Madame Chairwoman and members of the Subcommittee, my name is Craig Kelly. I am Senior Vice President at Banc One Corporation, in Columbus, Ohio. I am pleased to testify on behalf of the Consumer Bankers Association (“CBA"), where I chair the Communications and Membership Council and serve on the Board of Directors. CBA is the recognized voice on retail banking issues in the nation's capital. Member institutions are the leaders in consumer, auto, home equity and education finance, bank sales of investment products, small business services and community development. Founded in 1919, CBA's members hold more than 900 bank and thrift charters with total assets of more than $2.9 trillion. CBA has long supported financial services reform legislation that recognizes the need for comprehensive changes in our laws to make the delivery of consumer financial products and services as efficient and convenient as possible for banks and their customers. We are grateful that you and Mr. Vento, as well as Mr. Leach, and we expect Mr. Baker, are all addressing the issue of modernization. As you know, for the first time, diverse industry groups -- securities, insurance, diversifieds and banks -- are working together on this issue. Congressional actions, coupled with private sector initiatives and the current actions of both the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Board, are indications that modernization is essential. Bankers are continually seeking new ways of meeting the needs of their customers through the development of new products, services and delivery channels. New technologies are making possible a wide array of new financial services to bank customers, and we are looking for ways of using these new technological developments to meet the needs of every part of the communities we serve. Alternative delivery channels will allow expanded access to banks by all customers -- regardless of their income. As I speak here today, CBA and the OCC are co-sponsoring a forum to address ways of expanding access to financial services in the 21st Century. The efficiency and convenience with which services can be offered depends on the existence of a regulatory framework that minimizes unnecessary regulatory restrictions and affords banking organizations maximum flexibility to structure their operations in the manner that best suits each organization's customer base, market niche and business goals. Consumers will benefit enormously from comprehensive financial services modernization legislation through increased competition, innovations and the elimination of arbitrary market segmentation and its unnecessary and costly regulation. CBA believes that certain critical features must be included in financial modernization legislation if it is to be effective. We offer the following comments. Full Securities and Insurance Powers Elimination of artificial restrictions that prevent banks from operating as full-service financial service firms must be the central goal of comprehensive financial services reform. The inability of banks to offer a complete menu of financial services, including securities and insurance products, along with traditional banking products, has meant that consumers have been forced to obtain these services from different service providers at different locations and have not benefited from the convenience and potential cost savings of "one-stop shopping" at a single banking organization. CBA believes that banks should be free to offer securities, insurance and other financial services directly and through affiliates in order to maximize customer convenience and choice. The organizational structure for such activities should not be dictated by Congress or the regulatory agencies but by the decision of each individual banking organization as to which structure makes sense for its own operational efficiency and customer needs. Cross-Marketing The ability to cross-market products and services of affiliates on an integrated basis is essential for a full-service banking organization to be operated with maximum efficiency and customer convenience. Elimination of mandatory barriers between the banking and securities and insurance sectors will facilitate cross-marketing, but specific restrictions on crossmarketing also must 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 considered an essential feature of any financial services reform legislation. Sharing of Customer Information CBA has particular concerns regarding any legislative proposals that would limit the ability of banking organizations to share customer information. The convenience and efficiency of one-stop shopping for financial services is dependent upon the seamless delivery of products that results from the interchange of customer information among different affiliates or divisions of a banking organization. In addition, the use of customer information within a banking organization improves risk management. Both enhanced risk control and efficiency would be seriously impaired if information sharing were restricted. One-stop shopping is beneficial to consumers. It is our experience that bank customers expect banking organizations to be knowledgeable about the products they already have at the institutions, and to have the information readily at hand. They also value hearing of new products and services that fit their needs. To the typical customer, the banking organization is a seamless web and the artificial barriers imposed on it by regulators are invisible. The apparent inability of the banking organization to know its customers is viewed as frustrating and inconvenient, not beneficial. Recent Congressional action (passage of amendments to the Fair Credit Reporting Act) permits banking organizations to share information within the organization. Customers are informed of this practice. In order to secure customer information more effectively and to address concerns regarding customer information, CBA members have recently approved a "Best Practices" rule for use of customer information which is attached to this testimony. (See Appendix A) Inter-Industry Affiliations The artificial separations in the financial services industry have resulted in enormous regulatory costs for the industry as a whole to the disadvantage of individual financial services institutions and their customers. For example, such artificial structural distinctions only beget artificial regulatory restrictions that impair the ability of financial services firms to serve consumers with maximum efficiency and convenience. The goal of any comprehensive financial services reform legislation must be to eliminate such restrictions. CBA supports legislation to end limitations on the ability of banks to affiliate with financial service firms through direct subsidiaries as well as through holding companies. Any requirement that such affiliations occur only through a holding company structure or only through subsidiaries would be artificial and irrelevant to the efficient delivery of financial services. The United States is one of the few modern banking systems that maintains such arbitrary distinctions between market participants. In particular, we support the regulation recently adopted by the OCC to permit national banks to apply for OCC approval of operating subsidiaries engaged in activities that are financial in nature but that are not now permissible for a national bank to offer directly due to limitations on the national bank charter. Our banking system should allow banks to operate without the need of an artificial holding company structure. A bank may choose such an organization form in order to eliminate a layer of unnecessary holding company regulation or for other legitimate reasons. At the same time, other banks undoubtedly will find the holding company a useful organizational tool for a variety of business reasons. CBA believes that each banking organization should be permitted to choose its own organizational form unburdened by regulation. Banking and Commerce CBA believes that our financial system is sufficiently mature and strong that strict barriers against affiliations between banks and commercial firms are no longer necessary. We can permit a relaxation of such barriers without fear of undue concentrations of resources, commingling of banking and commerce and other concerns of the type that motivated Congress to adopt the Bank Holding Company Act of 1956. Affiliations between banks and commercial firms likely will occur if banks are permitted to acquire securities and insurance companies that are not currently restricted as to their affiliations. Such affiliations should not be automatically banned in the absence of any abuses. You have asked us to comment on the "basket" approach included in your bill. This approach would permit a financial services holding company to maintain up to twenty-five percent of its business in nonfinancial activity. CBA has leaned toward some mixing of commerce and banking. Its Board of Directors is currently considering the matter. We believe the basket approach is one solution and that a Congressional debate on this issue will answer the questions and ensure that an equitable solution will be reached. Functional Regulation CBA believes that the concept of "functional regulation” makes sense when applied in such a way as to ensure that similar functions are subject to similar substantive regulation to avoid unfair competition. CBA supports the concept of functional regulation to the extent that its goal is to provide a level playing field and ensure that similar activities are subject to similar regulation, whether conducted in a bank or an affiliate. CBA believes, however, that functional regulation should not necessarily mean that the same activities must always be regulated by the same regulator. Cooperation among agencies with jurisdiction over different entities can successfully speed the implementation of functional regulation. For example, the substantive goals of the securities laws can be applied to banks without banks being subjected to regulation by the Securities and Exchange Commission. The federal banking regulators are experienced in regulating bank trust departments and securities operations in a manner consistent with the securities laws, and such regulation should not be duplicated or replaced by subjecting banks to another layer of regulatory jurisdiction. Moreover, CBA has concerns about subjecting banks to functional regulation at the state level if it means that banks will be required to comply with a maze of local rules and regulations that differ from state to state. Such 50-state regulation is inconsistent with the goal of financial |