[Congressional Record Volume 141, Number 72 (Wednesday, May 3, 1995)]
[House]
[Pages H4523-H4525]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       FINANCIAL SERVICES REFORM

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from New York [Mr. LaFalce] is recognized for 5 minutes.
  Mr. LaFALCE. Mr. Speaker, the House has a unique opportunity during 
this Congress to take important and long-overdue steps to modernize the 
U.S. financial services system and prepare it for the competitive 
challenges of the 21st century.
  In 1991, I served as chair of the Banking Committee's Task Force on 
the International Competitiveness of U.S. Financial Institutions. That 
task force concluded that our financial services policy had failed to 
keep pace with new market developments, including changes in corporate 
and individual consumer needs, new technology and product innovation. 
The result was a financial services system that was potentially 
uncompetitive, inefficient, unduly expensive, and slow to respond to 
changing customer demands.
  The task force report concluded that it was incumbent upon 
policymakers to undertake a fundamental and comprehensive reassessment 
of the major laws and the regulatory structure which underpin the U.S. 
financial system. There have been several abortive efforts since that 
time to do so. But I believe we have now finally achieved substantial 
consensus that change is necessary, the circumstances are now ripe for 
meaningful action, and the goal is within our reach.
  The chairmen of both the House and Senate Banking Committees have put 
forward comprehensive reform proposals. While these proposals differ in 
important regards, they share many key elements. The Treasury 
Department has put forward a proposal of its own that is substantively 
comparable in many critical respects. In addition, the affected 
industries are engaged in meaningful and substantive discussions on the 
key issues in an effort to achieve some consensus.
  While differences in perspective certainly exist, what is most 
noteworthy is the widely shared assumption that our financial services 
system requires substantial reinvention. If we can keep our eye on this 
shared goal, we should be able to build upon the many points on which 
we all agree and effect reasonable compromise where we do not in the 
days ahead.
  To that end, while I have very definite ideas of my own as to the 
best course of action on key issues, I do not plan to introduce 
legislation at this point. A Banking Committee markup is imminent, and 
we will be working from the chairman's mark--which is still in 
preparation--as is appropriate. I believe our best prospect of success 
lies in working cooperatively and in a spirit of compromise to further 
refine that mark in a way that builds consensus on these important 
issues. Past experience should certainly have taught us that 
legislation which does not reflect a reasonably broad consensus is 
doomed to failure.


                  i. principles to guide deliberations

  I would, however, like to set forth some principles which I believe 
should guide our deliberations.
  (A) Congress should attempt to achieve the broadest reform possible;
  (B) Elimination of the barrier between commercial and investment 
banking should be accomplished so as to maximize efficiencies and take 
advantage of possible synergies between lines of business, while 
safeguarding safety and soundness;
  (C) Reform should create a true two-way street between banks and 
securities firms, level the competitive playing field, and provide such 
firms equal opportunity to enter each other's businesses;
  (D) Nothing we do should turn the clock back or impose new 
restrictions where none are warranted;
  (E) Safeguarding consumer rights and interests should be an integral 
part of any reform package;
  (F) Proper regulatory oversight should emphasize functional 
regulation, ensure necessary political accountability, and take 
advantage of the benefits provided by a creative tention between 
regulators; and
  (G) Reform should ensure that foreign banks have a fair opportunity 
to compete on equal terms, and are not competitively disadvantaged.


