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TESTIMONY OF

MARC E. LACKRITZ
PRESIDENT

SECURITIES INDUSTRY ASSOCIATION

COMMITTEE ON BANKING AND FINANCIAL SERVICES SUBCOMMITTEE ON FINANCIAL INSTITUTIONS & CONSUMER

CREDIT

U.S HOUSE OF REPRESENTATIVES

HEARINGS ON H.R. 268

THE "DEPOSITORY INSTITUTION AFFILIATION AND THRIFT CHARTER CONVERSION ACT"

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STATEMENT OF THE SECURITIES INDUSTRY ASSOCIATION
REGARDING H.R. 268

THE "DEPOSITORY INSTITUTION AFFILIATION AND THRIFT
CHARTER CONVERSION ACT"

HEARINGS BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS & CONSUMER CREDIT OF THE HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES FEBRUARY 10, 1997

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Madam Chairwoman and members of the Subcommittee, I am Marc E. Lackritz, President of the Securities Industry Association ("SIA"). I appreciate the opportunity to participate in this hearing and to present SIA's views on H.R. 268, the "Depository Institution Affiliation and Thrift Charter Conversion Act". Madam Chairwoman, SIA especially would like to commend you for making financial restructuring a priority for this Subcommittee, and for your introduction of this proposed legislation, which further demonstrates your commitment to making progress on the issue of financial services restructuring.

I want to begin by quoting baseball great Yogi Berra -- this is like deja vu all over again. Just as baseball is the annual rite of springtime, SIA testimony on financial modernization legislation has become a traditional rite of each new legislative session. There is an important difference, though. While baseball is timeless and fundamentally the same as when Ty Cobb and Babe Ruth played the game, the financial services

The Securities Industry Association brings together the shared interests of more than 760 securities firms throughout North America to accomplish common goals. SIA members -- including investment banks, broker-dealers, specialists, and mutual fund companies -- are active in all markets and in all phases of corporate and public finance. In the U.S., SIA members collectively account for approximately 90 percent, or $100 billion, of securities firms' revenues and employ about 350,000 individuals. They manage the accounts of more than 50 million investors directly and tens of millions of investors indirectly through corporate, thrift and pension plans. (More information about the SIA is available on its home page: http://www.sia.com.)

industry today has relatively little in common with the industry as it existed in 1933, when Congress enacted the Glass-Steagall Act.2

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In 1933, there was a perceived need and a true ability to separate the deposit-taking function of commercial banks from the securities underwriting and dealing activities of investment banks. In 1997, bank regulatory agencies, technology and competition have blurred distinctions between different financial services providers.

Currently, bank regulatory agencies permit banks to broker any securities, act as investment adviser to individuals, mutual funds and other customers, and perform a wide array of other securities activities directly in the bank or in a bank subsidiary. The Board of Governors of the Federal Reserve System (the "Board") now permits nonbank subsidiaries of bank holding companies to derive up to 25% of their revenue from underwriting and dealing in corporate equity and debt securities. The Office of the Comptroller of the Currency (the "OCC") recently adopted its "operating subsidiary rules," and it is widely expected that the OCC will permit subsidiaries of national banks to underwrite and deal in corporate equity and debt securities. The Federal Deposit Insurance Corporation (the "FDIC") already permits bona fide subsidiaries of statechartered non-member banks to underwrite and deal in such securities. And, banks are permitted to underwrite and deal in government securities to an unlimited extent, either in the bank or in a subsidiary.

Plainly, commercial banks are now in the securities business. Mellon Bank's acquisition of Dreyfus is one obvious example of this fact, but only one of many. By

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As an aside, Ty Cobb retired as a player after the 1928 season. Babe Ruth was still playing in 1933.

contrast, securities firms still are excluded from being in the commercial banking

business.

In the context of today's financial markets, this makes no sense. Banks and securities firms compete to sell securities, to advise mutual funds, and to underwrite and deal in securities. They compete to offer sophisticated derivatives products; financial advice on mergers, acquisitions and other significant corporate transactions; annuities and similar products; debt-financing; and various other retail and commercial products and services. Many of these activities present at least the same level of risk as do securities activities consider the demise of Barings due to the activities of a single derivatives trader. If banks that accept insured deposits can engage in risky derivatives and other activities, and in securities activities, what possible policy objective is being achieved by prohibiting firms engaged in securities activities from affiliating with firms that accept insured deposits?

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In 1933, there was a concern that affiliations between commercial and investment banks could lead to undue concentrations of wealth in the hands of a single financial institution. If this concern needs to be addressed, it should be addressed through the anti-trust laws, not through the banking laws. And, in any event, this concern at most suggests that affiliations between dominant financial institutions should be examined for potential anti-competitive effects; it in no way supports the Glass-Steagall Act approach of a complete statutory ban on many commercial and investment bank affiliations.

More fundamentally, competition has largely made such concerns moot. Currently, there is vibrant competition among over 12,000 banks, large numbers of

underwriting and brokerage firms, mutual fund companies, insurance companies, foreign financial institutions and diversified financial services companies.

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Securities firms can and do affiliate with insurance compar.es, certain credit card and other special purpose banks, and other providers of financial services. These financial services affiliations have led to significant benefits to consumers in the form of new products, and the ability to conduct one-stop insurance and securities shopping. But no anti-competitive effects have resulted from these affiliations. Also, outside of the United States, commercial and investment banking services routinely are offered by the same financial institution, including in many cases by affiliates of U.S. financial institutions that could not provide those same services together in the United States.

Whatever shards remain of the Glass-Steagall Act's prohibition against banks affiliating with securities firms likely will be swept aside by technology. Already, a consumer can sit at her home computer, dial in to her bank, and send checks and buy and sell securities with the click of a mouse. Large and small computer companies are actively looking for ways to expand the electronic banking services that already exist, and banks are actively exploring the potential of electronic banking, the internet, smart cards and the like. Securities firms and individual companies are underwriting and selling securities over the internet. Electronic market places for securities are proliferating. A computer user may not be aware, or for that matter care, whether the financial services provider is a bank, a securities firm or another financial institution, as long as the transaction is successfully completed. Financial services firms more and more are becoming information businesses, where consumers use computers, telephones, newspaper ads and other methods of determining which institution is offering the best

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