Segment 3 Of 3 Previous Hearing Segment(2)
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FINANCIAL MODERNIZATION—PART II
TUESDAY, JUNE 3, 1997
House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.
The committee met, pursuant to call, at 10:10 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.
Present: Chairman Leach, Representatives Roukema, Bereuter, Baker, Castle, Campbell, Royce, Lucas, Metcalf, Kelly, Weldon, Ryun, Cook, Snowbarger, Riley, Hill, Sessions, LaTourette, Foley, Jones, LaFalce, Vento, Frank, Kanjorski, Waters, Gutierrez, Barrett, Watt, Ackerman, Bentsen, Jackson, Kilpatrick, J. Maloney of Connecticut, and Carson.
Chairman LEACH. The hearing will come to order. We are honored to welcome the distinguished Secretary of the Treasury, Robert Rubin, and his distinguished Under Secretary, Mr. John Hawke. This is the eleventh hearing on the subject of financial modernization in this Congress, with a series of hearings held at the full committee level and also at the subcommittee level, headed by Mrs. Roukema and Mr. Baker. We look forward to hearing Treasury's perspective. For Members' attention, the entirety of the Treasury bill is available in the Banking Committee office for anyone to pick up at this time.
On the table before the committee is the general subject of financial modernization, with three bills that have been introduced in this committee. One by myself, one by Mrs. Roukema, one by Mr. Baker, and then a Treasury bill that has been proposed by the Administration. It is the intent of the Chair to move, as we have been moving the last several months, with staff discussion and with Member discussion, to table a new bill, hopefully by this Friday, that will involve elements of all four approaches; and then to move to full committee markup next week, with presumably a wide assortment of amendments being reviewed at that time.
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Everyone's perspective will be dealt with as respectfully as possible. My own view is that I am increasingly optimistic that a bill can be worked out this month in this committee, and I feel not only that Members feel strongly about that possibility, but that the Administration is committed to it.
There are obviously various industrial groupings that have differences in opinion. Each will be taken into account, but there can be no guarantee that all sides will fully get what they want, and the probability is that no side will get fully what they want.
With that, by way of introduction, does anyone else have an opening statement?
Mr. Vento.
Mr. VENTO. Mr. Chairman, I do, and it is a little more lengthy than yours. I apologize to my colleagues, but I want to certainly welcome the Secretary of the Treasury and the Under Secretary, Mr. Hawke.
Thank you for bringing us this morning for a final hearing, Mr. Chairman, on the spring string of hearings on financial modernization. The views of the Treasury work are seen by many of us as key to moving some legislation forward and much of the language is basically providing a drafting service for us for many provisions we will be considering next week. This part is positive, but as I said 2 weeks ago, in their absence, the drafting assistance has depreciated, but the multiple choice recommendations for current Congressional decisionmaking are confusing and leave one with the impression that the Secretary of the Treasury has no position on, or views, with regard to basic policy matters. I know better than that, but the seven-page draft leaves those questions.
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But, Mr. Secretary, frankly I am disappointed, because we are less in need of drafting service and more in need of focus and direction in the basic terms of the policy path we should take. While each of the options may have their logic, it is not likely that they will be unadulterated, A; or B, considered by this committee. They are just more choices on the options menu.
The long-awaited Treasury position leaves us, frankly, without a road map on the basic underlying policies. Certainly, I am understanding and sympathetic to the evolution of an Option A or B. I am concerned, however, that the options are more of a devolution, and may not be the most helpful impetus for moving us forward to the end gain. Solid support for one position would move us forward with a bridge, instead of leading us to swim or fly over troubled waters, the political waters we face. I expected more, and as I said, I am disappointed.
Positively, the proposal that the Secretary will describe this morning does make strides in the right direction around the edges, if not advocating on the basic policy decisions. Both options, either by prescription or default, will broaden the business lines of financial institutions and their affiliates; both preserve corporate options for structure by creating WFIs, the Wholesale Financial Institutions, and basically granting operating subsidies the same powers as other holding company affiliates.
The WFI provision is strengthened by the application of CRA to the new institution that would siphon off funds and, thus, investments from communities. I would note that we can strengthen the overall community investment aspects of the Treasury approach to look more like the Leach bill in terms of CRA or other community requirements for other affiliations.
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Mr. Chairman, many more hurdles are ahead of us in insurance and securities activities, the functional regulation, the role of an umbrella supervisor, and of course, the thrift charter conversion provisions. With regard to the charter conversion provisions, it may be difficult to separate the future relationship between commerce and banking activities. Yet in some respects, we may need to look at them as separate issues in one bill.
Whether this committee in Congress does no harm to charter or powers will be evidenced by the positions that will be taken during the committee markup process. Clearly, however, Congress and the marketplace players must remain mindful that we are in good years and wisely must prepare for the economic cycles that impact our mixed economy. Merging insurance funds to diversify risks should remain on the table, while it is an easy option to date. If such a goal requires one charter, then we should work to that end.
Finally, as we move forward toward a markup next week, Mr. Chairman, many Members may be willing to work for appropriate provisions, creating a limited commercial basket of 15, 25 or 35 percent of revenues. We are kidding ourselves if we think commerce and banking are not mixing already. Exceptions are the rule, it seems, on the policy issue. The basis to largely extend or repeal Glass-Steagall is for the statutes to catch up with the reality.
The convergence of banking and securities activities has led to instruments that are nearly indistinguishable. This, after Federal policymakers spent decades attempting to differentiate these instruments. The record is replete with commerce and banking activities, with the unitary thrifts to non-bank banks, to foreign operations of U.S. financial institutions.
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Ideological regression with regard to this subject demonstrates a state of denial. The measures being advanced by some would take one step forward and two back. That is why the reports regarding a lack of focus by Treasury are so pessimistic; just look at the papers.
I would like to be part of the Congress that recognizes that rules should eliminate exceptions. Rules should be used instead to deliberately structure the parameters that will allow maximum and equal flexibility to financial services and other marketplace entities going forward into the future. This can be done with the appropriate level of safety and soundness protections in terms of firewalls, insider abuses, and community protections. It is not a simple task, we all know, and one that was not made any more simple by the recent actions, but certainly one worth working for.
Thank you, Mr. Chairman. I look forward to the testimony.
Chairman LEACH. Thank you, Mr. Vento.
Mrs. Roukema.
Mrs. ROUKEMA. Thank you, Mr. Chairman.
I certainly welcome Secretary of the Treasury Rubin here today, and his assistant, Mr. Hawke. I don't mean this in a derogatory sense, but I think we say, ''timing is everything'' and ''better late than never,'' perhaps, but I would have hoped that we could have had this earlier than one week before our markup.
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But, in any event, we are here today to ask some important questions and have explicit clarifications. And I thought we were making progress, but I must express some concern with the evident reports; and that is why I am very happy to be able to question you here today, because there have been evident reports that this proposal has opened new divisions, if not chasms, between interest groups, which I thought were being brought together through the refinements and reform of the Federal role and by creating a specific assignment for the National Council of Financial Services in conjunction with the functional regulators.
I thought we were all on the right track there. However, clearly the operating subsidiary and the WFI proposals in your bill have caused some angst with various industries and may not have moved us along in terms of resolving some of those fundamental questions.
Despite these problems, I continue to believe that we share an important goal, that it is imperative for us to move forward, and that not to pass a financial reform bill would prove that we are derelict in our responsibilities; and I think we are hand in hand, walking that route, I hope. We should use this time in this hearing and this proposal to focus on the policy questions of banking and commerce, the structure and supervision of financial services holding companies, and the insured depositories.
The handling of the thrift charter issue, however, does raise many controversial questions on how to proceed, as our colleague, Mr. Vento, has already outlined. Despite these complexities, we have to move the process to a conclusion, and I believe that is sincerely what I intend to do, and I welcome you here today as we join together.
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But, let me be direct. We now have to make a case for a comprehensive reform package. At times, the Treasury has been reported as sending conflicting signals, suggesting that we take quantum leaps to full banking and commerce. But, at other times it has been suggested that the opposite was true, and I hope that we can settle on a position here where you can amplify on defining the commercial component and how it should be defined and how we can move ahead.
As you all know, I have been pushing for expedited action by the Congress, because of my concern over developments, such as the Bankers Trust-Alex. Brown approval and the pending OCC application of the Zion National Bank to engage in municipal bond underwriting. It is my understanding, although I haven't had a full report, that the Fed yesterday gave approval for First Union Corp. to expand their securities underwriting operations.
These recent actions are, in my opinion, indisputable evidence as to why Congress must move quickly on financial modernization; and with all due respect, I don't believe we can allow the regulators to move ahead of us any longer, defining ad hoc rules of the game as they go. It is vital that Congress redefine the operations of financial institutions, because if these approvals continue on a piecemeal basis before proper safeguards are put in place, safety and soundness will be threatened. And by the way, we cannot turn our backs on technology and the competitive global financial markets.
I welcome the Secretary here today and look forward to a full and frank discussion on these issues.
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Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mrs. Roukema.
Mr. Frank.
Mr. FRANK. No.
Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman. I want to welcome Secretary Rubin and Mr. Hawke, but I don't have an opening statement directed to them. My opening statement is more directed to the Chairman.
First of all, I want to say that the Chairman has done a magnificent job of holding hearings that deal with and allow us to understand the whole range of issues that are out there. And I personally have benefited immensely from the series of hearings that the Chairman has held and I want to publicly thank him for that.
I do have some concern, however, that the Chairman is indicating that these bills are going to be merged on Friday of this week, and we are going to start a markup next week. I started really intensively trying to go through H.R. 10, which is the Chairman's bill, over the break that we just ended, and got substantially through H.R. 10; and I think I started to understand the substantial magnitude of really just getting through a bill and understanding what is in a single bill. And once these bills get merged into the final product, or what one would hope might be the final product, it seems to me we would benefit from at least a week to 10 days, if not more, of being able to analyze what the final product is, so that the whole committee could have some constructive input into the final product.
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I would hope that the Chairman would not give us a bill on Friday and then start a markup on Monday, because all of this magnificent benefit that we have gained from the protracted hearings and the ability to participate in this, I think, would then be lost if we are not given more time to really get into what is being proposed as the final product, as the markup vehicle.
And so I hope the Chairman will consider giving us substantially more time than just the weekend, at least 10 days, 2 weeks, or something of that nature, so that those of us who are not participating in the merger of these various bills have the same kind of opportunity to have input into the final product as those who are merging the product.
Chairman LEACH. Well, let me just respond.
The gentlemen makes some very decent points. All I can say is that I think the time is now for the committee to move rather propitiously. There have been delays this spring that have been longer than I had hoped. As we know, we all wished we would have had the Treasury language a little bit earlier, but that has not been under our control. But there would not be a Friday to Monday if it would be a Friday to Wednesday or Thursday, and I am hopeful we can move propitiously. Every element will be—I mean, in terms of a markup vehicle, does not mean that that will be the end of the game, because every element will be subject to amendment from anybody on any relevant issue.
But, I appreciate very much the gentleman's concerns and will take them into consideration.
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Mr. Bereuter.
Mr. Baker.
Mr. BAKER. Thank you, Mr. Chairman; just a brief word. I certainly wish to welcome the Secretary and Under Secretary here this morning and welcome their remarks, and I certainly hope, as the committee progresses today beyond the broad statement of policy and position that the Department has indicated, that you might be able to respond to fairly direct questions about alternatives.
As is obvious in coming to your own conclusions, there are many strongly held opinions on this matter, but your insight as to policy would be most instructive in helping this committee reach what I believe is a very important decision as to how our financial markets should be structured. And I must admit that the original findings and report were somewhat disappointing in that we did not reach a conclusion with any definitive set of guidelines or principles.
Certainly I understand your report for this committee moving forward, but we really need to have your leadership in making these difficult decisions.
Thank you for your appearance here today.
Chairman LEACH. Thank you, Mr. Baker.
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Is there any other statement on the Democratic side?
Chairman LEACH. On the Republican side?
If not, I would like to turn to the Secretary of the Treasury, Mr. Robert E. Rubin.
STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Secretary RUBIN. Thank you, Mr. Chairman. Last time you and I sat close to each other, I spilled wine all over you, so I will sit at an appropriate distance. I presume it suitably protects you.
Chairman LEACH. I bear no grudges.
Mr. RUBIN. Let me start by saying that we very much appreciate the opportunity to be here with you, and this is obviously an issue that we, as you, consider of enormous importance. And, Mr. Chairman, we very much respect the leadership position that you have taken in moving this issue forward and the position the entire committee has taken.
As others have observed, I have with me the Under Secretary of the Treasury for Domestic Finance, Jerry Hawke, and between the two of us, we will try to respond to whatever issues you may wish to raise.
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Let me say, before I begin with my prepared remarks, that Mr. Vento and Mr. Baker both referred to the choices we have offered, or the possibility that we suggested, with respect to the banking and commerce issue. In our view, what we have done is provided legislative language and clear decisions on all of the central features—including the most central feature, which is the combination of financial services across industry lines. The only issue we left unaddressed in that respect is this one issue, for the reasons we have stated, but in all other respects, we have given you complete legislation that you can accept or reject as you see fit, but it does give you clear decisions on all other issues.
We have had a very simple objective in modernizing financial services, and that is to provide an effective system for consumers, for businesses and communities that will increase competitiveness, lower costs, and enhance the competitiveness of our industry in the global financial markets, while at the same time fully protecting the safety and soundness.
I don't think there is any question that the stakes are enormous. The Bureau of Economic Analysis has estimated American consumers spent nearly $300 billion on brokerage, insurance and banking services in 1995. While it would be hard to judge exactly what would result from financial modernization, if you take 1 percent of that, you have $3 billion. If you take a number we consider not to be unreasonable, 5 percent, you have $15 billion—and that just refers to consumers, it does not refer to business users of financial services. The people who prepared the statistics say that the inclusion of business uses of financial services would very substantially increase that number, perhaps as much as double it.
Our financial services industry clearly is the world's leader and it provides the most reliable liquid capital markets in the world and at home here in the United States. On the other hand, it is still operating under an outdated legal and regulatory structure. Glass-Steagall may well have been appropriate in the environment in which it was enacted, but there have been enormous changes since then, and we believe it is time to change the legal structure.
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The old lines that once separated insurance, securities and banking have become increasingly blurred and in many cases obliterated by the new products and new services. The regulatory and judicial rulings have continued to erode many of the barriers that were put in place to restrain competition across financial services lines.
Our goal is to create a regulatory and legal environment in which, number one, consumers benefit from lower costs, increased access, better services and greater convenience;
Number two, financial service providers operate on a level playing field;
Number three, financial institutions can offer the full range of financial products and services without having to maneuver through a maze of what we view to be archaic laws; and
Number four, we protect the deposit insurance funds and fully protect safety and soundness.
Mr. Chairman, let me now share with you the five key elements in our financial modernization proposal. Under Secretary Hawke in his remarks will spell out our suggested approach in further detail.
First, we would propose to break down the barriers that inhibit or prevent competition among various providers of financial services. Therefore, we would permit banks, securities firms and insurance companies to affiliate with one another.
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Second, we would give firms a choice to organize their financial activities in the manner they see fit, either as a subsidiary of a bank, or as an affiliate of a bank holding company regulated by the Federal Reserve Board.
Third is the issue of whether to permit companies that include banks to engage in nonfinancial activities, the so-called ''banking and commerce'' issue.
It is clear there are strongly held views on all sides of this issue. As we looked at it, it was our conclusion that there are significant economic issues, but maybe even more importantly, there are very significant social and cultural issues involved, and it seems to us this is an issue that could most appropriately be determined by debate in Congress.
In order to facilitate that process, we have offered two possible alternative legislative models. Under the first model, Congress could decide to permit some modest measure of nonfinancial activity for bank holding companies. In such a case, it would seem to us to be sensible to set a high threshold percentage of financial activity to qualify the organization as predominately financial.
Under the second model, Congress may decide not to relax limits on nonfinancial activities or firms affiliated with banks, while at the same time permitting bank holding companies and bank subsidiaries to engage in the broad range of financial activities which is the heart of financial modernization.
Let me now turn to the fourth item in our approach, the creation of a new wholesale financial institution. We call them WFIs. WFIs would be banks which accept only wholesale uninsured deposits, but they would not be considered banks for the purpose of holding company regulation.
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Lastly, we believe that we should move closer to a system of regulation by function, functional regulation, whereby specific financial activities would be regulated by the appropriate Federal or State agency, regardless of where these activities are conducted. In this way, consumers would receive consistent regulatory protections. The Federal Reserve would continue to be responsible for consolidated supervision of bank holding companies, but we do recommend streamlined procedures, and we would propose to create a council that would help improve coordination among the various financial services regulators.
With all of these changes, we must ensure that any and all financial modernization proposals are safe and sound. In recent years, our system has made great strides in restoring safety and soundness. We are very mindful of the S&L experience and are committed to avoiding anything of that sort again.
For financial institutions, our proposal for expanding activities provides greater safety and soundness protections than current law. For example, banks would have to be well-capitalized—the highest regulatory capital category—and well-managed to qualify for broader affiliations; and they would have to meet important prudential safeguards that prevent subsidiaries from weakening the depository institution.
The Treasury approach would also enhance existing consumer safeguards. We would provide for important disclosures in plain, straightforward, readily understood terms so buyers can understand whether or not the products they purchase from financial services providers are insured.
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Finally, this proposal comes with an absolute commitment to safeguard communities. The Administration will not accept any weakening of the Community Reinvestment Act in any legislation.
In the past, when greater competition has been permitted in the financial services industry, consumers of financial products have benefited significantly. I can well remember when brokerage commissions became negotiated and rates dropped very, very substantially to the benefit of consumers. In addition, the variety of products available increased very substantially and new kinds of providers developed.
There have been even more dramatic savings when deregulations occurred in other industries.
Consumers would benefit in other ways than cost as well. A range of financial institutions could offer consumers, farmers and small businesses a greater choice of products; and institutions would be able to provide one-stop shopping for consumers of their products.
Our proposal could improve access for underserved consumers by encouraging new competitors to find profitable opportunities in overlooked markets as by offering multiple products in these markets, where the offering of any single product alone would not be potentially profitable.
Mr. Chairman, we strongly share the view that you have expressed and others have expressed, that the time has come to modernize the rules of our financial services system. We believe that such a move, done with due regard for safety and soundness, will benefit all users of financial services: consumers, small and large businesses, communities and State and local governments. A more rational system with a level playing field and appropriate safeguards is in everyone's interest.
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There are, as this committee well knows, enormous numbers of specific and technical questions that arise in the context of dealing with financial modernization. Under Secretary Hawke and I would be delighted to try to respond to them.
Let me close with the following thought, and it is one I think echoes something the Chairman said: Financial modernization efforts have had a long history. It is a very complex subject. I don't think it is conceivable that we will have legislation that will fully satisfy anybody, but I certainly think it is possible to get legislation that will be, on balance, very good for this country, and, on balance, will serve the interests of each of the groups that are involved in this industry. I think we all need to work toward achieving that objective.
