[Congressional Record Volume 142, Number 116 (Thursday, August 1, 1996)]
[Senate]
[Pages S9450-S9451]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 THE FORMATION OF THE FINANCIAL INSTITUTION MODERNIZATION WORKING GROUP

 Mr. GRAMS. Mr. President, I rise today to discuss something 
that probably has not been debated much in the Senate since this body 
considered the FDIC Improvement Act back in 1991. I want to talk about 
the need to modernize the outdated laws that govern America's financial 
services industry.
  The vital role that financial services play in our daily lives cannot 
be understated. We take out loans to go to college, to buy a car, and 
to purchase a home. We buy insurance to provide greater security to 
ourselves and our families. We make investments throughout our life so 
that we may retire in comfort and dignity.
  Today, technological advancements and increased innovation in the 
delivery of financial services make it easier than ever for consumers 
to get loans, purchase insurance, and invest their earnings. 
Unfortunately, our archaic and burdensome laws governing financial 
institutions continue to discourage, rather than encourage, such 
advancement and innovation.
  The laws to which I am referring are not those governing the safety 
and soundness of financial institutions, such as setting minimum 
capital requirements or requiring periodic oversight by Federal or 
State regulators. Safety and soundness laws and regulations are 
beneficial and necessary, as they enhance the security of the consumer 
whenever he or she deposits money in a bank or purchases an insurance 
policy.
  The outdated laws that I am referring to are the laws that create 
barriers to competition by artificially compartmentalizing the three 
major sectors of financial services--banking, securities, and 
insurance. For example, under the Banking Act of 1933, more commonly 
known as the Glass-Steagall Act, banks are generally barred from 
directly investing in corporate securities, underwriting new corporate 
issues, or sponsoring mutual funds. Under the Bank Holding Company Act 
of 1956, securities underwriters, insurance underwriters, and 
nonfinancial companies are generally prohibited from owning banks or 
being owned by a bank holding company.
  These outdated financial institution laws hurt consumers by 
artificially increasing the costs of financial services, reducing the 
availability of financial products, and reducing the level of 
convenience in the delivery of financial services. These outdated laws 
hurt small businesses--an engine of job growth in the American 
economy--by artificially limiting the amount of equity capital 
available for expanded activity. And finally, these outdated laws 
weaken the international competitiveness of America's financial 
institutions

[[Page S9451]]

by prohibiting them from offering the range of financial services that 
foreign financial institutions may offer.

  It should be noted that the Glass-Steagall Act--which created the 
compartmentalized structure of financial services that we have today--
was based upon the false premise that the massive amount of bank 
failures that occurred during the Great Depression was caused by the 
securities activities that these banks conducted. However, just the 
opposite is true: Diversification in financial services actually 
increased the safety and soundness of the banks. Between 1929 and 1933, 
26.3 percent of all national banks failed. However, the failure rate 
for those banks that conducted securities activities was lower. Of the 
national banks in 1929 that either had securities affiliates or had 
internal bond departments, only 7.2 percent had failed by 1933. The 
message from these statistics is clear: We should encourage competition 
and diversification, not discourage it.
  Earlier this year, Congress passed a bipartisan and comprehensive 
legislative initiative to reform the Telecommunications Act and 
stimulate competition and innovation in the telecommunications 
industry. Similar action is needed to stimulate the growth and global 
competitiveness of our financial services industry.
  There are currently three financial institution modernization bills 
that have been proposed: S. 337, the Depository Institution Affiliation 
Act, sponsored by Senator D'Amato, Chairman of the Senate Banking 
Committee; H.R. 2520, the Financial Services Competitiveness and 
Regulatory Relief Act, sponsored by Representative Leach, Chairman of 
the House Banking Committee; and finally, a proposal submitted at the 
beginning of this year by the Alliance for Financial Modernization, 
which consists of various financial services industry organizations.
  It appears likely that next year, the Senate Banking Committee will 
consider the issue of financial institution modernization. So that 
Members of the Senate may have more information about the current 
compartmentalized structure of America's financial institutions, the 
three proposals for reforming this structure, and the issues that arise 
from these proposals, I am announcing the formation of the Financial 
Institution Modernization Working Group.
  The purpose of the Financial Institution Modernization Working Group 
is not to endorse any one of the currently proposed bills. Rather, it 
will engage in analyzing the merits of the current proposals and the 
current controversies surrounding these proposals.
  The Working Group will, however, endorse five principles that should 
be met by any financial institution modernization legislation package 
that is presented to the Senate:
  First, the legislation should lower the costs to consumers for 
financial services by increasing competition in the provision of these 
services.
  Second, the legislation should maintain the safety and soundness of 
the Federal deposit insurance system.
  Third, the legislation should not create a new structure that 
prevents current financial institutions from conducting any activities 
that they currently conduct.
  Fourth, the legislation should create a Financial Services Holding 
Company structure to increase competitive equality among all financial 
service providers.
  And fifth, the legislation should definitively resolve the current 
concerns about the future of the Savings Association Insurance Fund by 
merging the bank and thrift deposit insurance funds, unifying the bank 
and thrift charters, and consolidating the bank and thrift regulators.
  It is my hope that these five principles will provide a solid 
foundation for the Financial Institution Modernization Working Group's 
discussions in the coming months.
  In closing, I look forward to working with Senators who are both on 
and off of the Banking Committee to make the Financial Institution 
Modernization Working Group a useful source of information and ideas. 
It is my hope that 1997 will be the year that we join together and 
create a bipartisan bill that will reform our financial institution 
laws so that America's financial institutions will be able to compete, 
innovate and grow to meet the challenges of the 21st century.

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