essence, the legislation preempts State law not for national banks but for State-chartered banks without the process established in the Riegle-Neal measure.

  The National Conference of State Legislatures has offered several options to reassert some State control over this preemption of State law. The impact of the legislation on consumers is unclear. The protections a consumer has will depend upon the bank the consumer uses. There could be a national bank standard, a different bank for home State banks and different standards for every out-of-State State-chartered bank. In some instances, the consumer could benefit from stronger out-of-State standards or, in other instances, could be harmed from weaker or no standards.
 Page 7       PREV PAGE       TOP OF DOC

  Under the proposed policy, there would be little recourse to address or to correct the problem. National banks, at least in theory, are under the control of the Federal Government with Administration regulators and Congressional input. At least that is the theory. The same is not true for out-of-State, State-chartered institutions. Equally unclear is how or why State regulators would enforce consumer laws or how they would enforce consumer laws to protect consumers living in another State against home State banks.

  The most important criterion that we must consider is the impact of the legislation on the safety and the soundness of the deposit insurance fund. The Chairwoman and I remember too well the direct effect that State investment laws and lax supervisory standards had in the S&L crisis. We certainly do not want a replay of that man-made national disaster, not natural disaster.

  While the FDIC and the CSBS pledge to remain vigilant and claim to have a process in place, the track record raises many questions, as you may well understand. We surely must seek greater protection for the taxpayer than that which existed in the past.

  Madam Chairwoman, I am not unalterably opposed to moving forward with this legislation. Our belief is that today's hearing will underline the need for further modifications to the proposal, if it is to address the questions that I have been raising. I look forward to working with you and with the staff and I thank the witnesses that are here today to try and share their views with us.

  Thank you, Madam Chairwoman.

 Page 8       PREV PAGE       TOP OF DOC
  Chairwoman ROUKEMA. Thank you.

  Does Mr. Metcalf have an opening statement?

  Mr. METCALF. Yes, I do, Madam Chairwoman, and I will try to be very brief.

  It is with great pleasure today that I come before the subcommittee. It is a privilege when people come from one's home State to testify, and today I am pleased to announce two people that call the great State of Washington home, who will be on our panels. Our Director of Financial Institutions, John Bley, has testified before this subcommittee previously. John has been an irreplaceable asset for me, as we have talked about many issues facing our State in the financial arena.

  Besides being an avid sportsman, as I am when I have time, he also wears cowboy boots. Now, my wife never allows me to say ''cowboy'' boots, it's ''western'' boots. But everybody else knows that they are cowboy boots, which I do. So we have a good thing there.

  Thanks for coming. I look forward to your comments, John.

  Also, Madam Chairwoman, it is my privilege to introduce Senator Margarita Prentice. Senator Prentice, who will be speaking on a later panel, represents an area Southeast of downtown Seattle. She and I had the privilege of serving together in the State legislature. She was in the House and I was in the Senate and she now is in the Senate and has taken my place on the Environment and Natural Resources Committee area and so she not only has a knowledge of financial issues but we share a keen respect for the environment and the importance of the salmon resource we have and salmon enhancement.
 Page 9       PREV PAGE       TOP OF DOC

  Senator Prentice, thank you for coming.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you.

  Mr. LaFalce.

  Mr. LAFALCE. Thank you, Madam Chairwoman. I am very pleased you are having this hearing. I think it is necessary.

  I am an original cosponsor of this bill. I came to the decision to cosponsor it somewhat reluctantly because I am not fond of giving State legislative bodies the ability to have extraterritorial effect in State decisions. Whenever possible, I like to reserve that to the Federal legislative body. On the other hand, I also believe in the dual banking system and I believe that the dual banking system is highly desirable—if we are to have innovation within the financial services industry, if we are to have competition and growth within the financial services industry.

  I think that the health of our banking system has been based on this healthy tension and competition which exists between the Federal bank charter and the State bank charter. Some people disagree. Some people just want one single charter, a Federal charter, forget about the State charters. Well, that makes the issue quite easy for them. But if you believe in the dual banking system or the dual chartering system, then we have to ensure that both national and State bank charters are flexible and capable of incorporating market innovations.
 Page 10       PREV PAGE       TOP OF DOC

  Certain provisions in the Riegle-Neal Interstate Bill have had the effect, and will continue to have the effect, increasingly, of putting State-chartered banks at a competitive disadvantage relative to national banks. In essence, the problem for State-chartered banks is that the OCC can preempt State laws that conflict with the National Banking Act. But State banking regulators have no similar authority when their State banks branch into another State which has a law that conflicts with their own home State banking law.

  So what is the result? The result is that national banks and the Federal charter itself have a clear advantage over any State-chartered bank and any State charter. So what is the remedy?

  Well, if you are a State-chartered bank, it is pretty obvious. You switch to a national charter. But that remedy, as more and more State banks want to go interstate, could easily result in the demise of the dual banking system. I don't think that is a result we should want to see.

  Now, the problem was recognized at the time the interstate bill was being drafted in 1994. I say the interstate bill. We tried to advance one through this subcommittee that I authored in 1986. We got it out of the Committee with tremendous opposition and it was stymied in the Rules Committee.

  But, in any event, in 1994, it was hoped that some type of multi-State agreement would be capable of dealing with the potential inequity. But despite agreements between State bank regulators reached last year which attempted to equalize the situation between State and national banks, many State banks still find themselves at a distinct disadvantage as they make plans to branch interstate. There are still an awful lot of complications, an awful lot of uncertainty as to whether host State or home State laws apply to an out-of-State branch of a State bank.
 Page 11       PREV PAGE       TOP OF DOC

  The situation has resulted in many State-chartered banks concluding that they would be better off with a national charter. I think we want to avoid the scenario which leads to a single bank charter in our country.

  This bill may need some amendments, perfections, improvements and I suspect all Members of the subcommittee and all the sponsors would be very open to that as we proceed. But let me make another point. I don't want to suggest that I am opposed to the Federal charter, to the OCC. I have nothing but admiration for the creativity and assertiveness of the OCC as regulator of our national banks.

  My support for this bill, rather, is based on the belief that our overall banking system is much stronger as a direct result of banks having a choice of Federal or State charters and I don't think our intention in passing the interstate legislation in 1994 was to abolish the dual banking system. I know it wasn't. This legislation will ensure that that is not its unintended effect either.

  I thank the Chairwoman.

  Chairwoman ROUKEMA. Thank you very much.

  Now, might I say that for this panel and those that will be succeeding this panel, I would like to say that we are going to try to adhere to the 5–minute rule. Those lights in front of you will tell you when you have a warning yellow light. I will try to be understanding in terms of how I apply it but I just ask for your cooperation to the furthest extent possible. But it is much more important that we hear a full explanation than we adhere arbitrarily to the 5–minute rule. But we recognize the House is in session and we could be interrupted with votes at any time.
 Page 12       PREV PAGE       TOP OF DOC

  I thank certainly Mr. Metcalf for introducing one of our panelists from the great State of Washington. Mr. Bley, we do appreciate your being here today and, as I understand it, you are Chairman of the Interstate Task Force for the Conference of State Bank Supervisors.

  And I have a special pleasure in welcoming Mr. Traier. He is not a stranger to this subcommittee but Mr. Traier has the extra distinction of not only testifying here on behalf of the Conference of State Bank Supervisors, but the extra distinction in that you are the Deputy Commissioner and Director of the Division of Banking in the great State of New Jersey, from which I hail. I just want you to know he has an excellent reputation across the board in that State.

  So we welcome both of you here today and we look forward to your testimony.

  Mr. Traier.


  Mr. TRAIER. Thank you, Congresswoman.

  Good afternoon, Congresswoman Roukema and Members of the subcommittee.

  I am John Traier, Deputy Commissioner of Banking for the State of New Jersey. I am here today on behalf the Conference of State Bank Supervisors, CSBS, with my colleague, John Bley, from Washington State and the Chairman of the Interstate Task Force for CSBS.
 Page 13       PREV PAGE       TOP OF DOC

  The Conference of State Bank Supervisors is the professional association of State officials responsible for chartering, regulating and supervising the Nation's 7,255 State-chartered commercial and savings banks and 433 State-licensed branches and agencies of foreign banking organizations. CSBS is the only national organization dedicated to the preservation of our dual banking system.

  The dual banking system, as you know, is the existence of two separate, equivalent chartering and regulatory systems at the State and Federal level. The dual banking system provides financial institutions a meaningful choice between State and Federal chartering, supervision and regulation. It is a unique system in the world and has been the major factor in the dynamism of the American banking system.

  The existence of two regulatory systems promotes efficiency as regulators learn from each other and have the incentive to improve their operations to serve their constituencies. The dual banking system also promotes creativity within the banking industry, allowing bankers and regulators to test new activities and practices on a State level before introducing them nationwide.

  Innovations that originated at the State level include savings banks, checking accounts, electronic funds transfers, bank insurance sales and, the issue that brings us here today, interstate branching. Four States had already enacted interstate branching laws before Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The Federal law, however, created new challenges for the State banking systems.

 Page 14       PREV PAGE       TOP OF DOC
  Over the past 3 years, States have acted quickly on the issue of interstate branching. Today, 44 States have acted to allow interstate banking on or before the nationwide trigger date of June 1 of this year. Only two States, Texas and Montana, have opted out of interstate branching, choosing to postpone interstate branching until 1999 and 2001 respectively.

  New Jersey has opted in early to interstate branching, opening our borders on April 17, 1996. While we do not allow out-of-State banks to branch into New Jersey de novo, there is no minimum age requirement for institutions to be purchased. An out-of-State bank can also purchase a single branch of a New Jersey bank, as long as a New Jersey bank can do the same in that institution's home State.

  Even before Riegle-Neal was enacted, State Bank Supervisors understood that we would have to develop a system to ensure that State regulation and supervision did not interfere with our State-chartered banks' ability to operate branches across State lines. We were determined to offer State-chartered banks the opportunity to take advantage of the benefits of interstate branching without losing the traditional advantages of a State charter, accessibility to one's home State regulator, flexibility, innovation and cost effectiveness.

  Toward this goal, the CSBS Interstate Task Force first developed a set of guidelines for the supervision of multi-State State-chartered banks. The overriding principle behind these guidelines was the determination that a multi-State State-chartered bank should have only one regulatory point of contact at the State level, its own State. Without this key element, State-chartered banks would reap far fewer benefits from interstate branching than their Federally-chartered counterparts and would have a powerful incentive to convert to a national charter.
 Page 15       PREV PAGE       TOP OF DOC

  From these guidelines, the State banking departments began to enter into regional agreements that laid out the details of cooperative multi-State supervision. Last November, State Bank Supervisors signed two nationwide cooperative agreements amongst themselves and with the Federal banking agencies to streamline the supervision of multi-State State-chartered banks. This was a truly historic event with all 50 States agreeing on how we would supervise and regulate financial institutions that operate in our States.

  These agreements create a structure and procedures for the supervision of a State-chartered bank and its out-of-State branches. Under these agreements, the State in which a bank is chartered, its home State, is the single point of contact for safety and soundness supervision. Home State regulators retain backup authority on consumer regulations and safety and soundness.

  The signing of these agreements was an historic achievement and the States are justly proud. Despite these efforts, however, we are finding the financial institutions are still reluctant to use the State charter to operate across State lines. One problem these banks have identified is uncertainty about which laws apply to host State branches.

  Riegle-Neal set out the concept of home State and host State. The nationwide supervisory agreements are based on the premise that home State law controls all of a State-chartered bank's corporate operations. CSBS believes that home State law applies to host State branches on most issues, including lending limits, rights and obligations of the board of directors and basic chartering issues.

 Page 16       PREV PAGE       TOP OF DOC
  Unfortunately, many lawyers disagree with CSBS's interpretation and believe that host State laws apply on many of these issues. Different courts could determine these applicable law provisions differently. Certainty about statutory obligations and restrictions is obviously a key element in a bank's decision on its structure.

  We have found that some bank attorneys are advising their banks to take a national charter because it provides this certainty. At this point, Riegle-Neal's ambiguity on this issue creates an unintended incentive for banks to choose a national charter over a State charter. H.R. 1306 seeks to make clear that host State law applies to a branch of an out-of-State State-chartered bank only to the same extent that it applies to a branch of an out-of-State national bank.

  Another problem for State-chartered banks under current law is that they cannot use the powers of their own charters in host States if the host State does not authorize these powers for its own State-chartered banks, even if national banks can exercise those powers in that State. National banks can use the powers granted to them in all States.

  Under current law, if a multi-State State-chartered bank wants to conduct an activity authorized for a national bank but a single host State prohibits it, this bank may switch to a national charter, even if the vast majority of States allowed that activity. I would like to give an example based on an actual case.

