However, S. 1720 does not restrict intrastate branching by federally chartered thrift institutions that exercise bank-like powers. It would be desirable if the State governments equalized the branching powers of all depository institutions under their jurisdiction, and did so by liberalizing those powers to permit unrestricted intrastate branch banking. This would strengthen the State banking systems prior to any expansion of the interstate activities of depository institutions. In that connection, as soon as this committee is prepared, Mr. Chairman, I would like to present administration proposals to liberalize those interstate activities. This legislation contains very important provisions authorizing emergency interstate and interindustry mergers and acquisitions to rescue troubled commercial banks and thrift institutions. These provisions would greatly assist the regulatory agencies in coping with problem organizations. We therefore regard the provisions for interindustry and interstate mergers and acquisitions as an essential element of any legislative assistance to the thrift industry. S. 1720 would provide broader language regarding the ability of the Federal Deposit Insurance Corporation to provide assistance to an insured institution. In the past we have generally opposed such a broading of financial assistance language for the Federal deposit insurance agencies, because we believe they already have the substance of the authority that the language provides. And most importantly, we do not want them to consider congressional action as a mandate for accelerated spending on assistance to an industry frozen in a noncompetitive framework. We believe it would be a significant disservice to the public if Congress were to provide some form of short-term assistance to thrift institutions while leaving action on their fundamental problems to a later date or another Congress. However, in the context of this proposed legislation, which addresses the thrift industry's long-term structural difficulties, we would not object to the new language regarding the conditions under which the FDIC may assist a troubled institution. The Administration has reviewed the issue of preempting the due-on-sale clause prohibitions, and has determined that a preemption is necessary and appropriate. We would confine the preemption to federally chartered depository institutions as well as lenders other than State-chartered depository institutions approved by the Secretary of Housing and Urban Development for participation in any mortgage insurance program under the National Housing Act. The difficulties of the thrift industry and the Federal Government's stake in the viability of the industry through the Federal deposit insurance agencies make preemption a legitimate Federal concern, and one that requires prompt action. REVISE GLASS-STEAGALL I would like to now turn to those sections of S. 1720 that deal with the Glass-Steagall Act. As you know from my testimony before this committee in April, I feel strongly about the need to revise this nearly 50-year-old statute. Mr. Chairman, we have developed an approach to deregulation of securities activities that differs from the approach contained in 1720. We propose that commercial banks be authorized to engage in municipal revenue bond underwriting and dealing and the sponsoring and underwriting of mutual funds, provided that they do so through a bank holding company subsidiary. The subsidiary would function as a full member of the securities industry. It would be eligible for membership in the appropriate securities industry selfregulatory organizations, such as the National Association of Securities Dealers, and would be regulated at the Federal Government level, by the Securities and Exchange Commission. Any bank electing to create a subsidiary would have to transfer to it all other traditional securities business, such as underwriting and dealing in U.S. Treasury and municipal general obligation bonds. Parenthetically, Mr. Chairman, I might mention that with regard to competitive equality, a securities firm dealing only in Federal, municipal, or mutual fund obligations could establish a holding company and own a commercial bank within it. Our approach to deregulation of securities activities has three major advantages: (1) It establishes an equal competitive footing for securities firms and commercial banks with respect to their common securities activities; (2) it establishes the holding company vehicle as a means to expand the activities of bank holding companies generally and securities subsidiaries in particular; (3) It uses the holding company vehicle to separate the federally insured depository business of banking from activities that may have a higher degree of risk. Our proposed bank holding company security subsidiary would have the same tax treatment as an independent securities firm, the same regulators, and the same access to outside financing and outside customers. In contrast, leaving securities activities submerged within the corporate structure of a commercial bank, as S. 1720 presently does, would afford the banks several competitive advantages in the securities business. The bank securities activities would have preferential tax treatment, particularly as regards the carrying of securities in inventory. They would be regulated by the Federal bank regulatory agencies for which securities activities are only a limited aspect of bank business. They would have access to financing based upon the cost of the bank's insured deposits, and they would have opportunities for the non-arm's-length linkage of traditional bank services to the securities business of the bank. There are too many inequalities here to satisfy the goal of equal treatment for all financial institutions doing the same kinds of business. We are prepared to submit legislation to implement our securities subsidiary concept, Mr. Chairman. In addition, we are prepared to make a study within 2 years after the effective date of the law regarding the impact of