FINANCIAL SERVICES MODERNIZATION THURSDAY, FEBRUARY 13, 1997 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT, COMMITTEE ON BANKING AND FINANCIAL SERVICES, The subcommittee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema [chairwoman of the subcommittee] presiding. Present: Chairwoman Roukema, Representatives McCollum, Bereuter, King, Campbell, Royce, Metcalf, Ehrlich, Barr, Kelly, Paul, Weldon, Ryun, Vento, LaFalce, Schumer, Maloney, Barrett, Watt, Roybal-Allard, Ackerman, Bentsen, McKinney and Kilpatrick. Also Present: Representatives Leach and Baker. Chairwoman ROUKEMA. Please, the hearing will come to order. We are here to welcome our panelists, and certainly our Chairman of the Federal Reserve Board, and the other panelists. As is too frequently the case, there are lots of conflicting schedules this morning; but we would expect more Members to arrive shortly. Of course, I do want to acknowledge that our chairman, Chairman Leach, is here today, as always thorough and diligent. We welcome you, Mr. Chairman. Thank you for being here. Mr. LEACH. Thank you. Chairwoman ROUKEMA. This is the second in our series of hearings here at the subcommittee level; and, as many of you know, it is our intention, both the subcommittee's and the full committee, to expedite consideration of reform this year. I fully expect that our subcommittee hearings are going to play an integral and constructive role in the development of that legislation. This, as I have stated, is the second in the hearings. I see this as a relevant and important chapter in the search for a procedure so that we can pass landmark legislation in this Congress. GlassSteagall did its job from the 1930's on to protect the safety and the soundness and economic concentration of power in a principled way, and it did protect consumers and businesses and the taxpayers of the Nation. However, it is out of date, and we have to address the problems and modernize our financial institutions. But I will say, and many of you have heard me say this, almost like a broken record, we do not want another savings and loan debacle, that goes without saying, and we do not want another Depression where the savings of people are gambled away by either ignorant financiers or unscru (63) pulous people, but we must have a financial system to compete in the modern world. As we proceed with these hearings, our common goal is to provide for defined and principled legislation that will benefit the consumer by increasing competition in the financial service sector and preserving the safety and soundness of our system. Technology and market forces have broken down the barriers between banking, securities and insurance. Our parent statutory framework, as I said, is stuck in the 1930's; and it has led to an inability of our financial institutions to compete in a market that is most correctly defined as global. In the absence of Congressional action, Federal agencies, and I hope no one here takes it very personally, but the Federal agencies have found loopholes and novel interpretation to allow financial institutions to adapt to this ever changing marketplace. The actions of the Office of the Comptroller of the Currency are well known, and they authorize bank subsidiaries to engage in activities previously prohibited from doing so, and the Federal Reserve has proposed to eliminate firewalls as it applies to Section 20 affiliates. Unfortunately, in my opinion, this has resulted in a piecemeal regulatory reform that may not be in the best interest of the U.S. system. I would expect that the regulators here today would confront these issues directly, and I look forward to their candor and intelligence and professionalism on those subjects. Without exception, the Representatives of Congress have a responsibility, and it is our duty to make the important policy decisions giving statutory authority regarding the structure of financial markets. It is not in the best interest of the system to continue to let regulators make these decisions in a piecemeal or arbitrary fashion. For Congress not to act, and here I am speaking to our membership, not so much the regulators as I am speaking to our membership, for Congress not to act would be a serious abdication of responsibility. For those of us who are on the Banking Committee, we are fully aware of how controversial these issues are; and, to say the least, various sectors in the financial services industry have had different and often conflicting views on how to best go about modernization. Over a number of years, particularly the last two, the coalition known as the Alliance for Financial Modernization was formed to build a common framework for that modernization. I believe you know the members. I won't go through the list. But there is an expanded list, beginning with the American Bankers Association; and more recently included is the American Council of Life Insurance who has come to the table. Indeed, in the hearing on Tuesday, the independent insurance agents expressed an interest in coming to the table, although not officially part of that Alliance. This Alliance, through a good deal of good faith negotiation and compromise, has come to agreement on reform, if not in every detail at least in a comprehensive way and an overriding way, an umbrella way. But I, while recognizing that not everybody is in 100 percent agreement on everything in that legislation, I have, along with my colleague and Ranking Member here, introduced the legislation be cause it occurs to me that there are certain portions of it that are excellent. While we do not agree with every detail, we do believe that it is the most appropriate vehicle to bring everyone to the table and to be successful this year in accelerating consideration of reform. I would say that conventional wisdom, without going into all the details of the legislation and going over it here today, I do want to point out two areas, at least, in which we have seen concern expressed. We will hear more concern expressed here, but we have also seen progress. The conventional wisdom suggests mixing banking and commerce would be detrimental to the overall vitality of the system because of potential conflicts of interest and potential for concentration of economic power. However, in today's world, the lines between. banking and commerce are far less clear than they have been previously. Various proposals recommend full banking in commerce. I do not support that, but there can be no doubt that full banking in commerce does have a constituency, but it has also far reaching ramifications, and the Alliance proposal, H.R. 268, takes an incremental approach and defines it as a "25 percent basket." Clearly, it is time for reform. The Alliance bill repeals Section 20 and incorporates functional regulation, which is the second important controversial part of our consideration here, one: commerce; two: regulation, incorporates functional regulation which will ensure that all participants are playing on a level playing field. Finally, the bill includes provisions that will close the last chapter, I hope, of the savings and loan debacle and the bill, that portion of the bill is very similar to, very close to, what I introduced last year, the Fifth Charter Conversion Bill, and also similar to the provision in the Leach bill. Again, not to belabor the issue, this legislation, H.R. 268, is, to