  A State-chartered bank operating in 10 States wants to sell mutual funds directly out of the bank, an activity permitted for national banks. Nine of the 10 States allow this activity; the tenth requires the bank to sell mutual funds through a subsidiary. Under current law, the easiest way for the bank to solve its dilemma would be to convert to a national charter.
 Page 17       PREV PAGE       TOP OF DOC

  House Resolution 1306 fixes this problem by allowing a State-chartered bank to exercise the powers of its own home State charter in host States to the same extent as allowed in the host State or allowed for a national bank.

  These changes are necessary to keep the State bank charter viable for banks that wish to operate interstate. It is our hope to pass this legislation before the June 1 trigger date for interstate branching.

  Banks are making decisions about their charter and structure now, in preparation for the June 1 trigger date. Current law creates an artificial, unintended incentive to choose a national bank charter. This incentive is an imbalance to our dual banking system that may do long-term harm to the system as a whole. A dual banking system in which the State charter is a realistic option for only the smallest, community-based banks is one that has lost much of its power to innovate and to drive efficiency and cost-effectiveness in our regulatory system. I cannot believe that this was the intent of Congress when it enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.

  The State banking system has always been an engine of change within the industry. Its potential to continue in this role should be preserved. State regulation continues to show its flexibility and its responsiveness as the State banking system prepares for interstate branching.

  At the same time, a primary benefit of State regulation remains its focus on local issues and the community. This is a major reason that the vast majority of new banks continue to choose the State charter to begin their operations. State regulation fits well with community-based banking, with its acknowledgement of the local and regional differences and its refusal to operate as if one size fits all.
 Page 18       PREV PAGE       TOP OF DOC

  State banking is known for its resilience in the face of change. It has survived the creation of a national banking system, the imposition of new layers of Federal regulation, the evolution of rival financial service industries, and several active attempts to dismantle it. Interstate branching, which emphasizes the ability of banks to operate without regard to State borders, is only the latest challenge to the State banking system. With the support for H.R. 1306, it will survive this challenge as well.

  The fact remains, however, that every banking transaction is personal, directly involving one individual or one business that lives in a community and is connected to the individuals or businesses around it. State regulation understands the immediate effect that financial decisions and conditions have on these individuals and businesses. This perspective is increasingly important as the big picture gets even bigger.

  The American bank regulatory system, like the American Government, evolved from the ground up, based on the belief that every individual held rights equal to every other, and that no government or organization would ever again be strong enough to deny these rights. The continuing existence of our dual banking system has prevented any single bank regulatory from stifling the industry, and has led to the most dynamic, creative, and prosperous banking system in the world. On behalf of CSBS and the State banking system I urge you to take this opportunity to protect and enhance this dual banking system by passing H.R. 1306.

  Thank you for your consideration, and both myself and Commissioner Bley will be happy to answer any questions you might have.

 Page 19       PREV PAGE       TOP OF DOC
  Chairwoman ROUKEMA. Thank you.

  Commissioner Bley, you are Chairman of the Interstate Task Force. Do you have a statement to read?

  Mr. BLEY. No, Madam Chairwoman, I am here for questions. Thank you.

  Chairwoman ROUKEMA. All right. Thank you.

  I should point out at this particular time that the National Conference of State Legislatures was invited to be a member of the panel or to testify before us today. They declined to send someone, but they have submitted testimony, and I want that to be on the record, and without question their testimony will be included in the record of the hearing.

  But let me just ask, I listened rather carefully, Mr. Traier. I wonder if either you or Mr. Bley could enlighten us or give us the benefit of your perspective as State regulators on the known objections of the National Conference of State Legislatures? Can you give us some insight?

  I believe this is more than a battle of turf between regulators and State legislatures. But could you give us your perspective on what the distinctions are and whether or not it would really be a diminishment of the dual banking system, which I know you have referred to frequently in your testimony, and you heard my introduction. I focus on the same things, but I would be interested in knowing your perspective, your judgment, on their objections, and try to be as objective as possible.
 Page 20       PREV PAGE       TOP OF DOC

  Mr. TRAIER. As a public servant, Madam Chairwoman, I believe that is my duty, to be as objective as possible.

  Chairwoman ROUKEMA. Well said.

  Mr. TRAIER. This issue was identified during the implementation stage of interstate branch, and when we were deliberating the protocols that were so well explained by my colleague from New Jersey. What we identified as we went through this process and started talking with financial institutions and getting their views on their deliberative process is that there became a significant amount of uncertainty, which has already been described, about the application of host State laws, and uncertainty costs money, and oftentimes financial institutions are obviously going to opt for certainty, especially if uncertainty can create loss of money. What we identified as a solution is what we consider to be a very surgical and practical solution to a practical problem, and that is the observation that a host State has little or no jurisdiction over the supervisory aspects of host branches of national banks——

  Chairwoman ROUKEMA. Continue. Pay no attention to those bells. We will take care of it.

  Mr. BLEY. OK. And that if there were uncertainties about the application of host State branches that we had to fix that in order that we could retain some influence as host States over the financial services delivery in those host States.

  We agree philosophically with the NCSL. We are State bank commissioners. We generally want to go through the mission of empowering our State legislatures to set policy on financial institution matters. We also agree that we need to continue with a strong dual banking system for all the reasons that were articulated. The main concern——
 Page 21       PREV PAGE       TOP OF DOC

  Chairwoman ROUKEMA. You do not view this as impairing or limiting the power of the State legislatures to define the State bank powers?

  Mr. BLEY. I do not in the material factors when the facts are applied to the principles, and what I am saying is that we agree with the principles articulated with the NCSL. Where we have parted company is when you apply those principles to the specific facts and the practical realities of interstate branching. Interstate branching by its very nature requires coordination among the States for it to work. As was articulated by my colleague, five legislatures could set policies, four of them consistent, one of them could be inconsistent in a very minute area. We are going to require that non-bank activities be conducted in subsidiaries.

  As a result of just that one State, if that bank converts to national charter, it is not just that one State that loses out, it is all five States. It is the other four that have set policy. So it is because of these practical problems we identified the need for what we described as a surgical preemption of some host State laws in the areas where they are inconsistent with what a national bank can operate in that State in order to preserve the dual banking system in my example for the other four States that were involved in that example.

  From a practical standpoint most States have passed national bank parity provisions anyway, and so even though there is a theoretical objection that there may be some surgical preemptions of host State laws, there are very few circumstances that I can identify where that is going to happen in the real world, Madam Chairwoman.

  Chairwoman ROUKEMA. I think it might be best for us to recess now, have our vote, and I would please ask the Members to return as quickly as possible, and when we resume we will begin with the questions from the Ranking Member, Mr. Vento.
 Page 22       PREV PAGE       TOP OF DOC


  Chairwoman ROUKEMA. All right. Thank you. Thank you for your patience.

  Mr. Vento.

  Mr. VENTO. Thank you.

  I just think to review the bidding here, it is useful to point out, especially for my colleagues and for others that the issue is that, although hard to imagine, I guess, a national bank would not have a power, Mr. Traier, Mr. Bley, and the State would permit an activity that was not authorized within the context of the national bank charter. The national bank could not exercise that power; is that correct? Mr. Bley, you have to speak into the microphone, because nodding——

  Mr. BLEY. Yes. In the context of host State?

  Mr. VENTO. Well, it would be a national bank, so it would be a nationally-chartered bank, so it would not have a home State, I suppose, in that sense, other than Washington, DC.

  Mr. BLEY. OK. In terms of how the amendment would work——

  Mr. VENTO. No, I am talking about existing law.

 Page 23       PREV PAGE       TOP OF DOC
  Mr. BLEY. Oh, existing law.

  Mr. VENTO. Well, it is hard to imagine, is it not, but I mean the point is that the national bank is limited by the national charter, and similarly if two States, a home State and a host State, permit a power, that home State bank in a host State could exercise that power. Is that correct?

  Mr. BLEY. Oh, broader than the national bank charter? OK, I understand the question.

  Mr. VENTO. I am not saying it is broader. I am just saying it can exercise it. Yes, they are inconsistent, and what I am pointing out is that there were inconsistencies envisioned in what we did. That is all I am trying to point out. We knew that when we did it. While there are special circumstances that now appear, the issue here, and I think this is important, Madam Chairwoman, is that if in fact a home State permits a power, the national bank charter permits a power in a host State, the national bank can exercise that power today. The home State bank in that host State cannot if it is not permitted in that host State.

  Mr. BLEY. That is correct.

  Mr. VENTO. What you are proposing to do today is to permit—this is what your proposal does—is permit the home State bank that has a branch in a host State to exercise that power, and the host State-chartered bank, the State-chartered banks that are in that host State that are chartered by the host State, would not be able to exercise that power. Is that correct?

 Page 24       PREV PAGE       TOP OF DOC
  Mr. BLEY. That is correct.

  Mr. VENTO. And this is why we're getting the—and of course I appreciate your efforts——

  Chairwoman ROUKEMA. And vice versa.

  Mr. VENTO. Not——

  Chairwoman ROUKEMA. Yes.

  Mr. VENTO. Well, no, I mean, yes, that is right. That host State bank that would—or that home State—that host State bank that would have a home State would go into another State and would not be permitted by its charter—would not be able to do that power, that is true. But I think that for practical purposes, of course, that would be true. But the issue is, of course, that the reason that the State legislators are concerned about this, and I appreciate your efforts to try and present the opposition's—that is, the proponents presenting the opposition's position is a difficult task—is that they obviously would lose control over what a home State bank in their host State would in fact do under a State charter.

  Mr. BLEY. That is correct.

  Mr. VENTO. And so that is why they are concerned about this, because it would in a sense, if we are looking at these powers as investing some sort of privilege or advantage from a home State in a bank that is in a host State, the banks within your own State then would be operating at a disadvantage.
 Page 25       PREV PAGE       TOP OF DOC

  Mr. BLEY. That is true. The host State would also lose entirely all influence if that bank were to convert to national charter and they still would not be able to stop that particular activity from occurring in their State.

  Mr. VENTO. Well, I understand that, but, I mean, I think the equivalent effect of this is that the Comptroller of the Currency or the laws that govern national banks in essence would be then embraced. In fact, we will have in essence in terms of determinative power wholly or almost wholly the national bank charter would be a determinative power, except that there may be some States that choose not to; for instance, they may not have interstate branches and they may choose not to, in other words, follow that. But I think that this is going to obviously equate into a sort of competition. The existing type of framework would be modified significantly, and this takes out of the hands of the legislatures the ability to, in essence, modify their laws in a very significant way.

  Now one of the proposals that they have made here—that is, the State legislatures have proposed—is that there be a sign-off by the host State supervisor in terms of this particular activity. Do you have any response to that, Mr. Bley?

  Mr. BLEY. A couple of responses. It would be a power conferred by Congress on a local State regulatory official, and we usually derive our powers from our local legislative body. Second, what we think is needed for the State banking system to work in an interstate environment is two things—a credible supervisory process, which we think the protocol does, and the second is certainty as to the application of laws. If a financial institution has to go to each State and say, ''Is this OK? Is this OK? Is this OK?'' That creates burden, it creates uncertainty, and still I think creates an incentive to continue to opt for the national charter. It simply creates more regulatory burden at the State level that does not exist with the national charter.
 Page 26       PREV PAGE       TOP OF DOC

  Mr. VENTO. Mr. Traier, do you agree with Mr. Bley on this?

  Mr. TRAIER. Wholeheartedly.

  Mr. VENTO. OK.

  So this is the document, this Nationwide Interstate Branching Agreement, this is the document that provides a certainty of predictability and eliminates regulation; is that right? This document has a—it is a book, actually, but I'm reading a summary of it. First of all, this document I understand, you see this is a voluntary agreement, is that not correct, this document?

  Mr. BLEY. It is a document that all States have signed on to——

  Mr. VENTO. Well, will the home State regulator be sending—you know, so what happens in the event that—if the State banks who have a cooperative agreement, an interstate bank is voluntary, what happens if a State withdraws or refuses to participate in the agreement? What enforcement does the Conference of State Bank Supervisors have to ensure that States participate and adhere to this cooperative agreement?

  Mr. BLEY. As of today all States have signed onto this agreement, and it is a legally enforceable agreement. Now there are provisions that allow a State to withdraw. They can withdraw I think it is with, if I refresh my memory, I think it is with 90 days' notice.

 Page 27       PREV PAGE       TOP OF DOC
  Mr. VENTO. OK, so they can withdraw, but you're saying it's legally binding in the sense that what type of—is it a civil action you anticipate in that instance? Is it criminal?

  Mr. BLEY. It certainly would not be criminal. We would hope that from a practical standpoint that we would be able to work out any differences among ourselves. The main thrust of this document is to empower the home State regulator to work with host State regulators to achieve a consensus on supervisory issues, consumer protection issues, and so forth. To the extent that a host State would opt not to follow the agreement—and this is of course a legal theory, but the legal theory would be that there would be an option to go into a court of law and enforce the agreement.

