You know, obviously the thrifts are going to oppose divestiture. They say, "We have had unitary thrifts for awhile now. They have been good, not bad. They have been helpful to just about everybody who has ever encountered them so, you know, what's the problem?" And there is a debate that is going to take place.

What are we going to do, charter down? Or as I have also said, we ought to charter up.

Mr. McConnell, Dr. Pollard, Mr. Tassey, Dr. Bracewell, do we charter down and divest, or do we charter up and enhance the powers of other financial services? Just give me one word, up or down? Mr. MCCONNELL. Up.

Dr. POLLARD. Up.

Dr. BRACEWELL. Down.
Mr. TASSEY. Up.

Mr. LAFALCE. All right. Thank you.

Another sticky wicket is going to be the securities industry. They are going to say, "Yes, well, if we drive around this cyberspace economy in the future, we want two-way streets, not one-way streets. And we don't like some of the legislation because the one way they go is OK, but they don't permit us to go also. We need a two-way street."

Now, what are your thoughts about that and how do we best accomplish two-way streets which has a certain sound, fair, sound to it, doesn't it?

Mr. McConnell.

Mr. McCONNELL. Indeed. The American Bankers Association feels so strongly about modernization that we, and we realize that in order to get legislation

Mr. LAFALCE. I tell you what, I am going to have to, because of the time constraints, ask for another one. Do you want a one-way street or two-way street?

Mr. MCCONNELL. If "two-way streets" means what is good for "A" is good for "B," then I am for two-way streets.

Mr. LAFALCE. Dr. Meyer, one-way street or two-way street?

Dr. MEYER. Two-way street.

Mr. LAFALCE. Dr. Pollard.

Dr. POLLARD. Two-way street.

Mr. LAFALCE. Mr. Tassey.

Mr. TASSEY. Two-way street.

Mr. LAFALCE. Dr. Bracewell.

Dr. BRACEWELL. We oppose banking and commerce being combined either way.

Mr. LAFALCE. All right.

Now, let's take, deal, with the insurance industry.

The insurance industry has voiced objections over the years to some financial modernization proposals, but recently, within the past 6 months or so, I think that they have gone at least halfway, if not far beyond that, in saying, “OK, we can see a day where we can have affiliation, where bank employees can sell insurance products," and so forth.

But they also say, "We have to have some safeguards, and most especially we need consumer safeguards." Now, some say, "Well, what's a consumer safeguard?" Is it really something you are

throwing up in the road to block the path? And then the devil is in the details.

My question goes to process now. We have the leadership of the banking community here; ABA, IBAA, Bankers Roundtable. Has there been some mechanism to reach out to the insurance industry to say, "Hey, you have come a long way. We want to come a long way, too, in dealing with these consumer issues, working together so we can come to closure amongst ourselves on these consumer safeguards."

Dr. Pollard.

Dr. POLLARD. Mr. LaFalce, I think two points to make. First of all, the Alliance itself is providing a very useful vehicle on all the points you have talked about securities issues, insurance and the like.

Mr. LAFALCE. Are the Independent Insurance Agents a member of the Alliance?

Dr. POLLARD. No. Meeting with the Alliance has been the ACLI, and we have been in discussions with them for more than 6 months. I feel it has been very positive, very progressive. I think we all have the same spirit of trying to work out some language that would make all of this, Mr. McConnell said on functional regulation.

Mr. LAFALCE. How close are we now?

Dr. POLLARD. I think we are fairly close. I really do.

Mr. LAFALCE. Jeff.

Mr. TASSEY. I think that that agreement can ultimately be reached, maybe not without a few amendments, but it can be reached. It is not a show-stopper.

Mr. LAFALCE. All right.

Madam Chairwoman, we covered the principal points I wish to address. Thank you.

Chairwoman ŘOUKEMA. Thank you.

Mrs. Maloney.

Mrs. MALONEY. Thank you, Madam Chairwoman.

At a meeting the Chairwoman mentioned earlier, Mr. Greenspan testified, and I quote, "In times of crisis, firewalls come down."

