[House Report 105-164]
[From the U.S. Government Publishing Office]



105th Congress                                            Rept. 105-164
                        HOUSE OF REPRESENTATIVES

 1st Session                                                     Part 2
_______________________________________________________________________


 
               FINANCIAL SERVICES COMPETITION ACT OF 1997

                               __________

                          SUPPLEMENTAL REPORT

                                 of the


                              COMMITTEE ON

                     BANKING AND FINANCIAL SERVICES

                        HOUSE OF REPRESENTATIVES

                                   on

                                H.R. 10

      [Including cost estimate of the Congressional Budget Office]





               September 17, 1997--Ordered to be printed


                          LETTER OF SUBMITTAL

                              ----------                              

                          House of Representatives,
               Committee on Banking and Financial Services,
                                Washington, DC, September 17, 1997.
Hon. Newt Gingrich,
Speaker, House of Representatives,
The Capitol, Washington, DC.
    Dear Mr. Speaker: On behalf of the Committee on Banking and 
Financial Services, I am transmitting herewith a supplemental 
report to accompany the bill, H.R. 10, the Financial Service 
Competition Act of 1997.
            Sincerely,
                                          James A. Leach, Chairman.



105th Congress                                            Rept. 105-164
                        HOUSE OF REPRESENTATIVES

 1st Session                                                     Part 2
_______________________________________________________________________


               FINANCIAL SERVICES COMPETITION ACT OF 1997

                                _______
                                

               September 17, 1997.--Ordered to be printed

_______________________________________________________________________


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

                          SUPPLEMENTAL REPORT

                         [To accompany H.R. 10]

      [Including cost estimate of the Congressional Budget Office]

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 12, 1997.
Hon. James A. Leach,
Chairman, Committee on Banking and Financial Services, House of 
        Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the two enclosed cost estimates the H.R. 10, the 
Financial Services Competition Act of 1997. One estimate 
includes federal costs and the state and local impact. The 
other estimate covers the private-sector impact.
    If you wish further details on these estimates, we will be 
pleased to provide them. The CBO staff contacts are Mary 
Maginniss (for federal costs); Mark Booth (for federal 
revenues); Marc Nicole (for the state and local impact); and 
Patrice Gordon and Judith Ruud (for the private-sector impact).
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).
    Enclosures.

               congressional budget office cost estimate

H.R. 10--Financial Services Competition Act of 1997

    Summary: H.R. 10 would abolish the federal thrift charter, 
thus allowing the merger of the bank and thrift insurance 
funds, and would eliminate certain barriers to ties between 
insured depository institutions and other financial and 
commercial firms. While these changes could affect the 
government's spending for deposit insurance, CBO has no basis 
for predicting whether the long-run costs of deposit insurance 
would be higher or lower than under current law. Because 
insured depository institutions pay premiums to cover these 
costs, any such changes would have little or no impact on the 
budget over time. CBO estimates that implementing the bill 
would increase other direct spending $4 million in 1998 and $62 
million over the 1998-2002 period, and would decrease revenues 
by $1 million in 1998 and $17 million over the 1998-2002 
period. Assuming appropriation of the necessary amounts, CBO 
estimates that several agencies would spend between $3 million 
and $4 million annually to carry out the provisions of the 
bill, once fully implemented. Because H.R. 10 would affect 
direct spending and receipts, pay-as-you-go procedures would 
apply.
    H.R. 10 contains several intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act (UMRA), but CBO 
estimates that the costs of complying with these mandates would 
total less than $10 million annually and thus would not exceed 
the threshold established under that act ($50 million in 1996, 
adjusted annually for inflation). H.R. 10 also contains several 
private-sector mandates as defined in UMRA. CBO's estimate of 
the cost of those private-sector mandates is detailed in a 
separate statement.
    Description of the bill's major provisions: H.R. 10 would:
          Require all federally chartered savings associations 
        to convert to a national bank or state charter within 
        two years after date of enactment, merge the Office of 
        Thrift Supervision (OTS) with the Office of the 
        Comptroller of the Currency (OCC), and allow the merger 
        of the Savings Association Insurance Fund (SAIF) and 
        the Bank Insurance Fund (BIF);
          Permit affiliations of banking, securities, and 
        insurance companies;
          With certain revenue limitations, allow non-banking 
        commercial firms to own small banks through a well-
        capitalized holding company and allow bank holding 
        companies to own commercial firms;
          Provide for a new type of wholesale financial 
        institution that does not accept retail insured 
        deposits, known as a ``woofie'';
          Create a 10-member National Council on Financial 
        Services (NCFS), comprising representatives from state 
        and federal regulatory agencies; the NCFS would 
        determine which products offered by banks and other 
        providers of financial services are financial in 
        nature, would identify the appropriate regulator for 
        these products, and would regulate disputes involving 
        the definition of these products;
          Reform the Federal Home Loan Bank (FHLB) System, 
        making membership voluntary; limit FHLBs' investments 
        only to those necessary for liquidity, safety and 
        soundness, and housing finance; and replace the $300 
        million annual payment made by the FHLBs for interest 
        on bonds issued by the Resolution Funding Corporation 
        (REFCORP) with an assessment set at 20.75 percent of 
        the FHLBs' net income;
          Require insured depository institutions and their 
        subsidiaries to adopt a number of consumer protection 
        measures affecting sales of nondeposit products.
          Require the General Accounting Office (GAO) to report 
        annually on market concentration in the financial 
        services industry;
          Amend the Securities Exchange Act of 1934 to define 
        bank employees or bank affiliates as ``brokers'' if 
        they conduct certain activities; and
          Shift from the financial regulatory agencies to the 
        Department of Justice (DOJ) the authority to review the 
        competitive effects of the antitrust laws involving 
        mergers of depository institutions.
    Estimated cost to the Federal Government: H.R. 10 would 
make a number of changes affecting direct spending and 
revenues, which would result in increased spending by the 
banking regulatory agencies and the FHLBs, and a decrease in 
the annual payment--recorded as revenues--that the Federal 
Reserve remits to the Treasury. CBO estimates that direct 
spending would increase by about $62 million over the 1998-2002 
period. We estimate that enacting H.R. 10 would decrease 
revenues by $17 million over the same period. The bill also 
would increase discretionary spending by an estimated $14 
million over the 1998-2002 period, assuming appropriation of 
the necessary amounts. The estimated budgetary impact of H.R. 
10 is shown in the following table.
    The budgetary effects of this legislation on outlays fall 
within budget functions 370 (commerce and housing credit) and 
900 (interest). The legislation would also affect revenues 
(governmental receipts).

Basis of estimate

            Direct spending and revenues
    H.R. 10 could affect direct spending for deposit insurance 
by increasing or decreasing amounts paid by the insurance funds 
to resolve insolvent institutions and to cover the 
administrative expenses necessary to implement its provisions. 
Changes in spending related to failed banks and thrifts could 
be volatile and vary in size from year to year, but any such 
costs would be offset by insurance premiums, and thus their 
budgetary impact would be negligible over time. The bank 
regulators would also incur expenses related to the proposed 
legislation, but not all of these costs would be offset by 
fees. The contribution the FHLBs make to pay interest on 
REFCORP bonds would increase, thus reducing the Treasury 
payment to REFCORP. Finally, H.R. 10 also would affect revenues 
by reducing annual payments from the Federal Reserve to the 
Treasury.