these new bank securities activities and to determine what additional activities might be appropriate. Recent events have brought into sharp focus the fact that the financial services market is growing rapidly, and that many companies are broadening the range of services they offer to businesses and the consumer. Increasingly, this is a direct challenge to banks and bank holding companies whose range of possible financial services is restricted by regulation. I believe that the time has come to permit bank holding companies to compete more fully with the many firms which are now entering the financial services market. Insofar as the greater risk of new activities can be separated from the risks of traditional banking business, we would support additional activities for bank and thrift holding companies beyond those now permitted. For example, Mr. Chairman, the thrift industry would like to make direct investments in real estate, as distinguished from mortgage loans, to make use of their expertise and experience in local real estate. This, of course, would create a quantum of additional and different risks for these insured institutions. I would have no objection if federally chartered thrift institutions were given this authority, provided that all direct investments in real estate were made through a holding company subsidiary; and that commercial banks, through a holding company subsidiary, were given the same authority. Mr. Chairman, in closing, let me note that my written testimony includes a more detailed administration position on S. 1720, and some comments on S. 1721. I would like to thank the committee again for offering me this opportunity to present the Treasury Department's and the administration's views on issues relating to the financial system, issues about which I feel very strongly. I would also like to thank you, Mr. Chairman, for all of the work you have done in arranging these hearings, and in preparing this legislation. We in the administration would like to work closely with the Congress to secure passage of the legislation. Mr. Chairman, that concludes my statement. And I would be pleased to answer any questions that the committee might have. [Complete statement follows:] FOR RELEASE UPON DELIVERY October 19, 1981 Testimony of the Honorable Donald T. Regan Secretary of the Treasury Before the Senate Committee on Banking, Housing and Urban Affairs Mr. Chairman and members of this distinguished Committee: I appreciate the opportunity to present to you some recommendations developed by the Administration to improve the operations of our financial system. The recommendations follow from the hearings held by the Committee in April to review the impact of recent legislation on our financial markets and financial institutions. At that time I indicated I would return to the Committee with specific proposals to implement the deregulation policies I outlined at those hearings. I would like to discuss our recommendations in conjunction with your proposals, Mr. Chairman, and with those of other members of this Committee as contained in S. 1720, the Financial Institutions Restructuring and Services Act of 1981, and S. 1721, a bill to combine the insurance funds of the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation and the National Credit Union Share Insurance Fund. I am delighted to see in the legislation developed by this Committee so many ideas for improving our financial system that are shared by those of us in the Administration. 85-952 0-81-2 INTRODUCTION As we proceed with our work we must keep in mind the basic objective of providing the public with the best possible financial system. In recent years, the present system has produced an exceptional number of new products and services, many of them conveniences and benefits for consumers which cannot be offered by commercial banks. Our financial system has evolved with a long history of institutional, product and geographic restrictions, generally for anticompetitive reasons, but in some cases to protect depository institutions themselves against risky ventures which might jeopardize their soundness and require the expenditure of Federal deposit insurance funds. In order to receive better products and services or just a better return on their savings, consumers have frequently had to shift their funds from one institution to another, from local to metropolitan markets, and in many cases outside the banking system itself. This redistribution of funds solely to avoid governmental constraints has tended to weaken traditional depository institutions, the most restricted segment of the financial system. It has also tended to disadvantage the rural communities and housing segment of the economy dependent on these institutions. To avoid such distortions in the financial system and the accompanying institutional and consumer inconveniences, we must rely more on deregulated markets and institutions. With fewer governmental restrictions, the financial system should respond more efficiently to changes in the economic and competitive environments to the benefit of everyone. This deregulatory effort is important to the Administration not only because it comports so well with the President's regulatory reform program but because the effort should be especially beneficial to consumers. EXPANDED POWERS FOR THRIFT INSTITUTIONS Those sections of S. 1720 dealing with expanded powers for thrift institutions--savings and loan associations and mutual savings banks--are justifiably an important priority of this Committee. At the moment the distortions and uncertainty caused by inflation, in interaction with continuing asset regulation, are forcing thrift institutions to use an increasing amount of deposit liabilities with interest rates that vary with market rates to make long-term mortgage loans or to carry long-term mortgages made in prior years. The remainder of the institutions' deposits are under Federal deposit interest rate ceilings and have rates that vary with market rates only below the ceilings. |