There is a lot of talk about regulation, but those of us who bailed out the S&Ls will have to say that the regulators didn't do such a very good job. So I am very concerned about the risk to the taxpayer and the insuring fund.

Either in a subsidiary or in an affiliate, new business is risky business. And I would like to know from each of you whether you think that there are adequate safeguards before us in this bill, or in other bills, to avoid the capital of an insurance, of an insured financial institution, being used to shore up a failing affiliate or a subsidiary?

And I don't want to hear that the firewalls are there to protect this. We had Alan Greenspan testify, and I quote, "In a time of crisis, when an affiliate or subsidiary is in trouble, firewalls go down." And I don't want to hear about the regulators.

I want to know, they don't have a very good track record, do they? It was $500 billion in the S&L crisis. But I want to know what safeguards are there in shifting insured capital to bail out a subsidiary or affiliate that is in trouble?

Dr. POLLARD. First, would you like me to take a stab at that?

Mrs. MALONEY. Sure.

Dr. POLLARD. The first comment, Mrs. Maloney, is new business is risky business, I guess I would only disagree to the extent of saying, not all new businesses are risky businesses.

Mrs. MALONEY. I agree. I stand corrected, some new businesses, a wonderful area that we need to get into. But assuming that it is a risky business, assuming that in this particular case that I am putting before you the new business was a risk, a bad financial risk

Dr. POLLARD. Right.

Mrs. MALONEY. And the large, highly-insured financial institution now faces a decision whether they bail out the subsidiary or

not.

There are no firewalls. The regulators aren't there. What safeguards are there to keep insured capital from shifting to, in this case, risky business?

Dr. POLLARD. I guess I would have to say that in terms of what is already in place, there are limitations on shifting money, extensions of credit. The regulators have the ability to step in and monitor and watch what is being done, to examine and ask for reports. There are fraud statutes and other elements if the behavior violates the rules. And again all I am talking about is the banking industry, not the laws that exist in other cases.

Mrs. MALONEY. Well, could you give me, in writing, what these capital standards are?

Dr. POLLARD. Sure.

[The information referred to can be found on page 253 in the appendix.]

Mrs. MALONEY. Exactly what the capital standards are for what size banks. And assuming that the regulator doesn't step in and stop it, is it still fraud that it has shifted if the regulator doesn't point it out? In other words, is it written into the law that a certain percentage of capital must be there to back up the insured bank? Is that the law?

Dr. POLLARD. That is the law in terms of the rules that this committee put in on early intervention and prompt corrective action. They have the ability to go and look at the capital level of the bank, to stop the bank from issuing dividends, to require the bank to increase its capital.

Mrs. MALONEY. What happens if the regulators miss it, they are asleep at the switch, like they were in the S&L crisis, and the bank shifts that money

Dr. POLLARD. Right.

Mrs. MALONEY. And the affiliate fails? Are there still what is in place then?

Dr. POLLARD. What is in place there is what this committee did in FDICIA, which, number one, is to mandate the exams so that they are not asleep at the switch. That is number one.

And, number two, with these levels of capital you can only engage in activities based on being, and in this committee's bill, wellmanaged, well-capitalized. So one of the other management risk tools is risk itself. If you want to do something that has more attendant risk, the regulators have required higher capital; and there

may be higher premiums for FDIC insurance based on the activities in which you are engaging.

Mr. VENTO. Would the gentlelady yield to me briefly?

Mrs. MALONEY. I always yield to the distinguished Ranking Member.

Mr. VENTO. Mr. McConnell testifies that the bill, H.R. 268, provides a holding company regulatory structure based on a risk assessment model that currently is applied to the securities industry. So one of the issues that we have to meld together here, of course, are these, not being as familiar with that as I would like to be. I mean, he says he believes that this model is worthy of consideration, but it may well be that there are other options that should be considered.

So these questions the gentlewoman is asking with regard to these additional activities become very relevant in further consideration with regard to our, and your, concerns about capital.

Mrs. MALONEY. My time is up, but I would certainly, if the Chairwoman would allow other members of the panel to respond to that question, if they have other things that they would like to add to it?