Mr. Chairman, we look forward to working with you and responding to your questions.
Chairman LEACH. Thank you, Mr. Secretary.
Chairman LEACH. Mr. Hawke.
STATEMENT OF HON. JOHN D. HAWKE, JR., UNDER SECRETARY FOR DOMESTIC FINANCE, U.S. DEPARTMENT OF THE TREASURY
Mr. HAWKE. Thank you, Mr. Chairman. I am pleased to appear today with Secretary Rubin to discuss the Treasury Department's draft proposal for financial modernization.
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As Secretary Rubin has stated, we believe American consumers will benefit significantly from legislation that brings increased competition to the financial services industry. Our proposal would achieve that result by eliminating barriers to affiliations between banks and other financial services firms and by broadening the ability of banking organizations to offer financial products and services. Specifically, we recommend Congress repeal Sections 20 and 32 of the 1933 Glass-Steagall Act, which restrict affiliations between commercial banks and securities firms, as well as Section 4 of the Bank Holding Company Act of 1956, which narrowly limits the permissible activities of bank holding companies.
In place of these old restrictions, we propose that Congress adopt a less restrictive regime for companies that want to own banks. We also propose that the authority of banks to engage in financial activities through financial subsidiaries be broadened. These changes would allow financial services companies that include banks the freedom to choose between the holding company affiliate and the bank subsidiary as the organizational format for expanded financial activities. We have structured the proposal to provide similar protections for the bank and the deposit insurance funds irrespective of the choice of format.
Let me expand briefly on the rules we would apply.
First, we adopt the concept of the qualifying bank holding company or QBHC. The proposal sets out three main prerequisites for a company owning a bank to engage in activities that are not permissible for a national bank to engage in directly:
First, QBHC must be engaged in activities that are financial in nature.
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Second, all of its subsidiary banks must meet—and remain in compliance with—the highest supervisory standard of capitalization, the well-capitalized standard; and they must be, and stay, well-managed.
Third, to be a QBHC, a holding company must execute an undertaking that if any bank subsidiary falls below the well-capitalized level it will restore the bank to that level or divest it under circumstances in which the divested bank will be well-capitalized immediately following the divestiture.
All bank holding companies would continue to be regulated and supervised by the Federal Reserve Board, but they would be free to diversify their financial activities within the limits described in the legislation without further application requirements.
Alternatively, national banks—and State banks to the extent permitted by State law—may elect to conduct financial activities not permissible for national banks themselves through their own financial subsidiaries. Three conditions would apply if this format were chosen:
First, as in the QBHC setting, a parent bank would be required to be and stay well-capitalized and well-managed.
Second, the amount of the bank's equity investment in the subsidiary would be excluded from the bank's capital for purposes of determining compliance with the well-capitalized standard. Thus, if the subsidiary were to fail, the bank's regulatory capital would be unaffected.
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Third, after excluding the bank's equity investments in financial subsidiaries, the limits on affiliate transactions in Sections 23(A) and 23(B) of the Federal Reserve Act would be applicable to dealings between the bank and the subsidiary. Those restrictions don't presently apply in that context.
Subsidiaries of national banks would be permitted to engage in the same financial activities as QBHCs, including insurance underwriting and agency operations, and the full range of securities activities, including merchant banking.
As Secretary Rubin has indicated, a major question that will face the Congress in considering expanded activities for bank holding companies is the extent to which, if at all, they should be permitted to engage in nonfinancial activities. Congress has a range of choices in this regard, and our proposal sets forth two possible models.
The first is a ''basket'' concept, similar to that suggested in some pending bills. Under this approach, a company could only be a QBHC if a predominant percentage of its gross domestic revenues—the exact number to be determined by Congress—were derived from financial institutions and other financial activities. If this eligibility threshold were met, the remainder of the QBHC's revenues could derive from nonfinancial activities.
However, in order to assure that the nonfinancial basket could not be used to create very large combinations of banking and commercial or industrial companies, we would prohibit a QBHC from acquiring any nonfinancial company that had total assets in excess of $750 million, a number that approximates the 1,000 largest nonfinancial companies of the United States.
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If such a basket approach were adopted, it would provide a framework for merging the bank and thrift charters and bringing unitary thrift holding companies, which presently have no limits on their nonfinancial activities, under a common regulatory umbrella with banking organizations. It would also provide a two-way street that would make it possible for securities and insurance companies and other diversified financial services firms that may have some modest volume of nonfinancial revenue to own a bank.
On the other hand, Congress might choose not to permit any level of nonfinancial activity for QBHCs. In this event, we believe it would be difficult to merge the bank and thrift charters and to eliminate the unitary thrift holding company; and, as a practical matter, ownership of banks may be precluded for many securities, insurance and diversified financial services firms.
Accordingly, if such a financial-only alternative were chosen, we believe the thrift industry should remain unchanged from its present configuration, with the unitary thrift holding company format available for companies that could not qualify to own an insured bank.
Neither model would permit subsidiaries of banks, however, to engage in commercial activities.
The Federal Reserve would continue to approve the formation of, and to supervise and regulate, all bank holding companies.
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The Fed would be permitted to set consolidated capital requirements for a bank holding company if the holding company and its bank were large enough so as to raise concerns if problems were to arise—that is, systemic concerns; or if the holding company's insured depository institutions accounted for a predominant percentage of the holding company's total assets.
Bank holding companies not meeting any of these criteria would presumptively be excluded from consolidated capital requirements, although the Board could impose such requirements—for an individual holding company or class of companies—if it determined that it was needed to avert a material risk to the safety and soundness of a subsidiary bank presented by unusual risk in the holding company's activities or particular characteristics of its financial structure.
We also propose that Congress authorize wholesale financial institutions, which would be chartered either as national banks or as State banks that are members of the Federal Reserve System, but which would not be FDIC insured and could not take deposits of less than $100,000. WFIs would not be considered banks for the purposes of the Bank Holding Company Act. Thus, like unitary thrift institutions under current law, there would be no activity limits on their owners. However, WFIs would be fully regulated by the OCC and the Federal Reserve. They would have strong capital requirements, enforceable through the usual prompt corrective action remedies.
The Federal Reserve would have broad authority to impose protective conditions on WFIs in connection with their use of Fed services, and WFIs would be subject to the Community Reinvestment Act.
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While the Federal Reserve would continue to be the regulator of all bank holding companies under our proposal, the usual regulators of non-banking financial activities would continue to regulate those activities, whether conducted in a holding company affiliate, a subsidiary of the bank or, with some exceptions, in the bank itself.
All insurance activities, wherever they might be conducted in a banking organization, would be subject to full regulation by State authorities under State insurance laws and regulations—provided that such laws were truly nondiscriminatory. Where State law had the purpose or effect of discriminating against financial institutions or had a disproportionately restrictive impact on financial institutions compared to other providers of insurance in the same State, that law would not be applicable to banks.
Similarly, we would retain the standard announced by the Supreme Court in the Barnett case, so that a State law that prevented a national bank from engaging in an insurance activity authorized under Federal law, or significantly impaired its ability to engage in such an activity, could not be applied to national banks. However, State laws relating to the rehabilitation, conservatorship, receivership or liquidation of insurance companies would be fully preserved.
In the securities area, our proposal would narrow the Securities Exchange Act's exemption of banks from broker and dealer registration to permit SEC regulation of activities other than traditional banking activities. The SEC's capital requirements generally may not be applied to a bank that is well-capitalized under our proposal, but traditional banking products would not be subject to SEC broker-dealer regulation, and the primary banking regulator and the SEC could jointly exempt new products.
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Now let me address conversion of the thrift industry.
Title III of our proposal sets forth a comprehensive program for eliminating the Federal thrift charter, phasing out the separate Federal regulation of thrift institutions and bringing unitary thrift holding companies under the same regulatory structure as bank holding companies. As I stated earlier, we believe a charter and regulatory merger makes sense if Congress adopts a basket approach that would accommodate some measure of nonfinancial activity by bank holding companies.
Our model would accomplish the merger of the thrift industry with the banking industry over a 2-year period after enactment. We believe that such a transition period is needed both to allow thrifts to prepare to become regulated as banks and to permit an orderly merger of the Office of Thrift Supervision and the Office of the Comptroller of the Currency.
At the end of the 2-year period a number of things would happen:
All Federally-chartered thrifts would be converted to national banks, by operation of law.
All State-chartered thrifts would be treated as State-chartered banks for all Federal regulatory purposes.
Unitary thrift holding companies now in existence would be given a grandfather exemption from the basket limitations, conditioned on their not having a change of control or acquiring an additional insured bank.
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OTS and OCC would be merged.
Membership in the Federal Home Loan Bank System would become voluntary for all institutions.
BIF and SAIF insurance funds would be merged.
Several other important provisions are proposed in connection with the conversion of the thrift industry to bank regulation:
Each banking agency would institute a program to accommodate voluntary specialization in housing finance and the conversion of thrift institutions to bank charters.
A mutual national bank charter would be made available to accommodate thrifts presently operating in mutual form, and we would also authorize mutual holding companies.
With the merger of OTS and OCC, the size of the FDIC board would be restored to three members, as it was for 56 years before the creation of OTS.
We would also create a National Council on Financial Services, consisting of the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairs of the FDIC, SEC and CFTC, the Comptroller of the Currency, the Director of OTS, and a final member, appointed by the President with the advice and consent of the Senate, having experience in State insurance regulation.
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The Council would have authority to define additional types of financial services companies' activities to be ''financial'' for purposes of the QBHC test, and it could also prescribe additional safeguards to promote safety and soundness. It would serve in a consultative role with respect to rulings by the OCC concerning the applicability of State insurance laws to national banks.
The proposal would require regulators to prescribe rules regarding the retail sale of non-deposit investment products by banks and their affiliates, in order to avoid customer confusion about the nature and applicability of FDIC and SIPC insurance and to protect against conflicts of interest and other abuses. These rules would address such matters as sales practices, qualifications of sales personnel, incentive compensation and referrals.
In addition, they would require that disclosures be simple and readily understandable. Consumers could prevent sharing of confidential customer information between banks and their non-bank affiliates, and the National Council would be required to review the effectiveness of these consumer protection regulations and could prescribe more stringent rules than those adopted by the agencies.
Finally, as to effective dates, under the basket alternative, the expansion of bank activities and affiliations would take effect 2 years after the enactment of the legislation, at the end of the period provided for conversion of the thrift industry. If the second alternative were adopted, with the thrift industry remaining as it is today, we would propose the expansion of powers and affiliations for banking organizations take effect 9 months after the date of enactment.
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That completes my testimony, Mr. Chairman.
Chairman LEACH. Well, thank you very much, Mr. Hawke.
Chairman LEACH. Let me just underscore, as a first question, something that the Secretary pointed out.
At one of our recent hearings, the four principal banking regulators: the Comptroller, Chairman of the Fed, Chairman of the Federal Deposit Insurance Corporation, Office of Thrift Supervision, all testified unanimously that they favored, at the end of the road, the homogenization of the bank and the thrift charters with the perspective on the merging of funds; and it is my understanding that is firmly the Treasury position as well. Is that correct?
Secretary RUBIN. Well, it depends on what route you take with respect, Mr. Chairman, to the so-called ''banking and commerce'' issue. If you preclude nonfinancial activity fully, as opposed to the basket approach we would like to see, the funds merge, but it was our view that you would leave the thrift charter as it is today.
Chairman LEACH. One of the surprises in your bill is, as I understand it, your draft contemplates access to the payment system by commercial corporations, as well as investment banks, if a basket approach is adopted.
Doesn't this have the effect of subsidizing certain American corporations clever enough to know how to use the payment system? Doesn't it have the effect of making the payment system more difficult to manage? And doesn't it, in effect, weaken substantially a bank charter?
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Secretary RUBIN. I don't quite see, Mr. Chairman, if you have a basket approach, let's say, a bank has a steel company, how would the steel company have an access to the window?
Chairman LEACH. Well, it is my understanding that with the basket approach, it would have that effect. Are you saying that is not the intent?
Secretary RUBIN. The WFIs would have access to the window.
Chairman LEACH. With the basket approach, as well, the American corporation would? Is that a misreading of your bill?
Mr. HAWKE. Nobody would have access to Fed services other than fully chartered banks. If a bank were affiliated with a company that had nonfinancial activities, that nonfinancial company would not have direct access to the Fed, nor would the owner of the WFI have direct access to the Fed. It would all go through a regularly chartered bank, or a WFI, subject to all the capital controls and all the restrictions that the regulators imposed on it.
Chairman LEACH. Thank you.
Mr. Vento.
Mr. VENTO. Thank you, Mr. Chairman.
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We have an amendment in FDICIA that provided for access for securities and others, although it is meant for extraordinary economic types of problems, and there was, incidentally, in the law a provision for Fed access to industrial and commercial firms that exist in an emergency power, not in the same sense as a window.
But my understanding here is that simply if you have a bank that is within the relationship and a holding company or an affiliate of a commercial firm, that they would have the same basis of activity with the Fed window; is that correct?
Secretary RUBIN. The bank would, but not the commercial firm.
Mr. VENTO. Mr. Secretary, the reason, of course, that I am concerned about this A and B Option, you are right. I appreciate the work on WFIs and sort of breeze by that for the purpose of disagreement. There is much that I agree with in the proposal in terms of your treatment of affiliates, subsidiaries and financial counsel. These look like familiar topics to me, and I am sure Mrs. Roukema, with regard to the legislation we proposed. And the concern I have is that so much flows from the banking-commerce issue and you are obviously not taking a position on that, so we will not go through the issue of trying to trap you into answering that particular question. But, it should be clear, and I only see if we don't move in this way, it is possible, if we were to adopt legislation which, for instance, put in place Option B, and then merged the thrift charter and eliminated some of the activities. In other words, we would have a question here of divestiture, would we not, of certain activities?
Secretary RUBIN. You mean in the thrifts? Not if you grandfathered them.
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Mr. VENTO. But if they are not grandfathered——
Secretary RUBIN. If they are not grandfathered, then you would have—our notion would be in the Option A that you would grandfather them, as you know, with respect to existing activities.
But, sure, if you don't grandfather and then you roll back, then obviously——
Mr. VENTO. If you go to B and don't grandfather, that obviously means that you have complete divestiture of a couple dozen thrifts.
Secretary RUBIN. No, if you go to B——
Mr. VENTO. Option B is the option with regard to the no mixing of commerce and banking, is my understanding.
Secretary RUBIN. Yes, if you merge them and you don't grandfather, then you would have a divestiture issue.
That is not our recommended path, but that is correct.
Mr. VENTO. And so that is the concern. I mean, that is obviously choosing. In other words then, Option A, if we did not grandfather and went to a commerce-banking mixture, then they would fall under a basket of 25 or 30 percent, whatever the amount was. If it was too restrictive, it would obviously cause divestiture.
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Secretary RUBIN. Which is why we grandfathered.
Mr. VENTO. That is right. It is a question of looking to the right percentage here that would be less likely to get involved in grandfathering?
Mr. Secretary, there is concern about grandfathering because there is a pretty lively business these days in terms of purchase of unitary thrift charters by—albeit by financial entities, by securities and insurance companies.
Secretary RUBIN. Yes, but, correct me if I am wrong, Jerry, then you would lose your grandfather rights. Once you made the acquisition, then the grandfathering would no longer apply. It is only grandfathered in the hands of the then-owners. It wouldn't be grandfathered once you had transfer of control.
That is actually a very important point. If we weren't clear on that, we should have been.
Mr. VENTO. No, no. I probably haven't done my homework adequately here.
Secretary RUBIN. Once you transfer that control, that grandfathering ceases and then you would go into whatever mode you are in.
Mr. VENTO. ''Foster grandparents'' my colleague from Massachusetts tells me here.
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The issue, I think, becomes very important in terms of a two-way street if we, for instance, preclude securities and preclude insurance firms from in fact being able to be involved in terms of banking. You point out that if we adopt Option B that it would preclude probably their involvement in terms of being able to purchase banks, because of the commerce restriction. They would have to divest themselves of any type of equity investments at that point that would add to a substantial amount of revenue on their part, is that correct, under option——
Secretary RUBIN. Yes, unless they fit within the merchant banking—unless they were part of the merchant banking business. But otherwise, if they had nonfinancial activities that didn't fit into the merchant banking activity, then they would have to divest, which is one of the issues I presume you all will consider as you decide between A and B or some other place on the spectrum.
Mr. VENTO. But that type of restructuring would completely change the business and activity that they have expertise in, would it not, in which they have profitability and some degree of success?
Secretary RUBIN. Well, let me parse that comment in two pieces, because I think you are raising one of the central issues in this whole debate.
It would require them to give up an activity that most of them view as a profitable activity. I don't think I would say that—it is an industry I know fairly well; I am thinking it over as I speak. I don't think for a vast preponderance of these firms it is what you would call a ''central activity,'' but it is certainly an activity they view as profitable.
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Mr. VENTO. Mr. Chairman, I would point out that I think on a temporary basis, though, in terms of security firms—which you have vast experience with, Mr. Secretary—the issue is that for a short time they may be involved in commerce in terms of taking an equity position and then reducing that position. But no accommodation is made in Option B for that type of——
Secretary RUBIN. If they are simply taking an equity position with a view to disposition at some point, I would presume that would fit in with our definition of merchant banking activity, which we do view as a financial activity. So I think they would be OK on what you just described.
Mr. VENTO. Well, we have to know for certain, Mr. Secretary.
Secretary RUBIN. Well, I give you my view. I don't know the facts. We will look at the facts and see how it applies, but as a general proposition, that would probably fit within merchant banking. Obviously, this is a case where it is fact driven.
Chairman LEACH. Mrs. Roukema.
Mrs. ROUKEMA. Well, I don't quite know how to ask my question. I think this is a little bit more complex than I thought. Are you saying that you do not want to take a position on the banking and commerce component, the basket position?
Secretary RUBIN. Correct. We have said that the——
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Mrs. ROUKEMA. Can I ask you personally? Don't you think that is the best option—since, in my opinion, Option B is totally unacceptable—that we have to have a definition of banking and commerce with a basket. Right?
Secretary RUBIN. Well——
Mrs. ROUKEMA. No?
Secretary RUBIN. What we have done is—let me say that my personal position and my position as Secretary of the Treasury tend to meld together here.
I think—as I said in my remarks, I think you are in a very complicated area. There are enormously strong feelings, and you all are going to have to figure out—they really are, I think, predominantly social and cultural issues and not economic issues, though there is an economic piece as Mr. Vento and I were just discussing. That is the area in which we have said we will bring these two possibilities to Congress, but we are not going to make a recommendation.
Mrs. ROUKEMA. Well, wait a minute. Mr. Secretary, I don't know what you meant by that last statement, because I thought we were talking about economic circumstances here and not cultural.