                          ii. the major issues

  A. The need for broad reform:
  It is imperative that we strive for the broadest financial services 
reform on which it is possible to achieve consensus. This is not a time 
to be timid.
  [[Page H4524]] The current structure of our financial services system 
fails to reflect substantial changes in products, technology, customer 
demand, and service delivery that have occurred over many years. It is 
increasingly difficult to discern meaningful differences between the 
products offered by banks, securities firms, and insurance companies, 
or to place into neatly segregated compartments the customer needs each 
provider is attempting to serve.
  Past ad hoc attempts to adjust to market changes without 
comprehensive reform have created a system replete with 
inconsistencies, and regulatory and legal anomalies. Our goal should be 
to correct this unduly complex and conceptually inconsistent structure, 
not perpetuate it. But we should not achieve purity by the elimination 
or undue restriction of legitimate businesses that pose no harm and 
contribute positively to the competitiveness and efficiency of our 
financial services system.
  We must also focus on achieving progressive change, If financial 
services reform is justified, it is presumably because the premise 
behind our action is that we are constructing a safer and sounder 
financial services system, offering opportunities for diversification 
and better risk management. I believe that is the case. In my view, it 
is the very limited nature of the existing bank charter that has 
created many of the industry's past problems. The reform we craft 
should reflect that understanding.
  B. Removing barriers between commercial and investment banking:
  The Leach bill takes a major step forward in finally removing the 
barriers between the banking and securities businesses, businesses 
which simply offer alternative means of meeting similar customer needs. 
Such a step is long overdue.
  Substantial changes have occurred in recent decades in the way 
traditional bank customers have attempted to meet their financial 
needs. Major corporations have moved increasingly to the capital 
markets to obtain needed financing. At the same time, individual 
consumers and small businesses have increasingly sought alternatives to 
traditional checking and savings accounts for transactional, savings, 
and investment purposes. Yet, while the market has changed 
substantially, the Nation's banks have been precluded from following 
their customers and effectively responding to changing demand.
  Bank holding companies do have limited authority to enter the 
securities business through the section 20 subsidiaries authorized by 
the Federal Reserve. The successful operation of such subsidiaries has 
established clearly that commercial and investment banking activities 
can be combined within a holding company structure to the benefit of 
consumers, and without risk to safety and soundness, if proper controls 
are put in place.
  I believe there is substantial consensus that the barriers between 
these two banking businesses should be eliminated, with proper 
prudential controls, and that should be a top priority of any reform 
package. Moreover, this reform should be effected in such a way as to 
maximize possible efficiencies and synergies.
  1. Wholesale bank holding companies:
  For those institutions that wish to engage solely in a wholesale 
business, the provision in the Leach bill for creation of a wholesale 
bank holding company, subject to more limited regulatory strictures, 
makes eminent sense. Many prudential controls are designed primarily to 
protect against an inappropriate use of depositor funds. For those 
institutions not engaged in retail activity and not seeking deposit 
insurance protection, less onerous controls are appropriate. While it 
is true that wholesale institutions will maintain access to the 
discount window, appropriate controls on such access are already in 
place.
  2. Appropriate firewalls:
  In the course of the debate on financial services reform in the past, 
great emphasis has been placed on firewalls between holding company 
affiliates as the primary mechanism for guarding against misuse of 
depositor funds. While I believe firewalls are important, they are only 
one element of an overall structure of prudential controls. A single-
minded focus on firewalls as a source of protection may only ensure 
that they are so restrictive as to render inoperative useful synergies 
that can otherwise be achieved within the holding company structure.
  Much has changed since earlier debates on these issues. The changes 
in bank capital requirements, coupled with provision in FDICIA for 
prompt corrective action and enhanced supervisory authority, have given 
bank regulators ample authority to intervene well before depositors are 
placed at any risk.
  Firewalls certainly offer additional protection, but are no 
substitute for the prudential controls otherwise already in place.
  I believe experience with the new authorities granted banking 
institutions will help us determine what firewalls are more or less 
meaningful and appropriate. Therefore, I believe it appropriate that 
the relevant regulatory authority be granted some marginal discretion 
