STATEMENT OF CRAIG J. KELLY, SENIOR VICE PRESIDENT, BANC ONE CORPORATION, ON BEHALF OF THE CONSUMER BANKERS ASSOCIATION

Mr. KELLY. Madam Chairwoman and Members the subcommittee, my name is Craig Kelly; and I am Senior Vice President of Banc One Corporation in Columbus, Ohio. I currently serve on the Consumer Bankers Association Board of Directors, and I am pleased to testify today for them.

CBA is recognized as the voice on retail banking issues here in our Nation's capital. We have long supported financial services reform. We believe that comprehensive changes in our laws are needed to make the delivery of consumer financial products and services as efficient and convenient as possible for our customers. We are grateful that you in the subcommittee are working on modernization. Congressional actions, coupled with the private sector initiatives and the current actions of both the OCC and Federal Reserve, are indications that modernization is, in fact, essential.

As bankers, we are continually seeking new ways of meeting the needs and demands of our customers through the development of new products, services and delivery channels. New technologies are making it possible for new financial services for bank customers, and we are always looking for ways to use these new developments to meet the needs of every part of the communities we serve. Alternative delivery channels will allow expanded access to the bank across all our communities and all our customers regardless of their incomes.

As we speak here today, the CBA and the OCC are cosponsoring a forum to address the ways of expanding access to financial services in the 21st Century. We can only supply these services effectively and conveniently within the regulatory framework that keeps unnecessary restrictions to a minimum. It must allow banking organizations maximum flexibility to structure their operations in a manner that best suits each organizations' customer base market niche and business goals.

We believe that comprehensive financial services modernization is essential to achieving this goal. It will benefit customers through increased competition, innovations and the elimination of arbitrary market segmentation.

However, critical features must be included in financial modernization if it is to be effective. In the interest of time, let me mention just a few of these.

Banks should be free to offer securities, insurance and other financial services directly through affiliates in order to maximize customer convenience and choice. The organizational structure for such activity should be the decision of each individual banking organization as they best know how to maximize their customer relationships.

Second, the ability to cross-market products and services of affiliates on an integrated basis is essential to achieve maximum efficiency and customer service. Elimination of mandatory barriers between banking and the securities and the industries sectors will facilitate cross-marketing, but specific restriction on cross-marketing must also be removed.

CBA believes that a provision such as Section 107 of H.R. 268, which specifically preempts Federal and State laws that prevent cross-marketing among financial services, holding company affiliates, must be an essential feature of any financial services reform legislation.

Third, and on a related note, CBA has particular concerns regarding any legislative proposals that would limit the ability of banking organizations to share customer information. From the customer's perspective, sharing allows one-stop shopping for financial services.

It is our experience that our bank customers expect us to be knowledgeable about the products they already have with us at our institution and to have that information readily at hand. Because they already have a relationship with us, they expect us to make them aware of new products and services that uniquely fit their needs. If we don't, they think we do not value their business.

If we are to meet customer and community needs, we must remove the artificial barriers that have been imposed on us that serve no real purpose other than to confuse the very customers we need to serve. In order to secure customer information more effectively and to address concerns regarding customer information, the CBA board has recently adopted and approved a "Best Practices" policy which we have attached to our written testimony.

[The information referred to can be found on page 238 in the appendix.]

I would like to mention several other important issues. Modernization should end limitation on the ability of banks to affiliate the financial service firms to direct subsidiaries as well as through holding companies. Each banking organization should be permitted to choose its own organizational form, subject to safe and sound considerations, but unburdened by unnecessary regulation. Our financial system is sufficiently mature and strong that strict barriers to affiliations between banks and commercial firms are no longer necessary. Therefore, the relaxation of such barriers is not only timely but recognizes the reality of today's marketplace.

CBA supports the concept of financial "functional regulation" to the extent that its goal is to ensure that similar activities are subject to similar regulation. Having said that, "functional regulation" should not necessarily mean that the same activities are always regulated by the same regulator, especially when some financial products have yet to be defined.