  Mr. VENTO. Well, let me just, I mean, first of all, I have read over some of the summary of this. I have not read it all, but on enforcement actions, Madam Chairwoman and the witnesses, and they can respond, the enforcement action provides for this. It says that the home State can do it alone. That is within a host State. Or they can do it jointly. Or if there is some other option that the host State can do it alone.

  So what you are really saying is that you have got a cognitive construct of what might take place in terms of enforcement actions. Now these are fairly important, I would say, and what this agreement offers is that the home State can do it alone, it can do it jointly, or it can do it—the host State can do it alone if it has reason or it has the volition and wants to do it. So, I mean, what I am just saying is that that sounds like multiple choice to me.

  Mr. BLEY. Yes, that is what we wanted to do in the agreement was to ensure that host States did have some say and reserve some rights to take enforcement actions, particularly in the area of the Big Four that are reserved for States for national banks and State banks, consumer protection, fair lending, community reinvestment. Why it is in the disjunctive is that home State regulators need to take their responsibility seriously.
 Page 28       PREV PAGE       TOP OF DOC

  For example, in the State of Washington, in the bill that Senator Prentice primed, there is a provision in our law now that says that a Washington State-chartered institution shall comply with all applicable host State laws. The reason why it is in Washington State law is it becomes a violation of Washington State law to violate a host State law. Thus as chartering authority we can take the enforcement action on that, and coordinate that with the host State supervisor. However, in States where the home State supervisor may not have jurisdiction because it is not a violation of their home State law, the host State supervisor still retains the authority to conduct that enforcement action——

  Mr. VENTO. No, and I am not trying to be—but I mean I think the same thing applies with regard to enforcement, with regard to examination, with varying degrees of adjectives, should I say, and requirements around it. This is not exactly a uniform State law that has been adopted. This will not be reflected in every State. I mean, it is not—even if you did adopt it, it does have these options in which I think leave a lot of local initiative.

  That is why I am trying to understand, you know, if the bottom line here is that the supervisor within a State needs to fundamentally cooperate, and I think that they will, I do not have any reason to believe that they will not. So I do not know what the objection would be, you know, why it would be so specific an objection with regard to this threshold question that the State legislatures have. I think what it points out is that there is not a contest so much between the State legislatures here and the supervisors are willing to—but they want some decisionmaking to rest within their State with regard to various powers that might be extended to national banks so that there at least can be a source of responsibility that is less cumbersome than the State actually changing the law for those banks, State banks, that they host.
 Page 29       PREV PAGE       TOP OF DOC

  So there are a lot of other questions, Madam Chairwoman——

  Chairwoman ROUKEMA. We are long over the time limit, but Mr. Traier has not had an opportunity to respond at all, and I see him nodding his head.

  Mr. TRAIER. I just want to say to Mr. Vento I think it is a problem of perception more than anything else. I think if we have to wait for a host State's supervisor to grant a power or interpretation of a law, you know, it is a problem of perception that I think a lot of legal people have told banks that why bother dealing with all these various State systems, especially if you are more than three or four States it becomes very cumbersome, and, you know, it is much easier just to have a national bank charter at that point.

  Mr. VENTO. What are the problems right now in terms of the differentiation in powers between the national and State banks that are being encountered by home State chartered institutions?

  Mr. TRAIER. Well, we have talked to some of our larger——

  Mr. VENTO. We have talked—we have got one example so far, one in 10 States.

  Mr. TRAIER. Well, we have talked to various large banks in New Jersey, and most of the large banks in New Jersey are national banks, and they have clearly told us over and over again that the national bank charter is the only charter for them because of the ambiguity in the various States, and dealing with, you know, the applicability of laws and powers. So we have learned firsthand that, you know, they have not even looked at a State charter.
 Page 30       PREV PAGE       TOP OF DOC

  Mr. VENTO. I know, but I thought maybe we could get to more definitive information as an example you gave about the sale of securities and an affiliate as being a major problem in one State out of ten. What State was that, or was that just a hypothetical, your example?

  Mr. TRAIER. It was a hypothetical in my case.

  Mr. VENTO. What I am asking for now is some specifics that you—since this is such a serious problem, we ought to know about it if it is going to be a problem in ten different States——

  Chairwoman ROUKEMA. Well, perhaps we could come back to that next time around.

  Mr. VENTO. OK.

  Chairwoman ROUKEMA. I think we have gone way over the time limit.

  Mr. VENTO. Yes.

  Chairwoman ROUKEMA. I would like to remind our colleagues that we are trying to enforce the 5 minute rule so that we can get around, then we will get a second round if necessary.

  Mr. Metcalf from Washington.

  Mr. METCALF. Thank you, Madam Chairwoman.
 Page 31       PREV PAGE       TOP OF DOC

  Some have raised the potential scenario that the OCC could preempt a host State law and there would be no regulation on that issue in the home State. Are you aware of any fact pattern that fits this scenario?

  Mr. BLEY. I am aware of the theoretical concern, Congressman. I am not aware of any specific fact patterns where that could result. I think the primary concern is usually in the area of consumer protection. However, for the OCC to preempt a State law, there has got to be a Federal law that occupies that field, and I am aware of no consumer protection laws that apply in the banking area that solely apply to national banks. So that same law will apply to host branches of State-chartered institutions, and will continue to apply.

  Mr. METCALF. OK. Thank you. That is all.

  Chairwoman ROUKEMA. Well, that was very nice.

  Mr. Bentsen from Texas.

  Mr. BENTSEN. Thank you, Madam Chairwoman. I really do not have any questions. My State has sort of a unique position in this, as I have come to learn, and I guess from what I understand we are not really affected by it, and then we have the parity law, so we do not—it just really does not apply. I guess the only thing I would say, Madam Chairwoman, is I am studying this legislation as we move forward in the event that we do have financial modernization and charter conversion that this is an issue that we ought to look at as it relates to the thrift industry if we are going to continue to have a State thrift industry along with the Federal thrift industry.
 Page 32       PREV PAGE       TOP OF DOC

  Chairwoman ROUKEMA. Mr. Watt.

  Mr. WATT. Thank you, Madam Chairwoman. I had two questions. Number one, the criticism that I have heard most is the kind of forum-shopping, State-shopping issue, that this bill would allow banks to choose the State as their place of residence or domicile that is most favorable to them obviously for business reasons and that quite often that is the least favorable to consumers, so that banks then end up disadvantaging consumers in those States that have more pro-consumer laws under this bill. Would you both address that issue and tell me either why that is true or is not true?

  Mr. TRAIER. Well, I do not think it basically is true. Banks will determine their home State based on a variety of reasons. Probably, you know, where most of their business is located will primarily be the reason, for the most part.

  Mr. WATT. But would not one of those reasons be a consideration of which State has the most aggressive consumer protections? Why would that not be a factor? I mean, I am not saying it would necessarily be the overwhelming factor. It might not be the overriding factor, but would that not be one of the——

  Mr. TRAIER. Well, probably one of the most pro-consumer States is the State of New York, as far as consumer protections. It has a State CRA law and, you know, various other consumer protections in its law, and more States, you know, that do business in my State are State-chartered in New York than they are in New Jersey. So if the basis were, you know, where it would be more, you know, advantageous based on, you know, taxation or based on, you know, consumer protection, I mean, they probably should have, you know, be chartered in New Jersey. And they have chosen to be chartered in New York. So I do not think that is necessarily the case.
 Page 33       PREV PAGE       TOP OF DOC

  Mr. WATT. Well, you acknowledge that it might be the case? You are just saying that it is not necessarily the case?

  Mr. TRAIER. You know, based on the way it is today, we have not seen evidence of that fact, and maybe John has some other——

  Mr. BLEY. I guess the proposed amendments focus on the application of host State laws to host branches of State-chartered institutions. It does not affect the application of laws at the home State. It is a question of whether those host State laws are going to apply to host branches of States——

  Mr. WATT. Yes, that is the question I am asking. Say if I have got branches in four States and I have the choice of which one I am going to make my host State, why would I not select the one with the least consumer-oriented laws so that I then apply those least-friendly laws in the other three States also? Would that not be the effect of this bill?

  Mr. BLEY. It would be much easier to simply convert to a national charter and avoid——

  Mr. WATT. Well, that is my second question. I mean, I concede it might be easier to convert to a national charter, but—and I am going to ask—that actually was my second question, but is there some reason that what I am saying is not at least one of the factors that could go into the decisionmaking process?

 Page 34       PREV PAGE       TOP OF DOC
  Mr. BLEY. Well, one of the things that CSBS, NCSL, the National Governors' Association have been very strong supporters of is to carve out exceptions in the applicable law areas that local laws will apply in consumer protection, fair lending, and community reinvestment. So the general rule is that in host States those laws are going to apply regardless of whether it is a national charter or State charter.

  In terms of creating any incentives for forum shopping, I fail to see how that is going to be, since the laws are going to apply in that host State to national banks as well as State banks. What this amendment does is simply say if the laws are not going to apply to those host branches of national banks, then they ought not to apply to host branches of State-chartered banks as well. Otherwise simply the institution will convert to a national charter to avoid its application.

  Mr. VENTO. Will the gentleman yield?

  Mr. WATT. I do not think I have any more time to yield, if we are following the Chairlady's entreaty to stay within 5 minutes, but I am happy to yield if she thinks I have some more time. I think that red light means my time is up.

  Chairwoman ROUKEMA. I think the red light does mean that, Mr. Watt, and I had been distracted because you have raised a very interesting question, and I am glad that Mr. Bley and Mr. Traier pointed out to you exactly what my staff was demonstrating to me.

  Mr. WATT. Then perhaps you would share that with me because I am still not—my understanding is what this law does is allow, if I have a—if I select a host State then the laws of that host State are going to apply wherever else I am doing business, is that not what this bill does?
 Page 35       PREV PAGE       TOP OF DOC

  Mr. VENTO. If the gentleman would yield.

  Chairwoman ROUKEMA. Yes, but I thought the question you initiated was using specifically consumer protection laws and there was one other item that you mentioned.

  Mr. WATT. Is there something in the bill that exempts consumer protection laws?

  Chairwoman ROUKEMA. Will you please, Mr. Bley and Mr. Traier, explain how the law applies in that regard and how it applies to national banks?

  Mr. BLEY. I'll try.

  I guess it's the exportation of consumer protection laws from the host State.

  Chairwoman ROUKEMA. That is the question.

  Mr. BLEY. I think the answer to that, the legal answer to that would be a function of what the home State law says. Oftentimes the home State law is going to say for branches in the State of Washington or in Washington, if I am using the State of Washington as an example, State chartered banks shall be subject to XYZ.

  If the law is written that way, I would say that those laws would apply in the home State but not necessarily apply in the host State and that is the reason, I think that is the wisdom of the consumer protection exception in Riegle-Neal and it's one thing that we need to defend at CSVS and NCSL is to empower all host States to apply consumer protection laws to the best interest of the citizens within those States and not necessarily export consumer protection laws——
 Page 36       PREV PAGE       TOP OF DOC

  Mr. WATT. Where is this exception that you are making reference to? I guess that is what I am missing because I was not aware that there was a consumer protection——

  Mr. TRAIER. It is in Riegle-Neal.

  Mr. BLEY. If you look at the bill itself it will specifically state that the Big Four remain within the authority of the host State legislature.

  Mr. VENTO. Madam Chairwoman, I——

  Chairwoman ROUKEMA. It's on page two: ''The laws of the host State including laws regarding community reinvestment, consumer protection, fair lending, and establishment of interstate branches shall apply to any branch in the host State of an out-of-State bank to the same extent as such State laws apply to a branch in the host State of an out-of-State national bank.''

  Mr. WATT. But that sounds to me to say exactly the opposite of what you have just represented that it says, unless I misunderstand what it is saying. I will look at it. I don't want to prolong this. I'll look at it.

  Mr. VENTO. Well, if I can just——

  Chairwoman ROUKEMA. No, I think we had better go on now. Thank you.

 Page 37       PREV PAGE       TOP OF DOC
  Oh, all right. I guess it's your turn.

  Mr. VENTO. Well, I don't know. In any case——

  Chairwoman ROUKEMA. I will give you permission to continue then.

  Mr. VENTO. Thanks. I haven't said anything yet so I mean——

  Chairwoman ROUKEMA. No, you are not going to say anything unless you are continuing this line of thought.

  Mr. VENTO. I was going to, yes.

  Chairwoman ROUKEMA. All right, thank you.

  Mr. VENTO. The laws of the host State—I am reading it—''Laws applicable to national bank branches.'' It says in general ''The laws of the host State regarding community reinvestment, consumer protection, fair lending, establishment of interstate branches—intrastate branches shall apply to any branch in the host State of an out-of-State national bank to the same extent that such State laws apply to a branch of a bank chartered by that State except . . .''—and then the exceptions are when Federal law preempts, obviously, such State law that it be may be usury, it may be other factors.

