the financial system. But our financial institutions need to exist in a benign regulatory environment to successfully compete in the financial services marketplace. Only through comprehensive financial modernization can this be achieved. widely recognized. -- are The taxpayers your constituents - our members customers would benefit from a financial services industry that was free of artificial constraints on its business. The safety and soundness of the entire financial system would be strengthened; there would be open and fair competition in the domestic financial services marketplace; and American suppliers of financial services would become more competitive worldwide. A more efficient and stable financial system will be better able to serve the needs of individual consumers, businesses, and governments in the U.S. and around the world. TESTIMONY OF MARC E. LACKRITZ SECURITIES INDUSTRY ASSOCIATION COMMITTEE ON BANKING AND FINANCIAL SERVICES SUBCOMMITTEE ON FINANCIAL INSTITUTIONS & CONSUMER CREDIT U.S HOUSE OF REPRESENTATIVES HEARINGS ON H.R. 268 THE "DEPOSITORY INSTITUTION AFFILIATION AND THRIFT CHARTER CONVERSION ACT" STATEMENT OF THE SECURITIES INDUSTRY ASSOCIATION THE "DEPOSITORY INSTITUTION AFFILIATION AND THRIFT HEARINGS BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS & CONSUMER CREDIT OF THE HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES FEBRUARY 10, 1997 Madam Chairwoman and members of the Subcommittee, I am Marc E. Lackritz, President of the Securities Industry Association ("SIA")." I appreciate the opportunity to participate in this hearing and to present SIA's views on H.R. 268, the "Depository Institution Affiliation and Thrift Charter Conversion Act". Madam Chairwoman, SIA especially would like to commend you for making financial restructuring a priority for this Subcommittee, and for your introduction of this proposed legislation, which further demonstrates your commitment to making progress on the issue of financial services restructuring. I want to begin by quoting baseball great Yogi Berra -- this is like deja vu all over again. Just as baseball is the annual rite of springtime, SIA testimony on financial modernization legislation has become a traditional rite of each new legislative session. There is an important difference, though. While baseball is timeless and fundamentally the same as when Ty Cobb and Babe Ruth played the game, the financial services The Securities Industry Association brings together the shared interests of more than 760 securities firms throughout North America to accomplish common goals. SIA members -- including investment banks, broker-dealers, specialists, and mutual fund companies -- are active in all markets and in all phases of corporate and public finance. In the U.S., SIA members collectively account for approximately 90 percent, or $100 billion, of securities firms' revenues and employ about 350,000 individuals. They manage the accounts of more than 50 million investors directly and tens of millions of investors indirectly through corporate, thrift and pension plans. (More information about the SIA is available on its home page: http://www.sia.com.) industry today has relatively little in common with the industry as it existed in 1933, when Congress enacted the Glass-Steagall Act. - - to separate the In 1933, there was a perceived need and a true ability deposit-taking function of commercial banks from the securities underwriting and dealing activities of investment banks. In 1997, bank regulatory agencies, technology and competition have blurred distinctions between different financial services providers. Currently, bank regulatory agencies permit banks to broker any securities, act as investment adviser to individuals, mutual funds and other customers, and perform a wide array of other securities activities directly in the bank or in a bank subsidiary. The Board of Governors of the Federal Reserve System (the "Board") now permits nonbank subsidiaries of bank holding companies to derive up to 25% of their revenue from underwriting and dealing in corporate equity and debt securities. The Office of the Comptroller of the Currency (the "OCC") recently adopted its "operating subsidiary rules," and it is widely expected that the OCC will permit subsidiaries of national banks to underwrite and deal in corporate equity and debt securities. The Federal Deposit Insurance Corporation (the "FDIC") already permits bona fide subsidiaries of statechartered non-member banks to underwrite and deal in such securities. And, banks are permitted to underwrite and deal in government securities to an unlimited extent, either in the bank or in a subsidiary. Plainly, commercial banks are now in the securities business. Mellon Bank's acquisition of Dreyfus is one obvious example of this fact, but only one of many. By As an aside, Ty Cobb retired as a player after the 1928 season. Babe Ruth was still playing in 1933. contrast, securities firms still are excluded from being in the commercial banking business. In the context of today's financial markets, this makes no sense. Banks and securities firms compete to sell securities, to advise mutual funds, and to underwrite and deal in securities. They compete to offer sophisticated derivatives products; financial advice on mergers, acquisitions and other significant corporate transactions; annuities and similar products; debt-financing; and various other retail and commercial products and services. Many of these activities present at least the same level of risk as do securities activities consider the demise of Barings due to the activities of a single derivatives trader. If banks that accept insured deposits can engage in risky derivatives and other activities, and in securities activities, what possible policy objective is being achieved by prohibiting firms engaged in securities activities from affiliating with firms that accept insured deposits? - In 1933, there was a concern that affiliations between commercial and investment banks could lead to undue concentrations of wealth in the hands of a single financial institution. If this concern needs to be addressed, it should be addressed through the anti-trust laws, not through the banking laws. And, in any event, this concern at most suggests that affiliations between dominant financial institutions should be examined for potential anti-competitive effects; it in no way supports the Glass-Steagall Act approach of a complete statutory ban on many commercial and investment bank affiliations. More fundamentally, competition has largely made such concerns moot. Currently, there is vibrant competition among over 12,000 banks, large numbers of |