Now that we are in era of profound change, technologically, we have to be very cautious as to what they are prevented from doing in what we might perceive initially as a commerce area, but, in fact, can turn out to be intimately linked with their core business.

Mr. DOWNEY. As I testified, we have some experience, albeit limited, with the unitary holding company model. In that regard, we have found the mixing of banking and commerce to be very beneficial to the thrifts themselves. Again, our experience is very limited. If you take a look at the participants that have entered the thrift industry, including Ford, Sears and others, and infused capital, all worked well from our perspective, and protected the insurance fund.

Again, I don't think there is any magic number on the amount of commerce that should be permitted to be combined with banking. I think the safeguards, at least that we have experience with and that we have had in place, including Sections 23(A) and 23(B), and the fact that thrifts can't lend to affiliated commercial companies. You can't lend to your parent if it is involved in commerce, and other types of safeguards, have worked very well. Although the thrift industry experience is limited, it has largely been beneficial to the affected thrift institutions.

Chairwoman ROUKEMA. Thank you.

Let me use my prerogative here and just make one observation. based on that last question. I am a battle scarred veteran of the savings and loan wars of the 1980's, and I remember it. So whether it is a 25 percent basket or not, I certainly am with the incremental approach that Mr. Greenspan articulated, and certainly I am with Ms. Helfer, once that genie is out of the bottle, you can't get it back. We need experience and understanding. And I think opening the door, as some legislation would have us do, I think, would be very ill advised and show that we haven't learned much in the last 15 years. But that is my own particular bias.

Thank you very much. I greatly appreciate your contributions to this debate. And we will be submitting, as you have heard, questions in writing for you, of course. We hope you will feel free and take the time to further amplify in writing on your statements and the issues as we focused on them today.

Chairwoman ROUKEMA. Thank you very much.

The hearing is adjourned.

[Whereupon, at 2:30 p.m., the hearing was adjourned.]

FINANCIAL SERVICES MODERNIZATION

TUESDAY, FEBRUARY 25, 1997

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND

CONSUMER CREDIT,

COMMITTEE ON BANKING AND FINANCIAL SERVICES,
Washington, DC.

The subcommittee met, pursuant to call, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema [chairwoman of the subcommittee] presiding.

Present: Chairwoman Roukema, Representatives Bereuter, Barr, Kelly, Paul, Leach (ex officio), Vento, LaFalce, Watt of North Carolina, Bentsen, and Kilpatrick.

Chairwoman ROUKEMA. The hearing will come to order.

I do appreciate the attendance of my colleagues here today. We are under the unfortunate circumstance of the timing here. We had fully expected that today would be a voting session, but apparently it is not, so some Members have been delayed in returning to Washington after the President's Week recess.

Again, as I am sure all in this room know, but we want to have it on the record, and certainly Mr. Volcker knows, and the other panelists should know, that these records are all official records of the subcommittee and the full committee and the full testimony will be available not only to the public and the press, but in detail to every Member of the committee.

Today, we are concluding our first set of hearings on financial services reform. We have already heard testimony from both the Federal banking regulators and industry groups over a period of a week-and-a-half. Today, we will hear from the former Chairman of the Federal Reserve Board, Paul Volcker, and various community and consumer groups. We are certainly appreciative of the fact that Mr. Volcker has taken time out of his busy schedule, a schedule that takes him both nationally and internationally, rearranged his schedule in order to be with us here today.

and

I, for one, am encouraged by the amount of agreement that has been expressed by the participants in these hearings so far. Clearly, there is broad support for financial modernization, but key questions, and I hope not intractable questions, remain as to the appropriate supervision of the holding companies, the mix of banking and commerce which is a contentious issue and how best to merge the banking and thrift charters.

As I have previously stated, both in my questioning period and my opening statements, and certainly when I introduced the socalled Alliance Bill, H.R. 268, I have stated that I considered that (123)

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legislation to be the best vehicle to bring everyone to the table to iron out agreements and what is in the best interest of this country and financial services.

Congress has been abdicating its responsibility for all too long and, as we know, the regulators have been filling the vacuum.

While everyone seems to agree on the need for reform of our current system of regulating holding companies, the consensus ends there. We heard Chairman Greenspan make the case for continuation of an umbrella supervision. However, many industry groups testified in favor of a structure that supervises on the basis of function. Indeed, referring to Mr. Greenspan's assessment, the questions remain as to whether H.R. 268's holding company oversight is adequate.

Specifically, the proposed legislation would leave the agency regulating the lead bank of the established financial services holding company to implement and enforce the assessment and management of the risk of the affiliates. The Alliance maintains, and has so testified, that this oversight structure would maintain the safety and soundness. The Fed and the SEC, under whose authority risk management system is modeled, expressed great concern that this change from the current system would affect the government's ability to monitor systemic risk.

When it comes to banking and commerce, there are continuing concerns. Many of our witnesses made the point that rapidly changing technologies are altering the definition of finance. As time goes on, it has been stated over and over again, it will be more difficult to tell the difference between financial institutions and nonfinancial businesses. That very fact dictates that we carefully review the current legal barriers between banking and commerce.

House Resolution 268 includes a "basket" approach, which would allow us to approach the issue incrementally with a further mix of banking and commerce. The bill would limit financial services holding companies non-financial activities to 25 percent of the total business. While many of our witnesses testified in favor of a much broader mix, this is an issue that deserves a thoughtful and deliberate consideration, and I am confident that Chairman Volcker will address this issue.

