[House Report 106-74]
[From the U.S. Government Publishing Office]



106th Congress                                             Rept. 106-74
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 2

======================================================================



 
                     FINANCIAL SERVICES ACT OF 1999

                                _______
                                

                 June 10, 1999.--Ordered to be printed

                                _______


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

                          SUPPLEMENTARY REPORT

                         [To accompany H.R. 10]

    This supplemental report shows the cost estimate of the 
Congressional Budget Office with respect to the bill (H.R. 10), 
as reported, which was not included in part 1 of the report 
submitted by the Committee on Banking and Financial Services on 
March 23, 1999 (H. Rept. 106-74, pt. 1).
    This supplemental report is submitted in accordance with 
clause 3(a)(2) of rule XIII of the Rules of the House of 
Representatives.
    This supplemental report also contains an errata correction 
to page 2 of part 1 of the report.

                                      U.S Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 10, 1999.
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 enclosed costs estimate and mandate statements for 
H.R. 10, the Financial Services Act of 1999. One enclosure 
includes the estimate of federal costs and the estimate of the 
impact of the legislation on state, local, and tribal 
governments. The estimated impact of mandates on the private 
sector is discussed in a separate enclosure.
    If you wish further details on these estimates, we will be 
pleased to provide them. The CBO staff contacts are Robert S. 
Seiler (for costs to the Federal Home Loan Banks); Mary 
Maginniss (for other federal costs); Carolyn Lynch (for federal 
revenues); Susan Seig (for the state and local impact); and 
Patrice Gordon (for the private-sector impact).
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosures.

    congressional budget office estimate of costs of private-sector 
                                mandates

H.R. 10--Financial Services Act of 1999

    Summary: H.R. 10 would overhaul existing federal regulation 
of the financial services industry by eliminating certain 
barriers to affiliations among banking organizations and other 
financial firms, including insurance firms and securities 
businesses. At the same time, the bill would impose 
restrictions on newly authorized financial activities and 
prohibit associations between thrift and commercial entities 
through new unitary thrift holding companies.
    The bill would impose several new private-sector mandates 
as defined by the Unfunded Mandates Reform Act of 1995 (UMRA). 
CBO estimates that the net direct costs of mandates in the bill 
would not exceed the statutory threshold for private-sector 
mandates ($100 million in 1996 dollars, adjusted annually for 
inflation) in any one year for the first five years that the 
mandates are effective.
    Private-sector mandates contained in bill: H.R. 10 would 
impose new mandates on the Federal Home Loan Banks (FHLBs), 
banks and banking organizations, certain insurance companies 
affiliated with savings and loan holding companies, owners of 
automated teller machines, and foreign banks. The largest 
measurable costs are associated with mandates that would be 
imposed on the FHLB system. The bill would require the FHLBs 
to:
           Replace the $300 million fixed annual 
        payment for interest on Resolution Funding Corporation 
        (REFCORP) bonds with a 20.75 percent annual assessment 
        on their net earnings; and
           Comply with a leverage limit and new risk-
        based capital requirements.
    The bill also contains several new mandates on businesses 
in the financial services sector. If enacted, the principal 
mandates in the bill would:
           Require banking organizations to adopt 
        several consumer protection measures affecting the 
        sales of non-deposit products;
           Require certain insurance company affiliates 
        of savings and loan holding companies (SLHCs) to comply 
        with new guidelines regarding the confidentiality of 
        individual health and medical records;
           Require owners of automated teller machine 
        (ATMs) to disclose information on surcharge fees 
        charged to users before and during a transaction (the 
        requirement would not apply to fees from the consumer's 
        own bank);
           End the blanket exemption provided banks 
        from the definition of ``broker,'' ``dealer,'' and 
        ``investment adviser'' in the securities laws, making 
        them subject to regulation by the Securities and 
        Exchange Commission;
           End the authority of national banks (and 
        their subsidiaries) to underwrite title insurance if 
        they do not currently underwrite such insurance; and
           Require that foreign banks seek approval 
        from the Federal Reserve before establishing separate 
        subsidiaries or using nonbank subsidiaries to act as 
        representative offices that handle primarily 
        administrative matters, and give the Federal Reserve 
        the authority to examine a U.S. affiliate of a foreign 
        bank with a representative office.
    Estimated direct cost to the private sector: Most of the 
cost of the mandates in the bill would result from changes in 
payments from the Federal Home Loan Banks to REFCORP. CBO 
estimates the Federal Home Loan Banks would increase their 
payments to REFCORP by a total of $227 million over the 2000-
2004 period as compared with current law. The short-term costs 
overstate the long-term effect, however, because CBO expects 
that the estimated increase in payments in the near term would 
be offset by a decrease in payments of an equal amount (on a 
present-value basis) in future years.
    Mandates on banks, banking organizations, and foreign banks 
would impose some incremental costs of compliance on the 
industry. The additional costs to those institutions would 
depend on the actions of regulators and the degree to which new 
customer protection regulations would preempt state laws. By 
removing certain mandates, the bill would make possible some 
savings that could offset at least some of the costs of 
mandates on banks and banking organizations. In particular, 
provisions that expand the allowable activities for banking 
organizations and other financial firms may lead to additional 
net income for those institutions as compared to current law. 
Because of the multiple uncertainties involved and the complex 
interactions in the financial services sector, CBO cannot 
estimate the direct costs, net of savings, with any precision. 
However, based on discussions with federal banking agencies, 
securities regulators, and industry trade groups, CBO expects 
that the costs to banking organizations and domestic operations 
of foreign banks of complying with mandates in the bill are not 
likely to exceed the annual threshold established in UMRA.
    The costs of other mandates in the bill would not be 
significant. New restrictions on sharing confidential medical 
records should impose minimal costs because the bill would 
allow the sharing of such information for most common uses. 
Mandates on ATM operators (banks and other firms) to make 
disclosures about surcharge fees are very similar to industry 
operating rules imposed by the large ATM networks on operators 
that use their networks. Since most ATM machines use at least 
one of the large networks, a new federal requirement to make 
such disclosures would not impose a large incremental cost on 
the industry.

