NATIONAL ELECTRONICS PAYMENTS CORPORATION

Senator WIRTH. OK. Let me go on if I might then to focus on another element in our legislation which has not been touched upon at all this morning and is not touched on in the Garn-Proxmire legislation. That is, the focus on the payments system.

Senator Graham and I have proposed the establishment in title III of our legislation of a national electronics payments corporation. This is in response-I might read from the Corrigan report:

As discussed earlier, the large dollar electronics payments mechanism plays a vital role in the day-to-day, hour-by-hour functioning of the financial system. The fact that these systems are able to process tens of thousands of transactions daily, aggregating well in excess of a trillion dollars is testimony to their effectiveness, but it also underscores the urgency of ensuring that these systems are as reliable as possible and are capable of dealing with operational credit or liquidity shocks.

What we have attempted to do is to develop a broader mechanism, a more up-to-date mechanism, to meet the argument that's been made by a whole variety of experts and studies arguing that our current payments system simply hasn't kept up with the private sector and that this is going to get worse as our domestic economy is more intertwined in the international economy.

I was wondering if you had any reaction to the proposal for setting up a national electronics payments corporation, if that is a good idea, if that ought to be part as we believe of this legislation?

Mr. GREENSPAN. Well, Senator, I certainly think it should be studied because I fully concur with Gerry Corrigan's notions about this. He has done an extraordinary job in evolving a system at the Federal Reserve Bank of New York where most of the operational facility resides.

In the process, I personally have spent a rather considerable amount of my time looking at that system and I must say to you it's awesome in content-just talking about the state of the art— and potentially of grave concern about how the system is going to function in the years ahead as inevitably the volume of transactions continues to multiply at an extraordinary rate.

I do think that this has to be worked on. The Federal Reserve is and has been in the process for quite a while in trying to think through and upgrade the process and I would certainly say the notions in your bill are something which require a good deal of study and I ultimately suspect that something in that direction will be required.

The problem that exists obviously rests with the interface-for example, the Fed wire on the one hand and the CHIPS system, the private clearinghouse system, on the other. What we have to be careful of is to what extent we use Federal and private resources in a national payments system.

It's in those areas where considerable thought has to be given, but I certainly fully subscribe to the general thrust of your argument that something in this direction will ultimately be required.

Senator WIRTH. Perhaps we could get your specific responses to this as a legislative proposal. It seems to me, Mr. Chairman, one of the important things we ought to be doing is taking advantage of the opportunity that exists now, as Senator Graham pointed out, and this is an area Mr. Corrigan and the New York Fed deals with

on a steady basis. They think, to use my words, it's being held together currently by bailing wire. It has a possibility of creating some very, very severe problems for the overall system in the future and this might be an ideal opportunity in this piece of legislation to focus on the payments system.

So maybe we could get from you your response to that and say, OK, let's do more than study it; let's figure out what we can do about it.

Mr. GREENSPAN. We will, Senator.

Senator WIRTH. Thank you very much.

The CHAIRMAN. Thank you. Senator Graham.

Senator GRAHAM. Mr. Chairman, I come out of a background which includes in part the development of a new town and one of the challenges in that is to try to think 50 years ahead of what you want this place to look like and function like and how will it serve people when it's completed.

Once you have established those types of objectives, then you can begin to decide we're going to begin with part A or part В as the first increment of development. I know you had an opportunity sometime ago to visit with us there.

Mr. GREENSPAN. It was quite impressive, Senator.

FUTURE OBJECTIVES

Senator GRAHAM. Thank you. In the context of that, I'm interested in what you think the year 2000 objectives ought to be for America's financial institutions. Where should we be trying to go? Then we can decide whether we go there in one step or a thousand steps, but at least we will know when we have arrived at our destination.

Mr. GREENSPAN. Senator, it's very difficult to formulate other than generic legislation for a financial system which will stay in place for a protracted period of time, largely because consumer preferences are constantly changing and the technological capability of financial institutions to serve them is constantly advancing. If somebody asked 30 years ago, literally, whether we would have the type of financial instruments or products which now proliferate in the markets, clearly the suggestion would have been that it was a forecast which had very small probability of occurring. It was just peculiar notions of what markets would eventually do.