----------------------------------------------------------------------------------------------------------------
                                                            By fiscal years, in millions of dollars--           
                                               -----------------------------------------------------------------
                                                   1997       1998       1999       2000       2001       2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
                                                                                                                
Spending Under Current Law: \1\                                                                                 
    Estimated Budget Authority................      2,328      2,328      2,328      2,328      2,328      2,328
    Estimated Outlays.........................    -10,152     -1,934       -526      1,160      1,845      2,038
Proposed Changes:                                                                                               
    Estimated Budget Authority................          0          0        -22        -17         -4         -1
    Estimated Outlays.........................          0          4          8         11         18         21
Spending Under H.R. 10 \1\                                                                                      
    Estimated Budget Authority................      2,328      2,328      2,306      2,311      2,324      2,327
    Estimated Outlays.........................    -10,152     -1,930       -518      1,171      1,863      2,059
                                                                                                                
                                               CHANGES IN REVENUES                                              
                                                                                                                
Estimated Revenues \2\........................          0         -1         -4         -4         -4         -4
                                                                                                                
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION                                  
                                                                                                                
Estimated Authorization Level.................          0          1          3          3          3          4
Estimated Outlays.............................          0          1          3          3          3          4
----------------------------------------------------------------------------------------------------------------
\1\ Includes spending for deposit insurance activities (subfunction 373) and Treasury payments for interest on  
  REFCORP bonds.                                                                                                
\2\ Includes changes in the Federal Reserve surplus. A negative sign indicates a decrease in revenues.          

