[Congressional Record Volume 143, Number 2 (Thursday, January 9, 1997)]
[Extensions of Remarks]
[Pages E87-E89]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




    INTRODUCTION OF THE DEPOSITORY INSTITUTIONS AND THRIFT CHARTER 
                             CONVERSION ACT

                                 ______
                                 

                           HON. MARGE ROUKEMA

                             of new jersey

                    in the house of representatives

                       Thursday, January 9, 1997

  Mrs. ROUKEMA. Mr. Speaker, I am reintroducing The Depository 
Institution Affiliation and Thrift Charter Conversion Act, legislation 
that represents a significant step toward crafting meaningful financial 
reform legislation that will take us into the 21st Century and put us 
on sound footing to compete in the global marketplace.
  As I have said in the past, it is the responsibility of Congress 
after due diligence to make the important policy decisions giving 
statutory authority for the structure of financial institutions. It is 
not in the best interest of the system to continue to let the financial 
regulators make these decisions in a piecemeal, and arbitrary fashion. 
For Congress to not act would be a serious abdication of our 
responsibility.
  In anticipation of resuming my role as Chairwoman of the Financial 
Institutions and Consumer Credit Subcommittee, financial modernization 
will be on the top of my agenda. With that in mind, I am planning early 
and comprehensive hearings to commence as soon as the committee 
completes its organization process.
  For those of us that serve on the Banking Committee, we are painfully 
aware of how controversial the issues surrounding the financial 
services industry can be. To say the least, various sectors of the 
financial services industry have had different and often conflicting 
views on how best to go about modernization. The legislation we are 
reintroducing today represents the work of a coalition of 10 industry 
organizations representing a broad cross-section of the financial 
services industry. Participants in the Alliance group include: American 
Bankers Association; ABA Securities Association; American Financial 
Services Association; America's Community Bankers; Consumers Banker 
Association; Financial Services Council; Investment Company Institute; 
Securities Industry Association; and The Bankers Roundtable.
  I am pleased to see the American Council of Life Insurance [ACLI] has 
also begun participating in these discussion. In fact, several of the 
new provisions included in this package were at the ACLI's suggestion.
  This legislation represents a concrete effort to break the current 
logjam that has blocked financial services reform legislation in the 
past. The bill incorporated many significant compromises between those 
competing interests. For this reason, I believe it represents an 
important starting point for us to begin the debate on financial 
modernization.
  This legislation is a comprehensive approach that addresses 
affiliation issues, Glass-Steagall reform, functional regulation, 
insurance issues and thrift charter conversion by melding together key 
elements of the major reform bills introduced previously in Congress.
  While this latest ``Alliance'' bill is the product of a great deal of 
good faith negotiation and compromise by the major trade groups, it is 
nonetheless a work in progress that will require more discussion and 
development. While each member of the Alliance for Financial 
Modernization has participated in redrafting the legislation I am 
introducing today, they do not necessarily endorse all the provisions 
in the current product. In addition, there are several key elements 
missing from this bill.
  For example, a clear definition of what is meant by the terms 
``banking'', ``securities'', and ``insurance'' as well as a fair means 
to resolve any disputes that may arise between regulators over the 
proper characterization of

[[Page E88]]

