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decisionmaking.

First, banks must diversify their businesses and examiners look to excessive concentration in any one credit or borrower area.

Second, regulators may bar a capital infusion to a subsidiary and, if a subsidiary is in distress, the OCC may direct its divestiture or liquidation.

Third, if problems exist, bank regulators may restrict payment of dividends and trigger capital plans for creation of new capital for a bank.

Fourth, the capital rules placed in the law by the Federal Deposit Insurance Corporation Improvement Act require maintenance of bank capital, such that transfer of funds to a subsidiary which lowered bank capital would trigger early intervention rules and mandated regulatory action. Additionally, a drop in capital that removed a bank from the wellcapitalized level would eliminate bank advantages based on being strongly capitalized; that is, the benefits of being well capitalized under the law, such as reduced regulatory burden, would be lost and that would outweigh any value of transfers to a subsidiary.

Overall

As I testified at the hearing, the safeguards in place following recent congressional enactments and the incentives for maintaining strong capital make capital infusions to a risky enterprise highly unlikely. Certainly, capital infusions are appropriate to assist a subsidiary particularly if they represent a small percentage of bank capital, would keep a participant in the market and the likelihood for success are there.

Experience in bank regulation reveals few transfers of capital from a bank to a subsidiary that either posed a risk to the institution or violated regulatory directives. Penalties for such a violation exist under banking laws, with repercussions for a bank in the marketplace as well.

I hope this information is responsive to your inquiry and I can provide additional information as needed. Again, thank you for the opportunity to address the Subcommittee.

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STATEMENT OF THE

AMERICAN FINANCIAL SERVICES ASSOCIATION

BEFORE THE SUBCOMMITTEE ON

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

COMMITTEE ON BANKING AND FINANCIAL SERVICES

February 11, 1997

THE AMERICAN FINANCIAL SERVICES ASSOCIATION APPRECIATES THIS OPPORTUNITY TO EXPRESS OUR VIEWS ON THE MODERNIZATION OF THE U.S. FINANCIAL SYSTEM. BELOW IS A BRIEF DESCRIPTION OF THE ASSOCIATION AND ITS MEMBERS FOLLOWED BY VIEWS ON FINANCIAL MODERNIZATION AS REQUESTED BY THE

SUBCOMMITTEE.

THE AMERICAN FINANCIAL SERVICES ASSOCIATION

THE AMERICAN FINANCIAL SERVICES ASSOCIATION (AFSA) IS THE TRADE ASSOCIATION FOR A WIDE VARIETY OF NON-TRADITIONAL, MARKET-FUNDED PROVIDERS OF FINANCIAL SERVICES TO CONSUMERS AND SMALL BUSINESSES. AS ADOPTED BY OUR MEMBERS, THE MISSION OF AFSA “IS TO ASSURE A STRONG AND HEALTHY BROAD-BASED CONSUMER LENDING SERVICES INDUSTRY WHICH IS COMMITTED TO (1) PROVIDING THE PUBLIC WITH A QUALITY AND COST EFFECTIVE SERVICE, (2) PROMOTING A FINANCIAL SYSTEM THAT ENHANCES COMPETITIVENESS AND (3) SUPPORTING THE RESPONSIBLE DELIVERY AND USE OF CREDIT AND CREDIT RELATED PRODUCTS."

AFSA'S MEMBERS FIT INTO FOUR BASIC CATEGORIES:

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DIVERSIFIED FINANCIAL SERVICES COMPANIES-THESE ARE COMPANIES THAT OFFER A BROAD RANGE OF FINANCIAL SERVICES AND PRODUCTS TO CONSUMERS NATIONWIDE. MANY OF THESE MEMBERS

ARE AFFILIATED WITH BANKS OR SAVINGS AND LOANS.

• AUTOMOTIVE FINANCE COMPANIES—THESE COMPANIES ARE FREQUENTLY REFERRED TO AS "CAPTIVE FINANCE COMPANIES." THEY PROVIDE FINANCING FOR CUSTOMERS THAT PURCHASE THE MANUFACTURER'S PRODUCTS. IN ADDITION, MANY OF THE COMPANIES OR THEIR PARENTS HAVE BRANCHED OUT INTO A RANGE OF OTHER FINANCIAL SERVICES, SUCH AS CREDIT CARDS OR MORTGAGE LENDING.

• CONSUMER FINANCE COMPANIES-THE CORE BUSINESS OF THIS MEMBERSHIP SEGMENT INCLUDES: UNSECURED PERSONAL LOANS, HOME EQUITY LOANS, AND SALES FINANCING (FOR RETAILERS' CREDIT CUSTOMERS). THIS SEGMENT INCLUDES COMPANIES OF ALL SIZES.

