-2 directly. It should be a business decision as to which option makes more The sense for any individual banking organization. The supervisory wall as proposed does not prevent the flow of benefits to the bank from its nonbank subsidiaries (directly, via dividends) or affiliates (indirectly, via the parent or other parts of the organization). Moreover, a profitable subsidiary can be sold to aid the bank should it encounter financial difficulties. proposed supervisory wall between a bank and its affiliates or subsidiaries also allows ample room for capturing any cost economies available from joint production, joint marketing, joint product development, or other combinable operations within the organization. The ability to harness such synergies will raise bank earnings directly, thus attracting investment capital to the bank. It is important to stress that the proper policy goal of financial restructuring is not to maximize the dollar volume of capital devoted to the banking industry. The goal is to facilitate the allocation of capital to whatever types of financial organizations best meet consumers' needs, so long as this is done in a safe and sound manner. The FDIC proposal does this by allowing all types of financial service firms to compete on equal terms, as long as banking organizations are equipped with a "Chinese wall" around the banking unit. With competition on a level playing field, investors will reward the competitors with capital according to their performances in the marketplace (as judged by the dollar votes of consumers). The FDIC believes that each banking organization that prospers in this more equitable and more competitive environment will gain easier access to capital for its component banks, since such an organization will have established its viability among -3 the widest possible field of competitors. At present, the fear among potential investors that restrictive laws will prevent banking organizations from competing successfully against other financial firms is restricting bank access to capital. Clearly, if we remove the restrictive laws and allow the competitive process to work, the banking industry that emerges from this process will not labor under such a needless disadvantage in the capital markets. To follow up on our phone conversation today, I greatly appreciate your understanding of the important task that lies ahead for both the Administration and the Congress in achieving a meaningful deficit reduction package. Sincerely, Jim Baker James A. Baker, III The Honorable Fernand J. St Germain Chairman Committee on Banking, Finance, and Urban Affairs U.S. House of Representatives 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 and Under Secretary of the Treasury George D. Gould to appear and testify on Tuesday, November 3, 1987, at 10:00 a.m. in Room 2128 of the Rayburn Building. Some would argue that the globalization of financial markets and the inevitable effects technological innovation has had on such markets in recent years raise fundamental questions about the ability of our nation's financial institutions to fairly compete under the present legal and regulatory structure. However, I am sure you would agree that any serious discussion of structural reform of our financial system must address important safety and soundness considerations. In addition, whatever revisions or restructuring mechanisms, if any, are ultimately adopted would have to address the needs of and benefits to the consumers of this nation. This Subcommittee intends to continue to make major contributions to the delineation and formulation of policies affecting the well-being of our financial institutions, but not at the expense of those in our society who can least afford it. Mr. Secretary, the Subcommittee will welcome your views and those of Under Secretary Gould on these important matters. For your information, I am enclosing copies of the letters of invitation addressed to the Chairman of the FDIC, L. William Seidman, and the Comptroller of the Currency, Robert L. Clarke, with accompanying enclosures as noted in those letters. Flease note that you or Secretary Gould are not expected to address all of the topics referred to in the enclosures. They are included |