It seems to me that there are legitimate questions that we have to iron out with respect to the capitalization requirements, the regulatory umbrella and oversight regulating requirements as they relate to the functional regulation, whether it be the insurance or the security industry.
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Secretary RUBIN. Right.
Mrs. ROUKEMA. And at the same time, I thought I understood your requirement for well-capitalized banks. But now maybe I don't understand it.
Secretary RUBIN. No, I think you do.
I think on all of those issues we have legislative language and we have what we would view as the proper components for a bill. On the question of where on the banking-commerce spectrum you ought to be, we have—instead of recommending a position, we have presented two possibilities.
Mrs. ROUKEMA. Let me ask you the question about——
Secretary RUBIN. And I think Mr. Vento——
Mrs. ROUKEMA. There are two questions here, I think. Not only the insurance question, the definition of insurance, but also the requirements that it is, apparently, at least on first look—apparently you are taking a view very widely disparate from Chairman Levitt of the SEC with respect to the source-of-strength doctrine and the capitalization requirements. Do I understand that correctly?
Please clarify that; I would like to understand that better.
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And then I would like to have you amplify on the implications from the insurance groups that feel as though you have gone much too far in your expansion of Barnett to the aspects in this regulatory structure.
Mr. HAWKE. Mrs. Roukema, we have worked very closely with the SEC trying to resolve different approaches to the question of functional regulation of securities activities, and we think we have put forth a balanced proposal in that respect.
Traditional bank securities activities would be retained in the bank. If the bank engaged in a public brokerage or dealing activity, it would be subject to SEC regulation as a broker-dealer, which it is not now; banks have an exemption. We would be repealing that exemption for banks under those circumstances, and we would require that SEC net capital requirements apply to banks, unless the bank is well-capitalized. If a bank was well-capitalized, it would not be subject to the SEC's net capital requirements.
All securities activities of banks that are conducted in subsidiaries would be fully subject to SEC regulation.
Mrs. ROUKEMA. You feel you have taken into complete consideration the questions raised by Chairman Levitt in our most recent hearings, that we are being far too solicitous to the banks and requiring, under your regulatory program here, too much of the securities firms and really destroying functional regulation as we know it?
Mr. HAWKE. Well, I can't speak for Chairman Levitt. We have tried to be responsive to the concerns of the SEC. We have proposed the repeal of exemptions from the securities laws for banks in several instances and expanded SEC regulation. Now, I can't represent that he agrees with every provision of our bill, but we have gone a long way in the direction of bringing SEC regulation of bank-related securities activities to bear.
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Mrs. ROUKEMA. All right. Can you go to the question of the insurance exception with respect to your interpretation of Barnett?
Mr. HAWKE. I would be glad to. I realize this is an issue that has some controversy attached to it.
Our position is very clear. Bank and bank-related insurance activities should be subject to conventional State regulation of insurance, just in the same way that any other insurance activities are subject to State regulation, provided that they are nondiscriminatory, and truly nondiscriminatory, and provided that the effect of State regulation is to not preclude national banks from exercising their Federally-granted rights to engage in securities activities under the Barnett standard, which is a decision of the Supreme Court. State insurance regulation is the guiding light with respect to bank-related insurance activities. There is no question about that under our proposal.
Mrs. ROUKEMA. Are you saying that there is no preemption of State law?
Mr. HAWKE. No, as I say, if State law is truly nondiscriminatory, then it will apply. If it discriminates against financial institutions or has a disproportionately restrictive impact on financial institutions compared to other sellers of insurance in the same State, then it would be preempted.
But we understand and we have been working on the assumption, based on our conversations with various segments of the insurance industry, that they share the same view that State regulation should apply, providing it is nondiscriminatory, and that has been our guiding principle.
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Mrs. ROUKEMA. Evidently, in the last 24 or 48 hours there have been some gross distortions and misunderstandings, because that is not the position that is currently being presented. I am not here being an advocate for one side or the other. I want to understand with clarity exactly what you have in your legislation.
I may be able to come back later with another question. Thank you very much.
Chairman LEACH. Mr. Frank.
Mr. FRANK. On that last part, I think it might be useful. I agree with my colleague, people have read different meanings into the same words. It might be helpful if you could come up with an example of what you think might be such a discriminatory one. I think that would help. Not right now, but if we say, ''Well, if they did X or Y.''
I had a couple of general questions, but first a point, Mr. Secretary. I was delighted, as I think many—particularly on this side—were, when you reaffirmed the Administration's commitment to protect the Community Reinvestment Act and, I assume, related consumer protections. I am delighted with that. We have had, from time to time, efforts to weaken those in the course of general legislation, and I think you will find that there will be more than enough votes to override—or uphold any veto; and I hope people will take that into account and forget that from the beginning, because that seems to be very important.
I think it is particularly important—setting aside commerce for 1 minute. One of the things that strikes me about the passion that goes into this, some of those that one would have thought were the greatest devotees of the power of the market seem to lose faith in it. My sense is that, in fact, this whole process has been market-driven, and the legislation is really an after-the-fact recognition of what market forces have done. Would that comply with your view?
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Secretary RUBIN. Yes, I think strong advocates of market forces often would feel there ought to be exceptions in their particular areas.
Mr. FRANK. Yes, Senator Magnuson once said, after being Chairman of the Senate Commerce Committee, that it was his impression that ''All business in America wanted from the Government was a reasonable advantage over the competition.''
Secretary RUBIN. That was certainly my view when I was in business. And I think you are right; basically, this is legislation catching up to market forces.
Mr. FRANK. And that, I think, is very important. I mean, we ought to understand, we are not—if it was up to the strict definition of the laws, the integration of banks and securities, banks and insurance wouldn't have happened. The market is driving that. And I think we ought to be clear.
I think we ought to understand, too, there are very real limits to the extent to which we could stop the market if we wanted to. With regard to everything but commerce, this seems to me to be after-the-fact, what Murray Kempton once said was the function of editorial writers: ''Coming down from the hill after the battle and shooting the wounded and cleaning up after the major efforts.'' The one area where that seems to be somewhat not true, is in the commerce area.
My question would be this: Obviously there were forces, market forces that led to an integration of securities and insurance with banks despite laws that appeared to say no. Is commerce different? If we were to, in fact, make this decision, ''no'', and if we ran back your punt in the ''noncommerce'' direction, would that mean that it wouldn't happen? Would you foresee the same kind of erosion of the wall driven by the market with respect to commerce?
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Secretary RUBIN. I think it is a very good question, Mr. Frank.
I can remember 20 years ago when investment banking firms were very aggressively offering commercial paper and basically were displacing commercial banks in a lot of their commercial credit extension. So, as you say, market forces were already making some of this law obsolete.
With respect to commerce, I think it is a more complicated issue, but when you start getting into information technology and areas of that sort, I think you are going to find over time it is very hard to draw some of the lines that define what is ''commerce'' and what is ''financial services''. What happens when you start having very large amounts of commerce conducted electronically on the Internet, with Internet payments and so forth? I think a lot of that is going to tend to blur together.
Mr. FRANK. I noticed the recent merger of HFS and CUC where they talk about the ''asset-less'' company, the new company that is doing commerce, but there is an awful lot of what looks like, kind of, financial service transactions. And, I guess my concern is that we will accept the reality that the market has brought banking, insurance and securities together and set rules, and we would have been well-advised to set those rules 10 years ago—functional regulation, and other things—but we may resist on commerce only to repeat the pattern and find ourselves 10 years down the road with a similar kind of situation.
And what seems to me happens there is, one, transaction costs become very expensive. When you have laws, they don't stop people from doing things; they just make it more expensive, and there are more curlicues; and in fact you may have less sensible regulation because you don't recognize what is happening and try to deal with it.
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And I was wondering whether you think we run into that same danger?
Secretary RUBIN. I think there is that danger, but it is a complicated question, and maybe there is a little bit of the art of the doable right now. And if we can get financial modernization——
Mr. FRANK. Let me stipulate that nothing you say in response to this question will be taken as an answer to whether or not we should do it. I don't want to break that law, but I am interested as to what your guess would be.
Secretary RUBIN. I think your point is well taken, and I gave you my example of one kind of thing. But it also strikes me that there are very important examples on the other side.
Universal banking in Europe and Japan does raise concerns, and full banking and commerce has a lot of negative—at least I think—a lot of negative ramifications attached to it. You sort of have to weigh and balance all of these things. And maybe part of the answer is to do now what seems in my judgment must, or certainly should be done—close to must be done now.
Mr. FRANK. I am reminded of what President Kennedy said about Thomas Jefferson. Maybe we should say that ''The issue of whether or not banks should be allowed to get into commerce has never been as well and fully debated on both sides, as when the Secretary of the Treasury testified alone.''
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Thank you, Mr. Chairman.
Secretary RUBIN. I could arguably advocate both sides if you would like.
Chairman LEACH. Thank you, Mr. Frank.
Mr. Bereuter.
Mr. BEREUTER. Thank you, Mr. Chairman.
Secretary Rubin, Secretary Hawke, thank you for your testimony.
Mr. Secretary, when you were testifying before this committee on March 1, 1995, in your written testimony you stated, ''Bank supervisors in the U.S. have not had sufficient experience with the types of risks that accompany banking and commerce. A regulatory means to detect and prevent abuses would be very difficult to implement and would surely require substantial increases in the size of the examination forces. Prudence suggests that we look much more closely before permitting affiliation of banking and commerce.'' That is the end of your quote.
A couple of questions then.
One, have bank supervisors gained any substantial and significant experience in order to accommodate the risks associated with mixing banking and commerce? Second, would you suggest that there would be a need to increase the size of the examination force to accompany the new risk? And if so, by how much?
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Secretary RUBIN. You know, if you took the kind of structure that we had—let me stipulate, as Mr. Frank said, nothing that I said should be interpreted as a view one way or the other on anything in this area—but if you took the kind of structure that we are presenting, where as you know in our Option A, a bank could not engage in a loan transaction, for example, with a nonfinancial affiliate, so you really have cut off that avenue for conflict of interest, or misallocation of credit. I think if you wall in banks in the way that we are suggesting, you could probably deal with the safety and soundness issues that are involved in commerce. I don't think that is where my principal objections or concerns would lie in full banking and commerce.
I think the basket approach is a totally different concept. I am not addressing that. But you are talking about full banking and commerce. I think the issues go more to things like concentration of power, political and economic, and the various ways that that might be exercised.
Mr. BEREUTER. Mr. Secretary, you talked about the risks associated with the mixture of banking and commerce, not about the sociological——
Secretary RUBIN. You mean in my remarks then?
Mr. BEREUTER. Yes.
Secretary RUBIN. I know, but we spent 2 years working on this proposal. We are not advocating full banking and commerce, so I will stick to the fact that I have a lot of concerns about it. But that particular concern which I discussed at that time, I think, with proper walling in, you probably could handle. But I don't have to address that since we are not advocating that.
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Mr. BEREUTER. I understand.
Secretary RUBIN. But I do want to make a very important point. I do think this notion of a basket is a different concept than the full banking and commerce that I was talking about in 1995.
Mr. BEREUTER. Mr. Secretary, in Section 334 of your new bill, it would change the composition of the FDIC board to three members since the Office of Thrift Supervision would be abolished. In addition, while you provide for a Chairperson, Vice Chairperson and the Comptroller of the Currency to serve as the three members, your bill also has a provision that designates the Comptroller of the Currency as acting Chairman in the event the sitting Chairman departs.
I realize that was the practice before 1989; however, at that time the law didn't provide for a Vice Chairman. Wouldn't it be more sensible, especially in terms of the independence of the insurance agency, the FDIC, that the Vice Chairman would serve as the acting Chairman if that was necessary, especially since one of the lessons we have learned from the savings and loan crisis hopefully is the notion of having an independent insurer?
And also, in reducing it from five to three, you prevent two people from having a conversation under the Sunshine Law. They cannot converse about anything because they constitute the majority of the board under the Sunshine Law. But if you had a five-member board, two people can conduct conversations about relevant issues and it doesn't move them into a violation of the Sunshine Law because they do not, as two people of a five-member board, constitute a majority.
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Mr. HAWKE. Mr. Bereuter, if I may, the board of the FDIC was expanded to five members when the OTS was created, when the OTS was added to the board, and then a fifth member was added to create an odd number. We propose to put it back where it was because OTS is going to be eliminated. And I believe that the preexisting practice was that the OCC, the Comptroller of the Currency, who was a statutory member, was the acting Chairman in the event that the Office of the Chairman was vacant.
Mr. BEREUTER. I am told that is not the case today; of course, you understand, we have a Vice Chairman.
Mr. HAWKE. Today it is different with a five-person board. But previously, the configuration of the board was different.
With respect to the Sunshine Act, there are a number of three-person agencies that have that problem, and I think that is a consequence of the way the Sunshine Act works rather than the FDIC board. If Congress saw fit to change the Sunshine Act or provide some accommodation there for three-person agencies, that would address that concern. But we think that keeping the FDIC board at five members simply for the purpose of avoiding restrictions under the Sunshine Act is sort of the tail wagging the dog.
Mr. BEREUTER. Secretary Hawke, the Sunshine Act has a purpose, and the Congress should not set it aside simply to provide some convenient reduction from five to three members. But your regulators or people who serve on the boards will have some kind of functions that relate to banking and commerce, and they undoubtedly will have to talk to each other about a whole variety of things. But any time you do that in the future under your structure you are violating the Sunshine Act.
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Mr. HAWKE. Mr. Bereuter, we are not recommending that the Sunshine Act be changed; I am simply making the point that the Sunshine Act applies to all three-member agencies that exist today and there are a number of them in Government. So this is a common problem that any three-person agency has.
Mr. BEREUTER. I understand. And I am giving you a way of avoiding violating the law and still keeping the Sunshine Act in effect by leaving the membership at five members.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Bereuter.
Mr. Kanjorski.
Mr. KANJORSKI. Thank you, Mr. Chairman.
Mr. Secretary, Mr. Hawke, welcome. With your proposal, I sort of feel like we are in a tennis game, and let's serve; and somebody dropped the ball in our court, and let's see if we can get back to the net in time to hit it back across. It seems to me that the Administration is avoiding taking a very strong position, particularly on the mixing of commerce and banking.
If you do that, just what will you accept from the Congress? If we shave many of these elements out of your proposed legislation, are you still going to accept the legislation and support it?
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Secretary RUBIN. Well, what we have done, as I mentioned, is that we have presented our views as to how every issue in this legislation be resolved except for the banking and commerce issue. There, we presented two possibilities; obviously we would accept either of the possibilities we presented or we would not have presented them.
Mr. KANJORSKI. The Wholesale Financial Institutions, I can't see why that can't be carried on today, that activity. Why is it so important that they have access to the payment system?
Secretary RUBIN. For the WFIs?
Mr. KANJORSKI. Yes.
Secretary RUBIN. Our view was that it will provide additional competition in the financial system. They won't be able to take retail deposits. We set $100,000 as the limit. You can make that some other if you want, but our view was that $100,000 was enough to prevent retail deposits.
It is not allowed to take insured deposits, so in many ways it is like a GE Credit or something like that. Are you asking why we gave it access to the window?
Mr. KANJORSKI. Yes, it seems that it would be quite a benefit for private investment money to have. It is an exchange of benefits to——
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Secretary RUBIN. Actually, we talked about that yesterday. I don't think that is an enormous benefit, except in crisis situations. You should be able to discount those types of assets someplace else, although not as readily. You would have to have lines set up.
You are creating new kinds of financial institutions. You are not subjecting the taxpayer to risk because you don't have deposit insurance and you will get increased competition. So I think, on balance, it is positive to consumers, businesses and the like, users of financial services.
Mr. KANJORSKI. What if you allowed commercial companies access to the window?
Secretary RUBIN. Well, the commercial companies don't get access to the window, only the WFIs.
Mr. KANJORSKI. I understand that, but if you did, it would increase competition and it would be an interesting thing, wouldn't you say?
Secretary RUBIN. Except this is a bank and so it would be subject to——
Mr. KANJORSKI. But it is a bank because you define it as a bank. It is something that you could operate now.
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Secretary RUBIN. It is chartered and regulated as a bank.
Mr. KANJORSKI. Of what benefit is that to Government to be worried about having it chartered and regulated if it can function now as limited partners? Why not let it function and be in the real competitive marketplace? Why do we want to give it access to the discount window and why do we want to give it more powers, when it can do anything it wants to do now?
Secretary RUBIN. Well, because, at least in my view, what you are doing is establishing something that does not exist now; and when you establish a new institution, you more effectively intermediate between suppliers and issuers of credit.
Mr. KANJORSKI. The only reason we are regulating is to protect those unsophisticated $100,000 investors.
Secretary RUBIN. Well, you are regulated for three reasons at least. One is to protect them. Number two, if a financial institution goes under, it has other kinds of ripple effects. You don't want that to happen. And then I suppose in a way, you do it since they have access to the payment system, you do it for that reason.
Mr. KANJORSKI. Well then, if you do not give them access to the payment system, there are no risks. There is no reason to regulate. But if we don't give them access, there is no reason to regulate and let them go on and do what they want.
Secretary RUBIN. We are clearly creating a new institution with certain privileges, ''access to the window'' as you correctly say. On the other hand, we are preventing what I think is the risk to the taxpayer, which is the deposit insurance. And I think what you will wind up with is an intermediary that can function in some ways unlike any intermediary that we have now, and that is a benefit to the users of financial services.
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Mr. KANJORSKI. I understand it is an accommodation. I am merely saying we put that accommodation in the bill.
The question I really wanted to get to is, what accommodation have we put in for small institutions? What accommodation have we put in for average people? I do not see that this bill is going to do anything more for small business or small banking institutions in this country.
Secretary RUBIN. Oh, I think the small banks may actually turn out to be the prime beneficiaries of this legislation if it goes through. The big institutions, with very large customers and sophisticated products, cross these lines in all kinds of ways, although they will be able to do so more effectively with this legislation, instead of in the ad hoc way they do today. But if you have a small community bank, that small community bank now will be able to become—if it is creative—a one-stop shopping center, and offer insurance, mutual funds, brokerage.
I think it actually may be the saving grace for a lot of small banks and, by the way, provide a level of service to the residents of these small communities that they would not otherwise have.
Mr. KANJORSKI. I see my time has expired, Mr. Chairman.
Secretary RUBIN. I think, by the way, just along the same lines, one of the reasons that we felt it was very important to preserve the op sub, given that we think the protections are the same for the system with respect to op subs and affiliates, is that I think we will find for many small banks it is more efficient for them to operate through the op sub rather than through the affiliate structure.
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Chairman LEACH. Thank you, Mr. Kanjorski.
Mr. Baker.
