[House Report 104-127]
[From the U.S. Government Publishing Office]



104th Congress                                            Rept. 104-127
                        HOUSE OF REPRESENTATIVES

 1st Session                                                     Part 2
_______________________________________________________________________


 
             FINANCIAL SERVICES COMPETITIVENESS ACT OF 1995

                                _______


                 June 13, 1995.--Ordered to be printed

_______________________________________________________________________


   Mr. Leach, from the Committee on Banking and Financial Services, 
                        submitted the following

                          SUPPLEMENTAL REPORT

                        [To accompany H.R. 1062]
                           cbo cost estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 23, 1995.
Hon. James A. Leach,
Chairman, Committee on Banking and Financial Services,
U.S. House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed H.R. 1062, the Financial Services Competitiveness Act 
of 1995, as reported by the Housing Committee on Banking and 
Financial Services on May 18, 1995. H.R. 1062 would repeal 
provisions of the Glass-Steagall Act that restrict the 
authority of commercial banks to underwrite and sell 
securities. While these changes could affect the government's 
spending for deposit insurance, CBO has no basis for predicting 
whether long-run deposit insurance costs would be higher or 
lower than current law. Implementing this bill is not expected 
to affect significantly the administrative costs of the 
financial regulatory agencies other than the Securities and 
Exchange Commission (SEC), which would spend an additional 
$750,000 to $1 million annually, assuming appropriation of the 
necessary amount.
    Because the bill could affect direct spending and receipts, 
pay-as-you-go procedures would apply. CBO estimates that the 
net effect of H.R. 1062 on both direct spending and receipts 
would not be significant.
    We expect that this bill would not result in any 
significant costs to state and local governments.

                              bill purpose

    H.R. 1062 would amend a number of banking laws, including 
the repeal of certain restrictions of the Glass-Steagall Act, 
to allow banks and securities firms to affiliate through 
financial services holding companies and to offer a full range 
of retail and wholesale banking services, as well as 
underwriting and selling securities.
    H.R. 1062 would require financial institutions to conduct 
banking and securities activities in separate subsidiaries, and 
would impose strict capital standards on bank holding companies 
that seek to acquire or retain a securities affiliate. In an 
effort to maintain the safety and soundness of the insured 
depository institutions, the bill would create ``firewalls'' to 
protect federally insured banks from losses by a security 
affiliate, and would prevent banks from using insured deposits 
to subsidize non-bank related activities. A number of 
safeguards, including restrictions on access to credit and 
other information, limits on the direct risk to banks and the 
federal government's deposit insurance funds primarily the Bank 
Insurance Fund.
    The Federal Reserve, the SEC, and state and federal banking 
regulators--the Comptroller of the Currency (OCC), the Federal 
Deposit Insurance Corporation (FDIC), and the Office of Thrift 
Supervision (OTS)--would have responsibility for monitoring and 
enforcing compliance with the statute. The bill would create an 
interagency advisory committee to recommend types of financial 
activities permissible for financial service holding companies 
and would allow the various regulatory agencies to coordinate 
examinations and enforcement procedures.
    H.R. 1062 also includes a number of provisions affected 
financial transactions and products. In addition, banks selling 
nondeposits and are not federally insured.

                          impact on the budget

    Deposit Insurance Funds. Enactment of H.R. 1062 could 
affect the federal budget by causing changes in the 
government's spending for deposit insurance, but there is not 
clear basis for predicting the direction or the amount of such 
changes.
    On the one hand, the bill could reduce potential risk to 
the insurance funds by allowing banks to diversify their 
sources of income and by helping banks to be more competitive 
in the world's financial markets. Diversification of income 
sources could result in lower overall risks of banks, assuming 
that the expansion of their activities is accompanied by 
adequate safeguards. H.R. 1062 would create a holding company 
framework to limit the direct risk of securities activities to 
banks and the deposit insurance fund. Other firewalls and rules 
would prohibit or limit certain bank and affiliate 
transactions.
    In addition, repeal of the restrictions of the Glass-
Steagall Act would accelerate changes already occurring in the 
marketplace. For example, some banks now sell mutual funds to 
their customers and, under limited circumstances, underwrite 
securities. At the same time, some securities firms offer 
checking-like accounts linked to mutual funds and extend credit 
directly to businesses. Expanding permissible activities and 
would organizations to compete more effectively and efficiently 
with other financial businesses.
    On the other hand, while the bill contains safeguards and 
other provisions to protect the banks, the benefits do not come 
without risks. In certain circumstances, a holding company may 
have an incentive to transfer or divert value away from the 
insured bank, leaving greater losses for the FDIC if the bank 
ultimately fails. Ultimately, strong supervision and monitoring 
by the regulators which history has demonstrated is critical in 
limiting the exposure of the taxpayer during times of severe 
financial stress, will be essential to avoid additional losses 
to the deposit insurance funds.
    If losses to the deposit insurance funds were to increase 
as a result of enactment of this measure, the FDIC would 
increase premiums that banks pay for deposit insurance. 
Similarly, if losses were to decrease, banks might pay smaller 
premiums. As a result, the net budgetary impact is likely to be 
negligible over time in either case.
    Regulatory Costs. The Federal Reserve would be the primary 
regulator of the new banking organizations. Because the Federal 
Reserve System remits its budget surplus to the Treasury, with 
the payment classified as a miscellaneous receipt (or revenue), 
additional operating costs can potential reduce governmental 
receipts. Based on information provided by staff members of the 
Board of Governors of the Federal Reserve System, we estimate 
that H.R. 1062 would cause no overall change in Federal Reserve 
costs of processing applications in two offsetting ways. By 
allowing bank holding companies to own securities firms, 
subject to the approval of the Federal Reserve, the bill would 
increase the Federal Reserve's costs for processing the 
required applications. But that effect would be offset by other 
cost reductions because the bill also would streamline the 
processing of certain other applications.
    Based on information from the SEC, we expect that 
additional rulemaking and inspections would cost $750,000 to $1 
million annually. The other financial regulatory agencies--OCC, 
FDIC, and OTS--do not expect any significant net change in 
their workload as a result of enactment of the legislation.
    If you wish further details on this estimate, we will be 
pleased to provided them. The CBO staff contacts are Mary 
Maginniss, who can be reached to 226-2860, and Mark Booth, who 
can be reached at 226-2685.
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).