Federal Home Loan Bank reform

    H.R. 10 contains a number of provisions that would affect 
the Federal Home Loan Bank system. The 12 Federal Home Loan 
Banks are private, member-owned institutions regulated by the 
Federal Housing Finance Board (FHFB). The FHFB system has more 
than 6,800 member institutions, including federal- and state-
chartered thrift institutions, commercial banks, credit unions, 
and insurance companies. Each member is a shareholder in one of 
the regional Federal Home Loan Banks, which are separate 
corporate entities. The FHFBs provide members with loans 
(advances) at attractive rates, and make investments in 
mortgage-backed securities and other financial assets. (The 
Federal Home Loan Banks finance most of their assets through 
the sale of collateralized obligations.) Members are required 
to purchase stock in the FHFBs; and the FHFBs pay dividends on 
that stock. The primary mandates on FHFBs in the bill would 
require them to change the REFCORP payment system and meet new 
capital requirements.
    Section 167 would require the FHLBs to replace the current 
$300 million annual payment for the interest on bonds issued by 
REFCORP with a 20.75 percent assessment on the annual net 
income of each FHLB. Based on an analysis of the FHLB system's 
balance sheet and income statement, and accounting for the 
effects of other FHLB reform provisions in the bill, CBO 
estimates that the new assessment rate would increase the 
payments made by FHLBs above the current annual payment. The 
increase in payments above current levels would amount to $45 
million in fiscal year 2000 and a total of $227 million over 
the 2000-2004 period. However, CBO expects that the present 
value of the total amount paid by the FHLBs to the federal 
government would not change. The bill would authorize the 
Federal Housing Finance Board to extend or shorten the period 
over which payments are made such that, over time, the average 
payment would equal $300 million a year, on a present-value 
basis.
    Section 168 would replace the existing structure of the 
FHLB system with a capital structure that would require each 
FHLB to meet a leverage requirement and a risk-based capital 
requirement. The bill would also authorize the FHLBs to issue 
three classes of stock to its members: Class A stock, 
redeemable in cash at par value 6 months following written 
notice by a member of intent to redeem it; Class B stock, 
redeemable in 5 years; and Class C stock, which would not be 
redeemable but could be sold to another member of the FHLB. All 
three classes of stock would qualify to meet the required 
holdings of any member. Under the current system, if a member 
chooses to withdraw, the value of its stock holdings is fully 
redeemable. The current stock holdings are, therefore, similar 
to the Class A stock authorized in the bill.
    The bill would direct the FHFB to establish rules for the 
leverage and risk-based capital requirements for FHLBs within 
one year after enactment. Under the leverage capital 
requirement, all the FHLBs would be required to maintain a new 
minimum total capital requirement of at least 5 percent. (The 
capital ratio for the FHLB system as a whole in the third 
quarter of 1998 was 5.4 percent.) Total capital would include 
Class A stock, unlimited Class B stock, and other reserves as 
allowed by the FHFB. The bill would direct the Finance Board to 
establish a risk-based capital requirement that can be met only 
with permanent capital--class C stock, retained earnings, and 
limited amounts of Class B stock. When the new capital 
requirements are established, the bill would require each FHLB 
to submit for FHFB approval a capital structure plan to meet 
the requirements. Most banks surveyed by CBO are uncertain 
about how a new capital structure plan would affect operations, 
and hence, compliance costs. However, the industry does not 
expect the costs to be significant because the FHLBs would have 
flexibility to choose among the different forms of stock to 
meet capital requirements. The risk weight attached to each 
class of stock--especially the weight attached to the stock 
with the lowest risk relative to the other forms of stock--
would be one of the principle factors that would determine the 
difficulty of compliance with new capital standards.
    Many other provisions of the bill would affect the 
administration of the Federal Home Loan Bank system. Beginning 
in 2000, membership in the FHLB system would become voluntary. 
Section 163 would repeal the federal mandate that requires 
federal savings associations to be members of the system. (Most 
experts do not anticipate a large exodus of thrift 
institutions.) In addition, section 165 would allow community 
financial institutions (defined as insured depository 
institutions with less than $500 million in total assets) to be 
members of 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. The bill 
would also allow community financial institutions that are 
members of the FHLB system greater access to long-term advances 
for the purpose of funding small business, agriculture or rural 
development by expanding the types of assets that they may 
pledge as collateral. Under current law, the FHLBs may make 
advances secured by farms and business real estate only if a 
permanent residence which is being used as a residence is 
located on the property.

Consumer protection regulations

    Section 176 would direct the federal banking regulators to 
issue, within one year of enactment, final consumer protection 
regulations that would govern the sale of non-deposit products. 
Regulations would apply to retail sales, solicitations, 
advertising, or offers 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. According 
to the bill, the regulations should include requirements that 
address the following major areas: (1) anti-coercion rules 
(prohibiting banks from misleading consumers into believing 
that an extension of credit is conditional upon the purchase of 
a non-deposit product); (2) oral and written disclosures about 
whether a product is insured by the Federal Deposit Insurance 
Corporation (FDIC), about the risk associated with certain 
products, and about the prohibition against anti-tying and 
anti-coercion practices; (3) customer acknowledgment of 
disclosures; (4) an appropriate delineation of the settings and 
circumstances under which non-deposit sales should be 
physically segregated from bank loan and teller activities; and 
(5) rules against misleading advertising.
    Regulators would also have to include: (1) 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, (2) standards for sales personnel allowing such 
employees 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; and (3) standards 
prohibiting insured depository institutions from permitting 
unlicensed and unqualified persons fromengaging in sales of 
non-deposit products. In addition, the bill would require the federal 
banking regulators to establish a customer complaint process including 
notifying customers of their rights under such a process and addressing 
their grievances.
    CBO estimates that the bill's consumer protection 
requirements would not impose significant additional costs on 
the private sector. Except for the anti-coercion provision, the 
provisions in section 176 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. Other new regulations would largely 
codify a modified version of existing guidelines drafted by the 
federal banking regulators and, therefore, would not likely 
impose large incremental costs on banks that currently engage 
in non-deposit activities. Moreover, in states where state 
laws, regulations, orders, or interpretations are inconsistent 
with the prescribed federal regulations but deemed to be at 
least as protective as those regulations, the new federal 
customer protection regulations would not apply.

