Unless I am mistaken about Chairman Greenspan's testimony, he seemed to think that it was inevitable that by 2015 we were going to be at this juncture where commerce and banking were one. We are not at 2015, obviously, but we are going to get there one of these days, if we live long enough, and those of us who don't live long enough, somebody is going to get there even subsequent to us. How should we be planning for this inevitable outcome? Maybe I should ask it in two stages. First of all, do you see it as inevitable, as I think Chairman Greenspan indicated it was, that we will get there? And if, in fact, you do see it as inevitable, what steps ought we be making in the interim between now and then? I take it you say we shouldn't go there at all, we shouldn't allow it to happen, but if it is inevitably going to happen, how would we move from where we are today to where we need to be in 2015?

Mr. VOLCKER. Well, I think that is a very relevant question, and I obviously don't think it is inevitable. But that is kind of beside the point; nobody knows. But when you put it in the context of 2015, I think that is probably about the right context, and 2015 is almost 20 years away.

I think we will have a better idea maybe in 2010 whether that is inevitable in 2015, and I don't, you have no idea, collectively we have no idea what shape that might be in, and I don't know how to deal with it and don't deal with it.

One way of dealing with it, not completely dealing with it, but I think people ought to be put on notice once again that those who operate the payment system and those who do essential banking functions are going to be regulated, because I think it is extremely likely, whatever the technological change is that might take place, that people are going to continue to think the economy is vulnerable to a breakdown of the payment system. Therefore, there will be a public interest one way or another in regulating it.

So maybe you ought to put non-financial companies that have ambitions in that area potentially, a little gleam in their eye for 2015, on notice that if they are going to go into that business, they are going to be regulated.

Mr. WATT. You mean companywide, or just the core banking functions?

Mr. VOLCKER. Precisely the question. Then you say, "Companywide", we are going to regulate the whole company, because they have a bright enough idea in the payment system?

Mr. WATT. I am trying to figure out what you would tell them. Mr. VOLCKER. I would tell them they ought to plan, who knows about the future? But one plan they ought to have, if they want to get in this business, they ought to realize they are going to have to make a choice down the road and either operate the payment system or do some other business. So they shouldn't build their whole business strategy around the idea they are going to be combined.

The question is very interesting, because that is precisely what I am worried about, and that is, I think, the signal that the subcommittee ought to be giving is: "Don't plan that way," because it is obvious if somebody wants to get into the payment system, and it is a big company, it just has to put its toe in, and then its foot in, and it is not very much, and it can go in in a "basket," and then

they are going to come to you and say. "We are already in this business, but we obviously want to expand it, and, you know, it would be terribly inequitable for you not to now permit us to expand this thing." And you are caught. So you ought to put them on notice right now.

Mr. WATT. So it would be fair to say your position on this would be, first of all, if we start putting in place some regulations and some steps leading to 2015 now, that will actually hasten the day that 2015 will get here?

Mr. VOLCKER. Yes.

Mr. WATT. If we get to that point at 2010, when it is inevitable, we ought to start dealing with it at that time, rather than worrying about it in the interim?

Mr. VOLCKER. You can worry about it now, but I wouldn't like to see steps put in the regulatory legislative structure that assume that is going to happen and facilitate it, because I think that potentially obviously creates problems. You have a lot of problems you have to worry about in 2020, how you are going to pay my Social Security and all that stuff.

Mr. WATT. Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you.
Congressman Bereuter.

Mr. BEREUTER. Chairman Volcker, thank you very much for your testimony. I had to be at another hearing where we are getting our first exposure to the Foreign Aid Bill. I have read your comments and heard staff analysis, and I am very supportive of the comments and the cautionary notes you have given us.

On page three, you talk about the need to avoid the conflict of interest that we could find when we break down the traditional separation of commerce and banking. On page seven, you reference your hope, your trust, that those supporting banking and commerce combinations are not contemplating a replication of the Japanese keiretsu system. I certainly hope so too, but I think it is almost inevitable that you get some American variant of a keiretsu system to some degree in this country if you break down the barriers. Along with it is the anti-consumer practices and the corruption and the domestic and international inefficiencies that go with the keiretsu-type system.