    Deposit Insurance Funds. Enacting H.R. 10 could affect the 
federal budget by causing changes in the government's spending 
for deposit insurance, but CBO has no clear basis for 
predicting the direction or the amount of such changes. Changes 
in spending for deposit insurance could be significant in some 
years, but would have little or no net impact on the budget 
over time.
    Title III would convert to national banks all federal 
savings institutions in existence within two years of the date 
of enactment, thus allowing the merger of the BIF and SAIF. 
Both funds hold reserves in excess of the levels mandated by 
statute, and thus the combined fund would be well-capitalized 
initially. The SAIF insures far fewer and more geographically 
concentrated institutions than does the BIF, and those 
institutions focus on housing finance.A combined insurance fund 
thus could benefit from diversifying geographic and product risks that 
could lower the probability that the fund would become insolvent.
    Other provisions in the bill could affect spending by the 
deposit insurance funds. Some are likely to reduce the risks of 
future bank failures. For example, H.R. 10 would permit 
affiliations of banking, securities, and insurance companies, 
thereby giving such institutions the opportunity to diversify 
and to compete more effectively with other financial 
businesses. Changes in the marketplace, particularly the 
effects of technology, have already helped to blur the 
distinctions among financial service firms. Further, regulatory 
and judicial rulings continue to erode many of the barriers 
separating different segments of the financial services 
industry. For example, banks now sell mutual funds and 
insurance to their customers and, under limited circumstances, 
may underwrite securities. At the same time, some securities 
firms offer checking-like accounts linked to mutual funds and 
extend credit directly to businesses. Because H.R. 10 would 
streamline the regulatory and legal structure that currently 
governs bank activities, CBO expects that its enactment would 
allow banks to compete more effectively in the rapidly evolving 
financial services industry. Diversifying income sources also 
could result in lower overall risks for banks, assuming that 
the expansion of their activities is accompanied by adequate 
safeguards. The bill would create ``firewalls'' to protect the 
banking components of a financial services organization from 
its riskier securities, insurance, or other financial 
activities, and would prohibit or limit certain transactions 
between banks and affiliates, hopefully preventing financial 
and informational abuses and conflicts of interest.
    H.R. 10 also would allow banks to expand into relatively 
unfamiliar activities, thus possibly increasing the risk of 
bank failures. The bill would allow two approaches that would 
mix banking and commerce. Well-capitalized and healthy bank 
holding companies could own commercial firms as long as the 
aggregate commercial revenues do not exceed 15 percent of the 
holding company's gross domestic revenues. It also would allow 
a commercial firm to control a bank holding company with one 
small bank (less than $500 million in assets). Similarly, 
revenues from the bank could not exceed 15 percent of the 
consolidated gross domestic revenues of the commercial firm.
    But, permitting insured banks to diversify into product 
areas where they have little experience, or allowing commercial 
firms to own banks, raises questions about the adequacy of the 
regulators' ability to protect the insured entities and the 
insurance funds. Several federal banking regulators have 
expressed uncertainty about their ability to maintain adequate 
safeguards between the transactions of the insured institutions 
and their commercial affiliates and subsidiaries. A major 
concern would be preventing nonbanking losses in affiliates 
from draining the resources of the insured banks. To maintain 
safety and soundness in the banking system, H.R. 10 would 
specifically prohibit a bank from lending to a commercial 
affiliate and would impose a number of other restrictions. 
Nonetheless, experience with mixing commerce and banking in the 
United States has been limited. Ultimately, strong supervision 
and monitoring by regulators, which history has demonstrated is 
critical in limiting the exposure of the taxpayers during times 
of financial stress, would be essential to avoid additional 
losses to the deposit insurance fund.
    If losses to the deposit insurance fund were to increase as 
a result of enacting H.R. 10, the BIF would increase premiums 
that banks pay for deposit insurance. Similarly, if losses were 
to decrease, bans might pay smaller premiums. As a result, the 
net budgetary impact is likely to be negligible over time in 
either case.
    Conversion of Thrift Institutions. Two years after the date 
of enactment, all existing federal thrifts would be converted 
to national banks, and all state-chartered thrifts would be 
treated as state-chartered banks. At the same time, the OCC and 
the OTS would be merged, along with the bank and thrift deposit 
insurance funds, the BIF and the SAIF. Thrifts would no longer 
be required to maintain membership in the FHLB system. Finally, 
unitary thrift holding companies now in existence could 
continue to engage in all current activities, with certain 
limitations.
    Merging the OTS and the OCC should result in long-term 
savings to the financial institutions that pay annual fees to 
cover the administrative expenses of the agencies. CBO 
estimates that reducing overhead and streamlining the 
examination process would result in cost savings of between $10 
million and $15 million annually, once the merger is completed. 
The net budgetary effect of any such savings would be zero over 
time, however, because any reduction in expenses would result 
in a corresponding decrease in fee income.
    Initially, CBO anticipates that the transition costs to 
move employees, to cover cancellations of leases, to train 
employees, to pay the costs of reductions-in-force, and to 
reprogram payroll, accounting, and other data systems, would 
cost about $15 million over the 1999-2000 period. Based on 
information from the OTS and the OCC, we expect that the OTS 
would tap its existing reserve funds to pay these transition 
costs. Given the current OTS surplus, the agencies do not 
anticipate that fees paid by banks and the newly converted 
thrifts would be increased to replenish any reserves used for 
this purpose. As a result, CBO estimates that outlays would 
increase by $8 million in 1999 and by $7 million in 2000.
    H.R. 10 would require about 1,100 federal thrifts to choose 
a new charter--either a state depository charter or a national 
bank charter. If no action is taken, the institution would 
automatically be designated a national bank. Under current law, 
the OCC is responsible forregulating national banks; the 
Federal Deposit Insurance Corporation (FDIC) regulates state-chartered 
banks that are not members of the Federal Reserve System; and the 
Federal Reserve regulates state-chartered member banks and bank holding 
companies. CBO expects that most thrifts would retain their state or 
federal affiliation, and that most large thrifts would become national 
banks, thus coming under the OCC's authority. The FDIC would supervise 
some smaller thrifts that shift their federal charters to either state 
thrift or state bank charters, as well as holding companies where the 
lead bank is state-chartered and not a member of the Federal Reserve 
System. We expect that abolishing the federal thrift charter would have 
a minimal effect of the supervisory activities of the Federal Reserve 
System. In addition, all the federal regulators are likely to have some 
additional examination activity associated with banks and nonfinancial 
affiliates.
    As previously noted, with the exception of transition 
costs, transferring supervisory responsibility for newly 
chartered national banks from the OTS to the OCC would have no 
net budget effect, because both agencies charge fees to cover 
all their administrative costs. That is not the case with the 
FDIC, however, which uses deposit insurance premiums paid by 
all banks to cover the expenses it incurs to supervise state-
chartered banks. Because the BIF and SAIF are well-capitalized, 
most banks and thrifts pay no premiums for deposit insurance at 
this time. Further, any increase in administrative costs 
triggered by H.R. 10 is not likely to result in future rate 
increases. CBO estimates that the FDIC would spend an 
additional $2 million in 1998 and about $18 million annually 
beginning in 1999 on regulatory and examination costs 
associated with its role in maintaining the safety and 
soundness of the institutions it supervises. CBO expects no 
significant administrative savings or costs from merging the 
BIF and the SAIF into a combined fund.
    Other Bank Regulatory Costs. The Federal Reserve, the 
Securities and Exchange Commission (SEC), and state and federal 
banking regulators--the OCC, the FDIC, and the OTS--would have 
primary responsibility for monitoring compliance with the 
statute. The bill also would create a 10-member NCFS, headed by 
the Secretary of the Treasury, to determine what activities are 
financial in nature and which are not. It would have authority 
to issue regulations and to resolve disputes arising among 
providers of financial services. CBO estimates that the NCFS 
would incur costs of $2 million to $3 million annually. These 
expenses would be shared by the member agencies and largely 
funded by fees paid by financial institutions or by agency 
appropriations.
    In addition, the bill would impose consumer protection 
regulations governing retail sales of nondeposit products and 
other requirements. The banking agencies would be required to 
establish a consumer compliant mechanism to address various 
complaints, to develop programs for promoting housing finance, 
and to implement new regulations, policies, and training 
procedures related to securities, insurance and other areas. 
CBO expects that spending by the FDIC would total about $1 
million in 1998 and $2 million annually for these new 
activities and for costs associated with monitoring compliance 
with the Community Reinvestment Act by the newly converted 
thrifts. The OCC and the OTS would also incur expenses for 
these purposes, but they would be offset by increased fees, 
resulting in no net change in outlays for those agencies.
    Federal Home Loan Banks. The bill would make a number of 
reforms to the FHLB system, including: (1) Beginning in 1999, 
membership in the FHLB system would become voluntary; (2) total 
advances that the FHLBs could issue to institutions that do not 
qualify as thrift lenders would no longer be capped at 30 
percent; and (3) investments could not exceed the amounts 
necessary to ensure liquidity, safety and soundness, and 
support for housing finance. H.R. 10 also would replace the 
$300 million annual payment made by the FHLBs for the interest 
on bonds issued by the REFCORP with an assessment set at 20.75 
percent of the FHLBs' net income.
    Based on CBO's analysis of the FHLB system's balance sheet 
and income statement, and using economic assumptions consistent 
with the budget resolution baseline, CBO estimates that the 
FHLBs' net earnings will peak in 1998 at $1.3 billion and 
gradually drop to about $1.1 billion by 2002 As a result, CBO 
estimates that the provisions affecting the FHLBs would 
increase their payments to REFCORP by a total of $44 million 
over the 1998-2002 period. The FHLB system is a government-
sponsored enterprise and its activities are not included in the 
federal budget. But, because the Treasury pays the interest on 
REFCORP bonds not covered by the FHLBs, this change would 
reduce Treasury outlays by $44 million over the five-year 
period.
    Revenues. Based on information from the Federal Reserve, we 
estimate that H.R. 10 would require the Federal Reserve to 
incur added examination costs of about $4 million per year once 
the bill's requirements are fully effective in 1999. These 
costs would be necessary to supervise the activities of the new 
bank holding companies as well as the new type of bank, the 
``woofie,'' which would not accept retail insured deposits. The 
Federal Reserve's cost of processing applications could also be 
affected. Applications for nonbanking activities could decrease 
but applications for the newly authorized activities of holding 
companies could increase. We expect that these changes would be 
roughly offsetting, resulting in no net budgetary impact.
    Because the Federal Reserve system remits its surplus to 
the Treasury, changes in its operating costs would affect 
governmental receipts. The net effect of the changes in this 
bill would be to reduce governmental receipts of $17 million 
over the 1998-2002 period.
            Spending subject to appropriation
    A number of federal agencies would be responsible for 
monitoring changes resulting from enactment of H.R. 10. CBO 
estimates that total costs, assuming appropriation of the 
necessary amounts, would be about $1 million in 1998 and $3 
million to $4 million annually beginning in 1999, primarily for 
expenses of the SEC, the Treasury, and GAO. The SEC would incur 
costs to monitor market conditions, to examine firms, and to 
investigate practices to ensure compliance with the statute. 
The SEC would also be required to pay a portion of the annual 
expenses of the NCFS. We expect these additional rulemaking, 
inspection, and administrative expenses of the SEC would total 
less than $1 million in 1998 and about $2 million annually 
beginning in 1999. The Treasury also would participate in the 
NCFS, and we expect that its annual costs would be about $1 
million, once the NCFS is fully staffed and operating.
    H.R. 10 would require GAO to conduct annual study 
evaluating competition in the financial services industry. CBS 
estimates that GAO would spend about $1 million annual to 
collect and analyze data and prepare the report. Finally, DOJ 
would assume primary responsibility for streamlining the review 
of the antitrust implications of bank acquisitions and mergers. 
Based on information from DOJ, we expect that the department 
would continue to work with federal banking regulators to 
monitor such activity, and would incur no significant 
additional cost as a result of this change.
    Pay-as-you-go considerations: Section 252 of the Balanced 
Budget and Emergency Deficit Control Act of 1985 sets up pay-
as-you-go procedures for legislation affecting direct spending 
or receipts. Legislation providing funding necessary to meet 
the deposit insurance commitment is excluded from these 
procedures. CBO believes that the various costs of H.R. 10 
related to consumer protection and housing lending do not meet 
the exemption for the full funding of the deposit insurance 
commitment and thus would have pay-as-you-go implications. We 
estimate that direct spending changes resulting from the 
increase in the FDIC's supervisory costs associated with 
activities other than those related to safety and soundness 
would total about $1 million in 1998 and $2 million annually 
beginning in 1999. Costs for similar activities of the OCC and 
the OTS would be offset by increases in fees of an equal 
amount, resulting in no significant net budgetary impact for 
those agencies.
    CBO estimates that provisions affecting the FHLBs would 
result in an increase in their payments for REFCORP interest 
and a corresponding decreasing in Treasury outlays, totaling 
$109 million over the 1998-2007 period.
    CBO expects that the Federal Reserve would incur additional 
expenses associated with consumer and housing issues that are 
not directly related to protecting the deposit insurance 
commitment. We estimate that the resulting increase in 
regulatory and other costs would reduce the surplus payment 
that the Federal Reserve remits to the Treasury by less than 
$500,000 annually.
    The net changes in outlays and governmental receipts that 
are subject to pay-as-you-go procedures are shown in the 
following table. For the purposes of enforcing pay-as-you-go 
procedures, only the effects in the budget year and the 
succeeding four years are counted.