• CREDIT CARD ISSUERS - THIS MEMBERSHIP SEGMENT OFFERS BANK CARDS, CHARGE CARDS, CREDIT CARDS OR PRIVATE LABEL CARDS. AFSA MEMBERS INCLUDE SOME OF THE LARGEST CREDIT CARD ISSUERS IN THE U.S.

SOME CONSUMER FINANCE COMPANIES ARE OWNED BY, OWN, OR ARE AFFILIATED WITH DEPOSITORY INSTITUTIONS, SUCH AS SAVINGS & LOANS, CONSUMER BANKS (LIMITED-PURPOSE BANKS), OR CREDIT CARD BANKS. THESE INSTITUTIONS ARE FULLY REGULATED INSTITUTIONS, SUBJECT TO ALL OF THE LAWS AND REGULATIONS APPLYING TO BANKING INSTITUTIONS, INCLUDING THE COMMUNITY REINVESTMENT ACT AND THE HOME MORTGAGE DISCLOSURE ACT. THEY ARE REGULARLY EXAMINED BY STATE AND FEDERAL

BANKING AUTHORITIES.

IN ADDITION, EACH OF THESE CONSUMER LENDERS MUST COMPLY WITH FEDERAL REGULATIONS RELATING TO CONSUMER CREDIT THE EQUAL CREDIT OPPORTUNITY ACT, THE TRUTH IN LENDING ACT, THE REAL ESTATE SETTLEMENT PROCEDURES ACT, THE CONSUMER LEASING ACT, THE FAIR CREDIT BILLING ACT, THE FAIR CREDIT REPORTING ACT, AND THE FEDERAL TRADE Commission'S CREDIT PRACTICES RULE

ARE AMONG THE MOST IMPORTANT.

CONSUMER LENDERS WHICH ARE NOT DEPOSITORY INSTITUTIONS, ARE GENERALLY LICENSED AND REGULATED BY THE STATE BANKING DEPARTMENT OR THE DEPARTMENT OF CORPORATIONS IN EVERY STATE IN WHICH THEY OPERATE, OFTEN SEPARATELY REGULATED FOR EACH PRODUCT. THEY ARE SUBJECT TO STATE

LAWS GOVERNING THE RATES THEY CAN CHARGE ON CONSUMER LOANS, AS WELL AS STATE CONSUMER

PROTECTION LAWS.

AS THE ABOVE DEMONSTRATES, AFSA MEMBERS ARE IMPORTANT SOURCES OF CREDIT TO THE AMERICAN CONSUMER, PROVIDING OVER 20 PERCENT OF ALL CONSUMER CREDIT. AFSA MEMBERS ARE HIGHLY INNOVATIVE AND COMPETE AT ALL LEVELS IN THE FINANCIAL SERVICES MARKETS. OUR MEMBERS HAVE CHARGED AFSA WITH PROMOTING A FREE AND OPEN FINANCIAL SERVICES MARKET THAT REWARDS THE

HIGHEST LEVEL OF COMPETITIVENESS.

SUMMARY OF AFSA'S POSITION

AFSA STRONGLY SUPPORTS THE SUBCOMMITTEE'S EFFORTS TO START A PROCESS THAT WILL LEAD TO A COMPREHENSIVE OVERHAUL OF THE BALKANIZED FINANCIAL SERVICES STRUCTURE. THESE EFFORTS WILL LEAD TO A SYSTEM IN WHICH MARKETS AND CONSUMERS WILL DETERMINE WHAT FINANCIAL SERVICES ARE AVAILABLE AND HOW THEY ARE DELIVERED WHILE PROMOTING THE SUBSTITUTION OF PRIVATE CAPITAL FOR

GOVERNMENT REGULATION.

AFSA URGES THE SUBCOMMITTEE TO TAKE THE BROADEST, MOST COMPREHENSIVE APPROACH TO MODERNIZATION POSSIBLE, PARTICULARLY IN THE AREAS OF HOLDING COMPANY REGULATION AND AFFILIATIONS. IDEALLY, WE URGE THE SUBCOMMITTEE TO SUPPORT THE AFFILIATIONS BETWEEN INSURED INSTITUTIONS AND ALL FINANCIAL AND COMMERCIAL ENTITIES. WE FEEL THAT THESE AFFILIATIONS CAN SAFELY TAKE PLACE AMONG SEPARATELY CAPITALIZED AFFILIATES IN A FUNCTIONALLY REGULATED HOLDING COMPANY STRUCTURE.

