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FERNAND J. ST GERMAIN, RHODE ISLAND, CHAIRMAN

FRANK ANNUNZIO, ILLINOIS

CARROLL HUBBARD, JR. KENTUCKY
DOUG BARNARD. JR. GEORGIA
JOHN J. LAFALCE, NEW YORK
MARY ROSE OAKAR, OHIO
BRUCE F. VENTO, MINNESOTA

CHARLES E. SCHUMER NEW YORK
BARNEY FRANK, MASSACHUSETTS
RICHARD N. LEHMAN, CALIFORNIA
BUDDY ROEMER LOUISIANA
MARCY KAPTUR OHIO

BILL NELSON, FLORIDA

PAUL E KANJORSKI, PENNSYLVANIA

BART GORDON, TENNESSEE

THOMAS J. MANTON, NEW YORK

HENRY B. GONZALEZ TEXAS

STEPHEN L NEAL NORTH CAROLINA

BRUCE A MORRISON, CONNECTICUT

BEN ERDREICH, ALABAMA

THOMAS R. CARPER, DELAWARE

ESTEBAN EDWARD TORRES, CALIFORNIA

GERALD D. KLECZKA, WISCONSIN

ELIZABETH J. PATTERSON, SOUTH CAROLINA

THOMAS MCMILLEN, MARYLAND

DAVID & PRICE, NORTH CAROLINA

U.S. HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
OF THE

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

ONE HUNDREDTH CONGRESS
WASHINGTON, DC 20515

October 15, 1987

CHALMERS P. WYLIE, OHIO

JIM LEACH, IOWA

STEWART 8. MCKINNEY, CONNECTICUT

NORMAN B. SHUMWAY, CALIFORNIA

BILL MCCOLLUM. FLORIDA

GEORGE C. WORTLEY, NEW YORK

DAVID DREIER CALIFORNIA

STAN PARRIS, VIRGINIA

MARGE ROUKEMA, NEW JERSEY

DOUG BEREUTER. NEBRASKA

STEVE BARTLETT, TEXAS
TOBY ROTH, WISCONSIN

JOHN HILER, INDIANA

THOMAS J. ROGE. PENNSYLVANIA

AL MCCANDLESS, CALIFORNIA

J. ALEX MCMILLAN. NORTH CAROLINA
JIM SAXTON, NEW JERSEY

Mr. Robert L. Clarke

Comptroller of the Currency 490 L'Enfant Plaza

Washington, D.C. 20219

Dear Mr. Clarke:

The Subcommittee will continue hearings on broad-based reform of this nation's banking and financial system. Confirming discussions with our respective staffs, the Subcommittee invites you to appear and testify on Wednesday, October 28, 1987, at 10:00 a.m. in Room 2128 of the Rayburn Building.

Your views on expanded powers for banks have been highly publicized as a result of your frequent appearances before a number of Subcommittees where you have testified on banking reform issues. However, this will give you the opportunity to make a formal presentation of your views before the Committee which has primary jurisdiction over this subject matter.

As you will recall, during consideration in conference on H.R. 27, most troublesome questions were raised as to the definition of what constitutes a "security." These questions raised concern over the impact of the moratorium on the operations of OCC. At the root of these concerns seems to be the different procedures employed by your office insofar as a national bank application is concerned, and the Federal Reserve Board insofar as a bank holding company application is concerned, for essentially the same type activity. The significance of this matter, for the future, is that it raises serious structural banking reform issues which, in my judgment, need to be considered as a part of any comprehensive review of the Glass-Steagall Act.

As you are well aware, there are a number of important issues the Subcommittee wishes to address on the broad question of restructuring this nation's banking and financial system. These issues cover a wide spectrum of topics, ranging from international subjects such as the globalization of financial markets and effective international banking supervision to equally important domestic issues such as consumer benefits and safeguards,

regulatory enforcement of the Community Reinvestment Act and the Home Mortgage Disclosure Act, just to name a few. You should also be aware of the Subcommittee's growing concern over excessive increases in banking costs which may be denying basic access to services to millions of people, as well as to whole communities across the nation.