Confidentiality of medical records

    The bill would place new restrictions on sharing 
confidential medical information by certain insurance companies 
affiliated with savings and loan holding companies. (The same 
restrictions also would apply to insurance companies that 
become associated with a depository institution within the 
newly authorized structure of the financial holding company.) 
The bill would limit the circumstances in which insurance 
affiliates of SLHCs could disclose individual customer health 
and medical information without the consent of the customer. 
Because the bill would allow the sharing of such information 
for most common business uses without customer consent, CBO 
expects that the costs of complying with the mandate would be 
minimal. Currently, fewer than 25 savings and loan holding 
companies have insurance company affiliates. (Not all of those 
affiliates handle medical and health records.)
    The bill also contains a sunset clause on this mandate on 
certain insurance company affiliates. The provision would not 
become effective if (or would cease to be effective when) the 
Congress passes legislation governing privacy standards in 
general with respect to health information before the deadline 
under the Health Insurance Portability and Accountability Act 
of 1996.

ATM disclosures

    The bill would amend the Electronic Fund Transfer Act 
(EFTA) to require ATM operators to disclose certain surcharge 
fees to cardholders. The disclosures would apply to surcharges 
imposed by ATM operators on non-customers and would not apply 
to fees from the consumer's own bank. ATM operators would be 
required to disclose the surcharge both on a sign placed on the 
ATM machine and as part of the on-screen display. The bill 
would prohibit a surcharge fee unless the required disclosures 
are made and the consumer elects to proceed with the 
transaction after receiving the notice. In addition, the bill 
would require banks, when issuing ATM cards, to issue a warning 
that surcharges may be imposed by other parties.
    Each ATM is typically connected to at least three computer 
networks. The first connection is to the network of the bank or 
firm that owns the ATM. The second connection is to a shared 
network that links many of the banks operating in a state or 
region of the country and allows their customers to use (or 
share) all the ATMs of the member banks. The third connection 
is to the national networks operated by the major credit card 
associations. The national networks permit ATM cardholders from 
other states, regions, or nations to use an ATM.
    The industry operating rules imposed by the major ATM 
networks generally require ATM operators to make the same 
disclosures that would be required by H.R. 10. The national ATM 
networks, Plus and Cirrus, and many of the regional networks 
require ATM operators to disclose on a sign at the ATM and on 
the screen the amount of any surcharge and then require the 
customer to make a positive choice to continue. According to 
several industry sources, most ATM machines use at least one of 
the major networks. In addition, the Electronic Fund Transfer 
Act, as implemented by Federal Reserve Board Regulation E, 
requires ATM access charge disclosures on or at the terminal 
and on the ATM terminal receipt. Also under the EFTA, financial 
institutions must disclose fees that might be charged by the 
financial institutions holding the consumer's account before 
the consumer ever uses the account. Considering the existing 
federal and industry standards, CBO expects that the cost of 
complying with the ATM disclosure mandates in the bill should 
be minimal.

