provide the agencies with those resources. Of greater importance to consumers, none of these proposals recognize that the federal bank regulators are already overextended and that, as a consequence, they are not fulfilling all of their statutory mandates. Mildred Brown of ACORN, from her experience of trying to enforce the Community Reinvestment Act, stated: And from where ACORN members sit, most regulators look and sound just like bankers. It is hard to believe that regulators are paid With these to protect our interests. Most experiences behind us, ACORN is worried about the grab by banks for expanded powers. banks have not come close to living up to their current legal responsibilities to serve low and moderate income people. (emphasis in original) Because of their concerns that Congress has not fully addressed all of the potential dangers to individual consumers and to the economy as a whole associated with giving banks new securities powers, three of the witnesses requested Congress explicitly to extend the moratorium to enable Congress to fully Specifically, Bankwatch suggested that Congress adopt legislation quickly that would set in motion investigate these concerns. a two year investigation of these issues under the direction of the House and Senate Banking Committees and that the legislation should identify the issues that Congress should investigate. economy. 9. Banks Should Not Neglect Their Intermediary Role Financial intermediation is an essential function in our Only a very small percentage of American businesses can qualify for investment-grade ratings on their obligations. While a few of the rest may be able to issue so-called junk bonds, the vast majority need a bank with which they can develop an ongoing, reactive business relationship with sufficient mutual understanding to encourage the extension of credit and the proper handling of the credit relationship when things get rough. This vast majority is essentially a captive audience. When Congress long ago instituted federal deposit insurance, it was clear that not only depositors but the banks The world now knows that the FDIC and the Federal Reserve discount window are firmly behind banking themselves would benefit. The aura of organizations and not just their $100,000 accounts. that government support makes money flow into bank certificates of deposits from all over the world on an unsecured basis at When Congress conferred this benefit on the banking industry, however, it did not intend for banks to take favorable rates. the money and run in all directions with it. It was banking, the critical job of the financial intermediary that provides credit to companies and citizens that cannot access the capital markets, that was to be backed by federal insurance funds and the federal treasury. Expansion of banking organizations into additional non-banking activities would not only jeopardize the federal safety net surrounding the insured deposits, but would encourage neglect of the functions that are the raison-d'etre of banks and If banking create a void in our economic structure. organizations, as they claim, can make bigger profits elsewhere, will traditional lending become a poor cousin when banks are given carte blanche to engage in other activities? If Salomon Brothers is driven by balance sheet concerns to eliminate its municipal bond operations, will bank holding companies cut back on their banking operations if their performance is mediocre Bank holding relative to their non-banking subsidiaries? companies are supposed to tend to their banks; bank holding companies that hold banks and an assortment of other subsidiaries may not, if the drive to maximize the bottom-line If this phenomenon is leads them to neglect their banking role. encouraged, financing for essential sectors of the economy such as the farm and energy areas and small business may become scarce, to the detriment of the nation's financial health. 10. Securities Industry Is Highly Competitive The American securities industry has served American Statistics on the volume of underwriting tend to indicate that five or six firms account for the majority of underwriting This data has of certain types of debt and equity securities. been cited as evidence of concentration in the securities industry, but concentration should not be confused with lack of Indeed, in his testimony last month before the Subcommittee on Financial Institutions Supervision, price competition. Regulation and Insurance of the House Committee on Banking, Finance and Urban Affairs, Alan Greenspan, Chairman of the Federal Reserve Board, while discussing competition in the securities industry, stated, "I would emphasize that concentration per se need not lead to higher consumer costs, because the possibility that new firms will enter a market may be sufficient to achieve competitive prices. - 40 - 41 recent years. The securities industry is highly competitive and margins on underwriting and brokerage services have tended to decline in While profit levels have been good over the past layoffs and mergers. few years, the health of the industry has been cyclical, and the present period is one in which there have been a large number of The 1970s witnessed a severe shakeout as under the competitive strains. hundreds of firms failed or merged and thousands lost their jobs Developments in the securities business in the last six to The lead underwriters in major transactions recently have had capital of over $500 million and often over $1 billion. Because of the special nature of the securities business, particularly the large size of many transactions and related large capital requirements, new entrants into the business tend in the larger transactions. to specialize in niches rather than compete for a lead position The potential for mergers or entry into the business by non-financial companies, nevertheless, exercises a moderating influence on pricing in the industry. As Chairman Greenspan indicated, this is the effect of potential future competition, which regulatory agencies and courts take into account in deciding whether a sector is unduly concentrated. Appendix III-B-10 shows that the top five U.S. securities firms ranked by capital over the past eight years has the competitiveness of the industry. changed and has been shared by nine different firms, evidence of The appendix also shows the marked increase in growth in capital of these firms that has been