I don't know what the markets will be doing with respect to financial structure in the year 2000. I do know that it will be very complex and the financial system will create an extraordinary array of products driven by consumer needs. Therefore, what is crucial to any generic financial system is that it grants very general powers and that it maintains safety and soundness in a very general way without endeavoring to specifically restrict the system to a long list of powers which, if implemented in today's environment, will surely be by the turn of the century half obsolete.

So that one either has to have in position a very general legislative vehicle or one which is presumed to be revisited periodically to update the system to the current environment.

So while I would say it's useful to think that far into the future, I don't think it is useful to think that far into the future with any

great specificity because the chances of our being right are really quite small.

Senator GRAHAM. You have stated that one of the objectives would be to have a system which optimized or maximized market responsiveness.

Mr. GREENSPAN. Yes.

Senator GRAHAM. I think that is a significant statement of an objective which, if adopted, would drive a number of the immediate and incremental decisions.

Mr. GREENSPAN. Yes.

Senator GRAHAM. How do you see in terms of looking at those objectives from a nationalistic standpoint what should be the objectives in the year 2000 relative to the degree of domestic control over domestic financial institutions?

Mr. GREENSPAN. Well, I think it's obligatory for us to maintain control over our domestic institutions in the same general context that exists today. I am only concerned that we don't so rigidify the statutes that the form of those institutions, even if they are competitive today, will cease to be so in the year 2000. Senator GRAHAM. Thank you.

The CHAIRMAN. Dr. Greenspan, in your November 18 appearance before the House Banking Committee you said, "That without the repeal of Glass-Steagall, banks' share of credit markets is likely to decline, as it already has in our measure of short and intermediate term business credit."

Why should that be a concern of the Congress if banks lose share of credit markets and what are the public policy consequences of this for our country?

Mr. GREENSPAN. Well, first of all, let me say that the reasons that that would occur are basically market forces, largely the issue of securitization or forms of securitization.

The CHAIRMAN. Because the Glass-Steagall Act keeps the banks out of securitizing loans?

Mr. GREENSPAN. Yes, but it basically eliminates the capability of essentially getting involved in security products generally. If that should occur-meaning that we don't repeal Glass-Steagall-and we gradually contract the banking function in this country, I'm not saying that the financial system will become inefficient. What I am saying is that we will be foregoing the extraordinary value that our commercial banking system has to this economy. The system of 14,000 banks is a tremendously important institutional framework with resources and personnel which would be scattered to different forms of institutions.

The cost to the economy in doing that is potentially significant and we should endeavor by all means to avoid that if we possibly can and repeal of Glass-Steagall, in my judgment, would succeed in holding these institutions in place.

The CHAIRMAN. Now as you know, American banks are engaging in securities activities abroad-we've mentioned that before-underwriting of corporate debt and equity securities that they cannot conduct in the United States because of Glass-Steagall.

To carry out such activities abroad, are U.S. banks using separate securities affiliates as set forth in S. 1886, The Financial Mod

ernization Act? If not, do you recommend that S. 1886 be amended to require that they do so?

Mr. GREENSPAN. I think it's a major question which this committee is going to have to confront. At the moment, clearly, these securities affiliates do not have the requirements that are implicit in S. 1886. They function quite well. They have done quite well.

The CHAIRMAN. Are you saying that banks do use securities affiliates abroad or they don't?

Mr. GREENSPAN. Well, the major ones do. It's not the issue of holding company affiliates per se that's an issue, but the question really of the symmetry of regulation that does not exist in S. 1886. Currently, what we are supporting is a series of safeguards between securities affiliates of bank holding companies domestically and banks and a number of those safeguards do not apply overseas. Very specifically, lending to the the securities affiliate by the bank, is not prohibited currently for securities affiliates or even subsidiaries of banks in the securities area abroad.

