1. Do you feel that functional regulation would fail because technology has erased traditional distinctions among financial services providers and their products? Can we have regulator overlap or will there be great gaps? My position is not that "functional regulation would (inevitably) fail" in achieving clearly specified purposes - for instance, investor protection, fair market practices, or insurance sales disclosures. However, I do believe the breakdown of old distinctions will inevitably create both overlaps and gaps that would need to be rooted out whatever new arrangements are made. That will be a difficult process at best. What would be truly dangerous would be to neglect the need for coherent oversight of the entire organization from the standpoint of safety and soundness. The idea that that core concern be left to separate functional regulators with their own different priorities, agendas, and individual approaches is logically and bureaucratically unworkable. It would simply invite trouble, inefficiency and conflict, with the taxpayer and the stability of the banking system at risk. 2. If we were to create a committee of regulators, should the lead banking regulator perform a coordinating function of sorts, regardless of the relative size of the bank vis à vis other affiliates? If the bank were very small, with no systemic implications of its possible failure, and if the Government is prepared to stand aside in the event of failure of other affiliates, then it might be argued that a bank regulator need not be in the coordinating or oversight position. What is questionable is the condition I have underscored. In any event, the general "oversight" approach should be reasonably comparable for all financial services firms for equity as well as prudential reasons. Consequently, the oversight role shouldn't be fragmented among 3. You note on page 5 of your testimony that government will de facto step in to support and stabilize the banking system-- stating that is why we regulate, supervise and provide safety net services. Would it be a wise option to separate the government links to the banking system if we enlarge banking's universe? If I understand the question correctly, you raise the possibility of ending all Government support for financial conglomerates, including banks. Whatever theoretical arguments some might advance for such an approach in the name of free enterprise, experience amply demonstrates that no government has been prepared to take such an approach, with its perceived risk of major financial crisis, instability, and prolonged recession. 4. On page 6 of your testimony, you state that one part of the organization cannot be insulated from its affiliate. Would you say that is the case even today? Does it make a difference if the bank is a sister or parent of the affiliate? It certainly remains the case that one part of an organization is dependent on the performance of other parts, especially in financial firms where so much depends on perceptions of strength and confidence. I cannot recall instances of any consequence where management of financial firms do not act to protect troubled affiliates once "the name is on the door" in the words of a former Chairman of Citicorp. And managers typically want the "name on the door" precisely because they want to operate the business as a coherent whole. The dangers are clearly amplified if the bank is the direct parent. 5. How do you view the effect of having the FRB as the regulatory overseer on our financial institutions as they There is no doubt that the Federal Reserve has greater respect than any other American regulatory authority internationally. It has the closest relationship with foreign authorities. It is well known to foreign banks and investment banks. - Relationships between the regulator and regulated are seldom easy and free of friction not if the regulator is doing its job and the regulated are testing the limits of their flexibility. The Fed has sometimes been criticized as being cumbersome and heavy-handed, among other things hampering the competitiveness of American institutions operating abroad. However, I have heard less of that criticism in recent years, and I believe even those regulated respect its competence and independence. 6. What is your view of the FRB's recent Section 20 expansion? Isn't that incrementalism? Whether or not the Fed's recent decisions on Section 20 liberalization are good or bad regulatory practices or tactics given present law, I have no doubt that the substantive effort has been to move in a direction generally perceived to be appropriate. I have no doubt that Congress has been derelict in not taking the lead and clarifying the broad "rules of the game" so that the Fed would have clearer direction on how to accommodate to existing facts. I hope that oversight can be remedied this year. In sum, if the Fed action can be characterized as "incrementalism", it is moving in the right direction substantively. An approach of "testing" and "enlarging" limits gradually may be justified. Incrementalism in permitting bank/commerce combinations would be moving in the wrong direction. Small steps would only encourage further steps, precisely the pattern with respect to Sec. 20 decisions. The difference is that, inexorably, the pressure would be in the wrong direction. 7. As incrementalism has clearly happened under the current underlying laws? Why not just leave it alone? The world will not end if present law is unchanged for another year. I would prefer that result, if the price of legislation were to start on the road to banking/commerce combinations which present law pretty well stops. But it would be far better to change, modernize and rationalize present law. The present legal and regulatory patchwork unnecessarily favors some institutions over others, creates competitive inequities within the U.S. and internationally, leaves important questions of regulatory jurisdiction unresolved, and, frankly, has had the practical result of loss of Congressional direction and excessive regulatory freedom of action. The agencies are not only administering law but, de facto, rewriting law. While some of that has been in directions generally agreed to be appropriate, some of it is not. Rather, it bears the imprint of parochial bureaucratic concerns and industry special pleading. The time has long since come for Congress to carefully resolve these issues in a way that reflects the general interest. The injection of the banking/commerce question has plainly jeopardized the possibility of a consensus. That is itself a strong reason to take the issue off the table as soon as possible. U.S. Board of Directors Alaska PIRG California PIRG Colorado PIRG Connecticut PIRG Florida PIRG Illinois PIRG Maryland PIRG Massachusetts PIRG PIRG in Michigan Montana PIRG New Jersey PIRG New Mexico PIRG U.S. PIRG Public Interest Research Group National Association of State PIRGS. Madame Chairwoman Roukema, Representative Vento and members of the committee, my name is Edmund Mierzwinski and I am the Consumer Program Director for the U.S. Public Interest Research Group, the national lobbying office for the state PIRGs, which are non-profit and non-partisan consumer and environmental advocacy groups with members around the country. I appreciate the opportunity to testify before you on the issue of financial restructuring and modernization. As you know, the PIRGS and other consumer groups have investigated and challenged numerous unfair bank practices over the years. U.S. PIRG, the state PIRGS, the Consumer Federation of America, Consumers Union and the Center for the Study of Responsive Law have published a series of reports documenting the unanticipated effects of 1980s deregulation on consumer pocketbooks. Regardless of whether the legislative proposal before the committee today, or similar proposals from Chairman Leach, Chairman D'Amato (and Reps. Baker and LaFalce), are enacted, consumers will face increased strains in a less regulated marketplace. It is incumbent on this committee to ensure that steps are taken to ensure that proposed legislation (1) solves problems already identified in the marketplace and (2) anticipates potential problems. In a recent letter to Chairman Leach, U.S. PIRG joined other consumer groups in identifying four principles which the legislation must address to ensure consumers are protected. First, any bill must close the loopholes that allow banks to sell securities We concur with the detailed analysis in Consumers Union's testimony today that H.R. 268 does not adequately solve this critical problem. First, Section 301 applies only to banks operating under the new Financial Services Holding Company Structure. Further, even the effect of Section 301 is limited by other sections of the proposed bill. 218 D Street, SE Washington, DC 20003 (202) 546-9707 |