Additionally, in today's and tomorrow's electronic world, customers are clearly demonstrating that they want to bank away from the traditional branch. In this brave new world, having to comply with a maze of rules and regulations that differ from State to State makes it extremely difficult to meet customer needs. The concept of an umbrella regulator to oversee consolidated financial institutions should be studied further before it is implemented in a way that would disrupt existing relationships between banks and their current regulators.

We also have concerns about the loss of some of the powers under the current thrift charter. A thrift charter offers an attractive alternative structure to commercial banking considerations as well as other types of financial firms.

We do appreciate this opportunity and your leadership in working toward comprehensive financial modernization. We are looking forward to working with you and Members of the subcommittee. Thank you very much.

[The prepared statement of Mr. Craig J. Kelly can be found on page 230 in the appendix.]

Chairwoman ROUKEMA. Thank you.

Now, Dr. Pollard, Bankers Roundtable.

STATEMENT OF DR. ALFRED M. POLLARD, SENIOR DIRECTOR FOR LEGISLATIVE AFFAIRS, BANKERS ROUNDTABLE

Dr. POLLARD. Thank you, Chairwoman Roukema. The Roundtable appreciates the opportunity provided to address the subcommittee today on issues surrounding proposals for financial modernization; your early action to introduce, along with Congressman Vento, H.R. 268, and to conduct a series of hearings that starts today and begins the process of considering long-needed reforms of laws governing the financial services sector. On behalf of the Bankers Roundtable, thank you.

For purposes of my oral prepared statement, I would like to focus on one element of the written testimony and that is the subject of safeguards, protections, firewalls or other terms that contemplate insulating banks or other companies from one another.

The Roundtable urges the subcommittee to carefully consider any proposed safeguards that only make new affiliated entities or operation of new product lines uneconomical and noncompetitive. In businesses, where margins remain extremely thin, a so-called "safeguard" that has no real value for safety and soundness can mean the lack of viability of a company. An extensive array of safeguards exist, and adding new authorities or permitting new affiliations need not be accompanied by new protections.

An approach the Roundtable would suggest consists of asking two fundamental questions of any proposed new safeguard. First, will the proposed safeguard address some real concern for safety and soundness or does it represent merely an attempt to make one competitor's operations more costly than another's?

Second, do regulators have the ability within the existing panoply of authorities to apply such a safeguard when and where needed? That is, even if a safeguard has merit, does it not already exist within the purview of regulators, both banking and non-banking? A review of banking, securities, insurance, Federal Trade Commission, Justice Department, Labor Department, HUD and other Federal regulatory regimes, alongside State laws, indicates no gap in prudential regulation. There are many safeguards today that apply already across markets, antitrust laws, SEC fraud rules, SEC regulations of firms issuing stock, FTC and Justice Department consumer and merger rules and State laws governing privacy or more specific rules, such as insurance holding company statutes.

Safeguards based on capital and risk management techniques and other rules exist within each regulatory entity. Offering of diverse product lines in whatever corporate structure does not diminish the regulation of the various entities or individual companies within the group.

I would like to highlight, if I may, and illustrate this point by the work of this subcommittee and the full committee over the past 8 years. In many ways, permitting new financial activities will be catching the structures up to the safeguards. Let me highlight this with just two areas.

There are major policy concerns, and always have been, of protecting the insurance fund. Let me just review briefly the safeguards that have been added in the past few years.

We have a risk-based premium system for deposit insurance. We have a risk-based capital system, and that capital system has been enhanced by addition of risk measures for interest rate, credit and concentration risk.

The fund is insulated from losses. We have increased the reserve ratio to 14 percent. This subcommittee and committee worked out early intervention and prompt corrective action measures that mandate regulatory action as capital declines within a banking institution. This committee put in least-cost resolution. That means that in essence, major elements of the too-big-to-fail concept have disappeared. Cross guarantees are in place; capital plans where the bank has to list its future capital plans; growth limitations for undercapitalized firms; the very critical element of depositor preference, which elevated the FDIC in the priority scheme. The likelihood of FDIC losses in a failing bank situation is very small because of depositor preference.