Mr. BAKER. Mr. Secretary, it is my understanding that under Section 4(c)(13) of the Bank Holding Company Act today, a domestic bank holding company can hold up to 40 percent position in a foreign corporation with no more than 20 percent voting shares. The restriction on the domestic side with the same set of facts with a domestic corporation is dramatically different. Is there some evidence that shows that allowing a domestic bank to hold up to 40 percent interest in a foreign corporation is a somehow safer public policy than allowing it to occur in the United States?
Mr. HAWKE. I think there is a fundamental difference in our banking laws between the way domestic activities and foreign activities are treated. And that is something of an anomaly. U.S. banking organizations are allowed to do things offshore that they cannot do at home.
Mr. BAKER. With regard to a similar observation about the Fed rules on owning a 24.9 percent equity position with no more than 5 percent voting, it has been in some publication I read that it is under consideration, that might be bumped up to 40 percent or some other higher number at some future point.
In exploring what you might oppose, rather than what you might be for, would you find it objectionable if there were, rather than a gross revenue basket approach, some equity limit placed on ownership by a bank of a domestic corporation? What I have understood from you and the Fed and the others is that the principal limit that we should be concerned about in a new banking and commerce world is the question of control of that new entity you might be investing in. If you don't have financial or managerial control, does that open an opportunity for a more progressive alliance between commerce and finance?
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Secretary RUBIN. Mr. Baker, let me take a shot at that and then let Jerry Hawke answer.
I think that if you are going to talk about something less than full commerce and banking, my own view, for whatever it is worth, is that the basket approach we have taken deals with the issues of undue concentration, whether political or economic.
Mr. BAKER. That is because you exclude the top 1,000 corporations?
Secretary RUBIN. Yes.
Mr. BAKER. Setting that aside for a moment——
Secretary RUBIN. I think it is partly that, and I don't know what percentage you all would conclude to pick, but if you pick a higher threshold to define financial activity——
Mr. BAKER. Is that measurement something you do daily at the close of business? Or is that a quarterly test? Is it an annual test?
Let's go back to the qualified test for thrifts in the last decade. Everybody would game their books in the last week to get on board, so they would be a qualified lender and go back to whatever they were doing.
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Secretary RUBIN. You have to deal with a lot of technical issues to make sure it functions effectively.
But on your question, I guess my view would be that the same thing, through percentage of ownership——
Mr. BAKER. It is a cleaner measure, as opposed to gross revenue monitoring approach?
Secretary RUBIN. Well, you say it is a cleaner measure, but I think it is susceptible—we have to think this through—but I think it can create the kinds of problems that we think we have avoided with this basket suggestion.
Mr. BAKER. Is there experience to show that the Fed's rule on the 24.9 percent equity has been a problem?
Mr. HAWKE. If I may, Mr. Baker, the statutory definition of control that the Fed administers is a 25 percent break, but what constitutes control is a very elusive concept, and the Fed actually has presumptions that for all practical purposes establish a 10 percent threshold for control. So there isn't much experience in determining whether that 25 percent leeway presents problems or not the way it has been administered.
But I think there are two different concepts here, control on the one hand and engaging in an activity on the other hand. But the basket test would allow a financial firm that wants to engage in a nonfinancial activity that has some synergy or some relationship to a financial activity to do that. A definition that put a limitation on the amount that could be owned, I think would be somewhat inconsistent with that approach.
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Mr. BAKER. Oh, it is clearly a different approach, but my point is that a gross revenue or asset test, as someone suggested earlier in this process, offers and affords no more guarantee of independent judgment than would an equity position. And I am simply saying there are adequate models in the marketplace to demonstrate that it has worked effectively; and allowing a domestic bank to own 40 percent of a foreign corporation in spite of the rules seems to me to run counter to what ought to be available to a domestic bank and a domestic corporation here.
Secretary RUBIN. In the basket suggestion, if one were to go that route, we combine the basket suggestion with a prohibition between transactions with affiliates, which would be another protection for independence.
Chairman LEACH. Mrs. Waters.
Ms. WATERS. Thank you, Mr. Chairman. I would like to thank Mr. Rubin for coming over this morning to further engage us in discussion about their proposal for modernization.
I would like to commend to your attention the Consumers Union report on the Treasury proposal, and I think it basically captures my very, very strong feelings and concerns about financial modernization. Consumers Union supports financial modernization if it promotes competition, provides a regulatory structure that ensures safety and soundness, and protects consumers as they attempt to understand and navigate in an increasingly complicated marketplace.
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Consumers Union does not believe the Treasury proposal will do this, that it falls short. And I will not go through the entire report, but I do want to bring a couple of items to your attention.
Some of us have been involved—we are trying to get a handle on the increasing profits that are made from fees that are imposed by financial institutions, by banks in general. Banks imposed at least 100 separate fees on their deposit accounts. The size of the fees has increased dramatically. Deposit fees have been rising at better than twice the rate of inflation, jumping more than 50 percent since 1990.
We believe that with this modernization that fees will continue to increase, there will be more imposed. And we see no safeguards, and you propose nothing in your bill to deal with that. We believe that there are needed consumer protections that will include disclosure, privacy and anticoercion rules that apply to bank sales of insurance and investment products that prevent confusion about whether the products are Federally-insured and consumers must have an enforcement mechanism that enables them to recover directly from financial institutions that violate the consumer protection rules.
Having said that relating to the fees and these kinds of protections, again I also add to that State consumer protection laws that should apply to bank activities and not be preempted.
What do you think about taking a look at your proposal to try and guarantee more consumer protections and what do you think about the continued efforts that we have had to try and get something done in some of these areas? And we have not had a lot of support to do it. Don't you think now—when everyone is sitting poised to make more money and to have more access to market, don't you think now is a good time to get them to do a few of these things?
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Secretary RUBIN. Well, let me try to address, if I may, the specifics because I haven't seen the Consumers Union report, but I think their objectives are the right objectives. I actually think our proposal does satisfy those objectives.
On the question you raised, Congresswoman Waters, with respect to the increased fees, that is precisely the kind of an issue, it seems to me, our proposal does address, because we are advocating increased competition, and I think the best answer to increased fees is increased competition.
With respect—maybe the prime example I would point to is the effort that the securities industry made in the late 1960's and 1970's—and I was very much a part of it at the time—to protect fixed commissions because it was in our interest. And soon as you had negotiated commissions, commissions came way down. I think here too, increased competition will tend to militate in that direction.
On the question of consumer protection, we do require in our legislation very clear, readily understandable notice with respect to whether a product is covered by deposit insurance or not. So I think we have a good provision in that respect.
On privacy, we provide the right for a consumer to prohibit the bank from sharing his private information with the affiliate that is engaged in other financial activity.
So I think we have gone a long way in those areas.
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Ms. WATERS. Mr. Chairman, let me say that I would like you to take a look at the Consumers Union report. I think it is a very good report. It is in-depth, and I think it addresses the concerns of many Members of the Congressional Black Caucus; and we would like to have you answer these directly because, without that, it is going to be very difficult to simply just sign off on this kind of proposal for modernization without trying to get some of the consumer protections that we have been fighting so hard for. If we can't get them now, we will never be able to get them.
Secretary RUBIN. We will definitely look at that report and give you a response to it. I have not been aware of it, and we need to do it anyway. They are a very well-respected organization.
Ms. WATERS. Thank you.
Chairman LEACH. Mr. Castle.
Mr. CASTLE. Thank you, Mr. Chairman.
And thank you, Mr. Secretary and Mr. Hawke. I appreciate what you have done, and I think you are in good faith here. And on good days, I am home in Wilmington, and I get up and go down to the train station, and I get on the train; and I read my Wilmington News Journal paper, and then I read The Washington Post and sometimes, by the time I get to Baltimore, I don't know if I should have jumped in front of the train, instead of getting on it, because of all the news that is there.
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We have been working on financial modernization for a long time. It is sort of a life's career for some of us here. I had hopes when your report came out that we would get this moving forward. The Chairman stated earlier today he is increasingly optimistic. I wouldn't quite go in that category. I am for the modernization.
And then The Washington Post says that hopes for reform of the bank laws fade. And then it says that Mr. Hawke is upbeat about this, feels it should be done. Then it says it remains unclear, however, how committed Secretary Rubin is to rewriting the banking laws according to Administration and industry sources.
Secretary RUBIN. Mr. Hawke said that?
Mr. CASTLE. I did not say Mr. Hawke said that. I don't want to get him in trouble.
Mr. FRANK. Yes, but not for attribution.
Mr. CASTLE. Can you reassure me that we are going to have a full-court press here? We are about to go into additional markups and time and running over for votes and late nights, and I don't want to waste my time. I want to get this done, and I assume that you do; and I hope that this report is somehow fallacious.
Secretary RUBIN. I also saw that article, as a matter of fact.
I can assure you, I think it is a very important thing to do and the time has come to do it. What may have been appropriate a long time ago is no longer appropriate in terms of restrictions, and I am fully committed to doing everything we can to work with you all to get this done.
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Mr. CASTLE. I do appreciate that. I think it is important that we stay together on this. This is not going to get done if it isn't Republicans, Democrats, House, Senate, White House, like a lot of other important legislation here.
With respect to savings to consumers that you spoke about, you spoke about 1 percent or 3 percent, I worry about who the consumer is, maybe somewhat along the lines of what Ms. Waters has said before. I mean, clearly when brokerage firms started breaking down fees, those who had investments started to save some money. But I do look at such things as automatic tellers, which are now imposing greater fees, and banking fees.
Is there a group of people who are not going to benefit from this at all, but with the increased competition and the desire for the greater dollar or whatever, that they are going to devise ways of—I don't want to say ''gouging,'' but of assessing fees on a small basis? Will we truly have savings?
I can imagine some of the ways we might have savings, but I would like a little more articulated reassurance in that area.
Secretary RUBIN. It may be something that we haven't thought of, but it seems to me—and maybe we have missed something—that when you introduce new competition into an area, I can see that it may apply unevenly so that some people may benefit more than others. But it is hard for me to see where anybody would be disadvantaged.
On the ATM issue, for example, I would think that the more competition and more competitive pressures you have, the more alternative ways people are going to be offered to do the same kind of things you do at an ATM, and the more chance you have of getting those fees back down, I would guess.
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Mr. CASTLE. I just worry about these things. I watched Jerry Ford give a speech on television last night. There wasn't any hockey or basketball on, so I watched President Ford give a speech. And he remembered when the CIA used to come in and say that Russia was going to overwhelm us economically and militarily, and of course none of that came to light at all.
One of my goals here would be to produce savings for consumers in the long run, or at least not harm consumers, so that worries me.
And let me ask you about WFIs, which frankly are somewhat new to me. It looks to me as if they could take over the world. Was this created out of whole cloth, or is this something that has been carefully crafted? I imagine there is going to be some tremendous opposition once people figure out the competition of it. To me, it sounds sort of good on its face, but——
Secretary RUBIN. Mr. Castle, I guess we had a discussion about it a few moments ago with Mr. Kanjorski, but I believe it was in the Chairman's bill last year, wasn't it?
Chairman LEACH. A very limited WFI, yes.
Mr. CASTLE. Now we have an expanded WFI. I was curious about that.
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Secretary RUBIN. Well, we have taken a good idea and carried it to its logical conclusion. I explained my view at least a few moments ago in response to Mr. Kanjorski.
Mr. CASTLE. I heard that.
Mr. HAWKE. The proposal for the WFI is consistent with the overall objective to reduce barriers to competition. The WFI addresses barriers to competition in the wholesale areas. We have financial institutions that don't presently have the ability to access Federal Reserve services. The WFI is a medium by which they can do that—fully regulated, strong capital requirements, no Federal deposit insurance—but it is consistent with the approach to removing barriers to competition in all segments of the financial services industry.
Mr. CASTLE. Maybe the fault is mine in that I don't comprehend wholesale banking. Most of the concepts here, I can understand what is happening. But that almost seems to be something a little new and different, and maybe I am not alone on the committee. It may take a little bit of coaching to make sure that we understand that and are comfortable with it. I am not opposed to it; I don't simply know a lot about it at this time.
And at this time, Mr. Chairman, I reluctantly yield back the balance of my time.
Secretary RUBIN. There is a whole industry, as you know, of wholesale financial institutions—GE Credit, for example—very large numbers of institutions that are wholesale financial institutions.
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Mr. CASTLE. I understand that, but I think that the details and the grasp of that is certainly more limited in my case, and I may be speaking for others when I say that.
Chairman LEACH. Thank you.
Mr. Watt.
Mr. WATT. Thank you, Mr. Chairman. I actually have a number of questions, but I think I will restrict myself to a series of questions about the Community Reinvestment Act, because it seemed to me that in going through the Chairman's bill and in a review of the Administration's bill, there seems to be a lot of lip service being given to the Community Reinvestment Act and safeguarding and not weakening it, but the more I looked at this, the more it seemed to me that how this modernization gets done could have dramatic impacts on community reinvestment.
Whether you do something in a subsidiary, or move that activity to a holding company, or put it off, could have some pretty dramatic consequences for the amount of assets that are really available and subject to the provisions of the Community Reinvestment Act. And so let me just ask a couple of questions about that.
On page 3 of your testimony, Secretary Rubin, you talk about conditions, the affiliation, and you talk about a requirement that banks would have to be well-capitalized and well-managed; and two paragraphs down, about the middle of the page, you do say ''This proposal comes with an absolute commitment to safeguard communities, the Administration will not accept any weakening of the Community Reinvestment Act in any legislation.''
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I don't see anything in the bill, either your bill or the Chairman's bill, that really does anything other than say that. Where is the beef?, so to speak? Where is language accomplishing what we are giving lip service to?
Secretary RUBIN. Let me first speak to the intent. You may remember a year ago, or 2 years ago—I have forgotten which it was—there was a serious effort to eviscerate CRA, as you may remember, and the President issued a statement to the effect that he would veto such a legislation. So I don't think there is any question——
Mr. WATT. I am not questioning the President's long-term commitment to preserve CRA. I am talking about the actual implications of this legislation, the practical implications of it on CRA.
Secretary RUBIN. I was just trying to address the intent issue, since you referred to the lip service.
Mr. WATT. I didn't mean that in a pejorative sense.
Secretary RUBIN. What we do in our bill is, we preserve CRA with respect to existing banks and then in setting up the wholesale financial institutions—although you could make an argument, if you wanted to, that since they don't have deposit insurance, they should not be subject to CRA.
Our view was that banks, or some very large banks today actually, could become WFIs relatively easily since they were largely wholesale in nature, and that would get them out from under CRA; and so we made the WFI subject to CRA to avoid——
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Mr. WATT. How do you do that, though? That was actually my next question. I wanted to address it on the holding company concept first, because where you put things in a holding company—whether they are subsidiaries, whether they are up above the bank, outside the bank—there are substantial implications for the amount of assets that are available to be applied to CRA. So that is the first question.
But the second question, and you got to it before I asked it, is how do you apply CRA to WFIs? I mean, because there needs to be something other than just a statement that we are going to protect CRA. There is no mechanism, it seems to me for doing that in this bill.
Secretary RUBIN. You know, you basically have got the application today of CRA to a number of the large money center banks that are, for practical purposes, wholesale banks. There is no such thing as WFIs, so they haven't taken that form, but they basically function as wholesale banks and they are subject to CRA.
Now, how they actually implement that——
Mr. HAWKE. Well, the regulations and the guidelines for CRA have standards for a wholesale institution's participation in CRA. So major money center banks that are essentially wholesale banks have CRA obligations that are enforceable just in the same way that retail banks' obligations are enforceable.
Secretary RUBIN. Rick Carnell, our Assistant Secretary, gave us a note saying that the regulators have rules with respect to dealing with wholesale oriented banks because, as you say, they do create a different set of issues. I am not personally familiar with those rules. We certainly could get back to you on that if you would like.
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Mr. WATT. That would be very helpful.
Secretary RUBIN. You are right to identify the issue. And as I say, the note is that there are rules that deal with these kinds of wholesale banks, but we will respond to you if we may.
Mr. WATT. Thank you, Mr. Chairman.
I hope the Chairman heard my concerns about his bill on this point, too. Some of the provisions in his bill leave me very uneasy about this too.
Chairman LEACH. Well, let me say to the gentleman, there are two distinctions between the Administration's approach and the bill that I have introduced. One is the Administration approach applies CRA to WFIs; our bill does not. But I have repeatedly said in this hearing that I would accept that direction and would want CRA applied to WFIs.
The second distinction is that the bill that I have introduced prescribes that 80 percent of depository institution assets in a holding company must have at least a satisfactory CRA rating. The Administration doesn't address that issue, but I think that should be helpful for the gentleman.
Mr. WATT. That is certainly a step in the right direction.
I saw the 80 percent. I couldn't figure out why it was 80 percent as opposed to 100 percent. Why would we say on the one side that we are making a major commitment to CRA and preserving CRA, and then not make that an absolute requirement for affiliation? That was the question I was asking Mr. Rubin.
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Chairman LEACH. Let me respond now.
Mr. WATT. But we will get to that in the markup. I don't want to get off——
Chairman LEACH. I think you deserve an explanation.
The 80 percent figure is derived from an amendment a year ago in markup. It also relates to the fact that some activities that are contemplated do not come under CRA today. And so, for example, you have certain securities activities that are not covered by CRA in securities operations; they would not be expected to be covered in CRA if they are operated by a bank. That is the reason for the 80 percent.
Mr. WATT. This is financial modernization, I thought, and one of the purposes was to deliver more services to the community. That is what I thought you all were talking about here.
Chairman LEACH. The gentleman is perfectly able to offer an amendment in that direction.
Mr. Vento.
Mr. VENTO. I think, Mr. Chairman, it outlines clearly with regard to the amendment that Treasury does not have a position with regard to affiliates, the holding companies, which, of course, would be its protection.
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Chairman LEACH. I certainly appreciate that. Thank you.
Mr. Campbell.
Mr. CAMPBELL. Thank you, Mr. Chairman.
I have two inquiries of Secretary Rubin and Secretary Hawke. I would like to state them both at the start, then take your time and respond.
The first deals with testimony from Paul Volcker and Alan Greenspan with which I suspect you are familiar. The burden of their argument on the commercial issue was that any insurance implies moral hazard, and they were worried about the potential of expanding moral hazard as insured deposits might be at risk with the commercial activity.
It seems to me the logic of that position is equally strong, that is to say, the moral hazard argument, which goes along whenever there is insurance, whether you are speaking of commercial or financial or insurance itself. So, I invite your addressing directly—because, to be candid, Paul Volcker's advice, Alan Greenspan's advice, that is hard to go against. And Paul Volcker particularly was very strong here in saying ''don't expand,'' or ''be very careful if you expand, because of the moral hazard.''
And the second—that is my first—and the second inquiry is simply this: On the confusion to a depositor—you remember, I am sure, with pain, as do all of us, the Lincoln Savings and some of the depositors who thought that they were buying an insured instrument. They walked across the lobby, and they thought the eagle on the door meant that what you bought across the lobby was insured as much as what they used to have in their deposits. And that would, to me, be a risk of any affiliation outside of strict: ''I will take your deposit and I will invest it.''