  Second, when the controller of the currency determines that the application of such State law would have a discriminatory effect on the branch in comparison with the effect of the application of such State laws would have with respect to branches of a bank chartered by the host State, so there has to be that particular finding that has to occur.
 Page 38       PREV PAGE       TOP OF DOC

  Of course, the issue that is of concern here is that if there is a national bank that has a certain treatment it seems to me that there's open for interpretation here that that in fact and the host State does not permit certain activities by its State banks in terms of consumer or other applicable laws that there it is open to interpretation as to whether or not the home State bank in concert with the national bank would in fact preempt what is today considered a legitimate host State type of consumer protection.

  I think there is that opening in here based on of course the template or the limit would be, the Governor would be, as to what the national bank interpretation would be.

  So if that is actually weaker than what the host State would have there or is interpreted as being different, then that home State consistent with the national bank charter interpretation and consumer laws would I think apply, and of course it is possible then under the scenario set up by my friend from North Carolina, although the law hasn't changed, so to suggest that someone could jump charter and go from New York to, let's say, Delaware as long as we have——

  Mr. WATT. Would the gentleman yield?

  Mr. VENTO. No, I don't know that I have time——

  Mr. WATT. With the permission of the Chairwoman, so I could make a suggestion about this?

 Page 39       PREV PAGE       TOP OF DOC
  It sounds to me like everybody intends for what I am saying not to be a problem.

  Chairwoman ROUKEMA. Exactly.

  Mr. WATT. But it sounds to me like the language does not get as far as the intention——

  Chairwoman ROUKEMA. Let me clarify this and then turn it over to our legal counsel, OK?

  Mr. WATT. I was just going to suggest that if that is everybody's intention then maybe what we will want to do is just make it absolutely clear so that we wouldn't be debating it and you wouldn't have to worry about me on this issue anymore.

  Chairwoman ROUKEMA. I think we are also reading from different versions, and I am reading from page two of the bill that I introduced.

  I believe, and I am not sure, and this is what we will turn over to counsel, I believe that what Mr. Vento was reading from was the unmodified language of the 1994 law, Riegle-Neal.

  It is my understanding that this language and my legislation modifies that to be exactly what our bank supervisors have said here. However, I would be more than happy to have our legal counsel talk about this and see if indeed that is what we have accomplished with this language. OK?

 Page 40       PREV PAGE       TOP OF DOC
  Mr. WATT. Thank you.

  Mr. TRAIER. You are correct. You are correct.

  Chairwoman ROUKEMA. All right, thank you.

  Any final words of wisdom?

  Mr. VENTO. Madam Chairwoman——

  Chairwoman ROUKEMA. Before we release you? All right, yes.

  Mr. VENTO. I'll just make one further observation. I know you are waiting for our colleague to come on, and I am too, but I think that the issue here of course anticipates, as I looked at the agreement, and I think it is not only because of this concern with regard to powers but with regard to generally the operability of the State-chartered banks.

  The discussion about examinations, for instance, I would just point out that—and they may want to comment about this—that generally the examiners that would be examining a host State or a home State would be from the home State. That anticipates that for instance if banks in New Jersey have branches in 30 States they would be sending examiners to those 30 States. Is that correct, Mr. Traier?

  Mr. TRAIER. On an as-needed basis. Most of the time the examinations take place in the headquarters of the bank.
 Page 41       PREV PAGE       TOP OF DOC

  Mr. VENTO. I just think it is——

  Mr. TRAIER. There is no function to be served in sending people to branches, except to count cash maybe.

  Mr. VENTO. Well, I don't know but I mean obviously I am just going under the summary of the Interstate Branching Agreements that have been provided by the staff, and so I was just anticipating that.

  I do think there is, and of course I appreciate this question on this consumer issue, which was a question I had as well. Thank you.

  Chairwoman ROUKEMA. Yes. I might say that was the question that had been raised to me by a Member on our side, and Mr. Watt, I was going to ask the same question for clarification from them.

  I thought I knew the answer and I am glad that we had this airing. It certainly is our mutual intention here.

  Mr. Bentsen, please. I understand you have a follow-up.

  Mr. BENTSEN. Very brief question. I may be off-base here but I am curious in talking with staff, would this have any impact on State usury laws?

 Page 42       PREV PAGE       TOP OF DOC
  Mr. BLEY. It is not the intent to have any impact on usury laws. I can't see how it would. The usury laws are—there's already a parity policy in place regarding usury laws and it is based on the fact that there is an amendment in the Federal Deposit Insurance Act which means it applies to all Federally-insured institutions, whether that is State or Federal.

  Mr. BENTSEN. OK, thank you. Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. Thank you. I thank the panel for your enlightenment and you of course are invited to submit to us in writing any follow-up material you think we need in order to evaluate the answers.

  Mr. BLEY. Thank you.

  Mr. TRAIER. Thank you.

  Mr. VENTO. Madam Chairwoman, there are some written questions for——

  Chairwoman ROUKEMA. Oh, yes, of course, and the usual procedure is that by unanimous consent we will submit written questions from any of the Members of the subcommittee here who are not present today for your response.

  Mr. TRAIER. Thank you.

  Chairwoman ROUKEMA. Thank you, and now it is a great pleasure to greet our second panelist, and while our second panelist, the Governor of the great State of Delaware is coming forward with our colleague, Mr. Castle, our colleague on this subcommittee who represents the State of Delaware, and I believe weren't you the former Governor of that great State as well?
 Page 43       PREV PAGE       TOP OF DOC

  Mr. CASTLE. Yes.

  Chairwoman ROUKEMA. So we have the honor of having two Governors here with us today and Mr. Castle, I would ask you to greet our former—a former Member of this subcommittee, the Governor of Delaware, Mr. Carper.

  Mr. Castle.

  Mr. CASTLE. Madam Chairwoman, I appreciate this opportunity. Apropos of Mr. Vento's earlier comment, I would just suggest that moving from anyplace to Delaware is always a good idea, sir. We have strict immigration laws, though, so we have to check you out very carefully.


  Mr. CASTLE. Not necessarily the banks. We like the banks.

  Obviously I am extremely pleased to introduce Tom Carper, the Governor of Delaware, today for his testimony on this very important piece of legislation, at least important to us in Delaware—H.R. 1306—legislation to ensure equality for State bank charters in interstate banking.

  While we are of different parties, we have a whole lot in common, and one of the things that we have in common is that we have seen the importance of a strong dual banking system from both the State and Federal perspective.
 Page 44       PREV PAGE       TOP OF DOC

  As probably most people in this room know, Governor Carper served in the House and on this subcommittee for 10 years, from 1982 to 1992, so he can really feel our pain as we deal with these various issues, but I feel his pain, too, as he deals with some of the issues back home.

  Governor Carper also knows the importance of strong State bank charters and we have we believe an excellent charter system in Delaware if any banks truly would like to move there. I am sorry there aren't more people in the audience for that little appeal.

  It is my pleasure to introduce one of the fine Governors in the country and one of the fine Representatives at one time from our Banking Committee, Governor Tom Carper.

  Chairwoman ROUKEMA. Thank you. Before you begin, Governor Carper, I would like to note for the record and with unanimous consent that the National Governors Association has submitted a letter and testimony that I would like to have included in the record and there are letters from the following Governors that have been submitted for the consideration of this subcommittee and to be included in the record: Mr. Branstad of Iowa; Ms. Todd Whitman of New Jersey; Miller of Nevada; Voinovich of Ohio; Locke of Washington, Levitt of Utah, Nelson of Nebraska, Symington of Arizona, Pataki of New York, Fordice of Mississippi, and Richard A. Duncen, Director of Banking, State of South Dakota, of behalf of Gov. Janklow.

  Without exception, their letters will be included in the record.
  Governor Carper.

 Page 45       PREV PAGE       TOP OF DOC

  Governor CARPER. Madam Chairwoman, Representative Vento, Representative Metcalf, and my friend and colleague Mike Castle. I thank you very much, Mike, for being here to introduce me and for the good work that you do on this subcommittee on behalf of our country and our State.

  Mr. CASTLE. I had a tough act to follow.

  Governor CARPER. As Governor, I have had a lot tougher than he has had to follow down here, and it is always a pleasure to be in his company.

  I would just say being back in this room brings back some terrific memories and some that aren't so terrific.


  Governor CARPER. It is great to see some former colleagues and it is really nice to see a number of the members of the staff that are still here, imparting their wisdom and keeping the rest of us straight.

  I would like to ask Madam Chairwoman if I could, Madam Chairwoman, I would like to ask——

  Chairwoman ROUKEMA. I apologize. I am sorry, Governor Carper, I didn't hear your question.
 Page 46       PREV PAGE       TOP OF DOC

  Governor CARPER.——If I may, that my testimony be entered in the record.

  Chairwoman ROUKEMA. Oh, of course. Without exception.

  Governor CARPER. Congressman Castle, being able to respond to any questions you might have.


  Chairwoman ROUKEMA. That too. Yes, I approve. I agree.

  Governor CARPER. Let me just summarize very briefly. I think you are behind a little bit on your schedule.

  Let me just summarize very briefly as what I see this as. In its essence, this is really a bit of a turf battle that is going on between States who want to protect State charters, the value of State charters and those who are not as anxious to do that and may be more interested in protecting the value of a national charter.

  In Delaware, I think about a year or so ago we had about 60 banks that were chartered in our State. We had maybe another 500–600 or so that are in related kinds of business—you know, mortgage banking, that kind of thing.

  When you think back over the last 10– or 15–years, and some of us served at a time when there was great calamity in the safety and soundness of our banking system and we were greatly concerned about the adequacy of monies in the FDIC or the FSLIC, and that entire period of time we never lost a single bank in Delaware. We never lost a single thrift in our State.
 Page 47       PREV PAGE       TOP OF DOC

  We have seen our State-chartered banks be engines of innovation that were designed to make money for the banks and for the folks that owned the banks, but also to provide good service for people in our State and other places. We think there is great value to State charters, and if you look back at some of the innovations—you know them as well or better than I do—whether they are the adjustable rate mortgages or they are just checking accounts or ATMs. My recollection is those really had their start in State-chartered banks and they spread from one State to another and eventually became devices that we use nationally.

  I would just have us think about this for a moment. I am sorry our friend from North Carolina has gone. We'll use New Jersey just as an example.

  If a bank in New Jersey decided that they wanted to branch into Delaware and they do—we have had a couple of banks branch into our State from other places. If you set up, your New Jersey bank sets up your branches in Delaware. If your charter bank in New Jersey permits you to do certain activities in New Jersey, it would also permit you to do those activities in your Delaware branches as long as we in Delaware are doing one of two things.

  One is if we have—we let our own State-chartered bank do those activities, or two, if nationally-chartered banks that are branched in our State have the ability to do those activities.

  I think that is not an unreasonable thing to permit to happen.

  In our State we would want our regulators to have the ability to supervise and to join in supervisory activities that involve those branches from your State in our State.
 Page 48       PREV PAGE       TOP OF DOC

  I am told that there are the ''Big Four'' items that are protected, and you mentioned a couple of them earlier in the give-and-take that you had, but they are really sort of boiled down to consumer protection and making sure CRA rights are protected.

  I think you have done a pretty good job in your amendment as I read it to stay true to the spirit of Riegle-Neal, but to make sure that we do have a decent shot in the various States to still have some State-chartered banks when the day is done.

  Let me simply close, if I may, with this. You mentioned that the NGA has a release today and I have it here in my hands and perhaps you have it already as well—a letter from our organization. It's getting input from all over the States, from Washington to the Carolinas and up into New England and certainly from Delaware and New Jersey. I think it's a good thing to do.

  I am not sure—I have not read every part of the bill that has been offered and maybe there is some way that can be improved but I think you are on the right track and we would hope very much that what you started here can go forward and be enacted.

  With that having been said, let me stop and respond to any questions you might have—or better yet, to have my Congressman respond to any questions you might have.

  Chairwoman ROUKEMA. No, he will have to come over on the other side of the table for that.

 Page 49       PREV PAGE       TOP OF DOC
  Mr. CASTLE. Either ask or answer.

  Chairwoman ROUKEMA. I don't know. I don't know that I have any question for you, Governor, but I would like to reinforce something that you said, because I think the facts in your State have clearly demonstrated that the innovation of State banks has been a great boon to your economy and to consumer services really in the State of Delaware, and I think that it is strong evidence that we should be continuing to help the small State-chartered banks be competitive. I think you have stated that very well.

  Governor CARPER. If I might just say, we have got about 700,000 people who live in Delaware; about 380,000 will go to work in our State today. Roughly 25,000 of them work in financial services directly and that is a pretty good proportion of people whose livelihood depends on financial services.