novel or hybrid products is an area of great sensitivity for all 
financial service providers--and one that still lacks a consensus among 
the industries. For this reason, this bill does not include such a 
provision.
  In addition, America's Community Bankers would like to see a much 
broader approach, and have urged that permissible holding company 
affiliations be expended from financial activities to all businesses. 
This would extend the unitary thrift holding company authority to all 
holding companies--a view that is supported by the securities and 
insurance companies and other diversified financial companies as well. 
However, this bill does not address the so-called ``chartering up'' 
approach which would allow thrifts and commercial banks to engage in 
insurance and real estate activities. Currently, commercial banks are 
now prohibited in most cases from fully engaging in these activities; 
and thrift institutions, under this Alliance proposal, would be forced 
to divest of these activities and to nates the thrift charter and 
requires thrifts to convert to banks.
  I, too, have serious reservations regarding many of the provisions 
included in this bill. The least of which is the holding company 
regulation structure and the regulatory oversight authority.
  Last year's Alliance bill included a new regulation and oversight of 
holding companies based on similar requirements to the structure 
currently applied to Unitary Holding Companies. With the introduction 
of this legislation today, I have, at the Alliance's request, included 
a different regulatory structure which mirrors the current Securities 
industry risk assessment model.
  Let me be clear that I have reservations about both the previous 
model in last year's Alliance bill and the one included in the bill I 
am introducing today. A fundamental question of financial reform is to 
determine the most appropriate means of regulating the system to 
preserve the safety and soundness of the financial services industry 
and the taxpayers dollars. As I begin hearings on this bill, this will 
be a major focus. While I agree that the current holding company 
structure needs reform, I am not convinced that the model included in 
this bill is the most appropriate and efficient means.
  The key elements of the bill include:
  Financial Services Holding Company [FSHC]: creation of a new, 
optional structure allowing financial companies to affiliate with banks 
similar to the D'Amato-Baker approach. A company could choose to own a 
bank through a new ``financial services holding company'' that would 
not be subjected to the Bank Holding Company Act, but subject to a new 
regulatory structure.
  Permissible Affiliations: FSHCs could own or affiliate with companies 
engaged in a much broader range of activities than is permitted for 
bank holding companies under current law. The bill would not, however, 
eliminate all current restrictions on affiliations between banks and 
commercial firms. A financial services holding company would have to 
maintain at least 75 percent of its business in financial activities or 
financial services institutions, which would include such institutions 
as banks, insurance companies, securities broker dealers, and wholesale 
financial institution.
  FSHCs are restricted from entering the insurance agency business 
through a new affiliate unless it bought an insurance agency that had 
been in business for at least 2 years.
  This bill includes lists of activities that are deemed to be 
``financial'' and entities that are deemed to be ``financial services 
institutions.'' A new National Financial Services Committee, chaired by 
the Treasury Department and including the bank regulators, the SEC, and 
a representative state insurance commissioner would be created.
  Holding Company Oversight: The regulation and oversight of the new 
Financial Services Holding Companies would be based on the holding 
company risk assessment model that currently is applied to the 
Securities Industry. This represents a change from the original 
Alliance bill that I introduced last year. As we consider provisions 
that address the regulation of various institutions, I will be taking 
special care to assure that all institutions are regulated in such a 
way as to preserve the safety and soundness and the integrity of the 
insurance funds.
  Securities Activities: Provisions for certain securities activities 
such as asset-backed securities and municipal revenue bonds could be 
offered in a new, separate securities affiliate. These provisions are 
similar to provisions included in the Leach bill and agreed to by the 
Commerce Committee.
  Elimination of the Thrift Charter: With the new financial services 
holding company structure in place, the thrift charter would be 
eliminated; thrifts would generally be converted to banks, with 
grandfathering-transition provisions; and unitary thrift holding 
companies would be required to convert to either bank holding companies 
or financial services holding companies, also with grandfather-
transaction provisions. The statutory language for the charter 
conversion is similar to the language included in the last version of 
my Thrift Charter Conversion bill, H.R. 2363.
  I want to again reiterate that I do have serious concerns with 
several of the provisions included in this bill. However, I believe 
this draft proposal is an important document because it includes many 
compromises between the various financial services industry. Clearly, 
there are issues associated with this legislation that are yet to be 
discussed. However, with the introduction of this legislation we are 
advancing the debate on financial services modernization, and setting 
the stage for action in the 105th Congress that will take this industry 
into the 21st Century and beyond.
  There is no doubt that Congress has always had at its disposal the 
tools to modernize our Depression-era banking codes. What it has lacked 
is the will. The pressures of competing interests have made this task 
all but impossible and resulted in gridlock. This bill is a significant 
first step toward breaking that logjam. It includes major areas of 
compromise between the various competing industries. Again, I am 
planning for early and comprehensive hearings in my subcommittee on the 
issues of financial modernization.
  Again, let me stress that I will proceed with great care. My primary 
goal will be to preserve the safety and soundness of our financial 
system while protecting the American taxpayer and the business and 
consumers that rely on their services.