We have the Change in Bank Control Act that was enhanced by this committee to ensure that people taking over banks are supervised.

A second policy concern is insulation among affiliated companies and the ability of regulators to act. Again, the current law contains many of these protections.

Any institutional change affecting a bank is governed by the Change in Bank Control Act and the Bank Merger Act. Regulators have the ability to restrict dividends and capital. There are lending limitations. Frequently we hear, "Well, the bank will lend or favor a particular party," but there are absolute numerical limits on how much a bank may lend to an individual borrower. There are also limits on officer and shareholder borrowings. There are anti-tying restrictions, cease-and-desist authorities, civil money penalty authorities, removal authorities, the loss of deposit insurance.

Examinations occur of banks and their affiliates. Investigatory powers are there, as well as reporting, and all of you are familiar with Sections 23(A) and 23(B) that limits transactions among financial affiliates.

Let me end with one final example, which is Section 23(B). Section 23(B) says fundamentally that a securities firm fundamentally affiliated with a bank should be dealt with on an arm's length basis, so that if a bank is lending to an affiliated securities firm, an unaffiliated firm should have an equal ability to come in and borrow.

What is interesting about this provision is, it was put in the law, in a proposed bill that would have included the securities affiliate. The protection passed; the securities affiliate did not.

Madam Chairwoman, I will end here because of the time. I appreciate the opportunity.

Chairwoman ROUKEMA. Thank you.

[The prepared statement of Dr. Alfred M. Pollard can be found on page 245 in the appendix.]

Chairwoman ROUKEMA. Mr. Tassey.

STATEMENT OF JEFFREY A. TASSEY, SENIOR VICE PRESIDENT OF GOVERNMENT AND LEGAL AFFAIRS, AMERICAN FINANCIAL SERVICES ASSOCIATION

Mr. TASSEY. Thank you, Madam Chairwoman, Members of the subcommittee. My name is Jeff Tassey, and I am presenting this testimony on behalf of the American Financial Services Association, AFSA. AFSA appreciates both this opportunity to express our views on financial modernization and your leadership in bringing this issue to the forefront early in the session. We look forward to working with you to bring about a financial services industry where consumers and markets determine what financial services are available and how they are delivered while promoting the substitution of private risk capital for government regulation.

Financial modernization is necessary to end once and for all the compartmentalization of the financial services industry, established over 60 years ago, thereby removing the barriers to early capital flows in our financial services economy.

The affiliation issue is at the root of AFSA's support for financial modernization. As indicated at the beginning of our testimony, AFSA represents an extremely diverse group of lenders, primarily market funded and, accordingly, subject to intense scrutiny and regulation by the markets. A great many of these entities have a wide range of functionally-constrained affiliations with some type of federally-insured institution. There has never been any evidence that any of these entities pose any systemic or deposit insurance risk as they go about their business of providing approximately 20 percent of all consumer credit.

AFSA strongly supports the ability of commercial firms to own or otherwise affiliate with such a holding company.

The prohibition on banking and commerce dates from 1970 and has always been shot through with exceptions. Thousands of individuals own banks who also own many and varied commercial interests, none of which are subject to the same holding company affiliation restrictions and oversight as banks owned by corporate entities.

If it is harmful for banks and commercial entities owned in the corporate form to affiliate, then the same restrictions should apply to the thousands of wealthy individuals who freely mix banking and commercial enterprises.

The history of commerce and banking in the United States not only shows no greater propensity of commercial and banking firms to fail than banks, but to the contrary, indicates that commercial ownership has provided greater protection to the bank. The most recent example of this is found during the thrift failures of the 1980's where the commercially-affiliated unitaries had an excellent rate of survival.

The primary argument postulated against banking and commerce is that such a holding company form would result in large concentrations of economic resources. Such concentrations are far