required to compete in their segment of the market. For example, the top ranked firm in 1980 had just under $1 billion ranked in 1980, had over $3 billion in capital. in capital and the top ranked firm in 1986, which was the fourth It is also important to realize that the securities industry is not composed of only large companies. There are many companies, indeed hundreds, that have only a small number important segment of the business. of employees and a handful of offices and they constitute an 5,000 firms in the securities business. Altogether, there are over Independent of the question of whether from an abstract competition viewpoint banking organizations, as additional suppliers of services, should be encouraged to enter the this is appropriate policy. securities business to a greater extent, is the issue of whether Large banks, in particular those who have severe exposure from loan positions with developing now for their banking activities. nations, do not seem to have much, if any, excess capital right Also, because the risk-reward policy grounds, ratio of handling large transactions is high, it is questionable whether banking organizations should be encouraged, on public to enter the securities business to provide an additional source of competition because organizations affiliated with government-backed deposit insurance funds should shocks to which the securities business is prone. not, on policy grounds, be allowed to become vulnerable to the A recent study on rapid financial market change and Financial markets are highly competitive. markets seriously underprice assets, then dilute the capital base of financial losses will appear, which, if widespread, could institutions and expose the financial system as a whole to risk. SIA believes that the securities industry is highly competitive and that special risk factors of the securities in the false name of increased competition. business mitigate against placing the federal safety net at risk - 42 - 43 IV. BANK PARTICIPATION IN SECURITIES AND OTHER NON-BANKING ACTIVITIES WILL RESULT IN UNFAIR COMPETITION AND CONFLICTS OF INTEREST Bankers are fond of calling for repeal of the Glass-Steagall Act to create a level playing field" permitting head to head competition between banks and securities firms. However, banks enjoy a variety of government-conferred special benefits that enable them to transact business at a significantly lower cost than non-banking competitors. In addition, their role as lenders enables banks to use their The entry of credit facilities to tie-in unrelated services. banks into non-banking activities is therefore likely to c: eate not a level playing field, but a field sharply tilted in the It is not only the integrity of competition that is called into question by the participation of banks in direction of banks. non-banking activities, however, but the integrity of banks themselves, which may lose their objective role as lenders if they simultaneously participate in other transactions with, or in competition with, their credit customers. See per a A. Banks Have Substantial Government-Conferred Advantages Any business opportunities the banking industry may have lost in 1933 with respect to securities activities that were placed off limits to banks by the Glass-Steagall Act were more than compensated for by new federal support for basic banking This support includes the following special activities. advantages: Ability to take deposits for use in their business it Federal insurance of deposits which inspires U.S. Because banks have their federal safety net, they have • Exclusive direct access to the payments system for Federal funds market availability for low-cost funds Regular access to the Federal Reserve discount window Special accounting rules, especially those which do not require them to mark to market. Backed by federal deposit insurance, the banking industry in a lower cost of money raised by banks compared to financial [A]ssume a gap of 25 basis points between what Although interest rate ceilings on bank deposits have been removed, the attraction of federal insurance still enables banks In fact, some to borrow from depositors at favorable rates. legal preclusions on payment of interest to corporate customers on bank demand deposits still survive, yet the federal safety net provides an incentive for such customers to provide banks with no cost funds. This assortment of benefits was conferred on the banking industry by Congress on the assumption that they would not be major players in non-banking industries, and that the subsidies provided thereby would inure to the health and stability of the Congress did not traditional intermediation function of banks. intend these advantages to carry over into bank participation in financial or commercial enterprises that could stand alone Yet the bills being considered by the Committee do little to isolate those advantages to the without government support. 44 - 45 banks intermediary functions, and certainly the banks that surrender those advantages. demand a repeal of Glass-Steagall are not volunteering to B. The The list of bank advantages does not stop, however, with The potential for tie-ins exists as well in the The possibility of tie-ins occurring seems all the more contrary, it is explicitly encouraged. the Committee put any restraints on cross-marketing; to the What is "synergy" for a banking organization is unfair competition for a company that does not ha e such government-conferred benefits. In sum, banks are inherently unfair competitors outside of grow. C. Create Conflicts Of Interest Common ownership of banking and non-banking facilities The most clearcut conflict situation is where a bank's At a As controlled as inter-affiliate transac- -46 - 47 An equally disturbing conflict of interest arises with A third type of conflict of interest is a corollary to the and independent of the entrepreneurial and heavily profitmotivated urges of the rest of the financial world. A more detailed discussion by the OECD of the confl ct cf interest problems associated with bank participation in non-banking activities is contained in Appendix IV-C to this written statement. D. An Internal Firewall Is Weak And Unproven Advocates of bank entry into securities or other In particular, the concept of separate non-banking Chairman Proxmire has said that he could not support a Testifying about his experience in regulating bank holding |