LEGISLATIVE PROPOSALS TO RESTRUCTURE OUR FINANCIAL SYSTEM TUESDAY, DECEMBER 1, 1987 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The committee met at 10 a.m. in room SD-538, Dirksen Senate Office Building, Senator William Proxmire (chairman of the committee) presiding. Present: Senators Proxmire, Riegle, Sarbanes, Dixon, Sasser, Sanford, Shelby, Graham, Wirth, Garn, Heinz, D'Amato, Hecht, and Bond. OPENING STATEMENT OF CHAIRMAN PROXMIRE The CHAIRMAN. The committee will come to order. With the expiration of the moratorium 3 months away, the Congress has its work cut out. The committee is moving forward with the legislation to meet that deadline. Some have suggested that the recent turbulence in the stock market is sufficient reason to delay or to forego altogether the repeal of the barrier between investment banking and commercial banking known as the Glass-Steagall Act. I disagree. The time to pass new constructive financial legislation is now and for two reasons. First, Glass-Steagall has been shattered. The barrier between commercial banking and investment banking has been perforated in both directions. Whatever protection Glass-Steagall allegedly provided has long since ceased to be effective. What remains is only the protectionist barrier to socially beneficial competition. Commercial banks already underwrite corporate securities. They do it through their offshore subsidiaries. It makes no sense to permit them to underwrite bonds and equities in the Euromarkets but not at home. And investment banks have taken over the traditional bread and butter market of commercial banks. What was once a commercial loan is now commercial paper. The banks cannot adapt to the new techniques of securitization so they must stand by and watch in their 1933 model straitjacket. The second reason for passing legislation now is to reassert congressional control over the shape of our financial system. Failing to pass legislation does not mean that restructuring will cease after March 1. The question is not whether our financial system should be restructured. Eventually it will be whether or not we act. The question is how that restructuring is to occur and under what kind of regulatory framework. The inability of the two houses of Congress to act will delegate to the regulators, the courts, and the loophole lawyers the responsibility for the design of our financial landscape. Bank safety and soundness is of concern to us all. The best way to enhance safety and soundness is to pass legislation that acknowledges the reality of the financial system of the 1980's while at the same time providing specific safeguards to preserve safety, prevent conflicts of interest, and enhance competition. This morning we are fortunate to have Federal Reserve Chairman Alan Greenspan before the committee to testify on the need for modernization of our financial structure. At some later time, the Chairman will come before the committee to discuss Federal Reserve Board policy with respect to the stock market. It's my understanding that it would not be helpful to Federal Reserve policy with respect to our country's economic welfare for committee members to insist on answers to questions in that area this morning. That's not the purpose of the hearing. I hope that members will confine their questions to the Glass-Steagall Act which is certainly a very full plate and it should fully involve our attention and our time at this hearing. Chairman Greenspan, I want to thank you for appearing before us today to discuss this urgent legislative matter. I hope that in your remarks you will give considerable attention to the two bills that have been introduced by members of this committee; S. 1886 by Senator Garn and myself; and S. 1891 by Senators Graham and Wirth. [Copies of proposed bills follow:] 4 "(II) In acting on an application under "(III) The Board shall not approve an "(ii) Beginning 2 years after the date of en- 24 ant to this paragraph without the Board's 24 (iv) of that paragraph. 25 prior approval. 25 "(C) CONCENTRATION OF RESOURCES.— 17 “(ii) A bank holding company shall not di rectly or indirectly make any additional equity in- "(D) the Board issues a written state- "(II) the Board does not disapprove the "(E) CAPITAL ADEQUACY.-(i) In determining whether a bank holding company complies with the of the application, total assets of more than "(ii) The dollar limitations in clause (i) of this subparagraph shall be adjusted annually after De- "(D) FUNDING OF A SECURITIES AFFILIATE.- 25 holding companies. |