  I am proud of the way that we operate and as I said earlier we have never been a problem, never a drain on any of the insurance funds, the FDIC or the FSLIC, any of those.

  We offer some pretty innovative approaches to banking. We have debated some of those here in this room before, but I think in terms of safety and soundness we have a good record and in terms of what State-chartered banking is able to do for our State and obviously for some others whose governors have signed on really supports your legislation.

  Chairwoman ROUKEMA. I would also like to make this observation, that were we to not pass this legislation or deal with this inadvertent omission in the Riegle-Neal bill it would—not deal with anything—it would inevitably lead to a national bank system and seriously further erode the State banking system, so by working against this, it doesn't solve the problem that Riegle-Neal or the innovation that Riegle-Neal was opening up to the banks in this country.
 Page 50       PREV PAGE       TOP OF DOC

  Governor CARPER. There is a bit of uncertainty, if I could just offer, there is a good deal of uncertainty out there as to what the true intent of the language was in Riegle-Neal. I know you are trying to clarify and clean up the ambiguity.

  If you or I owned a bank and were in a position in our home State to branch into other States, we would want to know with some certainty that the activities that we would be able to do in that State, if we know that we can do them with a national charter, hey, we'll take the national charter.

  If it is not entirely clear that we can do them with a State charter, we'll take the national charter, so for us in our States this is an important point.

  Chairwoman ROUKEMA. Let me just ask a question of clarification. You alluded to this, but let me be a little more precise.

  Are you satisfied with Delaware's ability to enforce consumer protection with regard to State banks from New Jersey, which you have already had the experience of operating in Delaware?

  Are you satisfied with that operation?

  Governor CARPER. We are.

  Chairwoman ROUKEMA. Is it working well?
 Page 51       PREV PAGE       TOP OF DOC

  Governor CARPER. We had our own supervisor of banks in Delaware, a commissioner, who actually used to be counsel to the Senate Banking Committee a few years ago. We had him look very carefully at those kind of consumer protections and we believe that our folks in Delaware will be adequately protected.

  We can actually supervise and join in the supervision with Delaware supervisors. That might be done from, in this case, from the home State, from New Jersey. That gives us a fair amount of comfort.

  Chairwoman ROUKEMA. And this legislation follows those guidelines, that pattern of operation?

  Governor CARPER. That is the way we read it.

  Chairwoman ROUKEMA. Yes. Thank you very much.

  Mr. Vento.

  Mr. VENTO. Yes. The legislation doesn't really speak to the cooperative agreement or the compact which provides the examination, enforcement and the other provisions, Governor, that you have referred to, at least I don't think—maybe the legislation—maybe you want it to.

  I mean I don't think that we want to add to the legislation the entire reference in terms of this compact and in essence make it Federal law, do we?
 Page 52       PREV PAGE       TOP OF DOC

  I think it is an unfair question to you, but I think that the answer would be no, but I think we may want to rhetorically take some provisions of it, for instance, the four that we talked about.

  One of them, incidentally, isn't consumer protection. It is intrastate banking, and so I don't know that that comes across as a consumer but the others clearly, Governor, do represent that in the sense that they talk about fair lending and consumer protection and community reinvestment as such. I thought maybe there was sort of an economic development aspect to community reinvestment too, but those may be something we want to reference.

  I would just offer it.

  Governor CARPER. Could I make a comment, sir?

  Mr. VENTO. Yes.

  Governor CARPER. A fair amount of time and effort has gone into the effort to develop these cooperative agreements amongst the States, and I would just hope that you would be mindful of that.

  It didn't just occur magically. A lot of people worked hard to get us there.

  Mr. VENTO. No, I appreciate that, but I also want to—as I did point out, and you heard my exchange and I don't want to go over it again—in terms of the enforceability of it and what it means legally.
 Page 53       PREV PAGE       TOP OF DOC

  It isn't something that has been adopted as a uniform State law in each State, whether we should reference parts of it in terms of this to satisfy the concerns.

  I think you understand the issue here. I mean while some may look at it today as an imperfect law, I think in fact when we went to conference we said that home State banks had to comply with host State powers in all instances and even national banks, and the exception was made for national banks, that they would be able to preempt, and of course that has led us to the issue now to in fact match that power for home State banks that are in a host State.

  That is where we are going here, and so those that would be left behind, as it were, or left without those types of powers to exercise would be the host State home banks.

  So that is the concern. I mean I can cut it any way you want but I think the issue is that it does tend to go to the highest common denominator in terms of powers or the lowest, however you want to interpret it, and it does tend to move to a nationalization of the State charters, at least as they look in terms of powers, Governor.

  Governor CARPER. Again, I would just reiterate what I said earlier. Come June 1, when the rubber hits the road with respect to Riegle-Neal, a lot of banks around the country will have had to make a difficult choice.

  Our fear is that with the language as it is currently written there is enough uncertainty that there will be a wholesale change of conversion of charters from State to national.
 Page 54       PREV PAGE       TOP OF DOC

  We believe there is real value in the dual banking system. I have talked of some of the values that have come out of it and we hope that you will consider that as you deliberate this legislation.

  Mr. VENTO. Well, I will. I mean the first reaction I had from the bankers in my State when I raised this, those that were State-chartered, was that they saw immediately that they would be treated differently than for instance a host State bank or a home State bank as in Wisconsin and a host in our State, and so that is a real problem for them in that sense and there are some other provisions which we haven't talked about, and I feel I should mention, and that is that most States in addition to this have adopted a ''wild card'' law, and that in essence provides that a bank within the host State that is a home bank because a national bank or an out-of-State home bank or a bank that is from another State in your State can in fact have certain powers to exercise, that they then can also exercise those powers.

  Governor, what did you think of the response from the State legislature organization, their officers, when they talked about permitting a host State supervisor to sign off on the exercise of such power when of course it is not—or activity which is not permitted by State-chartered banks within the host State?

  Governor CARPER. I am not all that familiar with what was said. What I would really ask you to do is give me a chance to get familiar with it——

  Mr. VENTO. Sure. I would be happy to do that.

 Page 55       PREV PAGE       TOP OF DOC
  Governor CARPER. And I would be happy to respond in writing if you like.

  Mr. VENTO. Thank you, and I especially want to welcome our colleague and friend, and I think that he did a great job when he was here.

  Governor CARPER. Thank you.

  Mr. VENTO. From all reports I get, he is doing a great job in Delaware and we are proud to know you and to see the work that you have done.

  Governor CARPER. It's great to be back. My only regret is that I don't get to work out in the House gym with you in the morning like we used to do.

  Chairwoman ROUKEMA. Is that your only regret?

  Well, you don't have to answer that.

  Governor CARPER. There are one or two others.

  Chairwoman ROUKEMA. Thank you. Mr. Vento, I appreciate that. That is an important question and Governor Carper was not here at the time when that aspect of the question was being fully explored with the supervisors and the specific references to the State legislature questions. So we appreciate that, Governor, and we will submit that to you for your written response.

 Page 56       PREV PAGE       TOP OF DOC
  Mr. Bentsen.

  Mr. BENTSEN. Nothing.

  Chairwoman ROUKEMA. All right. Thank you very much. Appreciate it.

  Governor CARPER. I have never met Mr. Bentsen and I hear good things about him, even from Mike Castle. I hear good things about him. It is a real pleasure to make your acquaintance.

  Mr. BENTSEN. I thank the Governor. And, actually, even though my county is a little larger than your State, I do——

  Governor CARPER. A lot of counties are.

  Mr. BENTSEN. That's right. I have spent a great deal of time in your State and I think it is a wonderful place.

  Governor CARPER. Thank you.

  Chairwoman ROUKEMA. We will keep the record open and we invite you for any further comments that you might want to add to the record. I will say, in case you did not hear, our hope is that we are going to move this very quickly through Committee and hopefully to the floor in the near future.

  Governor CARPER. That's great.
 Page 57       PREV PAGE       TOP OF DOC

  Chairwoman ROUKEMA. So we appreciate your cooperation and coming here, taking time from your busy schedule.

  Governor CARPER. Thank you.

  Chairwoman ROUKEMA. And now our third panel. And I do believe that the Congressman is going to be back shortly.

  Mr. Vento has suggested that we go ahead. He will be returning but I would like everyone to be seated.

  I wonder if I might have the indulgence of everyone? Who was it that used to say ''All politics is local.''?

  Mr. ABBATE. Tip O'Neil.

  Chairwoman ROUKEMA. Tony Abbate used to say that?

  I have some school children that have been waiting anxiously to see me. They have been down here with their teacher from West Millford, New Jersey, to testify on the subject of a flag burning amendment and they are now, having been patient through 3 hours of testimony, wanting to see their Congresswoman. I told them I can't go out and see them but I can waive to them from here. Will you excuse me for this?

 Page 58       PREV PAGE       TOP OF DOC
  We are going to try once more to get them in here but, in the meantime, we will welcome our panelists.

  Senator, we will begin from my right, your left.

  Senator Margarita Prentice has traveled all the way from the State of Washington and, as Mr. Metcalf observed earlier, she is a distinguished Senator who serves in, what—Western Seattle and surrounding communities. Senator Prentice has served in the State legislature since 1988 and in the House of Representatives in the State of Washington since 1993. Oh, I'm sorry, beginning in 1988 in the House of Representatives and then 1993 in the Senate of the State of Washington.

  She is a Ranking Minority Member of the Senate Financial Institutions Committee, so you and I have something in common, don't we?

  Senator Prentice, thank you for being here today.

  Anthony Abbate, Tony to his friends, serves as President and CEO of Interchange Bank, located in Saddle Brook, New Jersey. Mr. Abbate and I have known each other over a number of years, have worked together mutually on issues important in the State of New Jersey and, certainly, issues concerning financial institutions both in New Jersey and at the Federal legislative level. Mr. Abbate is testifying on behalf of the Independent Bankers Association.

  You are no stranger here, Tony, and we welcome you yet again.

 Page 59       PREV PAGE       TOP OF DOC
  Michelle Meier serves as Government Affairs Counsel for the Consumers Union. Ms. Meier always provides this subcommittee with thoughtful testimony and we welcome her here again today. I think we heard from you not too many months ago, isn't that correct?

  Well, we thank you very much.

  With that, we will begin with Senator Prentice.


  Ms. PRENTICE. Thank you very much, Madam Chairwoman, and Members of the subcommittee. First of all, I would have waited a long time for you to go out and talk to the students because I think that is critically important. I think we have something else in common, we are both grandmothers, so suddenly there is another bond.

  I am the Ranking Minority Member from the State of Washington and very much appreciate the invitation. I am here today to support H.R. 1306, the Riegle-Neal Clarification Act.

  Now, in 1994, you passed Riegle-Neal. I became Chair of the Financial Institutions Subcommittee about a month later so, suddenly, I had to look at what you did and why you did it and suddenly figure out what was going to happen within our State.

  And so in 1996, we shepherded interstate branching legislation successfully through the State legislature. We made an early decision that we were going to opt in. Opting out was never under consideration. We simply said we are going to opt in. We decided we better understand what we were doing and so we looked at it for a year, we made sure all parties had a say and we eventually ended up with an agreed-upon legislation. Believe me, no mean accomplishment.
 Page 60       PREV PAGE       TOP OF DOC

  I did travel a long way to support the efforts of John Bley and his colleagues from around the country in asking for your support for early passage of a clarifying amendment. I also brought a letter from Governor Locke and I see that it is already part of your record and that is in support of this legislation.

  Washington State has always been a strong dual banking State. There are 21 national banks, 63 State-chartered banks, 15 State-chartered savings banks and 7 Federal savings and loans. We have seven foreign bank offices which have made a tremendous contribution to our development as a major trading center. Washington is the most trade-dependent State in the country. The last 3 years, the State issued seven charters to new community banks seeking to serve our citizens.

  The State charter has always been an important factor in Washington State's economic development policy. We have been able to provide credit to an expanding economy because we have an active banking sector. Economic development through credit availability was a priority for our former governor and my constituent, Mike Lowery, who was also a Member here, and it continues to be a priority for Governor Gary Locke.

  I thank this subcommittee for the State options that you provided in Riegle-Neal. In fashioning Riegle-Neal in this manner, Congress ensured that each State could consider a wide range of policy choices and then craft legislation that would meet the needs of each State. Giving the States this ability to carefully consider the issue and make their own policy decisions helped the process and it encouraged States to opt in without fear.

  We took the policy options you gave us and in over 6 months of consensus-building, believe me, that sounds so easy now. At first, I thought they would never make it. But over that process, they worked out a bill for our State. It ended up noncontroversial and it was bipartisan and it had the support of all financial institutions, the large ones and the small ones.
 Page 61       PREV PAGE       TOP OF DOC

  We were particularly pleased that Director Bley was appointed to chair the Interstate Task Force set up through CSBS. For the past 3 years, this task force has worked to develop a system to make interstate branching work for State-chartered banks as well as national banks.