Chairwoman ROUKEMA. Yes, I will permit it.

Mrs. MALONEY. Thank you.

Mr. MCCONNELL. You seem to be looking at me, and I am not sure I am

Chairwoman ROUKEMA. No, don't feel compelled that you have to provide an answer, but if you will.

Mr. MEYER. Perhaps I could give an example

Chairwoman ROUKEMA. Yes, Mr. Meyer, and then Dr. Bracewell. Mr. MEYER. Where this will work. And I think this is a total package. This is not one isolated control or mechanism that has been built into it.

This committee, over the last few years, has implemented a lot of laws which have been interpreted in regulation, that Alfred spoke about and, in fact, are controls.

An example that would apply in a thrift environment is a real estate subsidiary, which is used, and I gave the example of the institution that does real estate development in support of its local community. That is a separately-capitalized institution. There is a limit on how much capital the thrift could put into it.

Now, if it went beyond the authorized amount, obviously then they are getting into a whole host of laws that would be enforced. So there are in place today controls that do limit and, I think, protect the insurance fund from these types of activities.

Chairwoman ROUKEMA. Dr. Bracewell.

Dr. BRACEWELL. I was just going to say, whether the firewalls melt or not depends on how they work in real life under stress. And through my experience with our little bank in Houston, I have been there with a bank under stress and I understand that capital is a subjective thing. It is a negotiated thing between the banker and the regulator when you get into a stress and a survival situation. And while these firewalls exist and the numbers exist, the prompt corrective action measures exist, and it is called "triggered by capital."

I can just tell you that under stress there is negotiation, there is subjectivity and I don't believe we can be safe in relying on the safety of the safety net that protects the banking system on how those are going to operate under stress, when you have the pressure of commercial ownership of banks and the inherent conflict of interest that comes with it.

Mrs. MALONEY. I think your prepared statement is well made. I would be more comfortable if these items were not open to negotiation and subjective interpretation, but were written into law so that it was clear, so that it wasn't up to a regulator and a distressed bank to negotiate what the terms are.

Dr. BRACEWELL. If I could just, excuse me, but the way it is negotiated is, you have a loan at my bank that you are paying on a timely basis, and the regulator reviews your financial prepared statement, and we get into a disagreement about whether your loan is worth 100 cents on the dollar, 98 cents on the dollar, 95 cents on the dollar; or maybe the loan is secured by your house, and you are unemployed and so you haven't paid in 3 or 6 months and the question is, "Is your house worth what you paid for it, 80 percent of what you paid for it, 70 percent of what you paid for it?" So the subjectivity doesn't really relate to how much capital the bank has, but really a series of numbers that end up with capital at the bottom line.

Mrs. MALONEY. I would be more comfortable if capital were defining.

Dr. BRACEWELL. It is only the residual. That is the problem.
Mr. MCCONNELL. I might add something, if I could.

It occurs to me that we all do not want to see anything happen again like happened to cause the thrift crisis and there is certainly agreement here.

There is also agreement, I am sure, among this panel that we want safety and soundness to be held high. But that is part of what happened with FDICIA was that there were specific points at which intervention was demanded by the regulators and took away some of the, perhaps, subjective parts of that. So that it doesn't mean that there won't be new crises.

Somebody once said, "The trouble with making things foolproof is that fools are so innovative." So I don't think we will do that. But I think that we have come a long way and indeed the risks are more manageable than they were before the thrift crisis. Chairwoman ROUKEMA. Thank you very much.

I just want to make a very brief observation here to show how this particular issue requires further concentration of attention on all of our parts. I think your answers have been very constructive and interesting, but let's just understand that firewalls do melt.

What was it, the market crash in 1987, I think was Continental Illinois, in Illinois, and First Option, that was a prime example. But it is a demonstration of how we need not only good regulators but the fundamentals that some of you have talked about that came about in reforms of FDICIA. Maybe they are not going to be adequate for the new expanded powers that we are talking about here, but we are going to have to give intense concentration to that subject and not treat it as though it is only incidental or maybe not central.