But the keiretsu system makes me think of something I have been concerned about a long time, and that is the situation in Japan. I think the situation in the Japanese economy and the strength of their banking system today ought to be a cautionary sign, if not a stop sign, for us when we look at the possibility of combining banking and commerce. I would hope that it is not inevitable, that we need to look at what is happening in Japan.

The way I see it, it is a whole range of macro-economic factors and a wrongheaded kind of urban tax development problem that put them in a deep recession there. The fact that they had broken down the barriers between commerce and business means that the economic peaks are higher. And we looked with envy at the kind of assets the Japanese banks had as compared to American banks some time ago. But also I think it means that the valleys are deeper and perhaps wider, the economic valleys are deeper and wider.

Ms. GRIFFIN. My name is Mary Griffin, and I am with the Washington office of Consumers Union. We appreciate the opportunity to testify here today on H.R. 268 and the issue of financial modernization as it affects consumers.

I, too, would like to take this opportunity thank you, Congressman LaFalce, for your letter to Mr. Hawke and Mr. Ludwig about the need for consumer protections, because obviously this is very important for consumers as banks move further and further into the financial services marketplace.

Financial modernization is a laudable goal if it promotes competition, provides a regulatory structure that ensures safety and soundness and ensures consumers the needed protections as they attempt to make their way in the new and diversified marketplace. Today I would like to focus on the need to modernize consumer protection laws as part of any financial modernization package. Contrary to what many believe, banks have already made a substantial mark in the area of retail sales. According to industry estimates, bank insurance premiums totaled an estimated $16.3 billion in 1995. Their annuity sales accounted for one-third of all annuity sales in that same year.

Consumers have already experienced problems with banks selling insurance, annuities, mutual fund stocks and other non-banking products, and with bank fees increasing, many wonder whether banks' further expansion will promote competition, or just provide an opportunity to squeeze more out of consumers' pocketbooks, and consumers have cause for concern.

Study after study reveals that banks are not informing consumers about essential information relating to non-banking products. Banks argue that their expansion into the financial services marketplace will promote competition and help underserved areas. But as Mr. Mierzwinski just discussed, the track record for banks in the area of credit insurance, which is the second most sold insurance product for banks, shows more concern with increasing profits than with promoting a competitive market.

How can Congress help ensure that banks' expansion in the financial services marketplace helps, rather than hurts, consumers? First, the gaps in investor protection rules must be closed. Banks are currently exempt from the Federal securities laws. This means that banks don't have to comply with investor protection rules that non-bank brokers have to comply with, rules such as the requirement that salespeople recommend only products that meet the financial needs and goals of the particular customer, or as many people refer to it as, "suitability rules."

Most importantly, consumers do not have recourse to arbitration for violation of the rules as they do under securities laws. Unfortunately, H.R. 268 does not fully close this gaping loophole.

Second, strong disclosure in advertising rules are needed to ensure that banks don't mislead consumers. While H.R. 268 has some disclosure rules, they do not require disclosure prior to sale, which is the most important time. Nor do they cover insurance affiliates. Third, any modernization proposal must contain consumer protections to prevent coercive and deceptive practices in insurance sales. For example, banks use high pressure tactics on loan applicants awaiting their loan approval. To prevent this, banks should

be allowed to sell insurance only after the loan decision has been made, and consumers must have an enforcement mechanism to recover directly from banks when they violate these rules.

Finally, Congress should not preempt State consumer protection laws. The preemption language of H.R. 268 is very broad. In the area of privacy, we believe the bill does not go far enough to protect consumer privacy of the information they give to banks. In addition, we are also concerned that H.R. 268 may preempt State privacy laws that provide greater protection.

In addition to the consumer protections we just discussed, we also would like to touch upon structural issues that have gotten quite a bit of attention. First, with regard to the mixing of commerce and financial firms, we are opposed to it because of the potential overconcentration of economic power, the possible skewing of credit markets and general safety and soundness concerns.