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Those are my two areas of inquiry.
Secretary RUBIN. Let me respond to the second one first, if I may.
We also are worried about the problem that you have asked about; and our legislation would require that there be clear, readily understandable, boldfaced disclosure for products that are not covered by deposit insurance. The seller would have to say ''This product is not covered by deposit insurance'', or something of that sort, so it was clear to consumers what they were getting.
On your first question, I think that your point is right; and I think the answer is that what you need is a structure—and I believe we have a structure—in which you don't have moral hazard for your financial affiliations. I think you are right. I think they are analogous. You wouldn't have them for your commercial affiliation. So I think that is correct, and I think that our structure did not create the risk of moral hazard.
Mr. CAMPBELL. Could you be direct, then, maybe more specifically, to what Mr. Volcker said? I tend to think you are right. There is moral hazard both ways.
Secretary RUBIN. Or not moral hazard both ways.
Mr. CAMPBELL. Or not moral hazard both ways.
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Secretary RUBIN. Right.
Mr. CAMPBELL. And I assume you take the latter view.
Secretary RUBIN. Correct.
Mr. CAMPBELL. So why is Mr. Volcker wrong and Mr. Greenspan possibly wrong, because he was a touch less strong on this, that moral hazard is a serious concern here?
Secretary RUBIN. I don't know. I discussed this issue many times with Mr. Greenspan. I haven't heard him raise a moral hazard issue. Maybe you did in testimony before you, but I have not heard him raise that question.
Mr. CAMPBELL. Well, Mr. Volcker surely did; and on that we can agree.
Secretary RUBIN. I can't tell you why he did, although you heard his testimony, so he must have explained why he did.
But the essence of moral hazard is a situation where people feel they are not at risk in some ways, engaging in their activity. And I don't see why there would be any part of this structure that would give rise to the moral hazard issue.
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Mr. CAMPBELL. If he were here——
Secretary RUBIN. Consider, for example, if you had an affiliate—whether it be financial or nonfinancial, because I think your point is a valid one—and the bank invests in it, then that investment comes completely out of their capital. If the affiliate goes under, the bank loses 100 percent of its investment, or whatever percentage that is; and it doesn't seem to me the moral hazard issue is involved.
Jerry, do you have a different view?
Mr. HAWKE. Chairman Volcker and Chairman Greenspan, of course, didn't have the benefit of our fully fleshed-out proposal. But, under our proposal, we would require the maintenance of very high capital levels in the bank; we would require a holding company to provide an undertaking that it would maintain the bank's capital at the highest level of regulatory capital; and that would be very rigorously enforceable by the regulators.
If a bank—as Secretary Rubin just pointed out—if a bank invested in a subsidiary, the bank would have to subtract the amount of that investment from its capital and still meet the highest level of regulatory capital.
We also have provisions that would prevent a court from disregarding the corporate separateness of subsidiaries or affiliates and charging banks with liabilities that they otherwise wouldn't be charged for, under the piercing of the corporate veil doctrine.
So we think we have a number of very strong protections in the bill for the bank that really address the moral hazard issue.
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Mr. CAMPBELL. Thank you, Mr. Chairman. My time is up.
Chairman LEACH. Well, thank you, Mr. Campbell.
I would like to break a little bit of precedent and turn to Mr. LaFalce, who has been so active in this legislation, who had a 5:30 flight this morning canceled, so I don't want to hold it against him, in that he is tardy in getting here.
Mr. LaFalce.
Mr. LAFALCE. I thank the Chairman very, very much.
When you get up at 5:30 in order to hear the testimony of the Secretary of Treasury and your flight is canceled at the airport, it causes a concern.
Secretary RUBIN. We will send you a tape, Mr. LaFalce.
Mr. LAFALCE. OK. I will listen to it tonight at about 11 p.m.
Secretary Rubin, we are very, very glad that Treasury finally submitted their proposal. We were a little concerned on the time it took to reach your recommendations. I think, though, that might have been due in part to the differing soundings you were hearing within our committee and within the Senate and Banking Committee hearings; and I think, too, the different soundings you were hearing may have contributed to the options approach that you took.
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So to a certain extent, I think—it is my judgment, the options approach you took is a reflection of the political uncertainties. If that is not true, dispel that. But if it is true, then assume that we were interested in an academic——
Secretary RUBIN. Let me dispel that, if I may, Mr. LaFalce.
I mean, there are enormous political uncertainties. That is correct. But as we got into this more and more, in addition to having differing views within Treasury, I think it would be—well, I will give you my view.
My view is that you really did—at the heart of this debate, there are economic issues; but I think—as I said in my opening remarks, I think there are issues about political concentration, about the effects of concentration of power and issues I think of as more cultural and social, the effects on small communities and matters of that sort, that seem to me that Treasury really didn't have any value to add on and that really were peculiarly well suited to resolution or particularly appropriate for resolution in Congress.
I think that was the primary driving force. That has been simply political. And if we had a strong view on the economics I think we would have presented you with a single recommendation as opposed to these two possibilities.
Mr. LAFALCE. One of the difficulties that we confront is what to do with the thrift charter that presently exists, particularly the present unitary thrift charter.
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Now a good many individuals believe they have seen the future, they have seen progressive legislation, and it is, in essence, the unitary thrift charter, perhaps with some modifications. Now under one of your approaches I believe you would grandfather the unitary thrift charter, is that correct?
Secretary RUBIN. Yes, we would grandfather the charter; and then, if there was a change of control—you are talking about under our basket approach?
Mr. LAFALCE. Yes.
Secretary RUBIN. And then if there was a change of control, it would go into the basket approach mode.
Mr. LAFALCE. OK. Now would the grandfathering permit as much growth as an expansion, as is——
Secretary RUBIN. As long as it is controlled in change, it could do whatever it is doing now.
Mr. HAWKE. It wouldn't permit expansion in the banking business. A grandfathered company could continue to expand its nonfinancial activities, but it would lose its grandfather rights if there were a change of control or if they wanted to acquire an existing financial institution. So they really have to make the choice of which ballpark they want to play in.
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Mr. LAFALCE. And if they had an existing financial institution now?
Mr. HAWKE. It would be grandfathered. If they wanted to acquire additional financial institutions, they would have to come within the basket.
Mr. LAFALCE. Now let's take the other approach. If we were to take the other approach, you would merge the charters, is that correct?
Secretary RUBIN. In the other approach, which is the non-basket approach, we would keep S&Ls, the thrifts exactly as they are today. We would recommend merging the funds, but we would leave the thrifts the way they are today. So we would not be merging the charters.
Mr. LAFALCE. And you would leave the unitary thrift charter?
Secretary RUBIN. Yes. Because, otherwise, in the alternative—well, the answer is yes. In the alternative, you will have to roll it all the way back to the bank without the basket, so we would leave it where it is.
Mr. LAFALCE. OK. I thank the Chair.
Chairman LEACH. Thank you, Mr. LaFalce.
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The gentleman from California, Mr. Royce.
Mr. ROYCE. Thank you, Mr. Chairman.
And for Secretary Rubin, just two questions. Your proposal is inconclusive with respect to an approach for banking and commerce as well as the issue of the thrift charter conversion. While you made it clear that you feel Congress should make this determination, your thoughts on this debate would be helpful. And my question is, do you feel that we are compelled to address the thrift charter conversion issue sooner, rather than later? And, second, what benefits and risks do you feel should be considered concerning banking and commerce?
Secretary RUBIN. Well, on the thrift charter conversion issue, our view was that if you decide not to go the basket route, which is to maintain the current situation with respect to banking and commerce, then our view, at least, as I said—I guess Jerry Hawke and I both said a moment ago—is you should leave the thrifts in their current situation. So I guess my answer to that question would be that we don't feel that should be addressed at this time, although we did recommend that the funds, SAIF and BIF, be merged.
And on the question of full banking and commerce and what are all the competing considerations, you are talking about full banking and commerce now, not the basket, right? Because the basket, in our judgment, is a very different concept. You are talking about full banking and commerce.
Mr. ROYCE. Full banking and commerce.
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Secretary RUBIN. I think that is a very different matter. I think one set of issues are all the issues you get to when you look at the universal banks in Germany and—well, in Europe, basically, and in Japan—and I think they raise a lot of questions about centralization of economic power, centralization of political power, possible conflicts of interest, although to some extent, you may be able to address those. But having the kind of prohibition we have in our basket approach which, as you may remember, doesn't allow transactions with nonfinancial affiliates, so you have, at the very least, those sets of issues.
Mr. ROYCE. And the benefits?
Secretary RUBIN. I think the benefits probably lie primarily in the area that Mr. Frank raised before, which is that it is getting harder and harder to distinguish between financial activities and certain nonfinancial activities in the whole area of information technology, electronic transfer of payment and matters of that sort, and that will become, at least in my judgment, increasingly so as time goes on. So you have the question of where do you draw the lines.
And, you are probably losing some benefits, I suppose, synergistic benefits that would come from allowing those kinds of combinations. I don't know. You may be able to recapture a lot of that synergy by commercial arrangements short of banking and commerce, but I am not sure about that.
Mr. HAWKE. I think it is important to point out, too, that the basket approach allows everybody to be regulated under a common set of guidelines. The objective is not to create new opportunities for banking organizations to go out and engage in nonfinancial activities, but to provide a framework for breaking down the barriers to competition and having a common set of ground rules that apply with a two-way street approach to the ownership of banks.
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Mr. ROYCE. Thank you, Secretary Rubin. Thank you, Mr. Hawke.
Chairman LEACH. Thank you, Mr. Royce.
I believe it is Mr. Bentsen.
Mr. BENTSEN. Thank you, Mr. Chairman.
Mr. Secretary, let me ask some questions other than the banking and commerce issue, but in terms of what is in the bank and what is out of the bank.
I think your proposal is well thought out. You have taken a lot of what others have talked about. I appreciate the fact you have included the operating subsidiary structure, which I think probably makes sense. But, I have some questions about the treatment of security sales, as it appears you put municipal revenue bond underwriting in the bank and you put it all the way in the bank beyond the operating subsidiary structure.
So it is a brand new treatment. It is a new bank-eligible security, in effect. You would exempt banks in this category and other categories for underwriting bank-eligible securities from the net capital requirements under the SEC rules.
Mr. HAWKE. Provided they are well-capitalized?
Mr. BENTSEN. Provided they are well-capitalized.
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Do you think that might give some advantage to some banks over their non-bank competitors who have to follow the net capital requirement in their underwriting capacity and, in addition, as to how securities firms determine their capital versus how banks are able to determine their capital? Because you have a difference in accounting procedures as to what—I mean, securities firms market to market—banks don't necessarily market to market, so that should affect, in some cases, what your real capital is.
Mr. HAWKE. Well, that is a situation we have today, of course, with respect to the underwriting of general obligation municipal securities; and we actually——
Mr. BENTSEN. Although there is a difference between general obligation and revenue bonds.
Mr. HAWKE. And revenue bonds, to be sure. But we actually go further in the direction of bringing SEC regulation to bear. A bank that engages in broker-dealer activities, that, for example, that are presently exempt from regulation by the SEC because of the bank exemption from the definition of broker and dealer—would be brought under SEC regulation if they were activities addressed toward a public business. And we would apply SEC broker-dealer regulation with that one exception. If the bank were well-capitalized, it would be exempt from net capital.
Mr. BENTSEN. With respect to in-bank transactions. But, out-of-bank transactions, or subsidiary transactions, would be subject to net capital requirements and broker-dealer requirements?
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Mr. HAWKE. They would be fully subject to all SEC requirements.
Mr. BENTSEN. But I think there is a difference, otherwise; and it would appear that an in-bank underwriting of either muni rev bonds, GO bonds—well, it occurs in GO bonds and asset-backed bonds, but exemption from net capital requirement might give a little more reach to the bank than the non-bank securities.
Secretary RUBIN. You are worried about the market-to-market difference?
Mr. BENTSEN. Well, I think that is just one difference that exists. And as you know—and I don't want to dwell on this because I have other questions, but, as you know from your previous experience, you are restricted in your underwriting ability based upon your capital; and the way you determine your capital is different—uses different accounting procedures. Then you could make an argument one has advantage over the other.
But let me ask some other questions.
You do bring the SEC in more. I have some concerns about maybe not bringing them in enough, and there is still a dominance, I think, on the council that the SEC can end up being one out of seven, or one out of six, or whatever.
Why not—rather than making a comparable, why not make bank securities sales personnel subject to the same rules as non-bank security sales personnel? I mean, what is the difference? It really isn't going to cost the banks any more money to do that. Why not make them register reps? Why not make them subject to SROs? Why not make them subject to SEC and arbitration and all that comes with that? Wouldn't that be stronger consumer regulation and what would be the reason for not doing that?
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And added to that, wouldn't that make more sense if—and I would like an explanation to this, if I read the other section, where you allow de minimis security sales in the bank beyond bank eligible, and I would like clarification of that. If that is correct, which may make sense, what exactly does that mean? Does that mean you can broker securities, you just can't hold from your own account, you can't trade?
Can you answer those two issues for me?
Mr. HAWKE. Well, on the first issue, if the bank was required to register as a broker-dealer, then its employees who were selling securities would be fully subject to the same kinds of registration requirements that individuals selling in a broker-dealer would be subject to, and the continuation of the exemption for bank broker-dealer activity is pretty narrowly tailored. So if the bank engaged in any public offering of its broker-dealer services or if it had incentive——
Mr. BENTSEN. Well, I understand that, but why not just bring that all the way over? Wouldn't it be better for the bank as well to have their bank securities sales personnel meet the same registration requirements, not be a broker-dealer, but their actual sales personnel?
Mr. HAWKE. Well, they would, if the bank had to register as a broker-dealer. They would not if the bank was within the limits of the exemption that presently exists.
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Mr. BENTSEN. Why not?
Mr. HAWKE. Well, we want to strike a balance between maintaining the status quo with respect to traditional kinds of banking activities and bringing SEC regulation to bear under the concept of functional regulation, particularly with respect to expanded banking activities. I think in proposing a curtailment of the bank broker-dealer exemption we have gone a long way to subjecting banks to SEC regulation.
Mr. BENTSEN. I know my time is up; but you are adding to the list of eligible securities, you are adding de minimis, at least, sales ability to in-bank transactions, and you are already starting to expand consumer protections with sales. Why not go the whole distance? Are there some market costs? Is there some—I mean, what would be the reason not to do that?
Mr. HAWKE. Well, again, Mr. Bentsen, we would do that if the bank were engaged in the kind of activity that required the bank to have to register as a broker-dealer. All of its employees who are engaged in sales activities would be required to satisfy the same requirements as non-bank salespeople under those circumstances. All we would preserve is the exemption for a narrowly tailored list of traditional kinds of banking activities, and the only significant addition to the list of bank eligible securities is municipal revenue bonds.
That is an issue that has been argued over the years. We think that municipal revenue bonds are really not all that different from the kinds of activities banks engage in today, underwriting general obligation bonds and taking on the risks of making credit judgments with respect to loans, so we don't view that as a huge expansion of what banks can do.
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Mr. BENTSEN. Thank you.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Bentsen.
Mr. Lucas.
Mr. LUCAS. Thank you, Mr. Chairman.
Mr. Secretary, sometimes I know the perception is, back home, that no matter which end of Pennsylvania Avenue it may be on, if we attempt to modernize or streamline or simplify, that somehow we occasionally create a little more or modify our institutions in interesting ways. If I could shift a little bit back from a slightly different angle in the Alternative A concept, could you expand for me, just a little bit, about the concept of the mutual national bank?
Mr. HAWKE. The reason for including a provision for the mutual national bank is that there is a significant portion of the thrift industry today that operates in mutual form, and in order to accommodate the homogenization of bank and thrift regulation, we didn't want to deprive existing mutuals of the ability to operate in mutual form under a bank charter, so we provided for the mutual national bank charter for that reason.
Mr. LUCAS. So, they would be subject to the same taxation policies as would any national bank, if I interpret that right?
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Mr. HAWKE. They would be subject to the same tax rules as they are subject to as mutual thrifts today.
Mr. LUCAS. And like any other national bank would be subject to the Comptroller issuing the governing rules, I would assume?
Mr. HAWKE. That is correct.
Mr. LUCAS. And, also, not only—as I read the suggested language, not only would it be possible to convert, but there would be the authority there to create new mutual national banks.
Mr. HAWKE. There would be that authority in the Comptroller. We don't see a great demand for the creation of new mutuals, but the concept and philosophy of mutuality is and has traditionally been very important in the thrift industry, and we wanted to preserve that option as it exists today.
Mr. LUCAS. And as in a mutual thrift, the membership would be open to anyone who would choose to join the institution, essentially, is the way it works now in a mutual thrift.
Mr. HAWKE. That is correct.
Mr. LUCAS. Fascinating.
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Thank you, Mr. Chairman.
Chairman LEACH. Thank you very much, Mr. Lucas.
Mr. Jackson.
Mr. JACKSON. Let me thank you, Mr. Chairman, and let me thank Secretary Rubin and Under Secretary Hawke for their testimony and participation today.
I think I want to begin by associating myself with the gentleman from North Carolina's remarks about the location of the beef in both versions of the bill with respect to the Community Reinvestment Act. Let me first begin with just a brief comment.
Mr. Secretary, not long ago I purchased a Rand McNally map of the City of Chicago called the ''Chicago Finder Map.'' The map has all of the northwest suburbs on it, most of the west suburbs on it, and then it stops at the Museum of Science and Industry.
My District, for those of you who don't know, is about 20 blocks south of the Museum of Science and Industry, all the way south to the county line. Rand McNally treats my District as if it is the lost world. More than one-and-a-half-million people live south of that museum, several hundred thousand of whom are in Chicago, and yet they are not on Rand McNally's map.
Recently, I took a group of bankers on a tour of 576 acres of undeveloped lake-front property, almost one square mile, with the most magnificent view of the City of Chicago from the south side. It was as if these bankers were archeologists who had discovered, or heard of dinosaur bones, or gold in the ghetto.
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I want to make one point before my questions. The market forces did not drive the bankers south. I drove them south in a Ford Mini-van. And the very definition of an underserved community is a community where the market is not functioning properly.
And so, Mr. Secretary, you have indicated that the Community Reinvestment Act, on many occasions, has provided access to capital and credit to low- and moderate-income communities. I am interested, one, with the changes of structure envisioned by both your bill and Mr. Leach's bill, what you expect the impact to be on community development lending? I am specifically interested in the Administration's position if the Community Reinvestment Act is not applied to the WFIs, and I am very interested in those two questions.
Secretary RUBIN. Well, Mr. Jackson, I agree with what I think was your general proposition, which is that banks will not always serve the full area in their community. In fact, you and I, if I remember correctly, met with a group of bankers together in Chicago in what I think was a very useful meeting.