to adjust those firewalls as experience dictates.
  3. Exercise of authority through operating subsidiaries:
  The Leach bill relies heavily on the holding company structure as 
protection against newly authorized activities placing the depository 
institution at risk. I believe this is largely appropriate. However, we 
should not insist on the expense and potential inefficiency of creating 
a holding company structure where one might not be necessary.
  Where activities have been performed in the bank or bank subsidiaries 
with presenting any undue risk, such an alternative structure might 
continue to be appropriate. We should review closely what activities 
can reasonably continue to be conducted by the bank directly without 
undue risk.
  C. The need to establish a true two-way street:
  This reform effort should not be a debate simply about giving banks 
or any particular type of financial institution more powers, at the 
competitive expense of other financial services providers. Our goal 
should be to remove barriers between financial industries which we have 
come to see as artificial, level the competitive playing field and 
increase opportunities for all financial services providers.
  In removing the barriers between commercial and investment banking, 
our goal should be to create a full two-way street through which 
commercial and investment banks can enter each other's businesses on 
equal terms. Yet, while this is our appropriate goal, it is not easily 
achieved if a reform bill is too narrowly structured. The structure of 
many existing securities firms and their existing affiliations with 
insurance companies may well preclude their taking full advantage of 
the removal of existing barriers between commercial and investment 
banking.
  While the Leach bill provides some accommodation, I do not believe it 
goes far enough. Correcting this potential inequity must be a major 
matter of concern as we debate these issues.
  D. Avoiding retrenchment:
  There are legitimate and substantial differences of opinion regarding 
how far we should go in breaking down the walls between banking and 
commerce or, indeed, the barriers between various financial services 
providers. We may not ultimately be able to produce as broad reform as 
some, including myself, might like. However, in no case should this 
reform proposal become a vehicle for turning the clock back and 
eliminating or taking authority away from financial institutions whose 
activities have posed no risk while providing much benefit to 
consumers.
  In my view, many of the existing anomalies in our financial services 
system represent marginal progress toward a more integrated financial 
services system. In fact, some of these anomalies simply reflect our 
financial services system as it once existed before new restrictions 
were imposed in various bank and thrift holding company legislation, 
CEBA and other legislation imposing what were new restrictions and 
limitations. The proper response is not to remove these anomalies or 
restrict them further, but to move, incrementally if need be, toward a 
comprehensive reform of the financial services system which will 
ultimately embrace them.
  The original Leach bill would have eliminated the charter of unitary 
thrift holding companies. A subsequent draft 
[[Page H4525]] would grandfather existing institutions. In my view, if 
we are not to address the banking and commerce issue fully, the proper 
approach is for the bill to remain silent on this issue. Existing 
unitaries have served as instructive examples of how financial and 
commercial activities can in some cases be appropriately mixed. They 
have posed no risk to safety and soundness, are subject to appropriate 
regulatory and oversight authority, and serve customers well.
  There is no compelling reason to circumscribe their operations at 
this point. Grandfathering is an unworkable alternative in my view. To 
artificially circumscribe the ability of functioning businesses to 
expand and compete on equal terms is to effectively sound their death 
kneel. I believe that any changes in the unitary structure should await 
a subsequent day when we are willing and able to address banking and 
commerce issues in some comprehensive fashion.
  In the same fashion, I believe it is time to eliminate the 
restrictions imposed on limited purpose banks. I always believed these 
restrictions were anticompetitive and should never have been imposed. 
But in any case they were intended as a temporary measure awaiting 
comprehensive financial services reform. We are still awaiting such 
reform, and I believe even this Congress' effort will fall short of 
what is desirable.
  In the meantime, changes in the restrictions imposed on these 
financial institutions can no longer wait. This is virtually the only 
financial services arena in which time is standing still. There have 
otherwise been substantial changes in the laws and regulations that 
have enhanced opportunities for other financial services providers and 
made full-service banks more efficient, strong, and competitive. In 
this context, the arbitrary restrictions imposed on limited-purpose 
banks are untenable and unreasonable.
  E. Safeguarding consumers:
  Safeguarding the consumer's interests must be a central element of 
