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to help the thrifts, in order to get the housing market started again in 1982, 1983 and 1984.

So from our point of view we don't think the housing industry need fear losing the backing of the thrift industry or commercial banks. I think this is a factor more of interest rates than it is of the prerogatives that we are allowing the institutions here.

Senator CRANSTON. One final question. The chairman has indicated that he would like to pass these far-reaching measures as swiftly as possible and, if possible, before the end of the year. Would you indicate-and perhaps you would rather do this in writing than now-but if you could do it verbally, I would appreciate it.

Which of the provisions are not needed urgently, and which of the provisions are really necessary as soon as possible to address the very serious problems faced by the thrift industry at the present time?

Secretary REGAN. I would be glad to put that in writing for you, Senator.

[The following statement was received from Secretary Regan:] In my testimony I have indicated that the Administration believes the provisions in S. 1720 that we really need swiftly are those that authorize expanded asset and liability powers for thrift institutions so that these institutions will be able to compete for funds and invest them profitably. In addition, we believe the provisions authorizing emergency interstate and interindustry mergers and acquisitions to rescue troubled depository institutions, including credit unions, are very important. The Administration has reviewed the issue of preempting state due-on-sale prohibitions and has determined that a preemption is necessary and appropriate. Finally, we strongly support the sections in S. 1720 that deal with the Glass-Steagall Act, however, we would favor putting the securities and direct real estate investment activities of depository institutions in separate affiliates. Although we believe that this would be a good time to pass the other provisions that we support in S. 1720, I have mentioned only those about which we feel particularly strongly at this time.

Secretary REGAN. I think that the Senate has a much better bill than what the House has been concentrating on, because the Senate bill offers long-range solutions to the thrift industry's problems.

Senator CRANSTON. I agree with you on that point.

Secretary REGAN. This bill addresses the short-term as well as the long-term needs of the industry and I would be glad to explain that more in a reply to this committee.

Senator CRANSTON. Thank you very much. It's been a pleasure to see you.

The CHAIRMAN. Senator Chafee?

Senator CHAFEE. Thank you very much, Mr. Chairman.

ONE-STOP SHOPPING

Mr. Secretary, last spring I introduced legislation to allow banks, thrifts, and credit unions to set up their own mutual funds and to sell shares in their own funds or the funds of other institutes. Now, the opponents have come in and said-namely, the Investment Company Institute-have said that this will lead to an excessive concentration of power, giving the banks an unfair advantage over other institutions. Primarily they are thinking this would be onestop shopping, and thus the tilt will go and the playing field will not be even, as far as the investment companies are concerned. Could I have your thoughts on that?

Secretary REGAN. Certainly, Senator. I will try to make it brief, although it is really a complex answer.

The way that we are proposing this is that a bank holding company set up a security subsidiary within that holding company, and that subsidiary be the equivalent of a securities industry corporation or partnership. We see no unfair advantage that would result, just more competition. Now, the securities industry can hardly say that more competition is unfair, unless they are closet cartelists. I would suggest that they should welcome competition, because this is in the true sense of American capitalism.

There are many people who are concerned about the capital raising abilities of the securities industry. I think this is a step in helping resolve that concern. We have many large securities companies, many of whom are going to be backed by companies that have more earning power in finance-for example, Sears_earns more in finance than most banks and so does Prudential. To the extent that they are now going to be competing with banks, I don't think that the securities industry can say that it is unfair competition to allow banks to compete with Sears and/or American Express or Prudential. I think that it makes more sense to let banks into it.

I think the customer will benefit here; if a customer wants to buy mutual funds or money market funds from a bank, why not? What's wrong with that? So from my point of view, I say the more the merrier and the more competition, the better off the entire industry will be.

Senator CHAFEE. Well, I certainly agree with you on that. My problem is with the administration's proposal about this separate company that you are talking about. Banks currently, of course, invest trusts, guardianship and State accounts, individually and collectively. They handle agency accounts individually. They underwrite general obligation municipal bonds, and of course they invest for their own account in municipal revenue bonds. That is, the bank invests for its own account. And it seems to me to impose this elaborate structure on top of it presents a problem, an added impediment if you want, and I'm particularly thinking of the smaller banks.