----------------------------------------------------------------------------------------------------------------
                                                    By fiscal years, in millions of dollars--                   
                                --------------------------------------------------------------------------------
                                  1998    1999    2000     2001    2002    2003    2004    2005    2006    2007 
----------------------------------------------------------------------------------------------------------------
Changes in outlays:                                                                                             
    FDIC.......................       1       2       2        2       2       2       2       2       2       2
    REFCORP payment............       0     -22     -17       -4      -1      -1      -4     -11     -20     -29
                                --------------------------------------------------------------------------------
      Total....................       1     -20     -15      -12      -1       1       1      -2     -18     -27
Changes in receipts............       0       0       0        0       0       0       0       0       0       0
----------------------------------------------------------------------------------------------------------------

    Estimated impact on State, local and tribal governments: 
H.R. 10 contains several intergovernmental mandates as defined 
in UMRA. CBO estimates that the total cost complying with these 
mandates--primarily preemptions of state law--would be less 
than $10 million a year. The bill contains other provisions, 
which are not mandates, but which CBO estimates would affect 
the budgets of state and local governments. H.R. 10 would not 
impose mandates or have other budgetary impacts on tribal 
governments.
            Mandates
    A number of provisions in H.R. 10 would preempt state 
banking and insurance laws. States would not be allowed to 
prevent banks from engaging in certain activities (such as 
selling insurance and securities) authorized under the act, nor 
would they be allowed to restrict the reorganization of mutual 
insurers. The bill would also allow federal bank regulators to 
enforce regulations that contradict state laws in certain 
circumstances. Such preemptions are mandates under UMRA. Based 
on information provided by the National Association of 
Insurance Commissioners (NAIC) and the Conference of State Bank 
Supervisors (CSBS), CBO estimates that enactment of these 
provisions would not result in direct costs or lost revenue to 
state governments because, while they would be prevented from 
enforcing certain rules and regulations, they would not be 
required to undertake any new activities.
    Title IV of the bill would require a majority of states 
(within three years of enactment of H.R. 10) to enact uniform 
laws and regulations governing the licensing of individuals and 
entities authorized to sell insurance within the state. If a 
majority of states do not enact such laws, certain state 
insurance laws would be preempted and a National Association of 
Registered Agents and Brokers (NARAB) would be established. The 
purpose of the association would be to provide a mechanism 
through which uniform licensing, continuing education, and 
other qualifications could be adopted on a multistate basis. 
Membership in NARAB would be voluntary and open to any state-
licensed insurance agent.
    If NARAB is established, states would maintain the core 
functions of regulating insurance, such as licensing, 
supervising, and disciplining insurance agents and protecting 
purchasers of insurance from unfair trade practices, but 
certain state laws would be preempted. Specifically, Title IV 
would prevent states from discriminating against members of 
NARAB by charging different licensing fees based on residency 
and requiring compliance with countersignature laws. Based on 
information from the NAIC about the number of out-of-state 
agents and current state license fees, CBO estimates that these 
preemptions would result in the loss of license fees to states 
totaling less than $10 million a year.
    Finally, the bill would require state regulatory agencies 
to make available certain reports to the Federal Reserve Board 
and to notify the board of any significant financial or 
operational risk to any depository institution from the 
activities of an affiliate of the institution. CBO estimates 
that the cost of complying with these requirements would not be 
significant.
            Other impacts
    Enactment of H.R. 10 would result in additional costs and 
revenues to state regulatory agencies. Certain provisions of 
the bill could lead to the establishment of new bank 
subsidiaries involved in insurance or securities activities. 
Because most states already allow banks to be involved in such 
activities, we expect that any additional costs would be small. 
In general, costs incurred by states would be offset by 
additional examination and licensing fees.
    Title III also could result in additional workload for 
state banking agencies if federal thrifts whose charters are 
being abolished under the bill choose to become state-chartered 
financial institutions. Based on information from the CSBS, CBO 
estimates that any such increase in workload would be modest 
and that any costs would be offset by an increase in receipts 
from bank examination fees.
    Finally, section 217 of the bill, which would expand the 
definition of ``investment adviser'' under the Investment 
Advisers Act, would increase the number of advisers registering 
with states, thereby increasing fee revenues. Based on 
information from the North American Securities Administrators 
Association (NASAA), CBO estimates that additional filing and 
registration fees would total approximately $1 million 
annually.
    Estimated impact on the private sector: H.R. 10 would 
impose several private-sector mandates as defined in UMRA. 
CBO's analysis of those mandates is contained in a separate 
statement of private-sector mandates.
    Estimate prepared by: Federal costs: Mary Maginniss. 
Federal revenues: Mark Booth. Impact on State, local, and 
tribal governments: Marc Nicole.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.