                       Summary Section by Section

       The Draft bill is an effort to break the current logjam 
     that is blocking financial services reform legislation. It is 
     a comprehensive approach that addresses affiliation issues, 
     Glass-Steagall reform, functional regulation, insurance 
     issues, and thrift charter conversion. It does this by 
     melding together key elements of the major reform bills that 
     were considered by the last Congress. The purposes of this 
     approach are to (1) build on the constructive efforts of 
     Chairmen D'Amato and Leach and Representatives McCollum, 
     Baker, and Roukema, among others, during the past two years; 
     (2) provide a comprehensive framework for addressing the 
     major concerns of the broadest possible range of industry 
     participants; and (3) address legitimate concerns of the 
     regulators that were reflected in both legislative and 
     regulatory proposals that emerged during the last several 
     years.


                1. FINANCIAL SERVICES HOLDING COMPANIES

       Using modified language from the D'Amato-Baker bills, the 
     draft bill creates a new and entirely optional structure for 
     financial companies to affiliate with banks. A company could 
     choose to own a bank through a new ``financial services 
     holding company'' that would not be subject to the Bank 
     Holding Company Act. Instead, the financial services holding 
     company would be subject to a new regulatory structure 
     established by a newly-created section of financial services 
     law called the ``Financial Services Holding Company Act.'' 
     Any company that owns a bank but chooses not to form a 
     financial services holding company would remain subject to 
     the Bank Holding Company Act to the same extent and in the 
     same manner as it is under existing law. However, an 
     affiliate of a bank that is not part of a financial services 
     holding company generally could not engage in securities 
     activities to a greater extent than has been permitted under 
     existing law.
       Permissible Affiliations.--A financial services holding 
     company could own or affiliate with companies engaged in a 
     much broader range of activities than is permitted for bank 
     holding companies under current law (with contrary state law 
     preempted). The bill would not, however, eliminate all 
     current restrictions on affiliations between banks and 
     commercial firms. A financial services holding company would 
     have to maintain at least 75 percent of its business in 
     financial activities or financial services institutions, 
     which would include such institutions as banks, insurance 
     companies, securities broker dealers, and wholesale financial 
     institutions. In addition, a bank holding company that became 
     a financial services holding company could not enter the 
     insurance agency business through a new affiliate unless it 
     bought an insurance agency that had been in business for at 
     least two years. Finally, foreign banks could also choose to 
     become financial services holding companies.
       The bill includes lists of activities that are deemed to be 
     ``financial'' and entities that are deemed to be ``financial 
     services institutions.'' A new National Financial Services 
     Committee, which would be chaired by the Treasury Department 
     and include the bank regulators, the SEC, and a 
     representative state insurance commissioner, would (1) 
     determine whether additional activities should be deemed to 
     be ``financial'' or additional types of companies should be 
     deemed to be ``financial services institutions''; and (2) 
     issue regulations describing the methods for calculating 
     compliance with the 75 percent test. Other than these limited 
     circumstances, a financial services holding company would not 
     be subject to the cumbersome application and prior approval 
     process that currently applies to bank holding companies.
       Holding Company Oversight.--Because it would own a bank, a 
     financial services holding company would be subject to 
     certain supervisory requirements, but only to the extent 
     necessary to protect the safety and