this reform effort. If banking institutions are to be permitted to 
offer an array of products, some of which are insured, and others not, 
it is imperative that the consumer be clearly informed of any risk he 
is assuming and that safeguards be put in place to eliminate any 
potential confusion. Clear disclosure requirements which will ensure 
that the consumer understands what protections are afforded with any 
particular products must be a part of this bill.
  But disclosure alone is not enough. Institutional structures can 
inadvertently or purposefully suggest protections that do not apply. 
For example, the marketing of mutual funds under a name or logo that 
may suggest that the product is somehow insured or guaranteed by a 
banking institution could place the consumer at undue risk, and 
prohibitions or restrictions on the use of a common name and logo may 
be appropriate.
  We must also find a proper balance between the consumer's right to 
privacy and the synergies available from cross-marketing. Both 
financial services providers and consumers can benefit from marketing 
efforts that bring the full array of products available from a 
particular financial services provider to the consumer's attention. Yet 
consumers also have a right to have confidential information maintained 
as such, and to be protected from being inundated with sales pitches 
and marketing information they neither seek nor wish to have. We must 
strive for a proper balance between these competing interests.
  F. Providing for proper regulatory oversight:
  The regulatory controls put in place in FDICIA--most notably, tougher 
capital requirements and provision for prompt corrective action--have 
contributed substantially to the safety and soundness of our banking 
system. These and other prudential controls are essential to the proper 
implementation of financial services reform.
  I believe any effort at complete regulatory reorganization should 
follow rather than precede or accompany modernization legislation--it 
is difficult to determine what authority appropriately lies with what 
regulator when the distinctions between types of financial services 
providers and their products remain unclear. Nevertheless, 
clarification and, where appropriate, enhancement of regulatory 
authority should be central elements of the Banking Committee's 
product.
  In my own view, the proper regulatory oversight structure would rely 
heavily on a scheme of functional regulation, while providing some 
limited oversight authority to the Federal Reserve at the holding 
company level to protect against systemic risk. I have great confidence 
in the Federal Reserve as an institution and in its skill as a 
regulator. However, I believe there are inherent risks in placing 
plenary authority in any independent regulatory institution, and I 
believe the authority granted the Federal Reserve in the Leach bill is 
too encompassing. The scheme we ultimately construct should ensure the 
necessary degree of political accountability and take advantage of the 
creative tension between regulatory authorities that has proved a 
useful source of adaptation and innovation in the past.
  G. Equal treatment of foreign banks:
  The presence of foreign financial institutions in our market has 
served our economy and our communities well. In addition, U.S. 
financial institutions benefit when they are able to enter foreign 
markets under regulatory regimes that permit them to compete fairly 
with domestic service providers.
  Any financial services reform should provide for the equal treatment 
of foreign banks so long a hallmark of U.S. law. Most international 
banks in the United States operate uninsured, wholesale branches and 
agency offices rather than bank subsidiaries. The reform legislation 
should ensure that foreign banks that seek U.S. securities affiliates 
can continue to be able to operate branches and agency offices in the 
United States and not be required to ``roll up'' their U.S. banking 
operations into subsidiary banks.
  Most countries permit nondomestic banks to compete through branches, 
because the entire world-wide capital of the bank stands behind the 
branch's operations. Such rules applied in foreign markets 
substantially benefit U.S. banking institutions operating abroad. Any 
change in that requirement would disadvantage them severely.
  Applying these same rules in our own market benefits not only foreign 
banks but the U.S. customers they serve. The ability of a branch to 
draw on the resources of the entire bank directly benefits U.S. 
corporate customers by enhancing the availability of credit, increasing 
the availability and size of loans from international banks, and 
reducing the cost of financing for customers.


                            iii. conclusion

  This Congress provides a singular opportunity to take major steps 
toward financial services reform which will make our financial services 
system safer, more efficient, and more competitive and provide 
consumers better and more varied services. I look forward to working 
with Chairman Leach, Ranking Minority Member Gonzalez, and my 
colleagues in both sides of the aisle to achieve this long-sought goal.


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