Financial activities of national banks

    Section 305 would prohibit a national bank and its 
subsidiaries from underwriting title insurance, but would 
grandfather those activities that a bank (or its subsidiaries) 
was actively and lawfully engaged in before the date of 
enactment. However, if a national bank had an insurance 
underwriting affiliate or subsidiary, any title insurance 
underwriting or sales activities would have to be conducted by 
such affiliate or subsidiary (if there is no affiliate). This 
mandate may force some national banks to move their title 
insurance operations into an existing affiliate (or 
subsidiary). The bill would also prohibit national banks from 
selling title insurance unless they were selling title 
insurance prior to the date of enactment.
    At the same time, the bill 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 121 would authorize financial 
subsidiaries of national banks (with OCC approval) to engage in 
``financial activities'' not allowed in the bank itself, except 
for insurance underwriting, real estate development and real 
estate investment. 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. The bill would require that any 
national bank having more than $10 billion in total assets and 
controlling a financial subsidiary be a part of a holding 
company. Examples of new activities for national bank 
subsidiaries include merchant banking, securities underwriting, 
and insurance agency activities not restricted to small towns. 
In addition, section 181 of the bill would authorize well-
capitalized national banks to underwrite certain 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 regulation of existing and newly 
authorized bank securities activities. Under the bill, banks 
engaging directly in securities activities, with certain 
exceptions (primarily related to traditional banking 
activities), would be required to comply with securities 
regulations. Bank affiliates and subsidiaries would continue to 
be subject to the same regulation as other providers of 
securities products. Currently, national banks may engage in 
brokering (buying and selling) of all types of securities and 
investment products. State bank's securities activities vary 
from state to state, but most states permit state banks to 
engage in the sale of securities. Also under the bill, 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. 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 Stock 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. Securities activities of banks would, 
therefore, be subject to SEC regulation, with some exceptions. 
The bill would exempt from SEC regulation the securities 
activities of banks handling fewer than 500 transactions 
annually. Many of the roughly 300 small banks that currently 
provide brokerage services on bank premises would fall under 
this exemption. Sections 201 and 202 also would exempt several 
traditional securities activities of banks from the 
registration requirements and regulations that apply to brokers 
or dealers under SEC regulation. The exemptions would cover 
most products and services that banks currently offer so that 
they would not trigger SEC regulation. For example, sweep 
accounts transactions, trust activities, and U.S. government 
securities transactions would be exempt. However, for the 
products and services related to securities that would no 
longer be exempt under the bill, banks would most likely 
channel the non-exempt activities through their own securities 
affiliate or establish a relationship with a broker-dealer. A 
substantial number of banks that currently handle securities 
activities have a broker-dealer affiliate so that the 
incremental cost of complying with SEC regulation would involve 
moving non-exempt activities to such an affiliate and would not 
be significant.
    Section 203 would require the NASD to create a new limited 
qualification category of registration for certain persons 
engaged in private securities offerings (private placements). 
The NASD expects that the modest additional costs incurred due 
to this mandate would be offset by additional fees received 
from the industry. The bill provides that bank employees that 
engage in this activity would be exempt from any examination 
requirements if they have been engaged in private placement 
sales in the six months before this bill is enacted.
    Section 204 would require bank regulatory agencies to 
establish record keeping requirements for banks that claim the 
exemptions allowed under sections 201 and 202. The impact of 
the new reporting requirements on banks that would be allowed 
an exemption is uncertain because it would depend on future 
federal rulemaking. The bill would direct regulators to make 
the new requirements sufficient to demonstrate compliance with 
the terms of the exemption. Because CBO has no basis for 
predicting how this provision would be implemented, we cannot 
estimate the costs of new requirements on banks. However, given 
the infrastructure that supports current reporting 
requirements, we expect that the incremental costs of the new 
requirements would be 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. Banks that act as 
investment advisers are currently exempt from the registration 
and other requirements of the Investment Advisers Act of 1940. 
Under this bill those banks and banking organizations would be 
required to register with the SEC as investment advisers and be 
subject to SEC regulation of this activity.
    Section 217 would amend the Investment Advisers Act to 
subject banks that advise investment companies (typically, 
mutual funds) to the same regulatory scheme as other advisers 
to investment companies. 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 fee of $150 to register 
investment advisers.
    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. 
However, if such services are performed through a separately 
identifiable department or division of a bank, the department 
or division and not the bank itself shall be deemed to be the 
investment adviser. Since the fee would be based on the 
administrative costs of an electronic filing system, CBO does 
not expect that those costs to the industry would be large.
    Section 222 would require an investment adviser that holds 
a controlling interest (25 percent or more) in an investment 
company in a trustee or fiduciary capacity, to transfer the 
power to vote the shares of the investment company. Under the 
bill, the adviser would have to transfer voting shares to 
another fiduciary or to the beneficial owners, vote the 
fiduciary shares in the same proportion as shares held by all 
other shareholders of the investment company, or vote the 
shares according to new rules that the SEC may prescribe. 
Inasmuch as the adviser would have the flexibility to choose 
either to transfer voting powers or vote following specified 
guidelines, the direct costs of complying with this provision 
should not be significant. If the adviser holds the shares in a 
trustee or fiduciary capacity under an employee benefit plan 
subject to the Employee Retirement Income Security Act of 1974 
(ERISA), the adviser would have to transfer the power to vote 
the shares of the investment company to another plan fiduciary 
who is not affiliated with the adviser or an affiliate. 
According to some industry experts, this requirement may be in 
conflict with current ERISA contracts. The bill would not 
necessarily force advisers to amend those contracts, however. 
According to information obtained from the SEC, advisers 
affected by this provision may be able to avoid the cost of 
amending existing contracts by not voting those shares (or 
using other permissible measures) until such contracts come up 
for renewal and are adjusted to reflect the new restrictions on 
voting.
    Section 214 would amend the Investment Company Act to 
require any person issuing or selling the securities of a 
registered investment company that is advised or sold through a 
bank to disclose that an investment in the fund is not insured 
by the Federal Deposit Insurance Corporation or any other 
government agency. Under current interagency guidelines issued 
by the banking regulators, when non-deposit investment products 
are either recommended or sold to retail customers, the 
disclosures must specify that the product is not insured by 
FDIC. In addition, guidance issued by the NASD states that 
advertising and sales presentations of its bank-affiliated 
members should disclose that mutual funds purchased through 
banks are not deposits of, or guaranteed by, the bank and are 
not federally insured or otherwise guaranteed by the federal 
government. Much of the industry may already be performing 
disclosures similar to those required by the mandate therefore, 
a new federal requirement to make such disclosures would not 
impose a large incremental cost on the industry. In general, 
the costs of creating a standard disclosure form and 
distributing such a statement at the time of a transaction are 
not large.