I wonder if this isn't something a little extra that they will have to wrestle with in getting into a holding company. I suppose one of the questions is will the ability to go into a holding company be freely granted, and secondly, to set up a separate mechanism when already they are doing an awful lot of it. Would the agency accounts have to be moved over, for example, into this separate entity?

Secretary REGAN. Well, answering your last question first; no. What we are saying here is strictly whatever securities activities the bank is going to perform-and again, this is voluntary—a bank doesn't have to do this-but if the bank chooses to do it—— Senator CHAFEE. To get into the money market?

REVENUE BONDS

Secretary REGAN. To get into underwriting revenue bonds and the like. We say, OK, set up a separate subsidiary, because if you don't, first, a bank would have unfair tax advantages. A bank on

its municipal portfolio and its holdings of either revenue bonds or tax-exempt mutual funds, while they're waiting to be sold, would have tax advantages over a securities company.

Secondly, they might, because they were part of the bank, be able to get money at more favorable rates than a securities firm would be able to get it. A securities firm has to pay whatever the brokers' loan rate is. Sometimes interbank funds are much lower than the bank's brokers' loan rate. Therefore if the bank were to loan to its own department in the securities business at the current bank rate, the securities activity would have an advantage.

Thirdly, and most important we want to safeguard the FDIC funds. We in the Federal Government have to think through what the effect is of what we are doing. If these things prove risky, and if they put the bank in jeopardy, the FDIC has to step in. That has budgetary implications.

We are saying insulate the bank and its insurance feature, and from the securities affiliate that is taking more risks. If something happens in that securities affiliate, it need not impact the bank itself.

Senator CHAFEE. I agree with the general approach here. My bill doesn't directly provide for FDIC insurance, although I suppose the bank might be lending.

Secretary REGAN. Well, that's exactly the point, Senator. We have found that when the FDIC steps in to rescue a bank, for whatever reason the bank is having trouble, they bail out everybody. And we don't think that the bank's stockholders should be bailed out if the bank voluntarily assumes risks in a different field: Senator CHAFEE. Why aren't you prepared to give the same power to the thrifts, to the S. & L.'s, and to the credit unions? It seems to me you are exacerbating the problems that they are running into already if you don't let them compete in this field that is going to involve the commercial banks so extensively.

Secretary REGAN. We are well aware that there seems to be a dichotomy here, but what we're actually trying to do, Senator, is say, look, we're giving them a lot of new powers through S. 1720: the ability to make commercial loans; the ability to make consumer loans; various other things of that nature. That being the case, we don't want to force too much on to them all at once. We have said that we would be more than happy to revisit the question of additional powers in a while after they have gained experience with the new powers that make them more like banks. In the meantime, rather than hold the banks back, we have said let the banks go ahead into the securities business. I doubt, in all honesty, if there are many thrifts that really want to step into securities underwriting either revenue bonds, general obligation bonds, or mutual funds at this particular moment.

Senator CHAFEE. Some of those thrifts are pretty large and have a lot of managerial talent, and they might want to do it. Well, thank you very much, Mr. Secretary.

Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Secretary, Senator Proxmire is next and has some questions. He just had a phone call, and I might just ask you a question or two until he gets back.

Your statement proposes requiring a bank to form a holding company, as we have been discussing at quite great length here, and charter a separate subsidiary of that holding company for the bank to be able to offer mutual funds to its customers. Getting into the one bank holding company issue, this would be a significant expense for a smaller bank. Do you see any possibility to enable a smaller bank to act at least as an agent for a mutual fund, without incurring this expense and at the same time, without creating an unfair competitive advantage or undue additional risk for the FDIC? In other words, I'm looking at a mechanism that we might explore. I don't expect a final answer from you today, but hope to explore the concept primarily for the smaller institutions.

Secretary REGAN. I think that is a possibility, Senator. A bank below a certain size might be able to conduct securities business in some method other than through a bank holding company. I'm suggesting the use of a bank holding company primarily by the larger banks. It has been my experience that the large or mediumsize bank that would want to get into the underwriting of these particular types of issues probably would want to engage in other types of securities activities as time goes on. I am proposing the holding company approach for the long range future.