My view is CRA has been enormously successful. I think it is a lot more successful in the last 4 years than it had been previously partly because of the changes we made in the regulations and partly because I think the banking industry concluded that we were serious about it.
I don't know that financial modernization as such—I guess I will put it differently. I think that with more competitive forces it is more likely, rather than less likely, that you will have greater access to financial services in underserved communities; and I will give you one example of why.
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It seems to me that if you have an insurance agent or insurance agencies in an underserved area right now, it may very well be that in the kind of mode you get into on the financial modernization, they would find it to their financial advantage to get together with a bank and offer multiple services, not with tie-ins, which would not be legal, but multiple services under the same house. So my guess is that more competition and the right to cross entry lines would result in greater availability of services, rather than less.
On the question of WFIs, the reason we put CRA on WFIs was the reason I said before. You have some large money center institutions today that, for practical purposes, are wholesale banks. And our view was that if you didn't attach CRA to the WFIs, there was at least some risk that some of these institutions would become WFIs and thereby come out from under CRA and yet remain banks in the sense that they would have access to the window and access to the payment system. So we felt that CRA should apply to WFIs.
Mr. JACKSON. Let me comment on that quickly, if I may, Mr. Chairman.
John Taylor came before the Subcommittee on Financial Institutions. He is the President of the National Community Reinvestment Coalition, and he said that the rate of consolidation in the banking industry will increase if Congress allows the creation of financial services holding companies and new mechanisms for bank financing. He says that studies suggest that mergers and acquisitions decrease CRA performance, particularly in small business lending.
Economists predict a continuing sharp decline in small business lending due to the disappearance of small banks. Smaller banks make the bulk of their loans to small businesses, so their acquisition by larger banks worries many community advocates.
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Small banks possess, obviously, the intimate knowledge of community residents and business crucial for small business lending. After consolidation, however, decisionmaking often becomes centralized in headquarters hundreds of miles away from the community.
Would the Under Secretary please comment on that?
Secretary RUBIN. Yes. Let me take a first shot at that, Mr. Jackson.
With interstate banking, if small banks are going to be acquired by large banks in setting up national networks, I think you are going to have that happen anyway. I think you have a much better chance of small banks remaining financially viable—I think I said this earlier in my comments—if they become multiple sources, in fact, one-stop shopping centers, sources of multiple products.
So I would think that small communities and small banks should be net beneficiaries, maybe substantial net beneficiaries, of this legislation.
Mr. JACKSON. I will gladly yield to the lady from California. I think my time has just about expired.
Ms. WATERS. Thank you very much, if the Chairman does not mind.
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Chairman LEACH. This is a very important subject, and I think it would be very appropriate to yield an extra minute to Ms. Waters.
Ms. WATERS. Thank you very much. This is a significant question.
What about the small banks, what about the consolidations under this modernization? These banks, we believe, will be bought up, they will not be available. They are the ones who make the loans, and what about the capital requirements?
You talk about them being able to be players, but I see some instances where it is going to be more difficult for them to be players, based on their requirements, in order to take advantage of modernization.
Secretary RUBIN. I will tell you what I think.
If I owned a small bank, I think I would view this as very useful legislation. But what I would try to do, if this was to take effect, is affiliate one way or another with providers of various other products—insurance, mutual funds, whatever—and then become the one-stop shopping center in the community.
Similarly, if I were a big bank, if I were running a big bank today—well, banks can acquire small banks anyway because of interstate banking, but if I were running a big insurance company today and this legislation went into place, I think I would—I might try to, and I would have to think about this—but I might try to acquire small banks in various communities, not to take them out of the communities, but rather to strengthen them in those communities, by putting insurance in there, mutual funds and banking and all the rest, so it seems to me it should be cut the other way.
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Mr. JACKSON. Mr. Chairman—I am sorry, Mr. Hawke.
Mr. HAWKE. I would say that small banks are, if anything, more likely than larger banks to be able to meet the capital requirements. Small banks tend to be very well-capitalized, and the experience with interstate banking indicates that while credit judgments among some of the very large multistate banks have been centralized, that has provided an advantage to small banks in local communities which can provide more responsive service to their local communities.
And bank charters are still desirable to have. New bank charters are being issued all the time. So the idea of having the community bank is still something that is very attractive, notwithstanding interstate banking.
Mr. JACKSON. Mr. Chairman, I would just like to ask for the opportunity to submit questions to the Secretary and the Under Secretary consistent with the line of questioning we have engaged in this afternoon, and then share it with the Membership, so that as we enter the markup and, subsequently, the floor debate on this particular bill, the answers the Secretary gives with respect to community reinvestment are consistent and ones that are accepted by the committee.
Chairman LEACH. Without objection, that is a reasonable request. I would like to take 15 seconds, if I can, Mr. Jackson, to say the testimony we received about small banks and CRA, I think, is valid. Small banks comply with CRA better than after they have become consolidated with larger banks. That is an issue that relates to; A, regulation; and, B, the interstate banking bill, not to this bill.
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Second, and I want to comment on what Mr. Hawke said, that is extremely important. Right now the climate for creating new banks, so-called de novo banks, has never been better, partly because deposit insurance costs are minimal and they have all been paid for by existing banks, and new banks get the advantage without having to pay the cost.
Second, the distinction between book and market value. If you have banks selling at two times book, there is an enormous incentive to put down capital and to create a viable bank; and if it becomes viable that capital is automatically worth double. And so I think the competitive aspects will be very helpful for CRA, but I don't think this bill has any negative implications for CRA, although I would concur with the testimony before this committee——
Mr. JACKSON. If the Chairman would yield.
Chairman LEACH. Yes.
Mr. JACKSON. I think our biggest concern, Mr. Chairman, is that the creation of the WFI allows the bank to shift assets from the bank concern to the WFI and, therefore, reduce the deposit ratios in the banks and, therefore, reduce the bank's ability, by definition, to lend in these low income areas based upon the present ratios this body has established.
Chairman LEACH. The gentleman is partly correct, but that is why the Administration applies CRA to WFIs, and I personally believe that should occur. In addition, it brings new coverage of WFIs. It is not just a bank creating a WFI; the majority of WFIs, if they are created, are presumed to be created by non-banks, which brings non-banks under CRA, which they have never been before.
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Mr. JACKSON. I thank the Chairman.
Chairman LEACH. Mrs. Kelly.
Mrs. KELLY. Thank you, Mr. Chairman.
Mr. Secretary, like everybody else here, I am concerned about a level playing fields with regard to this legislation. One of the goals of financial services modernization is that we do provide this level playing field for everybody, so no competitor is going to be out there with an unfair advantage.
In the bill itself, the proposed Section 143 seems to mandate—this is the bank holding company capitalization section—seems to mandate an additional layer of regulations for certain banks, but not for their non-bank competitors; and I wonder if you would comment on how this achieves the level playing field goal?
Mr. HAWKE. We tried to be very responsive to that very concern in the bill by making capital requirements applicable to all large institutions, whether they are predominately banking organizations or not. Under our proposal, any organization that had total assets of $75 billion or more and had a bank as small as $5 billion would be subject to capital requirements. We think that deals with the issue of discrimination.
There are other approaches that have been suggested to that, but we think our approach eliminates, or reduces as far as we can possibly do it, discrimination between large banking organizations and their large non-bank competitors that might own smaller banks.
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Mrs. KELLY. I just want to go one step further, and that is to the small community banks. We have heard some dialogue here about them. I will be interested in what the responses are to questions, but I am just interested in making sure that we have a very strong—and I think our Chairman spoke to that issue very well. I am very interested in making sure that we, in the United States, because I come from a semirural area, I want to make sure we have community banks available to our people. And I wonder, why would a small community bank be in favor of the repeal of Glass-Steagall?
Secretary RUBIN. Well, since you and I come from the same community, I know the community of which you speak. I think—as I said a moment ago, in the community like the one we both know, if you have a small bank and it is currently limited in its product, I think at least, it is less able to survive financially in the long term than if it can become the locus of a broad array of products; and I think, as I said a few moments ago, what you see is a lot of these small community banks—at least the ones with this vision in terms of management—become exactly that, the locus of a full range of financial products which will strengthen them and better enable them to serve their local communities.
Maybe I am wrong, but it seems to me they may wind up being the biggest beneficiaries from this financial modernization, not the very large banks that used to be thought of as the people who would be the primary beneficiaries.
Mr. HAWKE. I would just add to that, by allowing new financial activities to be conducted through operating subsidiaries of banks, rather than forcing those activities into a holding company, which might be much more burdensome and expensive for smaller banks that don't have holding companies, we present an option for small banks to expand their financial activities in a very cost-effective way.
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Mrs. KELLY. One last question: Under the so-called Chevron decision, Federal regulators are given deference by the courts when construing their own statutes. It is a problem for State insurance regulators in disputes with Federal banking regulators because they automatically lose.
Why shouldn't we modify the system to grant an equal deference to the opinions of State insurance regulators so that the courts can at least consider the cases on the merits? What is wrong with giving both sides an impartial hearing?
Mr. HAWKE. I think we go beyond that. We provide in this legislation that all bank insurance activities shall be subject to State regulation of insurance. So the State insurance regulator is really, in a sense, the primary regulator of all bank-related insurance activities, provided that State regulation isn't aimed at discriminating against financial institutions. So I think we have addressed that with the way we have structured the insurance provisions in the bill.
Mrs. KELLY. You feel your bill has addressed this, so that everybody gets an equal shot?
Mr. HAWKE. I think it is more than equal. I think the State insurance regulator has the ability to determine what activities are insurance for purposes of that State regulation, and as long as that concept is applied in a nondiscriminatory way, so it doesn't have a disproportionate impact on financial institutions, the State insurance regulation should be the primary regulation.
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Mrs. KELLY. Thank you very much.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mrs. Kelly.
Ms. Kilpatrick.
Ms. KILPATRICK. Thank you, Mr. Chairman. I have listened very intently to all of the discussion here and much of what is in my mind has been brought up.
I just want to make sure I am understanding, Mr. Secretary. I heard you speak of the thrifts in terms of merging the funds and keeping the charters. The charters, as a thrift, now have them; is that your proposal and is that what you support, or do you support upping the bank's charter as well?
Secretary RUBIN. No. No, our idea under what we call the ''nonbasket option,'' was to keep the thrifts separate, as they are today.
Ms. KILPATRICK. So they would maintain whatever they are doing today—I think that is what I heard you say to someone on the other side—and at the same time, banks that don't have the same options would still not have them in the proposal you are making?
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Secretary RUBIN. There are two possibilities that we presented, but if you are talking about the nonbasket option, thrifts would have certain powers that the banks would not have; and that is correct.
Ms. KILPATRICK. That is what you would support?
Secretary RUBIN. Yes. We say support, yes, nonfinancial areas, exactly. When you say ''support,'' we threw out a few possibilities.
Ms. KILPATRICK. That is why I am having a real problem with Treasury and Administration or the Administration and Treasury giving two possibilities; and as I think Mr. Frank was saying earlier, we are not really supporting either one, or we may be supporting either.
Secretary RUBIN. No, let me be clear. We would not present a possibility we would not support. What we said was, if there are underlying issues that in our judgment lend themselves peculiarly to Congressional determination; therefore, we didn't make a choice between them.
Ms. KILPATRICK. So whatever Congress decides, in either of those instances, you will accept?
Secretary RUBIN. In either of those two possibilities. When you say, ''whatever Congress decides''——
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Ms. KILPATRICK. In those two instances.
Secretary RUBIN. Either of those two possibilities, yes.
Ms. KILPATRICK. OK. One of you gentlemen mentioned, too, as it relates to the Community Reinvestment Act, there are certain regulations that are written; and I would like to also be provided—I think Mr. Watt mentioned that a little earlier, and I would also like to be provided that.
And then the WFIs, in the legislation we had last week, those WFIs were not a part of CRA, and they would therefore reduce what would be eligible or reportable or available for CRA. I am happy to see the WFIs you have before us this morning will be a part of CRA, and those funds will be desperately needed.
And incidentally, as you said earlier, Mr. Secretary, CRA is working in America. Certainly not to the extent—I would want to double what they are doing; and I think when we are moving into modernization and the whole modernization of the banking industry, that we ought to be talking about enhancing them and moving forward. As you said, in this Administration, there hasn't been a commitment to it; and today you bring us back with the WFIs and everything, saying they are committed. But we would like to see that finite and enforced strictly so the banking community will in fact enhance what they are doing. I think it has made major impact.
I am from Michigan, and in southeastern Michigan, in that regard, and we have seen a lot of it happen. So I think to be silent on it, which much of the other two bills did—it is a good step, but I think it still needs to be, as someone was saying earlier, more defined, more enhanced.
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We are talking about bank modernization. If we are really going to help American citizens at large, I think that investment in the communities around America is a must. So we will continue to work with you on that, and look for further detailed enhancing of that.
Secretary RUBIN. I think Mr. Jackson said he was going to submit a set of questions with respect to CRA—maybe other issues as well, but at least CRA. We will be responding to some of that in Mr. Jackson's questions.
Ms. KILPATRICK. We will be looking forward to that and look forward to the Administration's strong support.
Mr. JACKSON. Will the gentlelady yield?
Ms. KILPATRICK. Certainly.
Mr. JACKSON. Mr. Secretary, let me ask one other question in light of what Ms. Kilpatrick has just indicated.
A lot of things happen in Congress; you acknowledged a lot of things changed in very short order and very quickly. If there was any indication that WFIs would not be subject to CRA requirements between now and, let's say, the time this bill hit the floor of the Congress, again, the Administration's position——
Secretary RUBIN. I think we would have a lot of trouble, Mr. Jackson, supporting WFIs without CRA. Is that your question?
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Mr. JACKSON. That is my question, sir.
Secretary RUBIN. I think we would have a lot of trouble supporting WFIs without CRA.
Mr. JACKSON. I appreciate that, Mr. Secretary.
I thank the gentlelady for yielding.
Chairman LEACH. Thank you, Ms. Kilpatrick.
Mr. Cook.
Mr. COOK. Thank you, Mr. Chairman. I was very interested in your opening statements that indicated that the American consumers could really save approximately $15 billion a year through banking and financial services modernization legislation.
Secretary RUBIN. Well, I really said, if you had $300 billion a year being spent and save 1 percent, it will be $3 billion; and we made an estimate, it is not unreasonable to think, of 5 percent—it could also be some number between 1 and 5, and the others were all—there is no documentable number. But I would also observe, if I may, as I said in my statement, that only refers to consumers; there are also the additional savings businesses would have.
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Mr. COOK. Well, however the calculation is made, it would seem reasonable, wouldn't it, that the savings would probably be more under some, at least modest, basket approach, for financial modernization, as opposed to the total restriction on nonfinancial activities? I mean, would that be too much of an assumption, to think that?
Secretary RUBIN. Well, the basket has pluses and minuses. One of the pluses is that there are certain institutions that I imagine would be more inclined to participate in this financial modernization, who may not be inclined if they had to divest themselves of offending assets. So in that sense, you might have more benefit.
On the other hand, those who are concerned about the basket—although, as I said, I think the basket is a very different concept than full banking and commerce—at least one of the arguments they make is, you may be on a slippery slope to banking and commerce. So they are all tradeoffs.
Mr. COOK. Let me just explore a little more on the CRA.
Obviously, we are all delighted that everybody is for making sure that CRA is maintaining their status in any proposed legislation, and that no one questions the commitment of the Administration or your commitment. But I am wondering if we are not promising too much, in terms of CRA, with respect to the wholesale financial institutions, the WFIs? Because for whatever advantages WFIs get under this new legislation, the window, the access to the payment system—no one questions that they are not going to be part of the FDIC system, and it isn't really that FDIC advantage. The main reason that the banks can really take these riskier loans in these poorer areas, or these areas that might otherwise not be serviced, at a minimum, wouldn't we have to modify the way the Community Reinvestment Act works for WFIs?
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Secretary RUBIN. No, because remember under CRA, the idea still is that people shouldn't be required to make loans that are not creditworthy. So I think my answer to your question is, no, I wouldn't modify CRA.
You are right in saying that the original idea with respect to CRA was that if you are going to get the benefit of the deposit insurance, then it was reasonable to expect you to take on the obligations of CRA. These institutions will still get the benefit of the window and the payment system; and you also have, I think, a possible evasion problem if you don't make WFI subject to CRA, and that is why we choose to do so.
Mr. COOK. But there could be some modification, couldn't there be, to make sure? Otherwise, I am not sure people would view this as a new opportunity.
Secretary RUBIN. Nobody is so forced to set up a WFI if they don't want to.
Mr. COOK. But we want them to.
Secretary RUBIN. We would like them to, but I think we would be very opposed to any weakening of CRA. And as long as nobody is required to make loans other than creditworthy loans, I don't think that this should create a problem for people.
Mr. COOK. Maybe this goes a little bit beyond the subject of this hearing, but last week, the Comptroller of the Currency indicated that the tax-exempt status of credit unions needs to be reexamined, that it provides an ''unfair advantage,'' I think, in his words.
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Is that the position of the Administration or is that your position?
Secretary RUBIN. Well, my recollection is—and correct me if I am wrong—there is a study due back this fall, or something; is that correct?
Mr. HAWKE. We have a study on credit unions that Congress has directed us to conduct. That study will be submitted this fall, and it will address a number of issues. I am not sure it will address the tax-exempt status as such, but it will address a number of issues related to credit unions.
Mr. COOK. But I am sure you probably have some feeling or some position on it. I mean, the opening statements centered on the advantages to the consumers, the modernization and legislation, isn't it pretty clear that there are advantages to consumers under the current credit union status?
Secretary RUBIN. I will speak for myself. I have not a fully developed view.
Mr. HAWKE. I think it would be premature for us to express a view on credit unions until our staff has really completed the work that is needed to form a judgment on those issues.
Mr. COOK. Thank you.
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Chairman LEACH. Ms. Carson.
Ms. CARSON. Yes, thank you, Mr. Chairman.
Mr. Secretary, you may have already addressed this question in my absence, but if you would be kind enough, I am concerned about the seven-member board. That is chaired—and of course, this is not a reflection on the Treasury Secretary, but it does not seem to sufficiently reach out in terms of consumers. It includes OCC, SEC, FDIC, and the Commodity Futures Trading Commission that the Treasury Secretary would chair.
We have had a lot of dialogue about community reinvestment and so forth, and my concern is the composition of this seven-member board, that it doesn't appear to incorporate a consumer protection advocate.
Mr. HAWKE. The intent of the board was really to have a function related primarily to regulatory issues. It will define, for example, how the gross revenues test is applied under our proposals; it would deal with safety and soundness safeguards; and it would deal with differences of view between regulatory agencies.
It would also have the responsibility for reviewing the consumer protection safeguards that the banking agencies had put in place, and could require more stringent safeguards than those that the agencies had put in place. We think that by having the composition of the council, given those purposes, made up of essentially the banking regulators and the securities and other financial services regulators would really be appropriate composition.