[[Page E89]]

     soundness of the bank. These supervisory requirements are 
     virtually identical to those that currently apply to 
     companies that own regulated securities broker dealers, and 
     companies that own regulated futures commission merchants--
     the so-called ``holding company risk assessment provisions.'' 
     In the past six years, Congress has twice embraced this model 
     for gathering information on potential risk to regulated 
     entities by affiliated companies, once in the Market Reform 
     Act of 1990 (securities firms), and once in the Futures 
     Trading Practices Act of 1992 (futures traders). While the 
     National Financial Services Committee would establish uniform 
     standards for these requirements as they apply to depository 
     institutions, the appropriate Federal banking agency that 
     regulate the lead depository institution of the financial 
     services holding company would implement and enforce them.
       Apart from these general requirements, financial services 
     holding companies would not be subject to the bank-like 
     regulation that currently applies to the capital and 
     activities of bank holding companies. However, as in the 
     D'Amato-Baker bills, financial services holding companies 
     would be subject to the following additional safety and 
     soundness requirements:
       Affiliate transaction restrictions, including but not 
     limited to the requirements of Sections 23A and 23B of the 
     Federal Reserve Act.
       Prohibition on credit extensions to nonfinancial 
     affiliates.
       Change in Control Act restrictions.
       Insider lending restrictions.
       A ``well-capitalized'' requirement for subsidiary banks.
       Civil money penalties, cease-and-desist authority, and 
     similar banking law enforcement provisions applicable to 
     violation of the new statute.
       New criminal law penalty provisions for knowing violations 
     of the new statute.
       Divesture requirement applicable to banks within any 
     financial services holding company that fails to satisfy 
     certain safety and soundness standards.
       Cross-Marketing Provisions.--As with the D'Amato-Baker 
     bills, the bill would preempt cross-marketing restrictions 
     imposed on financial services holding companies by state law 
     or any other federal law.
       Securities Activities.--The draft bill includes principal 
     elements of the last-introduced version of the Leach bill in 
     the previous Congress, H.R. 2520, as it related to Glass-
     Steagall issues. These include statutory firewall, ``push-
     out,'' and ``functional regulation'' provisions, with some 
     modifications. These new restrictions would apply only to 
     financial services holding companies; they would not apply to 
     the securities or investment company activities of banks that 
     remained part of bank holding companies.
       Wholesale Financial Institutions.--Financial services 
     holding companies (but not bank holding companies) could also 
     form uninsured bank subsidiaries called wholesale financial 
     institutions or ``WFIs.'' Such WFIs could be either state or 
     nationally chartered, and there would be no restrictions on 
     the ability of a WFI to affiliate with an insured bank. A WFI 
     would not be subject to the statutory securities firewalls 
     applicable to insured banks and their securities affiliates, 
     but the WFI could not be used to evade such statutory 
     firewalls.


                    2. ELIMINATION OF THRIFT CHARTER

       With the new financial services holding company structure 
     in place, the thrift charter would be eliminated; thrifts 
     would generally be required to convert to banks, with 
     grandfathering/transition provisions; and unitary thrift 
     holding companies would be required to convert to either bank 
     holding companies or financial services holding companies, 
     also with grandfathering/transition provisions. The statutory 
     language for the charter conversion is similar to the 
     language included in the last version of the Roukema bill, 
     which is the one that was used in the House's offer in the 
     Budget Reconciliation conference in late 1995.


             3. National market Funded Lending Institutions

       Unlike the D'Amato-Baker bills, the draft bill generally 
     precludes a commercial firm from owning an insured depository 
     institution. However, the bill recognizes the important role 
     that nonfinancial companies play in other aspects of the 
     financial services industry by allowing such companies to own 
     ``national market funded lending institutions.'' This new 
     kind of OCC-regulated institution would have national bank 
     lending powers, but would have no access to the federal 
     safety net: it could not take deposits or receive federal 
     deposit insurance, and it would have no bank-like access to 
     the payments system or the Federal Reserve's discount window. 
     In addition, the institution could not use the term ``bank'' 
     in its name. By owning a national market funded lending 
     institution, a nonfinancial company could provide all types 
     of credit throughout the country using uniform lending rates 
     and terms.

                          ____________________