REGULATION AND OVERSIGHT OF THE HOLDING COMPANY

THE EXAMINATION AND REPORTING REQUIREMENTS FOR A DIVERSIFIED FINANCIAL SERVICES HOLDING COMPANY POSE A PARTICULAR CHALLENGE THAT IS BEST MET THROUGH RELIANCE ON THE PRINCIPALS OF FUNCTIONAL REGULATION; AS OPPOSED TO THE EXTENTION OF VARIOUS FORMS OF CURRENT BANK REGULATION

TO NON DEPOSITORY AFFILIATES OF THE HOLDING COMPANY. USING THE MARKET REFORM ACT OF 1990
(THE "ACT") AS A MODEL, AFSA FEELS THAT IT IS POSSIBLE TO PROTECT THE INSURED DEPOSITORY
INSTITUTION FROM ANY MATERIAL RISKS POSED BY THE ACTIVITIES OF OTHER AFFILIATES. THE BEST MEANS OF
CONTROLLING RISK TO THE INSURED AFFILIATE IS BOTH THROUGH PROPER "INSULATION" BETWEEN HOLDING
COMPANY AFFILIATES AND BY ENSURING SUFFICIENT CAPITAL LEVELS IN THE BANK SUCH THAT IT CAN REMAIN
SOLVENT REGARDLESS OF THE FAILURE OF ANY AFFILIATES. DEFERENCE SHOULD BE GIVEN TO THE REPORTING
AND EXAMINATION REQUIREMENTS OF THE FUNCTIONAL REGULATORS. DUPLICATE EXAMINATIONS,
ESPECIALLY WHEN THE EXAMINING ENTITY HAS LITTLE EXPERTISE IN A GIVEN ACTIVITY, AND DUPLICATE
REPORTING REQUIREMENTS ARE SERIOUS BURDENS WHICH ADD LITTLE TO SAFETY AND SOUNDNESS. IT IS
PERFECTLY FEASIBLE TO MANDATE COOPERATION AMONG FUNCTIONAL REGULATORS AND TO PROVIDE
SAFEGUARDS IN THE EVENT THAT A REGULATOR IS SOMEHOW UNABLE TO EXAMINE AN ENTITY OR OBTAIN
APPROPRIATE INFORMATION. THE BASIC INFORMATION SHARING MODEL CONTAINED IN THE ACT PROVIDES A
SOUND BASIS FOR SUCCESSFUL FUNCTIONAL REGULATION. ADDITIONALLY, THE NATIONAL FINANCIAL
SERVICES COMMITTEE ("NFSC") ESTABLISHED BY H.R. 268 PROVIDES AN EXCELLENT MULTI-REGULATOR
BODY FOR CONSIDERING REGULATORY ISSUES THAT ARISE AND MAKING RECOMMENDATIONS TO CONGRESS AND

OTHER REGULATORS.

THE ACT WAS ULTIMATELY PROMPTED BY CHANGES IN THE FINANCIAL MARKETS, PARTICULARLY THEIR INTERNATIONALIZATION. AS PART OF THEIR EFFORTS TO OBTAIN CAPITAL AND TO COMPETE GLOBALLY, LARGE SECURITIES FIRMS UNDER WENT A VARIETY OF STRUCTURAL CHANGES. THESE INCLUDED THE FORMATION OF HOLDING COMPANY STRUCTURES WHERE MANY ACTIVITIES WERE DISTRIBUTED INTO AFFILIATES THAT PRIOR TO THE ACT WERE NOT SUBJECT TO DIRECT REGULATORY OVERSIGHT BUT CARRIED SOME POTENTIAL RISK TO THE REGULATED BROKER-DEALER. THE SEC DID NOT FEEL THAT IT HAD ADEQUATE INFORMATION TO SET BROKER-DEALER CAPITAL REQUIREMENTS TO ENSURE THAT THE BROKER DEALER WAS PROTECTED FROM THE FAILURE OF AN AFFILIATE(S). THE ACT WAS A RESPONSE TO THESE CONCERNS AND HAS WORKED WELL TO ADDRESS THESE CONCERNS WHILE RESPECTING THE ROLE OF THE PRIMARY FUNCTIONAL REGULATOR OF EACH AFFILIATE AND AVOIDING DUPLICATE EXAMINATION AND INFORMATION REQUIREMENTS. THERE IS NO REASON TO BELIEVE THIS MODEL CANNOT WORK FOR A HOLDING COMPANY THAT INCLUDES AN INSURED INSTITUTION AND AFSA URGES THE SUBCOMMITTEE TO FULLY CONSIDER AND ENDORSE THIS HOLDING COMPANY

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