Please find enclosed for your information a copy of the Subcommittee's first hearing on its comprehensive review of the financial system in which our witness was the former Chairman of the Federal Reserve, the Honorable Paul Volcker. In addition, enclosed is a memorandum dated July 24, 1987, from me to all members of the Subcommittee, on the scope of International Banking Hearings, and a statement made on October 1, 1987, before the Democratic Caucus of the Banking Committee, expressing my intention to hold comprehensive hearings. The House was pleased to accept the original moratorium language contained in H.R. 27 and, in furtherance of that concern over banking reform legislation, it is imperative that we assign a priority to this task and look to the OCC for its full consideration and cooperation.

In addition, recognizing the time limitations involved, and in the absence of specific legislative proposals before the Subcommittee at this time, the OCC will be given every opportunity to testify or comment on specific legislative proposals, or amendments thereto, probably either later this year or early in the next session.

Finally, in accordance with Committee rules, please deliver 175 copies of your prepared statement to Room B303 Rayburn House Office Building, Washington, D.C. 20515, 24 hours in advance of your scheduled appearance. Your statement in its entirety will be included in the hearing record and, if delivered when requested, the statement will be made available to all Subcommittee members

in advance of the hearing. To provide all Subcommittee members with sufficient time for questioning, the oral presentation of your prepared statement should be limited to 10 minutes.

Sincerely,

FJStG:dRh

Fernand J. St Germain
Chairman

TESTIMONY OF

L. WILLIAM SEIDMAN
CHAIRMAN

FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.

ON

REFORM OF THE FINANCIAL SYSTEM

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS UNITED STATES HOUSE OF REPRESENTATIVES

10:00 a.m. October 28, 1987

Room 2128, Rayburn House Office Building

Good morning, Mr. Chairman and members of the Subcommittee. We are pleased that you have called these comprehensive hearings on a most important subject. It is said that there is nothing as powerful as an idea whose time has come and we believe this applies today to the subject of these hearings restructuring the financial system. The FDIC's views on financial services reform and the structure of the financial services industry are set forth in our study Mandate for Change: Restructuring the Banking Industry. This study is being submitted today as part of the official record. The Executive Summary at the front of our study lays out the principal issues and our recommendations for reform.

Financial markets and competitive forces, both domestic and international, have changed dramatically since 1933 when the Glass-Steagall Act first imposed a partial separation between banking and securities activities and since 1956 when the Bank Holding Company Act further limited the activities of bank affiliates. These changes are addressed at length in our study.

Existing restrictions on banking activities have handicapped the banking industry in today's rapidly changing financial environment. The effect of these restrictions on banks is amply demonstrated by the appended chart that compares the annual growth rate of banks between 1980 and 1986 to that of other financial services firms. Of particular importance is a comparison of banks' growth rate of approximately 8 percent during that period with that of

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mutual funds and securities brokers and dealers which grew at rates of approximately 33 percent and 28 percent, respectively. Our banks should mirror the vitality of our economy. It is clear they are not doing so.

For an insurer like the FDIC, this news about the economic strength of our nation's banks is disturbing. This disadvantageous situation slowly will lead to a less safe and sound banking system.

Why does this situation alarm the FDIC? Why are we concerned about banks and why does the government have an involvement in the banking system? The answer is because banks are special. They are special for two principal reasons. First, because of deposit insurance, banks essentially borrow funds on the credit of the United States Government. Second, the banking system provides a safe harbor for savers, reserve liquidity and the mechanism for transferring funds throughout our economy. Without these functions by the banking system our economy could not function. In sum, any threat to the banking system is a threat to the intermediation process, private-sector liquidity, the payments system and the United States economy.

Through the operations of a more efficient banking system, direct benefits also accrue to individuals and society as a whole. Specifically, enhanced economic efficiency results from increased competition among the providers of financial services and the possible realization of economies of scale and scope. Furthermore, an improved level of safety and soundness for the banking system is a public benefit that can be expected to result from product liberalization.

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