However we proceed, we must be careful to make sure the appropriate safeguards are in place to ensure the safety and soundness of our insured financial institutions and to assure that they are preserved. This is more than just a matter of firewalls between banking and commerce. In this age of megacorporations, we must ensure that we do not allow the largest segment of the Nation's economy to be concentrated in one entity.

I was certainly encouraged by Chairman Greenspan's support for the "basket" approach, similar to what is included in H.R. 268. He indicated that a, quote: "small basket" unquote, approach should be available to organizations that either have to establish well capitalized and well managed bank subsidiaries, an approach the Fed is already overseeing in Section 20 affiliates.

In any event, we are most anxious to hear from our witnesses today, our first panel and the second panel representing the various consumer and business groups.

[The prepared statement of Hon. Marge Roukema can be found on page 560 in the appendix.]

With that, I will open it up for comments from my colleague, Mr. Vento, the Ranking Member of the subcommittee.

Mr. VENTO. Thank you, Chairwoman Roukema.

I would like to welcome our witnesses, especially Paul Volcker, who has graced this panel and this Congress with past testimony and service at the Federal Reserve Board and in other capacities.

I think that the tone that you struck in your opening comment is about right, that almost everyone agrees with modernization. Most everyone talks about harmonization, integration, the convergence of the various financial entities that sustain our mixed economy as, in fact, overlapping in significant ways and in the way they function in this economy today.

Updating the law, it is interesting, of course, that we deal with regulators, former regulators, like Mr. Volcker and others who come here who help us, tell us, what we really meant by the Holding Company Act and others, and the courts.

In any case, in his testimony talking about that it is very interesting to reflect upon it. I guess at one time I was of the mind that we could actually have more separation of these functions, but I think today it is pretty apparent to almost all that that is not the case, just calling our attention to money market mutual funds that have now eclipsed the deposits in other institutions.

In any case, everyone agrees that deposit insurance should not be spread to parts of the market, other parts of the free market; that we should not displace that; that we, in fact, need to have functional regulation. There is, I think, one aspect of the measure that we have before us, as we know, a bill that was largely put together by some of the competing groups to try and find some common ground. I think that that is helpful. But I think one aspect, or one group that has not been heard from, or reflected altogether in this, is the consumer groups. So their testimony, I think, will be key.

We know that we need, throughout this process of the expansion of powers and functions, disclosure, accountability, transparency, up to the point where we are dealing with proprietary information. And, in fact, if we accomplish our task right I think that we should keep in place the consumer protections, if not enhance them and reinforce them.

Just as we are extending powers and a new role and responsibility to financial entities, we should be certain that the consumers, in essence, that the consumer law that has, that does serve the constituencies that we represent, it follows, that in fact the franchises and the enterprises that are spin off from and are developing in the marketplace actually provide the foundation of credit and financial services that are necessary and needed by the constituencies we represent, both the consumers, as I said, the businesses and something called the social welfare.

Obviously, all within the mantle now, while we may agree generally upon where we are going, of course, there are differences about how we are going to regulate and how we are going to achieve that in law. I think, though, that that hopefully can be done, if not perfectly, I don't think we are going to work ourselves

out of a job here, but I think that we should, in fact, put in place a new foundation, as it were, with regard to these powers and recognize that we are going to have to carefully follow and make certain there is accountability and that it is working smoothly to accomplish the objectives that all of us have for the success of our economy.

So it is really a privilege, I think, to have someone like Paul Volcker come and participate, who has done the work. While we may not all agree with his conclusions, we certainly appreciate his participation, Madam Chairwoman. Thank you.

Chairwoman ROUKEMA. Are there other opening statements on our side?

Chairman Leach, do you have an opening statement? We are honored by your attendance.

Mr. LEACH. Thank you, Madam Chairwoman. No, I don't. I just wanted to welcome Mr. Volcker. Pleased to be with you. Thank you.

Chairwoman ROUKEMA. Congressman LaFalce.

Mr. LAFALCE. Yes. Thank you very much, Chairwoman Roukema. It is always a pleasure having Chairman Volcker before us and I look forward to his insights.

I think the stars are in alignment right now in 1997 and 1998. I think it is possible to bring about financial modernization, in part because of the players in Congress and the Administration but, in part, too, because some institutional groups that had hitherto had one position have now come to have a different position, so there is more consistency amongst the groups; the securities industries and the insurance industry, along with the bulk of the traditional banking industry that now is much closer together than they have ever been before.

But there are going to be at least two very sticky wickets. You know, one is banking and commerce. And we can't just say, “Oh, put that aside." I just think that is an impossibility to just put it aside. We must deal with it. The question is how we deal with it. We have a mixture of banking and commerce today and we have prohibitions against banking and commerce. It is all a question of how you define it.

There are some financial institutions that are able to do more than other types of financial institutions, and so forth. So there is a wide range there. I am hoping that we can come up with some consensus so that we do not have to take the approach just: A: Forget about it or; B: All or nothing at all. There may well be something that we could reach consensus about on that.

But whatever we do, the most important thing in this modernization effort, especially with the technology that exists today, is that we do not lose sight of the consumer. And I presently believe that none of the bills before us, including the one that I have cosponsored, adequately deal with consumer concerns. I think it is imperative that we not have a final product unless it, at the very least, adequately deals with consumer concerns.

There are a host of consumer concerns, but whenever financial institutions are offering a multiplicity of products, it can be very confusing, and we must make sure there to minimize the confusion and minimize any potential intimidation, and so forth.