    CONGRESSIONAL BUDGET OFFICE ESTIMATE OF COSTS OF PRIVATE-SECTOR 
                                MANDATES

H.R. 10--Financial Services Competition Act of 1997

    Summary: Overall, H.R. 10 would reduce existing federal 
regulation of the financial services industry by relaxing 
restrictions on business and financial transactions throughout 
the economy. In particular, the bill would eliminate certain 
barriers to ties among banking organizations, other financial 
firms and commercial businesses. At the same time the bill 
would impose restrictions on newly authorized financial and 
commercial activities.
    H.R. 10 would impose several new private-sector mandates as 
defined by the Unfunded Mandates Reform At of 1995 (UMRA). The 
mandates identified in the bill would affect banking firms and 
other organizations that engage in financial activities. CBO 
estimates that the direct costs of those mandates would exceed 
the statutory threshold for private-sector mandates ($100 
million in 1996 dollars, adjusted annually for inflation) in 
2003 because of requirements imposed on the Federal Home Loan 
Banks. Federally-chartered thrifts would probably experience 
some modest costs as a result being forced to change charters 
within two years after enactment. The direct costs of mandates 
on banking organizations could be at least partially offset by 
savings from changes the bill would make to expand the powers 
of banks and bank holding companies.
    Private-sector mandates contained in bill: H.R. 10 would 
impose new mandates on Federal Home Loan Banks (FHLBs), federal 
savings associations, and bank organizations. The largest costs 
are associated with mandates that would be imposed on the FHLB 
system. The primary mandates on FHLBs in the bill would require 
them to:
          Replace the $300 million fixed annual payment for 
        interest on Resolution Funding Corporation (REFCORP) 
        bonds with a 20.75 percent annual assessment on net 
        earnings; and
          Reduce the level of investments to the amount 
        necessary for liquidity, safety and soundness, and 
        housing finance.
    The bill would also impose new mandates on federally-
chartered thrifts (savings associations) and banking 
organizations. If enacted, major provisions in H.R. 10 would:
          Force all federally-chartered thrifts to convert to 
        another charter within two years after enactment;
          Require banking organizations to adopt several 
        consumer protection measures affecting sales of non 
        deposit products;
          End the blanket exemption under the Securities 
        Exchange Act of 1934 for brokers and dealers that 
        conduct business in banks, making them subject to 
        regulation by the Securities and Exchange Commission 
        (SEC);
          End the exemption under the Investment Adviser Act of 
        1940 for bank investment advisers, making them subject 
        to SEC examination and registration requirements; and
          End the authority of federally-charted banks 
        (national banks) to sell title insurance directly in 
        the bank.
    Savings made possible by the bill could offset at least 
some of the costs of mandates in the bill. In particular, 
provisions that expand the allowable activities for banking 
organizations may lead to additional net income for these 
institutions as compared to current law.
    Estimated direct cost to the private sector: The direct 
costs of private-sector mandates identified in this bill would 
exceed the threshold established in UMRA. Although mandates 
would become effective at different dates, CBO estimates that 
the aggregate costs of mandates would exceed the statutory 
threshold primarily due to mandates imposed on FHLBs. Under 
H.R. 10, CBO estimates that FHLBs would experience a reduction 
in net earnings as compared to projected net earnings under 
current law. In 2003, the fifth year after mandates on FHLBs 
would become effective, the estimated loss in net earnings 
(direct costs) to FHLBs would rise to $158 million. This amount 
exceeds the statutory threshold ($100 million in 1996, adjusted 
annually for inflation) by about $35 million dollars.
    The direct costs of other mandates in the bill would not 
likely be significant. CBO estimates that the direct costs to 
federally-chartered thrifts of converting to another charter 
would amount to about $14 million by the second year of 
enactment with zero costs thereafter. The direct costs of 
mandates on banking organizations for which we were able to 
obtain data would amount to less than $11 million initially 
falling precipitously thereafter. Although data were not 
available for every mandate identified in the bill, the 
additional costs of these mandates are not expected to be 
expected to be significant.
    The bill would also affect businesses and consumers in many 
ways other than through the mandates it contains. Estimates are 
more certain for the direct costs of mandates that are closely 
linked to legislative language. Greater uncertainty exists for 
the cost of mandates that are highly dependent on federal 
rulemaking. Moreover, there are many uncertainties concerning 
how firms might react to changes in financial and commercial 
markets as a result of provisions in this bill. The estimates 
provided below are of the direct costs (and potential savings) 
of mandates, and not the more general effects on the private 
sector. Where possible, a discussion of the broader effects is 
included.

Federal Home Loan Bank reform

    H.R. 10 contains a number of provisions regarding the 
Federal Home Loan Bank (FHLB) system. The 12 Federal Home Loan 
Banks are private, member-owned institutions regulated by the 
Federal Housing Finance Board (FHFB). The FHLB system has more 
than 6,100 member institutions, including federal- and state-
chartered thrift institutions, commercial banks, credit unions, 
and insurance companies. The FHLBs provide members with loans 
(advances) at attractive rates, and make investments in 
mortgage-backed securities and other financial assets. Members 
are required to purchase stock in the FHLBs; and the FHLBs pay 
dividends on that stock. Federal Home Loan Banks finance most 
of their assets through the sale of collateralized obligations. 
Because the FHLB system was created and chartered by the 
federal government, it is considered a government-sponsored 
enterprise, and its obligations are perceived to carry an 
implied federal guarantee. The implied guarantee enables the 
FHLBs to borrow funds from financial markets at low rates.
    Many provisions of the bill would affect the administration 
of the Federal Home Loan Bank system. Section 177 of H.R. 10 
would require each FHLB to submit for FHFB approval a capital 
structure plan and would authorize the FHFB to establish 
leverage and risk-based capital requirements for FHLBs. The 
bill would require two classes of FHLB stock with different 
voting and dividend features redeemable in either one or five 
years. Most banks surveyed by CBO are uncertain about how a new 
capital structure plan would affect operations, and hence, 
compliance costs.
    Section 172A would require the Office of Finance, now a 
part of the FHFB, to become a part of the FHLB system. The 
Office of Finance issues consolidated obligations that are sold 
through investment firms and dealer banks or as direct 
placements. Banks are currently assessed a fee to cover the 
administrative costs of the Office of Finance; therefore, 
compliance costs are not expected to increase with this change. 
Section 172B of H.R. 10 would require 15 directors for each 
bank--9 elected and 6 appointed. Most banks currently have 15 
or more directors; about 3 banks would have to hire an 
additional director. The cost of an additional director would 
vary by bank; fees plus expenses for a director usually range 
from $22,000 to $28,000.
    Section 176 would replace the fixed annual payment made by 
FHLBs for the interest on Resolution Funding corporation 
(REFCORP) bonds with a 20.75 percent assessment on the net 
earnings of each FHLB. The bill would also allow an additional 
assessment allocated equally among FHLBs if necessary to meet 
the minimum REFCORP payment. FHLBs would no longer have to pay 
a fixed amount regardless of annual earnings; under H.R. 10 
they would pay a fixed percentage of adjusted net earnings. CBO 
estimates that the new assessment rate would increase the 
payments made by FHLBs above the current payment of $300 
million annually by a total of $45 million over the 1998-2003 
period.
    Section 178 would mandate that the FHLBs reduce the level 
of their investments to the amount necessary for liquidity 
purposes, or for safe and sound operation, or for housing 
finance. Depending on how regulators interpret this mandate, 
the earnings on investments could be lower as compared to those 
earned by FHLBs under current law. CBO assumes that the 
relevant provisions in this section would go into effect on 
January 1, 1999, and that the FHLBs would gradually reduce 
their holdings of mortgage-backed securities from 300 percent 
of capital in 1998 to 50 percent of capital by 2003. Money 
market and other financial investments were assumed to decline 
from 475 percent of total capital in 1998 to 150 percent by the 
year 2000. Those adjustments would bring the FHLBs investment 
portfolio close tothe norm that was established before passage 
of the Financial Institutions Reform, Recovery and Enforcement Act of 
1989.
    Other provisions of the bill are likely to affect 
membership in the FHLB system and thereby could affect the 
earnings of FHLBs. Section 172 would repeal the federal mandate 
that requires federal savings associations to be members of the 
system effective January 1, 1999. (Most experts do not 
anticipate a large exodus of thrift institutions.) In addition, 
this section would allow community financial institution 
(defined as insured depository institutions with less than $500 
million in total assets) to be members in the Federal Home Loan 
Bank system by exempting them from the eligibility requirement 
that at least 10 percent of their total assets be in 
residential mortgage loans. This section of the bill would also 
allow community financial institutions that are members of the 
Federal Home Loan Bank system to get long-term advances for the 
purpose of funding small business, agriculture or rural 
development.
    Allowing for the projected changes in investments and 
accounting for the effects of additional earnings from new 
members and the expanded possibility of earnings from advances. 
CBO estimates that net earnings to FHLBs (after payments for 
REFCORP and the Affordable Housing Program) would be lower than 
net earnings projected under current law. The loss in net 
income would be counted as a direct cost of these mandates. The 
estimated cost to FHLBs, as measured by the loss in net income, 
increases from about $30 million in 1999 to about $122 million 
in 2002. By 2003, the fifth year after these provisions would 
become effective, the loss in net income totals $158 million 
and would exceed the threshold for private-sector mandates 
under UMRA. Nonetheless, the returns to FHLB shareholders would 
remain above competitive levels, although by less than they 
would have been otherwise. CBO estimates that FHLBs' net 
earnings would peak in 1998 at $1.3 billion, gradually drop to 
$1.149 billion by 2002 and begin to rise again thereafter.