In terms of risky activities such as underwriting securities and insurance, we believe the less risky approach is through a separately capitalized affiliate rather than permitting the activities in a federally insured bank subsidiary.

We thank you for this opportunity to testify and look forward to working with you in this endeavor.

[The prepared statement of Ms. Mary Griffin can be found on page 582 in the appendix.]

Chairwoman ROUKEMA. Thank you.

Mr. Allen Fishbein is General Counsel for the Center for Community Change and is no stranger to this subcommittee. He has been an advocate for consumer issues for a good number of years. Thank you. Welcome.

STATEMENT OF ALLEN J. FISHBEIN, GENERAL COUNSEL, CENTER FOR COMMUNITY CHANGE

Mr. FISHBEIN. Thank you very much, Madam Chairwoman. It is a pleasure to be here and appear before the subcommittee. I appreciate the opportunity to present my views and the views of the Center for Community Change on financial modernization and on H.R. 268.

I want to commend you, Madam Chairwoman and Representative Vento, in particular, for holding these hearings.

In my testimony, I want to focus on the implications of financial modernization and restructuring for modest income consumers and communities and the need for the modernization of the Community Reinvestment Act.

For some time now, deregulation, new technologies, increased competition domestically and from abroad, have been reshaping the banking and financial services industry. I don't think there is any question about that. As a result, Congress is contemplating legislation to allow interfinancial institution affiliations and perhaps even allow banks and commercial firms to own one another. But to paraphrase former French Premier Georges Clemenceau's comment about war and generals, we think that "banking is much too serious a matter to be entrusted to the bankers."

But, unfortunately, as we all know, the debate over the necessity of these changes is all too often dominated by narrow turf issues.

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So what you see is an exaggeration of the economic trends when you have banking and commerce mixed.

So at a time when you have industrial problems and when you have got problems in the economy in general in Japan, at a time when you need a stronger set of financial institutions, they are weakened by the fact that you have combined commerce and busi

ness.

I think that the commerce and business combination in Japan is one of the reasons Japan is having such a tough time pulling out of that recession.

I would welcome any kind of comments you might want to make on this subject. If you have any areas of agreement, or disagreement, with my concerns, I would appreciate it.

Mr. VOLCKER. I think there is a lot to what you say. There is a real irony to me that, by general assent, the American financial system is the most vigorous, flexible, innovative, quickest to change, most efficient in allocating capital, and it has been done by maintaining the separation.

So the burden of proof seems to me to be on those who want to end the separation. We are doing fine without it, and without exception those countries that have more connection between banking and commerce are noted for having inflexible systems. Whether it is cause and effect or not, I don't know, but it is true.

As you were talking, I happened, I don't think we are going to go very closely to a keiretsu system, I certainly hope not. I don't want to create the opportunity. But one of the problems, I think, plaguing Japan now is that, relative to American standards, industry is very highly leveraged, and the banks traditionally have been very highly leveraged. And one wonders whether the leverage of Japanese industry has not been made possible by the close perceived connection, and actual connection, between industrial firms and banks.

They always had kind of a "house" bank upon which to fall back. And I don't think that was the only factor, but I suspect it was a factor in contributing to an environment in which Japanese industry, by and large, has been pretty thinly capitalized.

Mr. BEREUTER. I have no doubt about it.

What about the possibility that I am suggesting that, in fact, breaking down the barriers between commerce and business really exaggerates the economic trends in an economy?

Mr. VOLCKER. I don't know. I think that is possible. I think it has complicated the Japanese recovery from, not exactly a depression or recession, but just a long period of sluggishness from this bubble that they had.

Now, did it contribute to the bubble? It could easily have done so. That cause and effect, I think, is hard to establish. It might well have done that. Again, how did they expand so much in these markets on such thin capitalization without a feeling that those big banks were there supporting it?

Mr. BEREUTER. Thank you.

Chairwoman ROUKEMA. I thank all my colleagues for their cooperation. There are so many questions, Mr. Volcker, that we have on our minds. We have restrained ourselves and we are respectful of your time commitment.