Foreign banks

    Section 153 would amend the International Banking Act of 
1978 (IBA) to require that foreign banks seek prior approval 
from the Federal Reserve Board for establishing separate 
subsidiaries or using nonbank subsidiaries to act as 
representative offices. Under current law, a foreign bank must 
obtain the approval of the Federal Reserve Board (FRB) before 
establishing a representative office in the United States. A 
representative office handles administrative matters and some 
types of sales for the foreign bank owner, but it does not 
handle deposits. In some cases, foreign banks are establishing 
separate subsidiaries or using nonbank subsidiaries to act as 
representative offices and thereby escaping the requirement for 
approval by the FRB. The bill would strike the exclusion for 
subsidiaries from the IBA and close this loophole. The industry 
association estimates that there are fewer than 20 entities 
that would have to register their subsidiaries as a 
representative office. CBO expects that the cost to existing 
subsidiaries of filing with the FRB would be small.
    Section 153 also would require that U.S. affiliates of 
foreign banks with a representative office be subject to 
examination by the Federal Reserve Board. Under current law, if 
a foreign bank has only a representative office and no other 
banking office in the United States, the FRB may examine only 
the representative office. The FRB cannot examine or seek 
information from U.S. affiliates of such a foreign bank. The 
bill would give the FRB the authority to examine a foreign bank 
affiliate in this situation. CBO has no basis for estimating 
the potential costs to the industry of such examinations. 
According to one industry expert, it is likely that the FRB 
would only use this authority in a case where suspicious 
behavior warrants further examination. If the FRB would examine 
affiliates under such limited circumstances, the costs of the 
mandate of the industry would be very modest.
    Previous CBO estimate: On April 22, 1999, CBO prepared an 
estimate of costs of private-sector mandates for S. 900, the 
Financial Services Modernization Act of 1999, as ordered 
reported by the Senate Committee on Banking, Housing, and Urban 
Affairs on March 4, 1999. CBO identified fewer mandates in S. 
900 than in H.R. 10 as reported by the House Committee on 
Banking. Most of the mandates identified in S. 900 are also 
contained in the House Banking version of H.R. 10. The largest 
measurable mandate costs in both bills would result from the 
provision in the bills that would change the financial 
responsibilities of the Federal Home Loan Bank system by 
replacing the fixed annual payment made by the FHLBs for 
interest on REFCORP bonds with an assessment set at 20.75 
percent of the FHLBs' net income. For S. 900, CBO estimated 
that the mandate changing the FHLBs' REFCORP payments would 
cost FHLBs $346 million (above the current payment of $300 
million annually) over the 2000-2004 period, whereas CBO 
estimates a cost of $227 million over the five years for H.R. 
10. The difference is attributable to the reform of the capital 
requirements of the FHLBs in the House Banking bill (not 
included in S. 900). CBO expects that , in response to the 
reform in the capital structure of the FHLB system, the FHLBs 
would manage their capital, income, and investments in such a 
way as to reduce the assessment base relative to the expected 
assessment base in the Senate bill and, hence, decrease the 
costs of the mandate over the 2000-2004 period. Overall, CBO 
estimates that the aggregate direct cost of private-sector 
mandates in each of the bills would fall below the statutory 
threshold established in UMRA.
    Estimate prepared by: Patrice Gordon and Robert S. Seiler--
Federal Home Loan Banks.
    Estimate approved by: Roger Hitchner, Acting Assistant 
Director for Natural Resources and Commerce Division.

               congressional budget office cost estimate

H.R. 10--Financial Services Act of 1999

    Summary: H.R. 10 would eliminate certain barriers to ties 
between insured depository institutions and other financial 
services companies, including insurance and securities 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 net impact on the budget over the long term.
    CBO estimates that implementing H.R. 10 would decrease 
other direct spending by $40 million in 2000 and $203 million 
over the 2000-2004 period, and would decrease revenues by $5 
million in 2000 and $25 million over the 2000-2004 period. 
Because the bill would affect direct spending and receipts, 
pay-as-you-go procedures would apply. Assuming appropriation of 
the necessary amounts, CBO estimates that federal agencies 
would spend between $3 million and $5 million annually from 
appropriated funds to carry out the provisions of H.R. 10.
    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 
not exceed the threshold established by that act ($50 million 
in 1996, adjusted annually for inflation). H.R. 10 also 
contains 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: The Financial 
Services Act of 1999 would:
           Permit affiliations of banking, securities, 
        and insurance companies;
           Eliminate the requirement that the Federal 
        Deposit Insurance Corporation (FDIC) retain a ``special 
        reserve'' for the Savings Association Insurance Fund 
        (SAIF);
           Amend the Federal Deposit Insurance Act to 
        prevent the use of deposit insurance funds to assist 
        affiliates or subsidiaries of insured financial 
        institutions;
           Institute a number of changes to protect 
        consumers, which would include requiring each bank and 
        thrift to clearly disclose fees for transactions on 
        automated teller machines and to disclose its privacy 
        policies;
           Reform the Federal Home Loan Bank (FHLB) 
        System, making membership voluntary and replacing 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 affiliates of bank holding companies 
        and bank subsidiaries to obtain the approval of the 
        Federal Reserve and the Treasury before engaging in new 
        activities;
           Create a system of functional regulation, 
        whereby institutions that conduct banking, securities, 
        or insurance activities would be regulated by the 
        agency responsible for each such activity; bar judges 
        from deferring to the expertise of the Office of the 
        Comptroller of the Currency (OCC) for purposes of 
        defining an insurance product;
           Terminate the authority of the Office of 
        Thrift Supervision (OTS) to grant new thrift charters 
        for unitary savings and loan holding companies for all 
        applications other than those approved or pending as of 
        March 4, 1999;
           Create a new type of uninsured charter for 
        national or state banks that would be known as 
        wholesale financial institutions (WFIs);
           Require federal banking agencies to develop 
        regulations governing retail sales of insurance 
        products and securities by depository institutions; and
           Require the General Accounting Office (GAO) 
        to prepare six reports.
    Estimated cost to the Federal Government: H.R. 10 would 
make a number of changes affecting direct spending and 
revenues, which would result in net increases in spending by 
the banking regulatory agencies, decreased spending by the 
Treasury, and a decrease in the annual payment--recorded and 
revenues--that the Federal Reserve remits to the Treasury. 
Assuming enactment late in fiscal year 1999, CBO estimates that 
direct spending would decrease by about $203 million over the 
2000-2004 period and that revenues would decline by $25 million 
over the same period. The legislation also would lead to an 
increase in discretionary spending of an estimated $19 million 
over the 2000-2004 period, assuming appropriation of the 
necessary amounts. The estimated budgetary impact is shown in 
the following table. The outlay effects fall within budget 
functions 370 (commerce and housing credit) and 900 (interest).