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Ms. CARSON. It would just appear perhaps there is room for one additional individual that would represent the consumer, since the consumers are responsible for producing the profits of banking institutions and consumers should not be set out of the process in terms of regulatory dialogue. That is just a comment for your consideration.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Ms. Carson. And let me say, because I think this is the first full committee meeting with—at least in the question sense, that you have been with us, and I want to welcome you to the committee. We have been much blessed by the new Member, and so you are welcomed.
Ms. CARSON. Thank you. This is not my first time at a committee meeting.
Chairman LEACH. Well, I know that, but in the question sense.
Ms. CARSON. I speak when I have something to say, not just when I have an opportunity to say something.
Chairman LEACH. Well, that is why you are particularly welcome.
Mr. Riley.
Mr. RILEY. Thank you, Mr. Chairman.
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Secretary Rubin, as you know, the Banking Oversight Committee is conducting a review of the Community Development Financial fund which is operated by the Department of Treasury. In light of the fact of the budget agreement, the Clinton Administration had requested an increase of $75 million for the CDFI fund in regard to this, I have a few questions.
First, in April of this year, the subcommittee investigators found four undated memos in the CDFI files that were used to justify awards made in the summer of 1996 for over $11 million to an entity called Shore Bank Corporation. On May 9th, the subcommittee asked the Treasury Department to answer some simple questions: When were these memos produced? And why they were left undated?
The Treasury Department has refused to answer, other than to say it referred the matter to the Inspector General.
My question is, first, when can we expect an answer on this matter from the Department; and two, do you consider it appropriate for Congress to increase funding for the program without first getting full answers to the questions from the Department?
Secretary RUBIN. Let me start by saying I think that the CDFI program is an outstanding program, and I think that it is a very effective way to bring capital to underserved communities. I also have no doubt that the loans and grants were made based solely on the merits.
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In terms of this question, I do think it is appropriate and very important to increase funding for a very good program.
In terms of the undated memos, there were a lot of issues around that; and it was our judgment, and I think correct judgment, that the right way to get the best answers for Congress, and for ourselves for that matter, was to submit this to the IG. I don't know how long she is going to take to do this, but I can assure that she will do it in the most expeditious way possible. That now is in the hands of the Inspector General, which, as you know, is an independent function. That should be reassuring to us as well as to us in terms of making sure that we get back a thorough examination.
Mr. RILEY. Do you have any timeframe?
Secretary RUBIN. I do not know what her timeframe is. We could try to get an estimate for you.
Mr. HAWKE. We have just referred the matter to the Inspector General and haven't heard back with respect to her estimate to how long it is going to take to complete the investigation.
Secretary RUBIN. Let us try to get an estimate if she thinks she can make one at this point.
Mr. RILEY. There is one other issue which regards the documents that Ernst & Young had worked on.
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Six weeks ago, these documents were requested. I believe we received partial documentation. Do you have any idea when we might receive the additional documents that Ernst & Young produced?
Secretary RUBIN. I am not familiar with the documents that you are referring to, but we will get you a response from our general counsel. He was here, but I guess he has left. We will get you an answer.
Mr. RILEY. OK. Sir, finally, I know you normally——
Secretary RUBIN. Let me say, though, we are obviously fully cooperating with the committee. I don't know what the answer is with respect to the particular documents. There may be good reasons why part of them were produced and part of them not, but we will get you a response.
Mr. RILEY. Chairman Bachus has stated that we may need to have additional hearings on this. I know that your time is very valuable, but if and when we have the opportunity to have these hearings, would you consider coming before the subcommittee?
Secretary RUBIN. Let me give you a two-part answer to that, if I may, Mr. Riley.
On the one hand, I think this is a very good and very important program; and I am very, very supportive of it. The question of whether or not we testify before a subcommittee hearing is something that we ought to discuss when we have the sense of what the hearing is going to be about and what the facts may be.
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Mr. RILEY. As we develop these facts, as the documents are related back to the committee, I hope that you will make yourself available to answer some questions at that time.
Secretary RUBIN. As I say, I would be happy to discuss it and let's see what it looks like at that time.
Mr. RILEY. Thank you, Mr. Chairman.
Chairman LEACH. Thank you Mr. Riley.
Mr. Barrett.
Mr. BARRETT. Thank you, Mr. Chairman. And I apologize. My flight was late coming from home, so I didn't get to hear some of the initial questions, and I assume that most people have had a chance to ask their questions. So maybe can you use this as sort of a summary.
I would like to go back to what you labeled the perhaps most difficult question in this debate and that is whether to permit the banking and commerce issue; and, again, I assume you have addressed this and so I apologize. But if you could give me a perspective of the pros and cons on this issue.
Mr. RUBIN. Are you talking about full banking-commerce now, or the different concept that is involved in the basket?
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Mr. BARRETT. Let's go with the basket.
Secretary RUBIN. Well, I think the advantage of the basket is that it would enable some firms that might not otherwise participate in financial modernization, because they have nonfinancial activities they do not want to divest of, to participate in financial modernization, which would increase the benefits.
I suppose another advantage is that, as we discussed some, Mr. Frank first raised it, there are, I think, a fair number of activities that are sometimes difficult to distinguish from financial activities, or, to put it somewhat differently, information technology and areas of that sort, electronic transfer of payment. It is difficult to know exactly where the lines are drawn between financial services and nonfinancial services. And, with the basket, financial institutions could get themselves involved in some of those activities, and I suspect there are synergies to be had from that. So that would be the positive side.
The negative side is—and, of course, in our basket approach, the possibility—a safeguard is the prohibition against the thousand largest companies getting involved with financial institutions.
The negatives I suppose are that some people feel that there are cultural and other issues involved in any banking and commerce, and then there are some people who feel that if you once begin with a basket that it is going to be a slippery slope and it will lead you to an erosion of that position. It seems to me those are the pluses and minuses.
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Mr. BARRETT. What is your response to that, the last comment, the slippery slope and the erosion?
Secretary RUBIN. Oh, I guess that you all know best how Congress behaves and how it is likely to behave.
Mr. BARRETT. I am more interested in what you think.
Secretary RUBIN. I guess that my view is that it is a legitimate concern, but it seems to me that in a lot of legislation we have standards and those standards draw lines somewhere on a spectrum and those lines tend to hold unless circumstances change. But that is a judgment that you all will have to make amongst yourselves.
Mr. BARRETT. When Mr. Greenspan was here I inferred from his comments that he felt that these were pretty big eggs to scramble; and, once they were scrambled, if there were problems that it would be very difficult to correct those problems. Again, that was my inference from his statements. What is your response to that, if we go down this road?
Secretary RUBIN. The basket or the full banking and commerce? They are very different concepts.
Mr. BARRETT. Then let's switch to the full.
Secretary RUBIN. If you go to the full banking and commerce, you get to other issues, centralization of economic and political power being one, possible conflicts of interest. Although we do have, as you know, in our basket approach a prohibition against transactions with nonfinancial affiliates.
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But there still may be, although it is less apparent what they would be, conflict of interest issues, but there certainly are centralization of political and economic power. There are people who might be disadvantaged, smaller institutions, community banks and the like. I think that is a different set of considerations.
Mr. BARRETT. Why is the basket approach not just ultimately going to lead to the full banking-commerce?
Secretary RUBIN. Some of those who are opposed to the basket approach would express—I think Paul Volcker did—the view that this could be a slippery slope; and once you permit some banking and commerce then that would lead you down the slope to full banking and commerce. There are others who say if you permit some banking and commerce that really is a very distinguishable concept from full banking and commerce and, therefore, you should be able to hold that line.
Mr. BARRETT. And the 1,000 figure that you used, is that an arbitrary figure more or less? How do you derive that figure?
Mr. HAWKE. First of all, the concept was to try to deal with the specter of a very large financial organization being created that would have a very large basket, whatever the basket number was, so that they could acquire very large nonfinancial companies. The use of the 1,000 largest nonfinancial companies as a standard for what would not be permitted was intended to be responsive to that fear, and the number of 1,000 is arbitrary.
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We would express that in terms of asset size, but it is pegged at an asset size that is intended to reach the 1,000 largest companies. It is an arbitrary number but intended to provide assurance that if a basket approach is followed that it would not allow a pyramiding on the financial side that would permit the acquisition of a very large nonfinancial company.
Secretary RUBIN. Let me add one comment if I may.
Since the basket approach is a different concept from full banking and commerce, it seems to me if you were to take that route you have drawn a line that you should be able to hold since, as I say, you are conceptually in a very different place than you would be with full banking and commerce. But that is my view, that you can hold the line; and there are others who feel that you cannot.
Mr. BARRETT. But, in essence——
Secretary RUBIN. That is why we would accept that possibility.
Mr. BARRETT. But, in essence, we would be drawing an arbitrary line, wouldn't we?
Secretary RUBIN. Well, it is arbitrary in one sense. Lines are always arbitrary when you make such choices—you could always take that position on anything. If six is OK, why isn't seven? And, therefore, why isn't a thousand? You could go one by one. You could always do that.
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A limit of 1,000, sure, is arbitrary as opposed to 1,200 or 800; but it is still different than allowing the largest entities in the economy to combine with financial institutions—nonfinancial entities to combine with financial institutions.
Mr. BARRETT. Mr. Hawke, in your testimony you said, if we don't allow any sort of basket approach or this type of commingling, if you will, that, as a practical matter, ownership of banks may be precluded from any securities insurance and diversified financial service firms. As a practical matter, what percentage do you think of a drop would we see? How much of an impact would this be?
Mr. HAWKE. Well, I think if you refer to Chairman Helfer's testimony at the hearing last week, she had some very interesting estimates of the degree of nonfinancial activity that was engaged in by the major financial services firms that don't presently own banks; and that, I think, is something that the committee would find useful in deciding where to peg the number if it was going to choose the basket approach. The idea is to provide some reasonable accommodation without binding the numbers so tightly down that it is going to force a lot of gaming by institutions who were right at the margin.
Mr. BARRETT. Finally, I want to join in with the comments of Mr. Jackson and Ms. Kilpatrick as they pertain to the Community Reinvestment Act and the wholesale financial institutions.
Thank you, Mr. Chairman.
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Chairman LEACH. Let me say we finished a round of—well, we have not quite. Mr. Hill is recognized.
Mr. HILL. Thank you, Mr. Chairman.
Secretary Rubin and Secretary Hawke, thank you very much for being here.
I want to talk with you a little bit about the functional regulation issue with regard to the matter of insurance. I want to make sure I understand what it is that your proposal would provide for, because functional regulation means different things to different people. But your plan would create this National Council on Financial Services, which am I correct in understanding, that it is your intention that this organization would then be able to determine whether or not State regulation was discriminatory or not discriminatory or whether it impeded trade?
Mr. HAWKE. They would have only a consultative role in that respect with the Comptroller of the Currency; but, ultimately, it will be the courts who will decide whether the standard of discrimination is satisfied.
Mr. HILL. So our resolution is to leave it in the hands of the courts?
Mr. HAWKE. No, our approach is to make absolutely clear that State insurance regulation will be the primary regulation of all bank insurance activities; and that regulation will apply to those activities provided that it is nondiscriminatory. If it is discriminatory, there are a number of ways that it might be preempted; and preemption could occur both with respect to a national bank or State bank.
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If it happened with a national bank, the Comptroller of the Currency might make a judgment about that. If there was disagreement about that, that would ultimately have to be resolved by the courts.
Secretary RUBIN. But the principle is State regulation of insurance activity; and if there is a discrimination problem, obviously, that is subject to the self cure by the State.
Mr. HILL. In the summary of your proposal, page 7, it says, ''Actions by the Council will bind the agencies represented on the Council, are to be enforced by the agency responsible for supervising any to which the action of the Council applies.'' But it is not your intention that that would apply to insurance?
Mr. HAWKE. No, the provision with respect to consultation by the OCC with the Council on insurance preemption is advisory in that regard. And the Comptroller's decision would be reviewable. We would have on the Council an individual with experience in State insurance regulation so that there would be input in that advisory——
Mr. HILL. But it wouldn't be binding, in your view?
Mr. HAWKE. It would not be binding.
Mr. HILL. OK. Why can't we just say that insurance is going to be regulated by the States and leave it at that?
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Mr. HAWKE. Well, that basically is our proposal.
The reason for the qualification with respect to discrimination—and this is something that both the insurance agents and the insurance companies have told us that they accept as a guiding principle—but the reason for that is that the great issues in this confrontation have been over discriminatory State laws, laws that prohibit, for example, the affiliation of banks with companies or firms that are engaged in the sale of insurance. So there is a great deal of apprehension about whether State law will really permit banks to exercise the kinds of insurance powers that legislation would confer.
Mr. HILL. I wanted to run through a few things that you commonly see in insurance regulation at a State level and you tell me whether they are discriminatory or not. Residency requirements for agents and brokers, would you say that is discriminatory?
Mr. HAWKE. It is a little awkward being in the position of giving advisory views on particular issues out of context, but I think the guiding principle here is that if banking organizations are treated in exactly the same way as other institutions, other people who are selling insurance that are not affiliated with financial institutions——
Mr. HILL. So you would be comfortable if we defined functional regulation as saying that it applies to all players the same? Because there is a sense among many that some of those things are in place for discriminatory purposes, but they really have been put in place to allow insurance commissioners to exercise authority over the people who sell and underwrite insurance in their States.
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Mr. HAWKE. We don't want to undermine that as all. We have met with the representatives of the National Association of Insurance Commissioners. They, I think, have a very forward-looking and positive approach.
Mr. HILL. But you are not suggesting that they are supportive of what you proposed here, are you?
Mr. HAWKE. I can't speak for them on that, but we understand their concerns. And we want to make absolutely clear that, so long as there is no discrimination against financial institutions—and we have a standard in the bill—banking organizations will be subject to State insurance regulation.
Mr. HILL. Just to clarify, though, it is clear what you are asking for is that the States are going to be fully regulating insurance, this Council isn't going to have authority over that regulation, and that the test ought to be that all players are treated equally. Is that a fair summation?
Mr. HAWKE. That is the standard that we have in the legislation.
Mr. HILL. Thank you, Mr. Chairman. Thank you.
Chairman LEACH. Thank you, Mr. Hill.
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We have completed the first round. Several people have asked me if they could ask additional questions, but they agreed not to be terribly time-consuming, if that is all right.
Mrs. Roukema.
Mrs. ROUKEMA. Thank you.
Actually, now Congressman Hill really led with my question. My question was going to be, what do you mean by discriminatory? But I am not sure what you said about consultative and advisory with respect to the Council. I did hear that. But I am not quite sure I understood with specificity any example that you gave about what is discriminatory. It sounded to me as though it was contradictory.
Could you tell me what was the reference to a court action? A court decision? Can you be a little more precise, either Treasury Secretary or Mr. Hawke, in giving me an example of what that means? My purpose here, as it has been from the beginning with this so-called Alliance bill, is to bring people to the table.
And I don't like what I have heard over the last 24 to 48 hours about the disputes that have been raised on this very subject, where we thought people were in agreement and now they are using this as an excuse, or a reason, to walk away. Could you give me another example of what is discriminatory and what would be the court action that would be necessary?
Mr. HAWKE. Mrs. Roukema, let me make clear from the text of our proposal that we make it very, very clear that national banks would be subject to all State laws generally applicable to insurance providers, including State laws prescribing licensing qualification requirements and standards for market conduct. We also make clear that State laws relating to the rehabilitation of insurance companies, insolvency, conservatorship and receivership would continue to apply.
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It is only in those situations where the State law has a discriminatory effect on financial institutions, or disproportionately restrictive effect on financial institutions as compared to other providers of insurance in the State, that preemption would occur.
There are some very obvious examples of what would be discriminatory. An anti-affiliation rule that said no financial institution could be affiliated with a company that sells or underwrites insurance is sort of the clearest example. But some efforts to restrict the abilities of financial institutions to sell insurance have become more subtle than that, and I don't think I could speculate about the different kinds of discriminatory provisions that might be put together to achieve that kind of result.
The objective is to make clear that if financial institutions can sell insurance on exactly the same basis as anybody else can sell insurance, and if they are not subject to undue restriction because they are financial institutions, then State regulations should apply; and we think that is a broad, generally applicable principle that we thought we had concurrence with the insurance industry on.
Mrs. ROUKEMA. All right. Thank you. We will go over that.
There is some other language that is not precise, but I don't have time to go into that now.
But I do want to add, Mr. Chairman, just a point of clarification, particularly for our colleague from Wisconsin, Mr. Barrett, who was asking the question on the subject of commerce and relating Chairman Greenspan's position when he appeared in testimony before the full committee.
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I do want you to know, just as a matter of fact, that when Mr. Greenspan testified before the subcommittee he took a very direct approach for an incremental approach to commerce and banking, that it would be incremental and clearly narrowly defined.
His position before the full committee seemed to change dramatically, and I am not quite sure why he changed dramatically. But, he did say that in a very few short years technology and other forces would be bringing us to the point of establishing a commercial basket, or incremental commercial approach or tie-in; and he did not specify as to why this was inappropriate to begin now, but maybe in 15 years we should be doing it.
So there was a great deal of ambiguity about his precise meaning with respect to the basket—not to total commerce but to the basket approach. But he did initially take the position of an incremental approach with the basket approach at his first testimony before the subcommittee.
I just wanted that to be on record for clarification. Thank you.
Chairman LEACH. Thank you Mrs. Roukema.
Mr. LaFalce.
Mr. LAFALCE. Thank you very much.
A non-banking question to the Secretary and then a banking question, technical one, to both of you.
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Secretary Rubin, when I was reading Richard Morris' book, it indicated that in order to advance the cause of education you would have preferred direct scholarships, direct loans to the tax policy approach. So, too, would I. But that is history, and now we are going to take a combination of the two.
Actually, we are going to have around $35 billion in some form of tax breaks. It is very important what form those tax breaks take. They have to be targeted to those most in need. We can work on that. We have to make sure that it doesn't bring about great inflation, and I think the President has dropped the B average. That is good.
But we also have to make sure it does not lead to inflation in the cost of higher education, and there I don't think any Administration for the past couple of decades, or the Congress, has done anything, because the cost of higher education has increased at two to three times the rate of inflation every single year for the past two decades. As a result, kids are in enormous debt when they graduate. They graduate at age 21, 22, it is not unusual to have a $30,000 or $40,000 indebtedness. They want to get married. They can't buy a home. Their future is mortgaged without it.
One of the problems with the tax breaks is, who will we be helping? Will we be helping the kid who has got to borrow or just helping the ones whose parents are footing the bill for them? That is another problem with the tax break approach.
Another problem is that so many of the benefits of education are not subject to the Tax Code. They are not subject to taxation. You take, for example, the free tuition that is offered to the children of faculty, administration, to the spouses of faculty, administration, to the nephews and nieces of a good many faculty and administrators and so forth. If you have a family, a husband and two children or wife and two children, you could be talking about a half a million dollars in tax-free benefits.