  If Congress doesn't pass H.R. 1306, all of this work may have been for nothing because, without a change, as you have well identified, and I am not going to belabor it, obviously, you said just about most of my testimony so I can cut it down so I don't get the red light. But without a change in the law, banks may turn disproportionately, we believe, to a national charter, making it difficult for local legislatures to set banking policy.

  One of the most effective tools States have for economic development is their jurisdiction over State-chartered banks and we don't want to lose that ability to influence economic growth and productivity. As has been identified, it is the innovativeness that we can have locally that we can appreciate. But, of course, everyone feels that same sense of anxiety and exasperation. Why are we revisiting this issue? It was so difficult in the first place. We thought we were done and now we have to come back and revisit it.

  But, of course, as many of you have already identified, we don't want to do anything that undermines the State chartering system and then to see a shift away I think would be doing the opposite of what you intended to do.

  To date, only a very small number of banks have chosen to branch and keep a State charter. These are very small institutions that have crossed the border into Idaho. But we have also lost several large institutions who have chosen a national charter and will be conducting a banking business in our State. Now what they told us is it is the ambiguity in Riegle-Neal that caused them to switch. We know that was never the intention of Congress when the bill was passed.
 Page 62       PREV PAGE       TOP OF DOC

  And some have asserted that if you change Riegle-Neal now, the States that have already opted in will have opted in under different rules. When we opted in, though, we believed that home States had the primacy over their institutions and therefore this amendment strengthens that view.

  It has also been stated that States could individually fix the problem and, in Washington State, we have already authorized our banks to conduct at any location any activity that we have authorized. But time is running short. June first is upon us and it will be difficult if not impossible for 50 individual State legislatures to enact this change. In our State, the legislature has adjourned for this year. We just adjourned Sunday, and it would be impossible for us to catch up.

  Some see the proposed amendment as a dangerous preemption of the States' authority. However, States will be losing much more authority if they are no longer supervising State-chartered financial institutions or supervising only the smallest community-based institutions.

  Our dual banking system has brought a great deal of good to our citizens, our businesses and our banking industry. State-chartered institutions and State regulations are intimately connected to their local communities in a unique way and we want to make sure this continues. So I urge you to enact H.R. 1306 as quickly as possible, as you stated is your intention. We need to restore the necessary balance to the dual banking system and make sure the State charters remain a viable option for any financial institution that values its connection to our communities.
 Page 63       PREV PAGE       TOP OF DOC

  Thank you for your attention and I would be pleased to answer any questions that you have.

  Chairwoman ROUKEMA. Thank you.

  Mr. Abbate.


  Mr. ABBATE. Madam Chairwoman, Members of the subcommittee, my name is Tony Abbate and I am pleased to testify today on behalf of the Independent Bankers Association of America, which represents some 5,500 community banks in all 50 States.

  Being a resident of the Fifth Congressional District of New Jersey, I am especially proud to be here to testify before my own Representative, Chairwoman Roukema. In the interest of time, I will summarize my remarks and submit my entire statement for the record.

  Let me state up front that the IBAA strongly supports the Chairwoman's bill, the Riegle-Neal Clarification Act of 1997, and we commend Chairwoman Roukema for introducing this important legislation which will correct an oversight in the Riegle-Neal Interstate Banking and Branching Act of 1994.

 Page 64       PREV PAGE       TOP OF DOC
  That act has caused an unprecedented level of consolidation in the banking industry. Some 500 independent banking units were merged or acquired in 1996 and this pace is expected to accelerate when full interstate branching becomes effective on June 1.

  The final outcome of this wave of consolidations, which has now extended to the securities industry as well, remains to be seen. So far, it is having a negative effect on consumers, small businesses, agricultural and Main Street.

  IBAA has always been a strong supporter of the dual banking system and States' rights. One issue that was not fully considered by the Congress in 1994 was the effect of interstate branching on the dual banking system. Interstate branching should not have the effect of devaluing the State banking charter. Yet, unless the law is changed, that is exactly the effect it will have.

  When a national bank branches interstate, it operates under one set of rules, the National Bank Act. This act defines what the national bank can do and where it can do it. Every branch of a national bank can sell the same products and services without reference to State law.

  The situation is quite different for a State-chartered bank. If a State-chartered bank branches into another State, the host State rules are applied to the branch's host State activities. This means that a State bank with interstate branches could be subject to a different set of rules in every State in which it operates. Sometimes, this can work to the advantage of the bank and sometimes it can work to its disadvantage, depending on how liberal or restrictive the rules of the host States are.

 Page 65       PREV PAGE       TOP OF DOC
  In either case, however, there will be a powerful incentive for the bank to flip to a national charter because, from a managerial perspective, it is far easier and less expensive to deal with one set of rules than multiple sets of rules. Having a variety of rules would require additional compliance staff to monitor the rules in each State in which the bank operates. It would also require a multiplicity of computer systems and programs and increase back office costs.

  IBAA does not think it is in the best interests of any State to see its State-chartered banks convert to national banks on a widespread basis. Interstate branching is in its infancy. The basic manner in which interstate banks will serve their communities is still being forged. Without a strong presence in interstate branching, the State banking system will decline and be less able to bring its expertise, innovation and local reference into play. This will undermine the dual banking system and the power of the States over the financial structure that best meets their needs.

  Your bill, Madam Chairwoman, would clarify that home State laws govern all corporate and operational issues for State-chartered banks and their branches, except with regard to interstate branching, consumer protection, community reinvestment and fair lending laws which will continue to be governed by host State law. Home State law will also govern the activities of host State branches allowing these branches to exercise all powers granted by their home State but only to the extent that a national bank can exercise those powers.

  In addition, under your bill, out-of-State banks operating in a host State would have no greater powers than State-chartered or national banks already operating in the State and, from the host State's perspective, since the out-of-State bank's powers would be kept at national bank powers, State-chartered banks in the host State would face no greater competition than they currently face from national banks.
 Page 66       PREV PAGE       TOP OF DOC

  Madam Chairwoman, your important bill preserves the dual banking system and all of the benefits that it has brought to our financial system and economy. The community bankers of IBAA appreciate your efforts to correct this oversight in the Riegle-Neal Act.

  Thank you for this opportunity to testify and I would be happy to answer any questions you or the other subcommittee Members may have.

  Chairwoman ROUKEMA. Thank you very much, Tony.

  Ms. Meier.


  Ms. MEIER. Thank you very much, Madam Chairwoman, and good afternoon, Members of the subcommittee and staff.

  The statement, the written statement that Consumers Union submitted was intentionally very brief and to the point and my statement today will be the same. I really, actually, have a hard time coming up with the words that can describe the level of seriousness that we approach this issue and the serious damage that we think this proposal will do to banking regulation in this country, particularly consumer protection.

  We, over the years, at Consumers Union and, frankly, within the entire consumer community here at the Federal level, have been very strong proponents of preserving State prerogatives in the area of bank regulation. We have fought many battles to try to avoid Congressional preemption of State legislative authority in the banking area. Sometimes we have succeeded, sometimes we haven't.
 Page 67       PREV PAGE       TOP OF DOC

  I think we have very strong credentials in the way of recognizing the value of local control, local regulation, innovation that can come about through flexibility and dual regulation between State and Federal regulators. That said, I must question the notion that I have heard today that preserving the dual banking system; i.e., preserving the dual chartering system that has been a fixture of U.S. banking for many years, is the entire cause of the flexibility and innovation we have seen in the past.

  The adjustable rate mortgage that Governor Carper referred to, the NOW account innovation that we have seen, those would not have come about but for action on the part of State legislatures over the years. There are a number of consumer protection laws that started at the State level that we, in turn, recognized as working well and as models for Federal legislation that we then brought to Congress and promoted.

  Only to say that preserving State legislative authority within individual States, we view, as the nub, the essence of innovation and flexibility in bank regulation. Unfortunately, we believe that the proposal will drastically undermine the prerogative of State legislatures.

  Sure, there will be some State legislatures and State governments generally that will stand to gain here who will put together bank regulatory packages and legislative regulatory regimes that are very attractive to banks and members of the banking industry in an effort to attract them to charter within their State. That will spur a race to the bottom where there will be a few States that will act as home States and many, many other States that will predominantly act as host States. All those States that end up being host States will have their legislative prerogatives totally eviscerated. Whenever the OCC deems national banks in those States not obligated to comply with those State laws.
 Page 68       PREV PAGE       TOP OF DOC

  In that case, whenever a national bank located in those host States does not have to comply with host State law, then the State-chartered bank will not have to comply with host State law. We can identify—the question was asked earlier, can you identify any instance in which this, if put into practice, would actually hurt consumer protection laws? And, in fact, I can identify an instance in the State of New Jersey involving the basic banking law that was passed there several years ago. That, in fact, I believe it was the State bank supervisor in New Jersey testified on a couple years ago, I think sitting right in this seat, commending it, saying how well it was working in the State of New Jersey. Now, the Comptroller of the Currency here in Washington has deemed that law as one which national banks in New Jersey do not have to comply with.

  So, under this bill, not only would national banks not have to comply with New Jersey's law, consumer protection law, but any other bank that comes in from out of State and sets up branches in New Jersey would no longer have to comply with the New Jersey law either.

  The Comptroller, over the years, has also deemed as outside the scope of national bank regulation State laws that deal with the number of days banks can place holds on checks. In the 1980's, there were State laws addressing that and the Comptroller said national banks in those States do not have to comply. And even right now, there is a current controversy over Rhode Island law that addresses bank sales of insurance. And, in fact, my organization has submitted comments to the Comptroller arguing against the Comptroller's proposal to preempt those laws.

  Now, if the Comptroller finalizes its proposal, national banks in Rhode Island will not have to comply with those consumer protection laws and any other bank that comes in from out of State, sets up branches in Rhode Island, would similarly be exempt from compliance.
 Page 69       PREV PAGE       TOP OF DOC

  Obviously, this gives us great concern. My expertise is in the area of consumer protection law but I think this race to the bottom, this substituting the national bank regulator with a handful of State bank regulators that dictate banking law across the country should raise similar concerns in every area of banking law.

  Thank you.

  Chairwoman ROUKEMA. Senator Prentice, let me ask you, with your experience as a State legislator and, I am certain, with your sensitivity to consumer protection questions, how do you respond to this criticism of the—I mean, the National Conference of State Legislatures? Is this a turf issue or do you really see that there is a violation of both consumer protection as well as States' rights charters as we have outlined them? Because you certainly are not intent on handing everything over to the OCC, are you? Or national banks, are you? That's not the way I read your testimony.


  Chairwoman ROUKEMA. Nor is it the way I understand your position as the Chair of the Financial Subcommittee.

  How do you respond to this, whether it is the consumer issue or whether it is the preemption by OCC and the move to national banks, or the race, really, the race to the bottom, if you will, as some people have referred to it, that OCC could initiate with its preemption?

 Page 70       PREV PAGE       TOP OF DOC
  Ms. PRENTICE. It is one thing to come down on the side of saying that we are for States' rights but I think what we are living with is what is happening in real life and when we said that, that was certainly not what Congress intended to do, was to have a flight from State-chartered banks because of some perceived ambiguity. The only logical thing was to come in and straighten it out and make it clear exactly what we were talking about. I did notice one paragraph on page 4, I think three times focusing on leveling the playing field.

  I mean, I read the testimony and I think throughout, in my opinion, I believe when we are talking about a perversion of our legal system, I would have to say it seems that some things are overstated.

  Certainly I think it has been made clear and when I became Chairwoman of the subcommittee, the banks knew—you know, my background is as a nurse and, obviously, everyone knew that consumer protection was extremely important to me—and that is how I have focused things. Then for us to come in and look at how this really is working out and we are saying, ''Wait a minute, that is not what they wanted to do, the intent was to preserve the dual banking system.''

  But if something we did in real life, the practical application, is turning out to be the reverse, the only logical thing is to come in. I guess I don't want to get hung up on something that is theoretical and yet isn't working in practical application.

  Chairwoman ROUKEMA. We will get to you, Ms. Meier, in a moment. But I wondered if Mr. Abbate, from his experience, both in New Jersey and as a State-chartered banker, do you see this as—did you interpret what happened in New Jersey in the say way? That is not my interpretation of what has happened in New Jersey nor is it my understanding, and you have already heard our dialogue, the three of us, Mr. Vento, Mr. Watt and myself, about what the intention of my legislation is with respect to consumer protections and the relationship between State charter and the OCC preempting through national charters.
 Page 71       PREV PAGE       TOP OF DOC

  Mr. ABBATE. Well, there are a whole host of issues, a whole host of issues.

  Chairwoman ROUKEMA. Yes, there are. And isn't it too simplistic to describe it in the way that Ms. Meier has?

  Mr. ABBATE. Let me see if I can put them in order.