----------------------------------------------------------------------------------------------------------------
                                                                 By fiscal years, in millions of dollars--
                                                         -------------------------------------------------------
                                                             1999      2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING

Spending Under Current Law \1\:
    Estimated Budget Authority..........................      3,830    3,830    3,830    3,830    3,830    3,830
    Estimated Outlays...................................     -1,503      473    1,438    2,074    2,564    2,967
Proposed Changes:
    Estimated Budget Authority..........................          0      -45      -54      -43      -41      -44
    Estimated Outlays...................................          0      -40      -50      -38      -36      -39
Spending Under H.R. 10:
    Estimated Budget Authority..........................      3,830    3,785    3,776    3,787    3,789    3,786
    Estimated Outlays...................................     -1,503      433    1,388    2,036    2,528    2,928

                                               CHANGES IN REVENUES

Estimated Revenues \2\..................................          0       -5       -5       -5       -5       -5

                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

    Estimated Authorization Level.......................          0        5        4        3        3        3
    Estimated Outlays...................................          0        5        4        3        3       3
----------------------------------------------------------------------------------------------------------------
\1\ Includes spending for deposit insurance activities (subfunction 373) and Treasury payments for interest on
  REFCORP bonds.
\2\ Includes changes in the annual payment from the Federal Reserve to the Treasury. A negative sign indicates a
  decrease in revenues.