Elimination of the Federal Thrift Charter

    Two years after enactment, Title III of the bill would 
require federal savings associations to automatically be 
converted by operation of law to national banks. The direct 
costs of this private-sector mandate are uncertain, but would 
not likely be significant. Moreover, the costs of regulating 
the newly converted banks would most likely be lower than under 
current law. If so, those savings would be passed on to 
regulated institutions.
    The direct costs of conversion could include such items as 
conversion fees to a new chartering agency, the costs of 
replacing signs and stationery, the cost of a pre-conversion 
examination, and legal costs associated with adopting and 
conforming with the new charter. CBO assumes that the 
chartering agency would not charge federal savings associations 
a conversion fee and that the converting federal savings 
associations would not incur the legal costs associated with 
filing for conversion or the costs of a pre-conversion 
examination. Therefore, the direct costs of converting to a 
national bank would be the costs of replacing signs and 
stationery. Given that federal thrifts would have two years for 
this transition, new stationery would not necessarily be an 
additional cost. The cost to replace signs, assuming a cost of 
about $2000 per branch, would amount to about $14 million.

Regulation of non-deposit products

    Section 112 of the bill would direct the federal banking 
agencies to adopt joint consumer protection regulations 
regarding bank retail sales of non-deposit products by any 
insured depository institution or any person engaged in such 
activities at an office of the institution or on behalf of the 
institution. The bill defines non-deposit products as 
investment and insurance products that are not deposit products 
as well as shares of registered investment companies. The major 
areas that must be addressed by regulation include:
          Suitability standards--standards to ensure that an 
        investment product sold to a consumer is suitable and 
        any other non-deposit product is appropriate for a 
        consumer based on financial information disclosed by 
        the consumer;
          Anti-coercion--a prohibition against engaging in any 
        practices that would lead a consumer to believe than an 
        extension of credit is conditional on the purchase of a 
        non-deposit product from the institution or a 
        subsidiary or affiliate;
          Consumer disclosures--oral and written disclosures 
        regarding the uninsured status of the product, the 
        absence of a bank guarantee, possible changes in value 
        and the prohibition on coercion in connection with a 
        loan, and consumer acknowledgment of the receipt of 
        such disclosures;
          Physical segregation of activities--a requirement 
        that retail deposits and transactions involving non-
        deposit products be conducted in separate settings, 
        when possible; and
          Sales personnel--a prohibition against the selling or 
        offering of an opinion or investment advice on any non-
        deposit product by persons who are engaged in deposit 
        taking functions; and standards allowing for such 
        persons to make referrals to qualified persons only if 
        the person making the referral receives no more than a 
        one-time nominal fee for each referral that does not 
        depend on whether the referral results in a 
        transaction. Requirements regarding the qualifications 
        of persons authorized to sell non-deposit products on 
        behalf of an insured depository institution.
    Currently, banks may engage in the retail sale of non-
deposit products with some restrictions. National banks are 
allowed to engage in brokering (buying and selling) of all 
types of securities and investment products. State banks' 
securities activities vary from state to state, but most states 
permit state banks to engage in the sale of securities--
currently, 43 states authorize discount or full securities 
brokerage, and 17 states allow banks to underwrite securities. 
Regarding insurance activities, permissible methods of entry 
for a bank generally depend on insurance powers granted under 
federal and state banking laws and state licensing 
requirements. A national bank may sell all lines of insurance 
as an agent, either directly or through a subsidiary, as long 
as it operates the insurance agency in towns with a population 
of 5,000 or less. Most states have laws that permit state bank 
sales of insurance either explicitly or implicitly through the 
operation of a ``wild card'' statute (permitting state banks to 
exercise the same powers as national banks).
    Except for the anti-coercion provision, the provisions in 
section 112 are based on current industry guidelines issued in 
1994 by bank regulators in an Interagency Statement on Retail 
Sales of Non-deposit Investment Products. The anti-coercion 
provision is similar to the anti-tying provision in current 
law. The consumer protection mandates would, depending on how 
regulators interpret these provisions, codify current industry 
guidelines and, therefore, would not likely impose measurable 
incremental costs on banks that currently engage in non-deposit 
activities.

Additional regulator--National Council on Financial Services

    The bill would establish a new National Council on 
Financial Services to coordinate the regulation of financial 
services. The Council would include representatives from the 
Treasury Department (chair), the Federal Reserve Board (vice 
chair), the Federal Deposit Insurance Corporation (FDIC), 
Office of the Comptroller of the Currency (OCC), the Securities 
and Exchange Commission (SEC), the Commodity Futures Trading 
Commission, two state insurance regulators, a state securities 
regulator and a state banking regulator.
    The bill would give the National Council on Financial 
Services the authority to prescribe additional, more stringent, 
consumer-related regulations if two years after the rules have 
been promulgated, the council decides that the regulations of 
the federal agencies are not sufficient to protect consumers. 
H.R. 10 also grants the council the authority to establish the 
regulatory framework that governs transactions and 
relationships between banks and their affiliates and 
subsidiaries. Because CBO has no basis for predicting the 
council's actions, we cannot estimate the costs of such 
potential incremental regulations on banks.

Powers of national banks

    Although H.R. 10 would allow insurance agency and 
underwriting activities to be conducted by a bank affiliate 
under a bank holding company framework or by an insurance 
agency in a subsidiary of a bank, the bill would not expand 
insurance activities in the national bank itself. Instead, 
section 151 of the bill restates current law that prohibits 
insurance underwriting in a national bank and further provides 
that products being regulated by a state as insurance as of 
January 1, 1997, would be considered as insurance for purposes 
of the ban on insurance underwriting. That is, the bill would 
generally prohibit national banks from underwriting insurance 
except if they had OCC authorization to provide insurance as a 
principal as of January 1, 1997, or were already providing 
insurance as of that date. In determining if a new product 
after this date is insurance, a new administrative decision-
making process would be created utilizing the National Council 
on Financial Services. A state insurance supervisory agency may 
petition the council to challenge an OCC determination 
regarding whether a new product (one not authorized or provided 
as of January 1, 1997) is an insurance product or a banking 
product. National banks would still be required to base 
insurance sales operations in towns with fewer than 5,000 
people. CBO has no basis for predicting how regulators would 
define insurance products and therefore, we cannot estimate the 
costs of future restrictions on insurance activities.
    Section 155 of the bill would end the current authority of 
national banks and their subsidiaries to sell title insurance 
as agent or principal. The direct costs of this prohibition, 
however, would be zero for existing institutions that sell 
title insurance because H.R. 10 would grandfather such 
institutions.
    H.R. 10 would grant national bank organizations the 
authority to engage in new activities that would provide 
national banks with a potential new source of income. In 
particular, section 141 would authorize subsidiaries of 
national banks (with OCC approval) to engage in ``financial 
activities'' not allowed in the bank itself, except for 
merchant banking, insurance underwriting and real estate 
development. To engage in activities through a financial 
subsidiary, the national bank and all of its depository 
institution affiliates must be well capitalized, be well-
managed and have at least a satisfactory rating under the 
Community Reinvestment Act (CRA). Examples of new activities 
for national bank subsidiaries include securities underwriting, 
and insurance agency activities not restricted to small towns. 
In addition, section 151 of the bill would authorize national 
banks to underwrite municipal revenue bonds directly in the 
bank.