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What is the Treasury Department doing to try to get a handle on what has taken place and to try to make sure that any program we come up with in this Congress or the Clinton Administration deals with these escalating inflationary costs of education?
Secretary RUBIN. Let me try to give you a very brief answer, if I may, Mr. LaFalce, because I—the question you are raising is very important.
First, let me say about Dick Morris' book, since you raised that, there was an original proposal which I thought had certain deficiencies to it. We, fortunately, had some very good processes in the Administration and wound up with a proposal that I, at least, thought made a good deal of sense.
What they basically do is provide middle income people who have kids in school, postsecondary school—and these are people who are very hard pressed, for the reasons you said, to send them to school—at least some level of tax relief.
It is our view that whatever the pressures may be on tuition and educational costs that the competitive forces are sufficiently great so that this should not add in a significant way to the impetus toward greater costs, but clearly that is one of the issues that will be debated as we go through this. I think we have got a good program there, as opposed to the program, the ideas that originally had been put forth. And we did change, as you know, the Pell Grant relationship to the tax credit.
Mr. LAFALCE. Yes, thank God.
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The banking question now, a technical one that deals with the issue of operating subs or bank holding company. Your preference is leave it up to the discretion—but would you at least exclude one thing from operational subs, and that is real estate development?
Secretary RUBIN. Well, we don't view real estate development as a financial activity altogether.
Mr. LAFALCE. All right. Fine.
Secretary RUBIN. So that would mean that under either of our models—it couldn't take place in the sub under either model.
Mr. LAFALCE. Right. I tend to agree with you, give the governance option to the institution. But there are a couple of activities in particular that I wonder if they should be given the same treatment as real estate development and not permitted under subs, and that is insurance underwriting and merchant banking.
Now I tend to think that maybe the one should be excluded from the subs, insurance underwriting; and I tend to think that merchant banking should be permitted. But what are your thoughts on that?
Secretary RUBIN. Well, conceptually at least—conceptually, if you accept the thesis, which I think is a correct thesis, that the sub is now in an equivalent position as the affiliate in terms of safety and soundness and by virtue of some of the things Mr. Hawke mentioned, the 100 percent deduction from the capital of the parent in terms of the investment and the need to maintain the well-capitalized status of the bank.
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And I don't know if you did mention, Jerry, the prohibition against piercing the corporate veil. We think we have now put the sub in the same position as the affiliate. At least theoretically, what should follow from that is that anything that you allow in the affiliate, you should allow in the sub.
Now we have opted not to allow in our model, which does permit a basket and, therefore, you could have some real estate development if you want as a nonfinancial activity, we say that cannot be in the sub. In merchant banking and insurance we said underwriting we could do in the sub——
Mr. HAWKE. We said underwriting could be done in the sub, and merchant banking we consider to be essentially a financing—a type of financing activity; and there are limitations on the extent to which investments made in the course of merchant banking activity can be retained. But——
Mr. LAFALCE. I tend to agree with you on merchant banking, Jerry. I am a little more uncertain about insurance underwriting as opposed to insurance sales. No problem with insurance sales. But I wonder about the inherent riskiness of the underwriting itself.
Mr. HAWKE. Whatever the degree of risks is in underwriting, it clearly is a financial activity. And we think that the important thing is assuring that the bank is adequately protected. And the consequence of the ''capital haircut'' that the Secretary described is that the subsidiary can fail and it wouldn't affect the bank's satisfaction of the highest level of regulatory capital.
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The other side of that coin is that not all activities fail. Obviously, many of them are profitable. And allowing the bank to have the benefit of the positive cash flow from activities in a subsidiary we think is a plus, rather than forcing that activity out into an affiliate where the holding company gets the benefit of it and the bank doesn't get the direct benefit of the activity.
So we think that so long as the bank is equally well-protected in either model, that choice should be essentially a business choice, and we should not deprive the bank of the ability to realize the positive benefits from the benefits of an earning subsidiary.
Chairman LEACH. Thank you Mr. LaFalce.
Does anyone else—yes, Mr. Campbell.
Mr. CAMPBELL. Mr. Chairman, I will try to be brief.
One last question. I don't see why you need the FDIC-insured deposit to get any of the synergies.
Here is my example: I happen to not have a bank account. I have a money market account at Charles Schwab. If I had one at Dean Witter at few years ago I could have gotten my Allstate insurance there and real estate assistance there as well. I just don't see why the synergies require access to FDIC-insured deposits or depository institution. Why not leave the system as it is and let these expansions take place outside of affiliation with FDIC insurance?
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Secretary RUBIN. I think the fundamental reason is that very large numbers of people prefer to have their deposits in places where they get the deposit insurance and that is why you have—when you come right down to the nub of it, it seems to me that in today's modern banks it may not be true, but at least that is the basis for the existence of an awful lot of banks, that they offer deposit insurance. And our view is that by taking down these lines that we think have become antiquated, we enable these institutions to cross-fertilize with all of these others in the same way that you describe Charles Schwab is doing.
Mr. CAMPBELL. But it seems to me that there are two separate advantages, and they don't have to flow from each other. There is an advantage to having the FDIC insurance. You are familiar with the core bank idea. Let that do that small function. It is going to be very restricted, very low risk and then the consumer take his or her choice otherwise.
Secretary RUBIN. You could do, as you say with Charles Schwab—I don't know much about Charles Schwab these days, but if they do everything—what we are trying to do is take advantage of those synergies and that one-stop-shopping, if you will, and apply it to the much larger asset base that is controlled——
Mr. CAMPBELL. And just to push—I am sorry.
Secretary RUBIN.——Controlled by the insured depository institutions.
Mr. CAMPBELL. And all I am saying, in response, is if you let nature take its course, if there are synergies, the Charles Schwabs of the world and Dean Witters of the world will provide those synergies.
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It seems what you are doing is offering an expanded base. I grant that. But all of the risk—which you are doing your best to prohibit, I understand. You have got firewalls and prohibitions and capital requirements. You don't have that problem if you leave the FDIC out of it.
Maybe I will put it this way: What is the negative of allowing the Charles Schwabs of the world to expand and take the market?
Secretary RUBIN. I think the negative—nothing against Charles Schwab. I am sure they are a wonderful firm—but the negative, it seems to me, is that you are greatly restricting the amount of competition that those who currently can cross these lines will encounter. Or, to put the same thing the other way around, if you believe that the more competitive markets are the better they function, you have an enormous, what I think to be artificial, barrier to competition.
Mr. CAMPBELL. But every brokerage firm can do this, not just Schwab. Every brokerage firm can offer a money market, can offer an insurance subsidiary, can offer a real estate subsidiary.
Secretary RUBIN. But we want to create more competition for them and also more competition for the banks.
Somebody mentioned ATM fees going up. We would like to provide more competition in both directions. But the question you are asking goes to the heart of the debate in financial modernization.
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Mr. CAMPBELL. It cannot be sold on the advantage of increasing competition for banks, but the reverse. I would be happy to hear your thoughts on that. And I don't see any inherent advantage to having the FDIC available funds. But I think I have your answer, for which I am grateful.
And, Mr. Chairman, I am going to yield back, recognizing the time. Mr. Hawke wants to respond.
Mr. HAWKE. I just wanted to add one point to that, Mr. Campbell; and that is that the paradox is that things like the Merrill Lynch cash management account and Charles Schwab account were marketplace responses to restrictions that prevented those firms from offering insured deposits. I think their primary choice probably would have been to be able to offer an insured deposit relationship to their customers.
Mr. CAMPBELL. Everyone who could would love to have an FDIC-insured deposit as part of their base. But the fact that they grew up, they exist, they are available for any consumer to purchase suggests to me that the market is full of alternatives; and the only argument the other way is if there was somewhat an absence of competition; and I don't see it.
Mr. HAWKE. I think it reflects the market working to get around the limitations that these restrictive laws impose on them.
Mr. CAMPBELL. Thank you, Mr. Chairman.
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I will conclude by saying that the restrictive laws imposed on them had one reason only and that was importance of getting confidence in the banking system at the time we established FDIC. That is there and that would be there. And then if somebody chooses not to take advantage of it, as I have chosen, that is my choice.
Secretary RUBIN. I think you stated the debate over financial modernization quite well, the core debate.
Mr. CAMPBELL. Thank you.
Chairman LEACH. Thank you Mr. Campbell.
Mr. Vento.
Mr. VENTO. Thanks, Mr. Chairman.
I was interested to hear my colleague from California.
I think the issue here is the introduction of banking with the investment banking and whether or not the sovereign credit, to use the phrase I heard here, would be extended in terms of a too-big-to-fail scenario.
I think we are taking a leap in faith when we assume WFIs, or assume these types of mergers that will take place, will not extend that credit. We are assuming that we can stop that. And I mean that is a concern we have because we see——
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I mean, I think, Mr. Chairman and Mr. Secretary of Treasury and Under Secretary, that the big risk is not legislating. Because I think the pattern has been where these activities take place on an ad hoc basis in terms of association that we do not define the lines, and I think we are better off trying to do that and to limit this.
One of the questions came up about percentages and whether percentages—I think Mr. Barrett raised this question—were adequate. But they are, because we used percentages with regard to Fed and voting stock and with other types of percentages. So that is not an uncommon basis, and it is one—it may be, as you say, the word ''control,'' while we might prefer that word, is much more subjective in terms of where it goes.
In listening to the discussion between you and Mr. LaFalce with regard to operating subs—the understanding I have is that the operating sub is available, the funds can flow up. The key is to not let the funds flow down. And if it is an affiliate the ability for funds to flow back into the parent organization are more strained, are they not, Mr. Hawke?
Mr. HAWKE. There are significant limitations on the ability of the bank to flow funds either downstream or across stream to capitalize, but——
Mr. VENTO. With regard to an affiliate.
Mr. HAWKE.——If the activity is forced into an affiliate, the ability of the bank to realize the benefit of positive cash flow——
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Mr. VENTO. I think that is very key. We have had a lot of debates about this. An operating sub can be a much greater source of strength in terms of financial. The key question that will be asked by those that criticize that will be whether it also represents a vulnerability?
Secretary RUBIN. I don't think so, Mr. Vento. As long as you have required 100 percent charge against capital and as long as have you eliminated piercing the corporate veil, I don't see why you would—and you also have the same requirements with respect to transactions, other transactions with the op subs as you have with the affiliates——
Mr. VENTO. I tend to agree with you, but I think the issue here also gets to be new roles for regulators which, again, introduce the opportunity for difficulties. I think that is the sort of threshold issue that we have to pass.
One question, Mr. Chairman and Mr. Secretary of the Treasury, I wanted to raise the issue of the antitrust. I notice that, currently, we have an approval in terms of antitrust with regard to merger of banks. That is a hot topic these days as we see lots of mergers and acquisitions going on. Frankly, there doesn't seem to be any level at this point which we are approaching, other than what we possibly have in law which are very high ceilings in the interstate banking and branching laws and within States some limits that exist there.
But the question here, more precisely, is to provide for—and I noticed that your measure does provide for an antitrust-type review by the Justice Department with regard to these. And I think, more precisely—and this is a question, Mr. Hawke, that we raised on the phone in a manner, and that is the issue of investment banking.
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For instance, the phenomenon in Canada is that there are hardly any independent investment banking institutions remaining. And I think that, frankly—I mean, I would hope that this antitrust provision would carry off. Because, as you indicated, this is dealing with a very significant portion of our culture. And I understand from your background—I think this is a group of entrepreneurial in terms of venture capital formation and issue in terms of culture and how we operate.
Many have compared us—that if we have commerce and banking, we are going to turn into a large Germany or Japan. I rather doubt it. I think our culture, I think our type of mixed economy, a variety of other factors enter in here.
But what I am concerned about is this sort of merger—because these are very different cultures in terms of these financial institutions. So I am not concerned about ''Citicorp Bank Motors'' or something, because that I think is more farfetched. I don't think Citicorp is going to use the bank to start raising its money. 3M can go to the market and get money cheaper than through the bank that they own, and I don't think we are going to change that.
What I am concerned about is what happens within the context of financial institutions and the antitrust provisions, and I hope that we can put provisions in the bill that deal with these antitrust provisions and address that concern.
Do you have any concerns about that? Obviously, you placed it in your legislation. I think it is a positive step. I would like to call your attention to it and gain your support for appropriate language in this regard.
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Secretary RUBIN. You are worried about the size of consolidations?
Mr. VENTO. The elimination, basically, that you would have no independent investment banking entities. Because if you compare the size of banks and their capitalization with that of investment banking, you find a pretty big mismatch, Mr. Secretary.
Secretary RUBIN. It is an interesting subject. What has happened to some extent is that some of these large banks have become investment banks. I can think of at least two in New York that arguably are investment banks as much as they are commercial banks. So I don't know——
Mr. VENTO. Maybe you would like to think about it. I realize that these are difficult topics, but we will be moving, and I think there are some safeguards and some review of this is in order. If it is what the Federal Reserve Board does now between the mergers of banks, it might not do as much good; but at least we would have the ability to enter into——
You know, the Federal Reserve is named after some Norwegian or some German in Minnesota. We pay great reverence to them both.
Mr. HAWKE. Mr. Vento, one point, the provision in our bill relating to antitrust doesn't change antitrust standards at all. It simply is a kind of a functional regulation approach.
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Right now, we have dual consideration of competitive factors in bank mergers, both by the banking agencies and by the Department of Justice. We propose simply to vest that solely in the Department of Justice, which has the controlling hand, in any event, because it ultimately is the one that goes to court.
Mr. VENTO. But with new functions and new possibilities, I would like you to consider the tenor of my comments as well as the specifics in your legislation, and I appreciate that. Thank you.
Chairman LEACH. Mr. Vento, anything that you suggest will be seriously considered, seeing as most of it stems from Norwegians up in Minnesota.
Mr. Hill.
Mr. HILL. Thank you, Mr. Chairman.
I want to go back to the subject of subsidiaries of banks underwriting insurance. Because my concern there is not with regard to the potential impact on the solvency of the bank, it does go to the solvency of the insurance company.
Insurance regulators have often looked to the parent companies or the holding companies of insurance subsidiaries when they have dealt with issues of solvency. And if a bank is the parent company, it seems to me that we are taking a tool out of the hands of the insurance commissioners in dealing with that.
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Frankly, I would make the case that if the insurance commissioners set a higher solvency standard for insurance underwriting subsidiaries of banks than they did if they were subsidiaries of a holding company, you might interpret that as discriminatory. So I guess my question is, have you considered that in your proposal? That aspect of that structure?
Mr. HAWKE. Well, I think, first of all, the question of whether a holding company that owns an insurance underwriting firm is really no different from a bank owning an insuror. Many insurance companies don't have holding companies above them, so they have nobody to look to.
In our situation, a bank that owns an insurance underwriting activity—and it is not entirely clear that banks would really find that to be everything they want it to be—but, if they chose to use that format, the bank would be able to make equity investments in that company provided that they were sufficiently overly well-capitalized at the bank level to be able to do that and still remain well-capitalized.
Mr. HILL. You are looking at this from the perspective of the bank, and I am looking at it from the perspective of the insurance regulator. Mr. Vento made the point that monies can flow up and but they don't flow down very easily, particularly if the bank is the parent of the underwriting subsidiary. Isn't that true?
Mr. HAWKE. In that situation it is no different from a situation where an insurance company has no holding company and it is directly owned by shareholders.
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Mr. HILL. That is true. But where it is held by a holding company often the holding company's financial situation is part of the considerations that are made for the solvency of the insurance company. If a bank is the parent, you can see where that would make a substantial difference to the insurance regulator.
Mr. HAWKE. It might make a difference to the bank in choosing whether to have the insurance operation in a subsidiary as opposed to a holding company.
Mr. HILL. You are taking tools away from the insurance regulators, and they are not here at the table to make their case.
Secretary RUBIN. I don't think we are taking tools away. All the insurance regulator has to do, it seems to me, is take a look at the restrictions that exist with respect to the bank infusion of capital into insurance companies like they would in taking into consideration all other factors in judging the financial protection of the insurance company. I don't see where that is different from any other set of circumstances.
Mr. HILL. I guess that is the opposite of the argument with bank holding companies today, which we regulate if they hold banks. We regulate them because of potential risks to the banking industry. It seems to me that the same principles apply to the insurance industry if we are concerned about the safety and solvency of the insurance industry.
Secretary RUBIN. No, because the problem—I don't see how a problem in the bank would threaten the insurance company.
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Mr. HILL. Take the example in your proposal where your proposal calls for the Federal Reserve Board to impose consolidated capital requirements on situations where there are unusual risks. The insurance property casualty business has catastrophic risks. Are those the kind of risks that you think would be contemplated in having the Federal Reserve——
Mr. HAWKE. No. We specifically provide that where a component of the holding company is regulated by a separate regulator, like an insurance regulator, that there is a carve-out for determining holding company capital requirements. So an insurance company that is meeting its own capital requirements under its own principal regulator would not be taken into account by the Federal Reserve in setting consolidated capital requirements.
Mr. HILL. If the insurance regulator set different capital requirements based upon whether or not it was a subsidiary of a holding company or a subsidiary of a bank, would you consider that discriminatory practice or not?
Mr. HAWKE. Well, I think we would have to look at that in particular context.
Mr. HILL. That automatically wouldn't qualify as a discriminatory practice?
Mr. HAWKE. I wouldn't say it would automatically qualify.
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Mr. HILL. Thank you. Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Hill.
Let me say that the assistants of the Secretary have informed me that it is mandatory that the Secretary leave; and I would like if both of us, Mr. Jackson, could give our questions in writing? If you have no further questions, that is fine.
Let me conclude by saying I think the committee and the Administration are in broad measure in the same direction, and I personally think the public interest is dramatically served by bringing more competition and more convenience to financial services.
I am also personally convinced, as in a discussion earlier on that, there will be enormous benefits to smaller institutions, that in the new age of electronics that if small institutions cannot offer certain products and larger ones can, more and more customers will turn to the institutions that can offer a full variety of products.
And just like 30 or 40 years ago to do serious SEC work, one could only go to New York or Chicago and for law firms, today one can go almost anywhere in America for serious legal work; and I think the same thing will occur in the profession of financial services. It is only through fully empowering financial services firms that we are going to be able to save the smaller institutions and make them viable in the financial landscape.
In any regard, let me just conclude by saying that I think the Administration's approach has a lot to offer. And I rather like the two-alternative approach, but I also want to suggest that when you have hundreds of issues together, often there aren't just two paths, and I don't want the committee to box into precisely an ''either/or'' because there can be points in between, and I think that should be clear.
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In any regard, I thank both of you. You have distinguished public life with your service, and we are appreciative. Thank you, Mr. Rubin, Mr. Hawke.
Secretary RUBIN. Thank you, Mr. Chairman.
[Whereupon, at 1:47 p.m., the hearing was adjourned.]