  Chairwoman ROUKEMA. Please, from a practical——

  Mr. ABBATE. It doesn't necessarily follow any logic, but——

  Chairwoman ROUKEMA. Well, but you are from New Jersey and New Jersey was being used as the example.

  Mr. ABBATE. Well, I know what Ms. Meier is speaking about and it has to do with lifeline checking, which was mandated by the Senate, by the State legislature. And the national banks felt that they didn't want to go along and the Comptroller backed them up.

  Chairwoman ROUKEMA. OCC, for national banks, can do that?

  Mr. ABBATE. Right.

  However, you know, free enterprise has a way of fixing itself and, while the law is kind of old on the books, guess what? There is a whole host of savings and loans and mutual thrifts that offer free checking accounts. I mean, you can't legislate free enterprise; free enterprise fixes itself.
 Page 72       PREV PAGE       TOP OF DOC

  OK? Yes, we offer lifeline checking but now more than ever have I seen banks throughout the State of New Jersey who are not national banks but are savings and loans and thrifts offering free checking and there are commercial banks offering free checking because lifeline checking allows you to write up to six checks a month without being charged. Well, that's just one example.

  I really don't know about a concentration in host States because if you look at Riegle-Neal by itself, Riegle-Neal actually promotes colonization. What it does is it takes from those States deposits and shifts them to the banks that are larger. For example, First Union buying First Fidelity Bank with its headquarters in North Carolina taking the lendable funds of the First Union branches and concentrating them in North Carolina. We have Glendale Savings and Loan sucking all of the deposits out of the State of Florida.

  So if you want to look at Riegle-Neal in and by itself, it is not a perfect law, OK?

  Chairwoman ROUKEMA. Exactly, which is what I was trying to say earlier, that if we don't do this, it doesn't mean that Riegle-Neal is going to be fine for all these other issues, whether they be consumer concerns or the dual banking system.

  Mr. ABBATE. I think what we are looking at is an interstate commerce issue. It has to do with cross-border issues. I have no desire to be a national bank, OK? Frankly, most States have leeway powers and leeway powers State that whatever a national bank can do, you can do in most cases. The FDIC in its laws also states that you have parity with the State bank with the national bank.
 Page 73       PREV PAGE       TOP OF DOC

  As to the issue of whether or not banks are going to do unregulated things, there is one common denominator when you have a State charter. That common denominator is either you are regulated on the other side by the FDIC or by the Federal Reserve.

  Chairwoman ROUKEMA. OK.

  Mr. ABBATE. And as a result of that, the FDIC and the Federal Reserve look at all nondeposit product activities and regulate them accordingly. So you can't really go off the reservation too far without being called back because there is a court of last resort. OK? So I really think it is a matter of whether or not there is unfair competition and, let's face it, every State has its own laws that apply.

  If we look at the State banking laws in New Jersey, they are ambiguous, they need to be recodified. As a matter of fact, the State recognizes it and they are trying to do it to create parity with Federal laws because we are doing three different things in three different ways.

  So we want to try to be singing from the same prayer book.

  Chairwoman ROUKEMA. Well, you can reserve that for the New Jersey State Legislature when it meets next month.

  Well, I don't know now. Mr. Vento, do you want me to give Ms. Meier a chance or do you want to go on?

 Page 74       PREV PAGE       TOP OF DOC
  Mr. VENTO. I think she has a comment related to your question.

  Chairwoman ROUKEMA. All right, with unanimous consent.

  Ms. MEIER. I will be really brief.

  I really was trying to give a practical example because I view this area, as a legal matter, as extremely complicated. And we can get involved in a lot of speculation so what I tried to do is identify a couple of areas where I know national banks don't have to comply with some State laws that consumers in those States care a lot about.

  Chairwoman ROUKEMA. But that is not this legislation.

  Ms. MEIER. No, I think it very much is this legislation. Because what your legislation would do is say that if national banks don't have to comply with it, then we can look to the home State to see if there is a comparable State law and if there isn't they don't have to comply.

  Chairwoman ROUKEMA. No, under present law OCC can preempt it, period. It has nothing to do with——

  Ms. MEIER. I agree. But then you built onto it to say that if the consumers lose their protection under the OCC, they are going to lose it as to State-chartered banks too. So the consumer loses here. The parity level established here is totally against the consumer.

  Chairwoman ROUKEMA. All right.
 Page 75       PREV PAGE       TOP OF DOC

  Well, we are not going to get into whether or not the Congress should cut back the OCC's authority but I think the important point that was made that relates to the overall subject as well as the specific is that Mr. Abbate was the only one that pointed out that it is not only the OCC but the FDIC and the Fed are here under regulatory authority as well.

  Ms. MEIER. Well, actually, Madam Chairwoman, my suggestion, and I am sympathetic with the changes that the 1994 Riegle-Neal bill has unleashed, I mean, it was a major bill. I think people realized it moved us into a very new stage in banking in this country and I do think it makes a national bank charter for banks that want to go across State lines more attractive. That is not a surprise.

  But I think this proposal, which allows exportation of State laws across borders, is not the way to answer the problem. I think it is putting a square peg into a round hole and creates a whole new host of problems. But we would be very happy to work with you on some solutions that bring the two types of banks to parity in a way that doesn't undermine consumer protection.

  Chairwoman ROUKEMA. All right. Thank you.

  Mr. Vento.

  Mr. VENTO. Well, I think that I agree, I guess, with Ms. Meier's interpretation of how this applies and I think that I don't want to be argumentative about it. I think that we had sort of, on the last panel, come to that conclusion and we will study it further, I take it, because nobody's intention is, apparently, to withdraw it. I think the States do act as laboratories for much of our law, consumer and otherwise. But I think part of this, Mr. Abbate, is not just the Congress but, you know, there were compacts being formed by most States and so this is an issue in recognition trying to provide some clarity to what was becoming quite an array of regional powers that simply didn't have the symmetry of that marketplace that exists. So, I mean, I think there were some factors that, you know, had placed Congress in a position where we should have had a deal with the legislation on interstate.
 Page 76       PREV PAGE       TOP OF DOC

  The issue, of course, that I raised with the last panel, and I want to make it clear, because the State Bank Supervisors are still here, is that we need to get a few more answers. I was a little surprised that they were not able to articulate several factors. Now, I know that there are consumer concerns. We had raised those. I think that that is a given, that that is going to happen. But I was really trying to talk to—I don't know that anyone is going to change charters to avoid, you know, the lifeline checking account in New Jersey. They may. I mean, I don't think they are going to do it for only that reason.

  But I think there may be substantial powers. And, of course, they gave a hypothetical of a bank that had branches in 10 States and one State required an affiliate for certain activities. So that type of corporate reorganization or rearranging and that type of problem could cause some difficulty. So I think we need some examples of that and I didn't hear them on the tip of their tongues: seven examples of why this is necessary for efficiency and for the other reasons that we talked about. So I think we need those examples.

  I appreciate the fact that we have this letter from the State Legislatures' group. One of the issues that was not so apparent to me was that there could be the opportunity to move charters or move the charter around to various States. For instance, if Washington or Minnesota were very liberal in terms of the powers they granted to financial institutions, there could be advantages to, if you wanted to maintain a State charter, although I think if someone was going to go through changing the charter from State to State, it probably would end up going national. But it could actually go around from State to State to attempt to do this.

  Then putting in—you know, this is the case of corporations that all organize in Delaware. They don't do it by accident; they do it because there are advantageous reasons to do so in terms of the requirements on corporations. So we could have the same phenomenon occurring with financial institutions.
 Page 77       PREV PAGE       TOP OF DOC

  Senator Prentice, do you understand that concern?

  Ms. PRENTICE. Yes, I certainly do, and it has been one of our concerns. What we are seeing, when we are looking at the relationship of State banks and nationally-chartered banks and what the effect is, I think what we are attempting to correct is exactly that happening. What we did, of course, we are only now beginning to live with and understand the impact of how it has affected us.

  I guess I do have some questions about the statement that this ''Would subvert the whole concept of a representative democracy,'' or talking about turning representative democracy on its head. I would rather be able to have a discussion with Consumers Union based on some fact, and now probably some very recent history, so that we can look at some statistics, data, what is really happening instead of sort of imagining what might happen, what is going to happen, what could the rascals do? I would rather see what's the pattern.

  I mean, if a bank could go——

  Mr. VENTO. We sort of asked the same question of the State Bank Supervisors, their view of what powers there are that are necessitating this concern. You are saying, well, if we don't have the ability to have parity from my home State to a host State, that that means they are going to change charters. And I am saying, well, what are the powers?

  Ms. MEIER. Could I also just explain, because you were quoting from my testimony.

 Page 78       PREV PAGE       TOP OF DOC
  Mr. VENTO. It's my time. Yes, I permit you to——

  Ms. MEIER. Thank you.

  What that means is, in the New Jersey example, if I lived in New Jersey and I cared a lot about the lifeline banking account and I couldn't find banks anymore who offered them or very few, I could not go to the New Jersey Legislature and have them fix the problem. I would have to go to Delaware or South Dakota or some other State that was the home State of the banks that I was dealing with to try to get them to help me. And, to me, that undermines representative democracy. You didn't elect those South Dakota representatives.

  Mr. VENTO. You could come to Congress and ask Congress to take care of it.

  Ms. MEIER. No, you are giving away those authorities.

  Mr. VENTO. Mr. Abbate.

  Mr. ABBATE. Thank you.

  I think there are two issues here on your question about the charter. I think that if a person wants to change charters, that that is a business decision. I mean, I certainly changed my primary regulator a couple of years ago because of business reasons. OK? So if a bank or financial institution wants to go to another State where he perceives that he will be treated fairly or more fairly by that regulator, it is a business decision.

 Page 79       PREV PAGE       TOP OF DOC
  As to consumer preferences, I have to tell you I don't think you can regulate consumer behavior. I firmly subscribe to a lot of things that Consumers Union stands for and promotes. I am one of their fans. But I think that people know where to find alternatives. If they couldn't find lifeline checking, using that as an example, in one bank they would find another bank. If they can't find an automobile loan at a favorable rate at one bank, they will go to another bank.

  If the automobile dealer wants to charge 18 percent, they will find a place to go. And how do I know this besides my own experience is that we conduct focus groups. We find out what the consumer preferences are and we do it in a strictly anonymous fashion so that the people do not know that we are involved in these focus groups and we use a broad brush of the constituency and the county that we do business with.

  Over the past 10 years, we have done three focus groups and it is amazing to see how consumer attitudes change and how more proactive the consumer is of late and how the average household has five different relationships for financial needs. So, you know, the people of our country are not ignorant, they are not stupid. They know where to go to get the services that they require.

  It is the same as the individual who prefers to go to a check casher as opposed to go to a local bank. That is a consumer preference. Lifeline checking was supposed to correct it. Guess what? The check cashers are doing better than ever.

  You cannot legislate consumer preferences.

  Mr. VENTO. Well, Madam Chairwoman, my time has expired.
 Page 80       PREV PAGE       TOP OF DOC

  I just think we have a common goal in maintaining—all of us, I think, want to maintain a dual banking system that is viable. I think obviously we knew when we did interstate banking the type of issue would occur with mergers. This is not a surprise. I think maybe we will sometime get into the 20th Century again and discover antitrust laws. But until we do, we are going to have to live with the interpretations of the Rodino-Scott. You know something about Mr. Rodino from New Jersey? He worked very hard to try to keep in place—but that is another problem.

  I do think in looking at it we just want to make certain that we, and I wanted to be certain, I have been the person raising many questions about this, and through my staff and so forth, that in fact we are understanding of what the consequences of this particular action were, just as we were understanding of the preference we gave to national banks when we passed the conference report. When the bill left the House, it treated national banks the same as any bank in the host State and, when it came back, national banks were given the preemption, the consequences, the disparity you see between home State and host State banks that exist today. We knew that was going to happen.

  The only one that is going to be out now is going to be the host State home bank in terms of powers. And if that happens to be you, Mr. Abbate, and I take it from your comments that you probably are it for tag if it is New Jersey, then we have, as I said, a wild card provision in Minnesota law which then ratchets that up.

  So the common denominator that is going to set this even playing field is going to be the Comptroller if, in fact, they are the ones liberalizing powers. So I just suggest that we are moving toward a homogenized system in this type of case. I think we have to be careful because if these States and these different financial institutions have been the laboratory which have, you know, accommodated change, I mean, somebody in New Jersey actually may have a better idea than we geniuses in DC. Some of us may even be listening to it, you know?
 Page 81       PREV PAGE       TOP OF DOC

  So I think that if we want that to be somewhat dynamic in terms of the dual banking system and to accomplish what it has accomplished to build the type of effective credit and economic mixed economy that we have in this country, then I think you ought to be careful about it. Already you are concerned about the mergers, I am too. You are concerned about the adequate credit, what is happening with credit units, what is happening with credit intermediaries, what is happening with the secondary market. All of these are factors, and I think the commercial banking system in this country has been an unheralded success.

