adequate capital levels, a concentration in residential mortgage lending presents substantially lower risk than some more diversified portfolios. We should not force institutions that focus on housing finance to abandon a business that not only is profitable but also fulfills a very important public purpose. Given their traditional focus on residential mortgage lending, many thrifts over the years have developed strong ties to their local communities. In fact, just last year, Congress modified the QTL test to allow federal thrifts to more adequately and effectively meet the lending needs of their local communities. As a result, thrifts can now include educational loans and credit card loans in calculating their QTL compliance. Thrifts may also now devote up to 20% of their portfolio to small business lending, the backbone of any community lending program. With these new lending powers, thrifts are able to expand their community lending activities. In our zeal to allow broader affiliations between large financial firms, we cannot overlook the invaluable services that small, local lending institutions provide to their communities. The simple fact is that millions of consumers and businesses prefer to do business with a local institution that they know and that knows them. Any changes to our financial services industry that have the effect of restricting, rather than expanding, the availability of banking services would be a mistake. We must preserve and extend, where possible, the ability of lending institutions to deliver personal, timely lending and other financial services to local communities. III. Conclusion Last year, there was concern that any solution to the BIF/SAIF premium disparity should also include a legislated merger of the insurance funds. As you are aware, the compromise that was struck did not bar a fund merger but, instead, imposed a condition that no insured depository institution could be a savings association for a fund merger to occur. The crux of this provision was to maintain the momentum for charter modernization by preventing a fund merger until charter modernization occurs. The fact that pressures built into last year's legislation to advance financial modernization reforms may no longer be compelling should not, however, dissuade us from pursuing the laudable objective of modernizing our financial services industry. Financial modernization remains as important today as before. We have been unable to move forward, however, because of the dilemma our political process continually poses at what cost, reform? Our nation's financial institutions, though comfortable in their current activities and eager for reforms that will ultimately make them more competitive, are sometimes wary of having their brethren across the street gain the same opportunities. Clearly, we are not in an immediate crisis situation. However, the longer we do nothing, the more ground we concede to non-depository competitors. The time is right for financial modernization and we should move forward to achieve this objective. Some may ultimately pay a price much greater than they were willing to offer, but such a price may be necessary to ensure the long-term competitiveness and viability of our nation's financial services industry. Statement by Congresswoman Marge Roukema Today, the Subcommittee will conclude its first set of hearings on financial services reform. We have already heard testimony from both the federal banking regulators and industry groups. Today, we will hear from the former Chairman of the Federal Reserve, Paul Volcker and various community and consumer groups. Clearly, there is broad support for financial modernization, but key questions remain on the appropriate supervision of holding companies, the mix of banking and commerce, and how best to merge the banking and thrift charters. As previously stated, I introduced the alliance bill HR 268, and I believe it is the best vehicle to bring everyone to the table, Congress has been abdicating its responsibility and regulators are filling the vaccuum. 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 the continuation of an umbrella supervision. However, many industry groups testified in favor of a structure that supervises on the basis of function. - When it comes to banking and commerce, many of our witnesses made the point that rapidly changing technogies are altering the definition of finance as time goes on, 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. I believe we have to probe further and have extended analysis in order to fulfill our duties to insure that a safe and sound structure is attained. Generally, I am referring to the oversight and regulation of this nation's financial institutions' ability to safely compete in the global marketplace. Specifically, i am referring to the federal safety net subsidy" that Fed Chairman Greenspan so vigorously defends. " If we are going to make any effort to "extend the federal safety net, we must be mindful of Mr. Greenspans's warning that we not do so "without understanding the implications of such an extension to the competitive balance and systemic risk of our financial system." This does not simply mean federal deposit insurance. This goes to the Fed's Discount window and the Fedwire as well. A meltdown of either of these systems could have grave consequeces not ony domestically, but thoughout the global payment system. The question remains whether HR 268's holding company oversight is adequate. Specifically, the proposed legislation would leave the agency regulating the lead bank of the established financial service holding company to implement and endorce the assessment and management of risk at the affiliates. The Alliance has maintained that this oversight structure would maintain safety and soundness, the Fed and the SEC (under whose authority the risk management system is modeled), expressed concern this change from the current system would affect the govenrment's ability HR 268 includes a "basket" approach which would allow us to incrementally approach a further mix of banking and commerce is practical. The bill would limit a financial services holding company's non-financial activities to 25 precent of the holding company's total business. While many of our witnesses testified in favor of a much broader mix, this is an issue that deserves our thoughtful and deliberate consideraton. However we proceed, we must be careful to make sure that the appropriate safeguards are in place to ensure that the safety of our insured financial institutions are preserved. This is more than just a matter of "firewalls" between the commerce and banking sides of a business. In this age of "megacorporations," we must ensure that we do not allow too large a segment of the nation's economy to be concentrated in one entity. I was encouraged by Chairman Greenspan's support for a basket approach similar to what we included in HR 268. He indicated that a "small basket" approach should be available to organizations that either have or establish well-capitalized, well-managed bank subsidiaies approach the Fed is already overseeing with Section 20 affiliates. I am most anxious today to hear from our first witness on these compelling issues. Chairman Volcker an |