Basis of estimate

            Direct spending and revenues
    The Financial Services Act 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 
provision. 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. Thus, 
their budgetary impact would be negligible over time. The major 
budgetary impact of H.R. 10 would stem from an increase in the 
annual payments by the FHLBs for interest on bonds issued by 
the REFCORP. As a result, Treasury outlays for such interest 
would decline. In addition, changes in regulatory activities 
would result in small outlay increases and revenue decreases.
    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.
    A number of 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, the bill 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 the legislation 
would clarify the regulatory and legal structure that currently 
governs bank activities, CBO expects that its enactment would 
allow banks to compete more effectively and efficiently 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. H.R. 10 would specifically 
prohibit the FDIC from using the resources of the Bank 
Insurance Fund (BIF) to assist affiliates or subsidiaries of 
insured financial institutions.
    It is also possible, however, that losses to the deposit 
insurance fund could increase as a result of enacting H.R. 10. 
The increase in scale and complexity of the new financial 
holding companies could challenge the ability of the regulators 
to manage any additional risk of losses to the deposit 
insurance funds. If additional losses were to occur, the BIF 
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 over the long 
term is likely to be negligible in either case.
    Federal Home Loan Banks. The act would make a number of 
reforms to the FHLB system. Beginning in 2000, membership in 
the FHLB system would become voluntary. The bill also would 
require the FHLBs to replace the $300 million annual payment 
for the interest on bonds issued by the REFCORP with an 
assessment set at 20.75 percent of the FHLBs' net income. The 
Federal Housing Finance Board, which regulates the FHLBs, would 
be authorized to extend or shorten the period over which 
payments are made such that, over time, the average payment 
would equal $300 million a year, on a present-value basis. The 
Board also would be required to issue regulations prescribing 
new capital standards applicable to each FHLB.
    Based on CBO's analysis of the FHLB system's balance sheet 
and income statement, and using CBO's baseline economic 
assumptions, we estimate that the provisions affecting the 
FHLBs would increase their payments to REFCORP by $45 million 
in 2000 and a total of $227 million over the 2000-2004 period. 
CBO expects that the estimated increase in payments in the near 
term would be offset by a decrease in payments of an equal 
amount (on a present-value basis) in future years.
    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 in REFCORP bonds not 
covered by the FHLBs, this change would reduce Treasury outlays 
by $227 million over the five-year period.
    Regulatory Costs. The Federal Reserve, the Securities and 
Exchange Commission (SEC), the Treasury, state banking 
regulators, and other federal banking regulators--the OCC, the 
FDIC, and the OTS--would have primary responsibility for 
monitoring compliance with the statute. CBO expects that higher 
costs for the banking regulatory activities would increase 
outlays by $24 million and would decrease revenues by $25 
million over the 2000-2004 period.
    The banking agencies would be required to implement new 
regulations, policies, and training procedures related to 
securities, insurance, and other areas. The bill would permit 
national banks with assets of $10 billion or less to conduct 
certain financial activities through operating subsidiaries and 
would allow the OCC to charter up to five new WFIs. It would 
require the agencies to prepare a number of studies, to hold 
public hearings on large bankacquisitions and mergers, and to 
enforce new regulations related to consumer protection provisions. CBO 
expects that the FDIC would spend between $4 million and $5 million 
annually for these various new activities. The OTS and the OCC would 
also incur annual expenses for these purposes--estimated to total less 
than $2 million for the OTS and between $5 million and $6 million for 
the OCC, but those costs would be offset by increased fees, resulting 
in no net change in outlays for those agencies. Other provisions in 
H.R. 10 affecting the FDIC, the OCC, or the OTS are expected to have no 
significant budgetary impact.
    CBO estimates that, under this bill, the Federal Reserve 
would spend an additional $25 million over the 2000-2004 
period. H.R. 10 would require it to supervise the activities of 
new bank holding companies and the WFIs. In conjunction with 
the Treasury Department, the Federal Reserve would also be 
responsible for approving the new and expanded financial 
activities of banking organizations. Based on information from 
the Board of Governors of the Federal Reserve System, CBO 
estimates that the Federal Reserve's new supervisory activities 
would result in added examination costs of about $4 million a 
year once the bill's requirements were fully effective in 2000. 
That increase in examination costs would total an estimated $20 
million over the 2000-2004 period, accounting for most of the 
Federal Reserve's additional costs. The Federal Reserve's cost 
of processing applications is not expected to be affected. 
Applications for the newly authorized activities of holding 
companies would increase, but the added workload would likely 
be offset by a decrease in applications for nonbanking 
activities, resulting in no significant net budgetary impact.
    H.R. 10 would give the banking regulatory agencies the 
discretion to hold public meetings in order to evaluate the 
impact of mergers and acquisitions of institutions with more 
than $1 billion in assets. The annual cost of such meetings 
would vary greatly because the number of mergers and 
acquisitions can differ substantially from year to year. The 
number of public meetings held by the Federal Reserve within a 
given year is likely to be between five and 30, although it is 
possible that the number could be well in excess of 30 with a 
very high volume of activity. CBO estimates an average annual 
cost to the Federal Reserve for holding additional public 
meetings of $1 million a year over the period 2000-2004. Other 
provisions in the bill would not significantly affect spending 
by the Federal Reserve.
    The total effect of these provisions of the administrative 
costs of the Federal Reserve would be an increase in costs of 
$25 million over the 2000-2004 period. Because the Federal 
Reserve System remits its surplus to the Treasury, the 
increased costs would reduce governmental receipts, or 
revenues, by the same amount.
    SAIF Special Reserves. H.R. 10 would repeal the 
requirements for the Savings Association Insurance Fund to 
retain a special reserve fund. CBO expects the cost of that 
repeal would total less than $500,000 in any year. The Deposit 
Insurance Funds Act of 1996 required the Federal Deposit 
Insurance Corporation to set aside, on January 1, 1999, all 
balances in the SAIF in excess of the required reserve level of 
$1.25 per $100 of insured deposits. The funds in this special 
reserve become available to pay for losses in failed 
institutions only if the SAIF's balance (excluding the reserve) 
subsequently falls below 50 percent of the required reserve 
level, and the FDIC determines that it is expected to remain at 
that level for a year. In January 1999, the FDIC allocated $1 
billion of the SAIF's balances to the special reserve. CBO's 
baseline assumes administrative costs and thrift failures will 
remain sufficiently low to avoid raising assessment rates on 
SAIF-insured institutions through 2004. We expect that the 
SAIF's fund balances of about $10 billion will continue to earn 
interest, and that the fund's ratio of reserves to insured 
deposits will climb each year, reaching more than 1.4 percent 
by 2004.
    Although CBO's baseline estimates do not assume that the 
cost of thrift failures in any year would exceed the net 
interest earned by the SAIF, unanticipated thrift failures 
could result in a drop in the SAIF's reserve ratio below 1.25 
percent. The baseline reflects CBO's best judgment as to the 
expected value of possible losses during a given year, but 
annual losses will likely vary from the levels assumed in the 
CBO baseline. Thus, some small probability exists that thrift 
failures could increase sufficiently to drive the reserve ratio 
below the required level of 1.25 percent, but not so low as to 
trigger use of the special reserve.
    When the balance of an insurance fund dips below the 
required ratio, the FDIC is forced to increase assessments for 
deposit insurance to restore the fund balance to the required 
level. Thus, if thrift losses were to exceed baseline estimates 
by a significant amount, we would expect the FDIC to increase 
insurance premiums in order to maintain the SAIF's fund 
balance. Eliminating the special reserve would add to the fund 
balances and would make it less likely that the FDIC would have 
to raise insurance premiums. The probability that this change 
would affect premium rates is quite small, however, and 
therefore CBO expects that the loss of deposit insurance 
premiums that could result from eliminating the special reserve 
would total less than $500,000 in any year.
            Spending subject to appropriation
    A number of federal agencies would be responsible for 
monitoring changes resulting from enactment of the legislation. 
CBO estimates that total costs, assuming appropriation of the 
necessary amounts, would be about $5 million annually beginning 
in 2000, primarily for expenses of the SEC, GAO, the Treasury, 
and the Federal Trade Commission. The SECwould incur costs to 