For a small bank in a small town wanting to get into a syndicate merely to underwrite a particular revenue bond or offer a money market fund, there should be some way to do so other than through a holding company.

The CHAIRMAN. Well, I would like to work with you on that issue because I think, as many people know, many of the smaller banks, particularly the independent banks, are not too enthralled with the one-bank holding company idea.

Secretary REGAN. I understand.
The CHAIRMAN. Senator Proxmire?

RECONSTITUTING THE DIDC

Senator PROXMIRE. Mr. Secretary, as one of the authors of the phaseout, I sympathize with the dilemma that you are in. We had no idea, of course, that we would have anything like the economic conditions we have. We certainly didn't visualize the terrific rise in interest rates and what that would do to the financial institutions. We did try to stress at that time that the phaseout should take into full account the safety and soundness of the institutions involved under those circumstances, and I realize that it is difficult for you to answer, perhaps. What would you think of our reconstituting DIDC to drop the presence of Treasury as well as the NCUA, and have it include only the Fed, the FDIČ, and the Home Loan Bank Board as the agencies that provide liquidity insurance for the financial system and have a direct stake?

Secretary REGAN. I will speak for Treasury, primarily. We have a point of view that is worth listening to and Treasury also, of course, is part of the regulating system, since the Comptroller of the Currency reports to the Secretary of the Treasury and he is a regulator. Therefore, I think we have as much interest in the work of the DIDC as anyone. In addition, the Treasury has a broad point of view on what is going on in the financial markets. I think Treasury should have a representative on the committee.

Senator PROXMIRE. Well, I sympathize with that, but at the same time it just seems to me that Treasury has the kind of independent voice there, but they don't have the same concern for the safety and soundness. And that is, of course, one of the center points of that legislation.

Secretary REGAN. If I might demur from that, I think Treasury is every bit as concerned with the financial soundness of the banking system, whether it be thrifts or commercial banks, and I think that we are pretty sensible about that responsibility. It may be that some people think I am a bit of a firebrand and might want to deregulate a little bit faster than others, but nonetheless I think we do proceed with deliberate caution.

Senator PROXMIRE. Well, let me just go over some of the other points that not only the half percent increase in passbook rate, which I think, as the chairman pointed out obviously isn't going to make the savings and loans any more competitive with the 15 percent interest; 6 percent interest, if anything, would call attention to the people who have money with the savings and loans and make them aware of the fact that sure, they're getting 6 percent now, but for heaven's sake, they're foolish not to get 15 percent. But the other provisions, changing the 6-month MMC index effective November 1, I understand the cost of that to S. & L.'s will be $300 million, creating an IRA/Keogh wildcard. And the cost of that, it is argued, could be as bad as both the MMC index change and the passbook rate, allowing the payment of brokerage fees on all savers certificates so that the S. & L.'s have to pay brokerage fees.

I wonder if those don't do serious damage to the savings and loans. After all, we passed this with the idea that we were going to be evenhanded, and I thought we were giving savings and loans an opportunity. I wanted them to have a chance to compete more effectively, and that was the reason we passed this legislation. These decisions by DIDC, it seems to me, make it very difficult, especially in aggregate.

Secretary REGAN. Well, again, this is a good-news, bad-news situation. If we keep restrictions on their money market certificates, if we keep restrictions on what they can pay for IRA and Keogh accounts and, on the other hand, other financial institutions are free to offer instruments that are the equivalent of what depository institutions can offer but have much more attractive rates of interest, certainly money will flow out of the thrifts and banks.

Senator PROXMIRE. What advantage do they get out of paying brokerage fees?

Secretary REGAN. Well, many of the large brokerage firms have made arrangements with thrift institutions to collect funds for them and to send the funds to the institutions. The thrift institutions are not in touch with a wide variety of customers to get new money for their All Savers accounts. The brokerage firms on Wall Street are finding their own customers who want to go into All Savers Certificates, who might not have heard of them, and are encouraging them to do so. The brokerage firms are acting as a collection agency.

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