use the vernacular, "a work in progress." I, along with other Members here, are willing to put our necks on the line in order to get a full and comprehensive debate on these complex issues. We want reform, but we do not want to compromise the basic soundness of our financial system. We want that bridge to the 21st Century, but it has to be on a firm foundation, and for that reason we are welcoming the regulators here today. I hope that their testimony, and I do not expect their testimony to be limited to H.R. 268. I want them to address in whichever way they are comfortable with, the overarching principles, the need, the imperative need for reform. I have to say that I welcome all of those, certainly the Chairman of the Fed and the others here, who have gone out of their way and rearranged schedules. Mr. Chairman, I don't want to embarrass you by referring to your jet lag. I refer to it only because you have gone well out of your way in your schedule to be here today, and others have as well. Unfortunately, unfortunately, Treasury is not here. I have discussed at length their intentions. They did not feel that they were prepared, or far enough along in the consideration of their legislation, to be here today, and I deeply regret that. I think we could have greatly benefited by their testimony, but they are not here. I would hope that as soon as possible they will consent to come before this subcommittee and give us the benefit of their proposals, because they are wrestling with the same issues that we are wrestling with here today. With that introduction, Mr. Ranking Member, do you have a statement to make? Mr. VENTO. Well, thank you, Madam Chairwoman. We had opening statements on Tuesday. I would just say that in our mixed economy the regulators and witnesses that are testifying today are at the interface of dealing with the market forces and our public policy initiatives in terms of guiding our economy. I think that is, you know, no better epitomized than the Chairman of the Board of Governors, Mr. Greenspan's presence this morning. I regret, too that the Treasury was not prepared, but I would say that this agenda is a very full agenda in terms of the testimony and information in that a member of the administration, Mr. Ludwig, also a regulator, will be testifying and will have views and guidance for us with regards to the banking modernization. We face a problem of dealing with the convergence of financial institution activities, the opportunity to get out in front of that and to provide the needed regulatory flexibility and involvement, and the necessary safeguards to achieve a consequence of extending credit, of keeping these financial institutions and the financial related activities in a profitable mode in terms of serving our economy and importantly and ultimately serving the consumers in this Nation. I think much has been done. I think the regulators have attempted to do this to the limits of what the current law provide, some would say in excess of what the current law provides. At times, I know I have made that observation; but, in reality, I think we have come around to the recognition that the franchises and powers that we here tried to extend to banks and to other entities now have been eclipsed by the marketplace activities. So coming to grips with this in this legislation, I don't know how prescriptive we can be with it. I think we have to be cautious and realize that we need to give the opportunity for the regulators and for the market forces to continue to shape this. I think the wisdom, if Glass-Steagall was the right thing to do, I note that some are involved in rewriting the history of why Glass-Steagall existed and what the consequences were in the 1920's and 1930's. I must say it leaves me a little cold. I am more interested in looking ahead than thinking too much about it. But the fact is that we need to-I think the reason that it functioned for so many years is because it did capture the necessary mix and relationship between financial institutions at that time and put it in a working format. We have to change that format today. And the question is how we do it. In a way, of course, there is a question of regulation, a question of corporate structure. There are many questions that we need to resolve. I think the measure we have before us goes a long way to try to take some of the best ideas which have been developed, not all unique and original, with the, if I might say, with the chief sponsor and myself. But, in the business of legislating, plagiarism is not necessarily considered a prosecutable activity. In fact, we thrive on it, taking good ideas. We look forward to, as the Chairwoman has said, we are working with a work in progress, so we look forward to the testimony today. I think we are very much in the formative stage with regards to this. So there have been many contributors to this process, and I know that there will be at this hearing, as we look at these structures. Hopefully, we will be able to come up with consensus legislation in this session that will have as lasting effects as that which was written during the 1930's. Thank you, Madam Chairwoman. I look forward and welcome. our witnesses. Thank you. Chairwoman ROUKEMA. Thank you. I think, without further ado, we will turn the panel over to our chairman, Mr. Greenspan, the Fed Chairman, and welcome you here most enthusiastically. Thank you, Mr. Chairman. STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, Mr. GREENSPAN. Thank you very much, Madam Chairwoman. I have submitted a statement for the record but would like to summarize it, if I may. It is a pleasure to appear before this subcommittee here today to present the views of the Federal Reserve Board on some broad issues associated with reform. We continue to support reform because we believe it would provide improved financial services for our citizens. Moreover, both our experience and analysis suggests that the additional risks of new financial products are modest and manageable. However, we urge that care be taken to assure that these newly permitted activities are financed at non-subsidized market rates. While a level playing field requires broader powers, it does not require subsidized ones. The issue is relevant because the Congress in this century delegated the use of the sovereign credit to protect bank depositories, stem bank runs and lower the level of risk to the financial system from the insolvency of individual institutions. By sovereign credit, I mean the power to create money and borrow unlimited funds at the lowest possible cost. In insuring depositors, the government, through the FDIC, substituted its unsurpassable credit rating for those of banks. Similarly, using the Federal Reserve's discount window, banks can convert illiquid assets, such as loans, into riskless assets; and banks can complete payments using Federal Reserve credits. All these uses of the sovereign credit have dramatically improved the soundness of our banking system and the public's confidence in it. In the process, it has also profoundly altered the risks and returns in banking. For example, sovereign credit guarantees have significantly reduced the amount of capital banks and other depositories need to hold, since creditors demand less of a buffer to protect themselves from the failure of institutions that are the beneficiaries of such guarantees. |