Regulation of securities services and investment advisers

    Title II of H.R. 10 would amend the securities laws in 
order to provide functional regulationof existing and newly 
authorized bank securities activities. Under the bill, bank affiliates 
and subsidiaries would continue to be subject to the same regulation as 
other providers of securities products. However, banks engaging 
directly in securities activities, with certain exceptions (primarily 
related to traditional banking activities), would be required to 
register with the Securities and Exchange Commission. Also under the 
bill, bank employees involved in the sale of securities would be 
required to meet securities industry standards. Moreover, under H.R. 
10, if a bank acts as an investment adviser to a registered investment 
company, the bank would be subject to the registration requirements and 
regulation under the Investment Adviser Act of 1940.
    Securities Services. The Glass-Steagall Act generally 
prohibits banks from underwriting and dealing in securities, 
except for ``bank-eligible'' securities. Eligible securities 
are limited to those offered and backed by the federal 
government and federally-sponsored agencies, and certain state 
and local government securities. As banks have sought to expand 
their product lines, federal regulators have provided banks, 
through affiliated firms, limited authority to underwrite and 
deal in other types of securities. Generally, a firm that 
provides securities brokerage services (known as a broker-
dealer) must register with and be regulated by the Securities 
and Exchange Commission and at least one self-regulatory 
organization such as the National Association of Securities 
Dealers (NASD), the New York Exchange, and the American Stock 
Exchange. Banks, however, are currently exempted from broker-
dealer regulation.
    H.R. 10 would end the current blanket exemption for banks 
from being treated as brokers or dealers under the Securities 
Exchange Act of 1934. Bank securities activities would, 
therefore, be subject to SEC regulation, with some exceptions. 
Sections 201 and 202 of the bill would exempt most traditional 
bank securities activities from registration and regulation as 
a broker-dealer under SEC regulation. The exemptions would 
cover many products that banks currently offer as agent so that 
these products would not trigger broker-dealer regulation. For 
example, private placements, trust activities, and U.S. 
government securities transactions would be exempt. Section 201 
would also provide an exemption for broker-dealers that handle 
fewer than 1,000 securities transactions in a year. Moreover, 
the bill would not apply full broker-dealer regulation to those 
banks that would be required to register. Banks that register 
as brokers or dealers would not be required to become a member 
of the Securities Investor Protection Corporation (SIPC). Well-
capitalized banks that register as brokers or dealers generally 
would not be subject to SEC net capital requirements.
    According to the General Accounting Office, about 22 
percent of banks offered securities brokerage services to their 
customers in 1994. The SEC and the National Association of 
Securities Dealers (NASD) regulated the securities activities 
of almost 90 percent of these 2,400 banks because they provided 
these services through registered broker-dealers or through 
third-party arrangements with registered broker-dealers. 
However, about 300 banks provided brokerage services on bank 
premises exclusively through bank employees. Those bank-direct 
brokerage operations were subject to regulation by federal bank 
regulators and were exempted from regulation by the SEC and 
NASD. Under H.R. 10, those 300 banks would potentially be 
subject to federal securities regulation. Many of these banks 
would probably be exempt, however, because they would not 
likely handle more than 1,000 transactions. Compliance costs of 
this mandate are, therefore, not likely to be large.
    Banks affected by this mandate would have to register with 
the SEC and register with securities commissions in those 
states where they plan to do business. To register, a firm must 
provide the SEC with extensive amounts of information, 
including a list of its principals (individuals authorized to 
make transactions on behalf of a firm, such as investing or 
underwriting), a description of its planned business, any 
disciplinary history, criminal convictions, and a statement of 
financial condition. The information that must be supplied to 
the state is similar to that required by the SEC. The SEC has 
no registration fee; registration and required examination fees 
could vary from $100 to $600 by state depending on state 
requirements. As an upper bound estimate CBO assumed that all 
300 banks would register in every state. Compliance costs for 
registration and examination would be less than $9 million 
dollars.
    Currently, any securities broker-dealer that wishes to do 
business with the public must become a member of the NASD and 
be subject to NASD regulation, examination and supervision. 
Under H.R. 10, banks that wish to continue brokerage services 
would also be required to become members of the NASD (and 
perhaps another other self-regulating organization in order to 
get a set on an exchange). NASD membership requirements for 
banks could include registering and certifying at least two 
principals, one of whom is designated as its financial and 
operating officer; written supervisory procedures to enable 
proper oversight of employee activities; business insurance 
(banks are typically bonded); a registered municipal principal 
for municipal business; a registered options principal for 
options activity; and a designated NASD executive 
representative who is the member's primary contact with the 
NASD. The cost of membership with the NASD depends on the level 
and types of securities services a firm decides to offer. 
Membership costs could range from $2,500 to $6,000 or more. In 
addition to the initial registration fees, banks would have to 
spend about $400 annually on continuing education requirements 
for each registered person. The additional costs to banks to 
register with NASD would be less than $2 million, assuming all 
300 banks register.
    New certification standards. Section 203 of the bill would 
require all bank employees involves in the sale of securities 
to be subject to the same rules applicable to employees of 
securities and other nonbank firms. Currently, over 90 percent 
of employees of banks thatengage in securities transactions are 
already registered with the NASD and hence, comply with industry 
standards. Because CBO has no basis for predicting how these provisions 
would be implemented, we cannot estimate the costs of such potential 
incremental regulations on banks. However, most industry experts 
surveyed by CBO expect the cost of complying with this mandate for the 
remaining portion of the industry would be relatively small.
    Investment Advisers. Investment advisers are responsible 
for managing an investment portfolio in order to attain the 
greatest return consistent with the investment strategy 
established by the fund board of directors. The Investment 
Advisers Act requires that investment advisers register with 
the SEC; however, under current law banks acting as investment 
advisers to mutual funds are exempt from this requirement. 
Under this bill those companies would be required to register 
with the SEC as investment advisers and be subject to SEC 
regulation of this activity.
    The Federal Reserve Board first authorized bank holding 
companies to act as investment advisers for mutual funds in 
1972. Since that time banks have advised an increasing number 
of funds. Bank revenues from investment advisory activities 
were over $900 million in 1994. In 1996, banks advised almost 
3,000 mutual funds, representing about 30 percent of all funds 
registered with the Securities and Exchange Commission.
    Currently, about 120 large bank holding companies engage in 
investment adviser activities. Before enactment of The National 
Securities Markets Improvement Act of 1996, the SEC charged a 
$150 registration fee. Because of the 1996 act, the SEC is in 
the process of formulating a fee that will be based on the 
expected cost of administering the registration program, and 
the expected number of registrants. Banking organizations that 
continue to be investment advisers would have to pay this new 
registration fee annually and maintain books and records 
according to SEC rules. Inasmuch as the SEC is still in the 
very early stages of designing a system for registration, CBO 
has no basis to estimate the incremental costs of registering 
with the SEC. The costs, however, are not expected to be 
prohibitively large.