  We like to beat up on you regularly, especially the Eastern banking interests, where I come from, Madam Chairwoman. We know their problems.

  In any case, I thank the Chairwoman for her indulgence of my verbosity.

  Chairwoman ROUKEMA. I don't get your last verbosity but we will have to take that up at—Eastern banking interests?

  Mr. VENTO. Eastern banking. You have to be from the Midwest to appreciate it.

  Ms. MEIER. I am.

  Chairwoman ROUKEMA. It sounds like a slur to me. Sounds like a slur.

  Mr. Bentsen, do you have a question?

 Page 82       PREV PAGE       TOP OF DOC
  Mr. BENTSEN. Thank you, Madam Chairwoman. Of course, my State would never say anything negative about the Eastern banking establishment.

  Chairwoman ROUKEMA. You're lucky you have us.

  Mr. BENTSEN. Well, that could be argued. But some in my State, Mr. Abbate, would agree with your comment that the bill was not perfect. Certainly my State legislature would agree with that.

  I guess I see two problems here. One, in going back to what Mr. Vento said, Senator Prentice, what is to preclude, if you allow the State charter, the home State charter to rule versus the host State charter rules, up to the national charter rules? What is to allow the State of Idaho, for instance, to come up with a more liberal charter than the State of Washington and, for all the State-chartered banks in Washington to then swap their charters over to Idaho, assuming they can do it, assuming it is just a paper transfer.

  Obviously, there are legal fees involved but that can be that much for, you know, most banks, billion dollar plus banks. I mean, wouldn't that be a potential problem?

  Ms. PRENTICE. Well, that certainly was one of the things we looked at, in fact, as we were talking about Riegle-Neal at the very beginning and a number of the larger banks said, ''You know, if you don't opt in immediately, that is what we are going to do now.'' So probably the same things. Of course, I said, ''I don't think you will do that within a year. Give us a few months to study that.''

 Page 83       PREV PAGE       TOP OF DOC
  But there probably are some disadvantages and I think these were the illustrations that John Bley, did you give them here, John? I believe you did. The four whose laws comply and then you have the one exception. I believe we did have something similar. You will have to help me, John, on the details of it. But there was one, I think U.S. bank was looking at something in Idaho in order not to comply with our laws; is that correct?

  May I? May I?

  Chairwoman ROUKEMA. Yes.

  Mr. BLEY. I think, and then this relates, I think, to Congressman Vento's remark about a specific example. We are aware of a specific example in the Northwest of a bank that was very studious about their choice of charter, studied the issues very significantly and when they made their choice for a national charter, we asked what were the factors. They said, ''One of the primary factors is we just simply didn't know what laws applied in host States and our lawyers were giving us lists that were 30–deep on possible laws that could apply.'' Then we asked ''What about powers?'' And the example they gave was the example that John gave in his testimony that there was one State that required non-bank powers to be conducted in a subsidiary, and if that host State law applies, then that bank is forced to either conduct those activities in a subsidiary throughout the whole five States or convert to national charter. So it becomes a factor.

  I think the question you asked about race to the bottom, race to laxity, things like that, and it has been brought up before by Tony, the State system is a partnering system with the Federal Government. I am a strong believer in that. I like having the FDIC and the State of Washington involved in the examination of financial institutions. I think one of the wisdoms of FDICA was that any powers above what a national bank can do, the FDIC must review it, must make a determination that it is not going to have a material effect on the bank insurance fund and then and only then is it approved.
 Page 84       PREV PAGE       TOP OF DOC

  So I think the fact that banks will run rampant and run to a specific friendly charter solely for that charter again, when applied to the facts and applied to the real world, simply aren't going to happen with the Section 24 provisions that FDICA placed into Federal law. I am not speaking for CSBS but from the State of Washington, I believe, are very prudent provisions.

  Mr. BENTSEN. If I might, Madam Chairwoman, on the other side I was asking Ms. Meier what—I mean, there is that potential race to the bottom that could occur but, on the other hand, you have banks now that apparently are at a disadvantage compared to their national bank competitors in the host State where OCC has preempted, as you mention, State consumer laws or other State banking laws but those State-chartered banks, out-of-State State-chartered banks are subject to the host State bank laws and therefore there is a discrepancy that exists, correct?

  Ms. MEIER. Yes. There have been discrepancies in the dual banking system inherently for years.

  Mr. BENTSEN. So does that—I mean, do we just allow that to continue or do we have a situation where if that discrepancy exists—let's take for instance you have a State which has very strict State consumer laws or State banking laws or lending laws. Could it occur where you would just have national banks and whatever host State State-chartered banks are there but otherwise other State-chartered banks from other States might not come in because; (A) they don't want to become a national bank, and; (B) they don't want to be subject to the host State's strict banking laws and, therefore, the consumer is perhaps disadvantaged because they don't have the benefit of 50 banks to choose from, they only have the benefit of 40 banks to choose from?

 Page 85       PREV PAGE       TOP OF DOC
  Ms. MEIER. I have a couple of responses. One, I think it does bear pointing out that when we talk about discrepancies that we like we use the terms innovation and flexibility and when we talk about discrepancies we don't like, people talk about uneven playing fields, and so forth.

  We have had discrepancies for decades. In terms of the disparity between the national bank charter and the State bank charter which we have had for quite a while, we have advocated and will continue to advocate that Congress take a look at the circumstances in which the OCC is letting national banks off the hook.

  Mr. BENTSEN. If I might interject right here, I met with Gene Ludwig this morning on some other issues and told him I very much think Congress—and I don't disagree with him completely but I very much think Congress should take a look at the latitude that we have provided the OCC. I think that is a major component of financial modernization to stop allowing the regulators to conduct the repeal of Glass-Steagal and let Congress do it where it ought to be.

  Ms. MEIER. Right. I agree with you and, in this preemption area, it has been a real problem for consumer protection where the Comptroller has attempted to make the national bank charter more attractive by letting banks, national banks, not have to comply with State laws that State-chartered banks were having to comply with.

  Generally, I would urge bringing national banks up to the same level as State-chartered banks in terms of compliance with State laws, consumer protection laws in particular. And the other type of discrepancy where, for example, you've got a national bank being able to engage in activities that State legislatures have not authorized their State banks, which one example is State bank sales of insurance. What I am very concerned about is that as State legislatures are working with the industry members in their State and others in their States to address the question of possibly beginning to deregulate that this proposal, which automatically creates parity with national banks, will eliminate the leverage that State legislatures and regulators have to impose the conditions that might be necessary as that deregulation moves forward in their State.
 Page 86       PREV PAGE       TOP OF DOC

  Parity sounds good and is good but parity with one fell blow, where we take away some of the powers that might be needed to put wise conditions on powers I think is a problem with this proposal.

  Mr. BENTSEN. I guess just the other problem, though, and it is not your fault, is that your position would only apply to some of the banks and not to all of the banks. So if you wanted to look at it from a bad guy perspective, you could have—the States would only be able to stop some of the bad guys and the others if you had a rogue OCC and there are some associations in town who would argue that, I don't agree with that, but that you would have others who would get away.

  Obviously, we need to do something.

  Ms. MEIER. Right and I guess we are saying that that national bank regulator problem has been with us before this issue came up and interstate branching came up. The problem is exacerbated with interstate branching and we hope you will deal with it in itself rather than use it as a reason to bring State-chartered banks down to that same level.

  Mr. BENTSEN. Thank you.

  Thank you, Madam Chairwoman.

  Mr. VENTO. I just had one—I don't know if the Chairwoman had—are you going to have another round of questions?
 Page 87       PREV PAGE       TOP OF DOC

  Chairwoman ROUKEMA. I will permit you.

  Mr. VENTO. I didn't want to. I thought maybe you, yourself, wanted to ask a question.

  One of the concerns I have, and I think this panel has been very helpful on that one, the regulators that preceded it, the State regulators. But one of the issues here is, and Senator Prentice, to just pose it to you is, the question is, are the laws that exist in States easily understood to be identical? For instance, to those powers or laws which are being conveyed or permitted by national banks? I mean, there has to be an arbitrator here.

  What I am saying is I know that, as a State legislator, I too served on a Financial Institution Subcommittee years ago. I didn't chair it; I wasn't there that long.

  Ms. PRENTICE. Did you behave?

  Mr. VENTO. I chaired a different subcommittee, actually.

  But in any case, the laws would be dissimilar again. So there is the question of interpretation here. Even assuming we were to act on this, there could be misunderstandings which may arise with regard to a home State charter and the powers invested in that franchise by the State and the national bank.

  Ms. PRENTICE. Yes. I had some difficulty, for example, with the suggestion that perhaps, as we are talking about consumer protection, that a national level would be what we would want Congress to enact. And yet I can think of many occasions in many other areas within State legislature where it is the last thing we would want you to do because in the State of Washington we pass stricter laws.
 Page 88       PREV PAGE       TOP OF DOC

  If you were to do that in the area of consumer protection, we might have to downgrade some things we were doing and we would be very unhappy about that and there are many areas I have been involved with where many groups will say, ''Well, we don't want to go beyond what Federal law requires.'' For example, in the area of child labor, we are saying, ''No, we are going to do better than the Federal Government requires in many areas.''

  But that argument then is really preempting State law. So I think I would really like to walk away perhaps from what I called overstatement and deal with the more factual. And I really think that Mr. Abbate's concept of focus groups, I think one of the things that some of us who are a little older are not recognizing and, of course, when you are in a banking subcommittee, you know, we think in terms of the banking subcommittee for the sake of the banks. Of course, the rest of us, some of us, are looking at it as what do real people do? You know, my contention is that people's banking behavior has been changing for many years.

  I remember years ago we selected the bank because it had early, way before everybody else, Saturday hours and they were staying, the drive-in window was open really late and that was when the Boeing Company was working shifts. We made a conscious decision because they provided some services that were innovative.

  Mr. VENTO. It is very helpful, your insights are. I just think the issue, though, that the State Bank Supervisor, Mr. Bley, presented was that—and others, that they would have a whole range of different legal issues, 30 different issues, and the consequence of this particular—this portfolio of different questions simply throw—a bank that is going to branch and throws its hands in the air and says we're going with a national charter, I mean, is a real concern to us.
 Page 89       PREV PAGE       TOP OF DOC

  I think the question may not be resolved here because, as you try to match up your home State laws against the template of what the national bank permits, you may still end up with a lot of legal questions and the confusion may not simply be erased or eliminated by virtue of this. I think we've got to think about that, I mean that problem.

  I am not so concerned about two State-chartered banks having actual symmetry. I don't see that as being a risk today in terms of people reverting to a State charter. Of course, that could occur too. But I am just posing this more as a question. I don't have an answer and I realize that you don't, other than to say that, you know, if there is this symmetry at least we can eliminate it. We have to identify what the issues are, we have to do something on the consumer side of this if these four areas in terms of this cooperative agreement are inviolate, like intrastate banking, which I think is a concern. I don't think anyone would disagree with that. Then there is community reinvestment and the consumer law issue. Maybe we can address that and try to eliminate some of the heat and how we can substantially deal with the reconciliation of these powers so that they are quickly assumed and that we can give the degree of confidence to financial institutions so that we would maintain a dual banking system and supervisory role.

  Thank you, Madam Chairwoman.

  Chairwoman ROUKEMA. I didn't realize how the time had gone by. I have another very important meeting regarding financial institution modernization. So, with that, I am going to conclude.

  Mr. VENTO. Do you want me to come with you? Maybe I can help you out?
 Page 90       PREV PAGE       TOP OF DOC

  Chairwoman ROUKEMA. No, I don't think so. Not this time.

  Mr. VENTO. OK.

  Chairwoman ROUKEMA. I think we will have to conclude this hearing. It has been very helpful, I believe. But I might just conclude by saying we are under time constraints here and to do nothing is far worse because Riegle-Neal is still there and so we have to—and Riegle-Neal, aside from the rhetoric that we have heard here today, will be a real danger to the dual banking system and if you don't care about that, then that's one thing. But everybody here has professed to care about it.

  So if we care about it, accepting the fact that we have agreed, you, Mr. Vento, and myself and Mr. Watt, that we are going to look at that, I think that the language concerning the consumer protections, I think it is satisfied but we are going to have our legal counsel look at it and see if we have indeed done what we intended to do there and beyond there, we will see.

  Mr. VENTO. Madam Chairwoman, these four provisions, I think, that they have that we referred to, are the issues that are outlined in the agreement.

  Chairwoman ROUKEMA. All right. Thank you. We will look at that.

  Thank you very much.

  [Whereupon, at 4:05 p.m., the hearing was adjourned.]
 Page 91       PREV PAGE       TOP OF DOC