As I said, it's a problem of symmetry. But I am reluctant myself to say that we must change the foreign operations to match the domestic because the foreign operations have functioned really quite well. I think it is an issue, however, of trading off the question of symmetry versus the proposition to which I hope we all subscribeif it ain't broke, don't fix it. And as far as I can judge, the securities operations of American banks abroad ain't broke.

The CHAIRMAN. I want to thank you, Chairman Greenspan, for a superlative appearance before the committee, both in your opening statement and in your thoughtful and effective answers to our questions. Thank you very much.

Mr. GREENSPAN. Thank you very much, Mr. Chairman,

Senator RIEGLE. Mr. Chairman, we've got probably 4 or 5 minutes here before I'll have to leave and also make this vote.

I'm concerned about the possibility of tie-in sales and that kind of problem. Do you envision a geographic separation? We had a person in representing a major bank holding company the other day who has really taken and set up one-stop financial shopping and actually has a bank that's sort of a business in the round where you've got one office that sells insurance and another office that sells real estate services and so forth right around presumably a securities office as well as the commercial banking office.

Do you feel that it's important one way or the other that these things either be in the same geographic location or do you think the securities activity ought to be separated from the commercial banking activity so that you really minimize the likelihood of a tiein in reality or pressure?

Mr. GREENSPAN. Well, this is a problem which I don't think we're ever going to solve, which is the issue of the advantages of joint marketing on the one hand and pressure on the other, pressure being a somewhat very difficult issue to define.

My own impression-and I may be mistaken on this-is that tiein sales are really a very small part of any operation and it is not a general practice, especially in the financial area. But I can understand concerns that may exist from that and I would certainly think that endeavors should be made to minimize the possibility of tie-in sales occurring but I would not wish to see us become so con

cerned about the issue that we would eliminate what consumers really want. In other words, there is clear evidence that one-stop type of shopping is something which consumers find of value.

Senator RIEGLE. Well, let me tell you the one concern I have because I hear from a lot of business people. Michigan is the eighth largest State and we've got a lot of business people of all sizes up and down the range, and I find that as smaller-scale business people establish and maintain their banking relationships, it's of a real choke point if things get tough all of a sudden and it's hard to get credit or it's hard to go and finance something. And they feelmany of the business people that I talk to feel that they don't have very much leverage in those relationships and they don't want to surrender what they have. And I think they feel, at least some that I've talked to, as if they would feel in some cases like they would have to be accommodating to the bank because they want the bank to be accommodating to them.

I don't think this is a fictitious thing. I think it's a real thing. Mr. GREENSPAN. Well, the interesting question is: There's a distinction between people who are being forced inappropriately and a negotiating position. It's very difficult to draw the line. It's very clear in most business relationships. People have different bargaining power and the question always gets down to whether there was coercion involved, whether there was a tie-in.

Senator RIEGLE. I have found, generally speaking, though, that the lender in most situations has more bargaining power than the borrower. Now there are times when that's not so.

Mr. GREENSPAN. I would agree with that.

Senator RIEGLE. Let me move to one other thing and that's bank profitability. When you look at bank profitability across the country, from the big money center banks on out to the smaller banks across the country, do you see a serious bank profitability problem and do you see this as an answer for the bank profitability problem if you see one, or are we talking here more about financial structure, efficiency of services, capital-raising capability as apart from just the sheer ability to be sufficiently profitable as a commercial bank?

Mr. GREENSPAN. It's the latter. I think that there are considerable financial problems in banks, but at the moment we do not yet see conclusive evidence that underlying bank profitability per se has undergone significant erosion, meaning that we can account for most of the actual reported decline in bank profits by problems in quality of loans, by technical issues which are not long term.

I should point out, however, that if the securitization issue, the problem that we have been discussing about the shrinking of the intermediation role-continues, it is inevitable, as I see it, that commercial banking profitability will decline.

There is a distinction between the forecast which I believe is reasonably assured in the future and current analysis. Our recommendation with respect to Glass-Steagall does not relate to concerns about profitability per se. It concerns, as you put it, Senator, the future structure of banking and the most efficient system that we think can be devised.

Senator RIEGLE. I thank you on behalf of the committee and we will be talking further about these matters.