Regulation of bank holding companies

    Section 133 of the bill would give statutory guidance to 
the Federal Reserve Board (FRB) regarding establishment of new 
capital rules or guidelines for bank holding companies. For 
example, the bill directs the FRB to take full account of the 
capital requirements imposed on non-depository institution 
subsidiaries by other federal or state regulatory authorities 
and of industry norms for capitalization of a company's 
unregulated subsidiaries and activities. The FRB would also be 
allowed to differentiate between different classes or 
categories of bank holding companies. Because it is uncertain 
how new capital rules would be implemented and, therefore, how 
they would affect operations, CBO has no basis for estimating 
compliance costs.
    Other private-sector effects: H.R. 10 would dramatically 
overhaul federal regulation of the financial services industry. 
Provisions in this bill would potentially affect business and 
financial transactions throughout the U.S. economy. Major 
provisions of the bill would:
          Repeal key provisions of the Glass-Steagall Act, 
        thereby allowing for the full integration of banking 
        and securities firms;
          Broadly expand the range of financial related 
        activities that would be permissible for banking 
        holding companies, including insurance underwriting;
          Permit affiliations between bank holding companies 
        and nonfinancial companies; and
          Allow nonfinancial companies to acquire a bank, 
        subject to certain asset size and revenue limitations.

Qualified bank holding companies

    At the end of 1996, the number of bank holding companies 
totaled about 6,000. These organizations controlled over 7,000 
insured commercial banks and held over 90 percent of the 
assents of all insured commercial banks. H.R. 10 would permit 
qualified bank holding companies (QBHCs), subject to certain 
safeguards, to engage in any financial activity. These 
activities would include a broad list of activities (including 
underwriting, dealing in, or making a market in securities and 
acting as a principal, agent or broker in connection with 
insurance or annuities) as well as any activity determined to 
be a financial activity by a newly established National Council 
on Financial Services. To be eligible to engage in new 
financial activities as a QBHC, all banks within a holding 
company must be well capitalized, well-managed and have at 
least a satisfactory rating under the Community Reinvestment 
Act. In addition, to be eligible banks must offer low-cost 
``life-line'' checking accounts and they must be in compliance 
with the Fair Housing Act. QBHCs would be permitted to engage 
in any permissible activities without prior notice to the FRB. 
QBHC acquisitions of banks and bank holding companies would 
remain subject to FRB approval.
    In addition to allowing banks, securities firms, and 
insurance firms to own each other, the bill would allow 
qualified bank holding companies to earn up to 15 percent of 
domestic grossrevenues from investments in nonfinancial 
businesses such as manufacturing and retail sales. A QBHC's commercial 
activities within this 15 percent ``basket'' would be limited in that a 
QBHC could not become affiliated with any company which had 
consolidated assets at the time such affiliation occurs of more than 
$750 million.

Acquisitions of banks by commercial firms

    Section 106 of H.R. 10 would allow a commercial firm to 
acquire a single bank under certain conditions. A nonfinancial 
commercial firm would be permitted to derive up to 15 percent 
of domestic revenues from an investment in a bank that has 
assets of less than $500 million. The bank must have been in 
business for at least five years at the time the bank is 
acquired, and must be held through an entity that is a QBHC. 
Any financial activities engaged in by such a commercial firm 
must be conducted through a subsidiary that the QBHC controls. 
A commercial firm that acquires a bank under this provision 
would not itself be treated as a bank holding company. The 
Federal Reserve would supervise nonfinancial holding companies 
that buy banks but only to the extent that activities may pose 
a potential risk to the federal safety net. Insurance companies 
in violation of the Fair Housing Act would not be permitted to 
affiliate with a bank.

Nonbank banks

    The bill would lift current restrictions on cross-marketing 
and activities imposed on so-called nonbank banks. Nonbank 
banks are banks that before 1987 did not both accept demand 
deposits and make commercial loans. In 1987, Congress enacted 
the Competitive Equality Banking Act, which made such limited 
purpose banks subject to the Bank Holding Company Act in the 
future. However, existing limited purpose banks were 
grandfathered subject to certain restrictions, including a 
restriction that they could not engage in activities or lines 
of business that they were not engaged in as of March 5, 1987, 
and a restriction on the cross marketing of certain products. 
H.R. 10 would lift these restrictions.

Wholesale financial institutions

    A commercial bank or securities company could establish or 
become an Investment Bank Holding Company to acquire or 
establish a Wholesale Financial Institution (``woofie'') which 
could not accept deposits that are insured or in initial 
amounts less than $100,000. Woofies would have to comply with 
bank holding company restrictions and the Community 
Reinvestment Act. A holding company that owned a woofie but no 
federal insured depository institutions would be allowed 
greater flexibility (a larger basket) for non-financial 
investment.

Mutual insurance companies

    The bill would permit mutual insurance companies to 
affiliate with banks if they move their home office to a state 
that allows mutual insurance companies to convert to a stock-
owned company held by a mutual holding company.

National Associations of Registered Agents and Brokers

    Title IV of the bill would require a majority of states 
(within three years of enactment of H.R. 10) to enact uniform 
laws and regulations governing the licensure of individuals and 
entities authorized to sell insurance within the state. If a 
majority of states do not enact such laws, section 402 of Title 
IV would establish the National Association of Registered 
Agents and Brokers (NARAB). The purpose of NARAB would be to 
provide a mechanism through which uniform licensing, continuing 
education, and other insurance producer qualifications could be 
adopted on a multi-state basis. If NARAB is established, states 
would maintain the core functions of insurance regulations such 
as licensing, supervising, and disciplining insurance producers 
and protecting insurance consumers from unfair trade practices, 
but certain state laws would be preempted. Specifically, Title 
IV would prevent states from discriminating against members of 
NARAB by charging different licensing fees based on residency 
and requiring compliance with coutersignature laws.
    Membership in NARAB would be voluntary and all state-
licensed agents and brokers would be eligible, but NARAB would 
have the ability to establish its own membership criteria. 
Section 405 would give NARAB the authority to establish 
separate classes of membership, with separate criteria based on 
education, training, or experience required by different agent 
and broker duties. Membership in NARAB would operate as 
licensure in each state in which the member pays the state 
licensing fee. NARAB would be funded solely through annual 
membership fees paid by agents and brokers who opt to become 
NARAB members.
    Estimate prepared by: Patrice Gordon and Judy Ruud. Doug 
Hamilton--Federal Home Loan Banks.
    Estimate approved by: Jan Acton, Assistant Director for 
Natural Resources Commerce.

                                
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