monitor market conditions, to examine firms offering certain securities 
products, and to investigate practices to ensure compliance with the 
statute. We expect these additional rulemaking, inspection, and 
administrative expenses of the SEC would total between $2 million and 
$3 million annually. H.R. 10 also would require various agencies to 
prepare various reports and would direct GAO to conduct six studies. 
CBO estimates that GAO would spend about $3 million in 2000 and less 
than $1 million annually thereafter to prepare the reports.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act 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. Most of 
the FDIC's additional costs that would result from this bill, 
about $4 million a year, would be covered by this exemption. 
CBO believes that the various costs of the legislation related 
to consumer protection, holding public meetings, and 
eliminating SAIF's special reserve would not qualify for the 
exemption that applies to the full funding of the deposit 
insurance commitment, and thus would count for pay-as-you-go 
purposes. These changes would result in a net increase in the 
FDIC's supervisory costs totaling about $1 million annually, 
for a total of $10 million over the 2000-2009 period. Costs 
each year for similar activities of the OCC and the OTS, which 
are estimated to total about $1 million annually for each 
agency, 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 decrease in Treasury outlays, totaling $636 
million over the 2000-2009 period.
    The cost of holding public meetings associated with mergers 
and acquisitions is estimated to increase the administrative 
costs of the Federal Reserve and thus reduce Treasury receipts 
on average by $1 million per year beginning in 2000, for a 
total of $10 million over the 2000-2009 period. CBO also 
expects that the Federal Reserve would incur additional 
expenses associated with consumer protection issues that are 
not directly related to meeting the deposit insurance 
commitment. We estimate that the resulting increases in 
regulatory and other costs would reduce the surplus payment 
that the Federal Reserve remits to the Treasury by less than 
$500,000 a year.
    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 current year, the budget 
year, and the succeeding four years are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         By fiscal years in millions of dollars--
                                                                ----------------------------------------------------------------------------------------
                                                                  1999    2000    2001    2002    2003    2004    2005    2006    2007    2008     2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays:
    FDIC.......................................................       0       1       1       1       1       1       1       1       1       1        1
    REFCORP payment............................................       0     -45     -54     -43     -41     -44     -63     -80     -79     -86     -101
                                                                ----------------------------------------------------------------------------------------
      Total....................................................       0     -44     -53     -42     -40     -43     -62     -79     -78     -85     -100
Changes in receipts............................................       0      -1      -1      -1      -1      -1      -1      -1      -1      -1       -1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated impact on State, local, and tribal governments: 
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 not 
exceed the threshold established under that act ($50 million in 
1996, adjusted annually for inflation). Other provisions in the 
bill, which are not mandates, would also 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 the bill would preempt state 
banking, insurance, and securities laws. States would not be 
allowed to prevent or restrict the affiliations between banks, 
securities firms, and insurance companies authorized by the 
bill, or prevent or significantly interfere with the expanded 
activities permitted banks by the bill. Further, while the bill 
would endorse states' primary role in licensing and regulating 
insurance operations, it would preempt their authority over 
these operations in a number of ways.
    Based on information provided by groups representing state 
and local governments, CBO expects that enactment of these 
provisions would not result in significant costs for state 
governments. While they would be prevented from enforcing 
certain rules and regulations, states would not be required to 
undertake any new activities.
    Certain provisions of Title III would take effect if a 
majority of states (within three years of enactment of H.R. 10) 
does not enact uniform laws and regulations governing the 
licensing of individuals and entities authorized to sell 
insurance within the state. If a majority of states does not 
enact such laws, certain state insurance laws would be 
preempted and a National Association of Registered Agents and 
Brokers (NARAB) would be established to provide a mechanism 
through which uniform licensing, continuing education, and 
other qualifications would 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 III 
would prevent states from discriminating against NARAB members 
by charging different license fees based on residency or 
imposing any licensing, appointment, continuing education, or 
certain other requirements on a NARAB member different from the 
criteria for NARAB membership. Based on information from groups 
representing state and local governments, CBO estimates that 
state would lose license fees totaling less than $20 million 
annually as a result of these preemptions.
            Other impacts
    To the extent that enactment of this bill would facilitate 
the integration of different types of financial services, it 
may have a variety of impacts on state and local finances that 
are difficult to predict. It is possible that changes stemming 
from its enactment could affect state and local borrowing costs 
as well as states' administrative and legal costs; revenues 
from fees imposed on regulated businesses, such as premium 
taxes and licensing fees; and insurance guarantee funds. It 
would be difficult to separate the impact of such legislation 
from ongoing changes to the structure and regulation of 
financial services taking place under current law.
    Estimated impact on the private sector: The act would 
impose several private-sector mandates as defined in UMRA. 
CBO's analysis of those mandates is contained in a separate 
statement on private-sector mandates.
    Previous CBO estimate: On April 22, 1999, CBO prepared a 
cost estimate for the Financial Service Modernization Act of 
1999, as ordered reported by the Senate Committee on Banking, 
Housing, and Urban Affairs on March 4, 1999. Under that 
legislation, CBO estimated that direct spending would decrease 
by $338 million over the 2000-2004 period, whereas we estimate 
a decrease in direct spending of $203 million for the House 
Banking Committee's version of financial modernization, of a 
difference of $135 million. One provision accounts for most of 
the difference. In the Senate version, CBO estimated that 
changing the FHLBs' annual payment for the interest on bonds 
issued by REFCORP to an assessment on net income would reduce 
Treasury outlays by $346 million over the 2000-2004 period, 
whereas we estimate a savings of $227 million over the next 
five years for the H.R. 10. The difference ($119 million) is 
attributable to the reform of the capital requirements of the 
FHLBs in the House bill. CBO expects that, in response to the 
reform, the FHLB system would reduce its capital somewhat in 
order to raise owners' return on equity. An increase in the 
FHLBs' liabilities would raise the FHLBs' interest expense, and 
lower capital would constrain the FHLB system's holdings of 
mortgage-backed securities, which the Federal Housing Finance 
Board limits to three times the FHLBs' capital. Both effects 
would lower the net income on which the FHLB system's REFCORP 
payment would be based.
    Other differences between the two estimates reflect various 
other provisions in the two bills. In particular, unlike the 
House bill, the Senate bill would exempt certain small 
institutions from complying with the provisions of the 
Community Reinvestment Act (CRA), thereby reducing the 
examination costs to the FEDIC by about $11 million through 
2004. Also, several consumer-related and other provisions in 
H.R. 10 would result in higher costs to the FDIC of about $5 
million over the 2000-2004 period. For similar reasons, H.R. 10 
would reduce revenues by $25 million over the 2000-2004 period, 
whereas the Senate bill would decrease revenues by $15 million 
through 2004. Because H.R. 10 would not reduce CRA 
requirements, the loss of savings attributable to fewer 
examinations would boost the bill's cost to the Federal Reserve 
by roughly $10 million over five years.
    Estimated spending from appropriated funds under H.R. 10 is 
higher by about $4 million through 2002, largely because the 
bill would require additional studies and reports.
    Estimate prepared by: costs for FHLBs: Robert S. Seiler; 
other Federal costs; Mary Maginniss; Federal revenue: Carolyn 
Lynch; and impact on State, local, and tribal governments: 
Susan Seig.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.
                                 ERRATA

                              ----------                              


                        H. Report 106-74, Part 1

    On page 2, before line 1, insert the following line:

    (b) Purposes.--The purposes of this Act are as follows:

                                  
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