recent amendments to our regulation governing bank holding company activities, the Board has gone as far as it felt it could, consistent with present law, to speed up procedures and lessen regulatory burdens. The approach encompassed in the bills before you would permit further progress in these directions by eliminating the "benefits and burdens" test of present law, limiting bank holding company examinations and reports, providing for expedited notice procedures for approval of new activities, and setting out new and simplified criteria for determining the permissibility of new activities generally. The third area with which any bill must deal is defining the degree of expanded bank holding company powers. Again, I believe a nascent consensus has developed for a broader test than incorporated in present law. S. 2134 and S. 2181 approach the matter in a somewhat different way; both would have the practical result of permitting and directing the Federal Reserve to permit holding companies to engage in a somewhat broader range of services and the differences between the bills should be reconcilable. Both bills follow the Administration proposal on expansion of securities powers of bank holding companies, including revenue bond underwriting, and mutual investment fund powers. All of this has long been supported by the Federal Reserve Board. In addition, both S. 2181 and S. 2134 would further provide for underwriting of mortgage-backed securities. Finally, the latter bill would promote competitive equity in this area by applying the Glass-Steagall Act to nonmembers as well as Federal Reserve member banks. Proposals to extend powers of bank holding companies to insurance underwriting and brokerage and to real estate brokerage, appear, to varying degrees, more controversial. S. 2181 provides one possible approach toward dealing with the concerns about banks acquiring "healthy" thrifts by limiting such acquisitions across state lines. Various limitations have been suggested for the exercise of real estate development powers. While I will touch upon most of these areas more specifically, we hope and anticipate that further agreement could be reached in the weeks ahead on the basis for proceeding. I look forward to further opportunities to work with the Committee as it reconciles various points of view. But I also want to emphasize as strongly as I can that the basic "core" elements for constructive legislation do seem to be falling into place, and the opportunity for action is here. Major Issues That Need Resolution authorization for regional inter Title I of S. 2181 draws on the base of the Administration FIDA proposals, but with certain significant changes and additions, including some consistent with my earlier testimony. S. 2134 is also built on the Administration proposals, but is more limited. The remaining Titles of S.2181 deal with a variety of other banking issues. These include: state banking compacts; interest on demand deposits and on reserves; pre-emption of state interest rate ceilings on business, agricultural and consumer credit; and federal rules on deposit availability. Finally, the bill also adds provisions on consumer leasing, credit card fraud, expanded powers for credit unions, and an authorization for bankers' banks to invest in export trading companies. So far as holding company powers are concerned, S. 2181 would make five important changes from the Administration bill: limitations on tying of banking and insurance products; the scope of real estate development; provisions to avoid excessive concentration of resources; the definition of the term bank; and the proposed thrift definition. I believe there is agreement that tying of the provision of bank credit or other banking services to the sale of products or services by other affiliates of a holding company could impair impartiality in credit decisions and competitive equity. The existing Bank Holding Company Act, Federal Reserve regulations, and anti-trust laws already contain safeguards and prohibitions against conflicts of interest in this area. S. 2181 would add a number of additional limitations and procedural requirements specifically directed toward the linkage of insurance and banking products, to reinforce the prohibition on tying. Similar questions could arise in the real estate brokerage area. We recognize the concerns that motivate the new provisions. At the same time, cumbersome detailed requirements could impose burdens not encountered by other businesses, including retail, securities and insurance firms, that might provide insurance services in combination with other services and products, including credit, such as personal loans. We note, for instance, that the proposed provision would not be applied to thrift holding companies, These potential competitive differences would be ameliorated by extending any tougher anti-tying provisions to thrift holding companies and by curtailing the ability of other businesses to acquire non-banks or consumer banks to which these provisions would not apply. Within that framework, I believe fair and reasonable procedural safeguards could be maintained. The provisions of S. 2181 limit the scope of real estate development activities, while S. 2134 would not authorize such activities. We believe there is a reasonable middle course. The term "real estate development" is itself an ambiguous and poorly defined activity, ranging in some concepts to including housing and commercial construction; speculative purchase of land; and owning, managing, and maintaining office buildings and other commercial properties. Taken as a whole, real estate development is an activity that experience has taught has large speculative elements; it is marked by cyclical instability, and the risks and large commitments potentially involved could bias lending decisions. As I understand it, however, the main concern of many banks interested in "real estate development" is taking more passive equity positions in projects managed by others, usually in connection with lending commitments, or to help facilitate the sale and exchange of property. The Administration proposals provided some basic and desirable limitations on risk by confining investment in real estate development subsidiaries to five percent of holding company capital, and S. 2181 would rule out construction activity as well. We support those provisions, but also believe it might be desirable to adopt certain other limitations on the scope of real estate development activities. After further consultations with interested groups, we will be prepared to suggest more precise legislative language. In any event, we believe the Board should have clear authority to maintain minimum capital and maximum leveraging provisions for real estate subsidiaries in the interest of the stability of the institutions and the banking system. Another provision of S. 2181 is responsive to the concerns expressed by some, including the Federal Reserve Board, about the possible potential for an excessive concentration of resources from a combination of banks and insurance or other non-banking companies within a holding company. Specifically, the bill provides that a holding company accounting for more than 0.3 percent of domestic deposits could not invest more than 25% of its capital in any one class of permissible nonbanking activities. I appreciate the ingenuity of the proposed approach. But I am both concerned about the arbitrary elements inherent in a doublebarreled statistical test, and whether it would in fact effectively accomplish the stated purpose. Preliminary analysis suggests, for instance, the largest bank holding companies could acquire controlling interests in the largest insurance companies. We are studying this matter further to see if in fact a simpler and more direct test may |