TESTIMONY OF ALLEN J. FISHBEIN on behalf of the CENTER FOR COMMUNITY CHANGE FINANCIAL MODERNIZATION AND H.R. 268 before the SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT of the COMMITTEE ON BANKING AND FINANCIAL SERVICES Feburary 25, 1997 Good morning, Madam Chairwoman and members of the Subcommittee. My name is Allen J. Fishbein and I am the General Counsel of the Center for Community Change and the Director of the Center's Neighborhood Revitalization Project. We welcome the opportunity to testify today on the topic of financial modernization, and also, to comment on H.R. 268, the "Depository Institution Affiliation and Thrift Charter Conversion Act,." and other legislative proposals that would allow banks and other financial companies to own one another. In particular, I would like to focus my remarks on the implications of these proposals for modest income consumers and communities and the need for modernization of the Community Reinvestment Act (CRA). The Center for Community Change (CCC) is a nearly thirty-year old national not-forprofit organization established to assist community-based organizations serving low- and moderate-income and predominately minority areas. Much of CCC's work involves providing research and technical help to local grassroots organizations involved in neighborhood revitalization and community development activities. CCC also monitors the progress of the federal banking agencies enforcement of the community reinvestment and fair lending laws. Summary For some time now, deregulation, new technologies, and increased competition both domestically and from abroad have been reshaping the banking and financial services industries. Judicial rulings and regulatory decisions have further eroded the legal walls that bar banks, securities firms and insurance companies from poaching in each others' businesses. As a result, Congress is contemplating legislation to allow inter-financial institution affiliations, and perhaps, even allow the cross ownership of banks and commercial firms. Industry proponents of the need for repeal of the Glass-Steagall Act and other longstanding laws in this area claim that these changes would promote greater competition between financial services providers and thereby benefit consumers in the form of better and cheaper products. However, from the standpoint of most consumers, the case for acting now seems much less compelling. In fact, in can be argued that wealthier customers are far more likely to purchase new financial services and because banks may not be able to sell comparable services to modest income families, their relative value to these institutions is likely to diminish. Moreover, to the extent such changes would increase concentration within the financial system, as seems likely, it will reinforce the trend already prevalent in banking toward upscale services while further deemphasizing the needs of older urban neighborhoods and rural communities. Unfortunately, all too often the discussion on these topics is dominated by narrow turf issues and various industry "wish lists." Yet, to paraphrase former French Premier Georges Clemenceau's comment about war, "Banking is much too serious a matter to be entrusted to the bankers." The debate over financial modernization and bank restructuring need not be strained solely through a narrow funnel. It can also provide an opportunity for a broader discussion about the type of financial system American families want and need and the types of obligations and public responsibilities of all financial institutions should be required to fulfill to better address the needs of underserved communities and businesses. Should Congress decide after careful consideration of all the relevant issues that these sweeping changes are needed now, we urge that strengthened community reinvestment safeguards and adequate consumer protections also be incorporated into these measures to ensure that broadest possible segment of our society benefits from financial restructuring. In particular, we believe that CRA must be strengthened and adapted to this changing banking environment. This law has proven to be a tremendously effective tool for stimulating lending and capital investments to low- and moderate-income communities, small businesses, and previously neglected minority households. But it must be allowed to keep pace with the changes that occurring within banking and the broader financial services industry. According to some estimates, CRA's impetus thus far has been responsible for targeting over $100 billion to affordable housing, community development projects, and small businesses. At the same time, we know that the base of financial assets covered by CRA requirements is rapidly shrinking. In 1977, when CRA was enacted, banks and thrifts controlled nearly 60 percent of all financial assets. Now, twenty years later, these depository institutions control about half that amount. Consequently, the law stands to become all but functionally obsolete. Regarding H.R. 268, we are opposed to even the relative modest twenty-five percent "basket" for nonfinancial activities of the proposed financial services holding company. We do not favor the adoption of legislation that would permit to even a limited degree cross-ownership opportunities between banks and commercial firms. We do, however, support retention of the Office of the Comptroller's Part Five rule that permits national banks to establish subsidiaries that would be eligible to engage in securities and insurance activities. In favorable contrast to current interpretations under the Bank Holding Company affiliate model, the OCC "op sub" rule allows agency examiners to consider the combined asset base of the bank and its subsidiaries for CRA purposes. Do We Need Financial Modernization Legislation At This Time? In the invitation letter, the Subcommittee asked us to address whether there is a need for financial modernization legislation at this time. We find that in the communities in which my organization works there is a great deal of wariness and skepticism about the need for the major changes that are being proposed for our financial system. And with good reason: Broadening the authority for banks and non-bank financial firms to affiliate with one another will inevitably lead to the emergence of fewer companies dominating the banking and the financial markets. Based upon the experience thus far, at least, it is hard to see how allowing even greater financial concentration. will be good for most Americans. For one thing, there does not seem a need for Congress to move headlong into these changes. At the moment, banks are strong and exceptionally profitable. The FDIC Chairman testified before this Subcommittee only two weeks ago that commercial bank earnings for 1996 are expected to surpass $50 million, a historic high. She also indicated that average equity ratios are at their highest levels in more than 50 years, while nonperforming assets are under 1 percent of total assets, the lowest level in 15 years. Industry proponents of the need for Glass-Steagall Act repeal point to the fact that despite the strong showing of banks, their share of the financial services industry continues to shrink. They argue that a level playing filed is need so that they can better compete. However, consumers in general do not seem unhappy about this current state of affairs. Increased competition from non-bank financial institutions has afforded them expanded opportunities to choose from a broader array of providers of services once offered only by banks and thrifts. Nor does there appear to be any widespread clamor for the emergence of one-stop financial supermarkets to handle all of the needs of consumers. On the other hand, the new authority that is being sought will likely accelerate the pace of consolidation and mergers that is leading to increasing concentration within banking. Consider that between 1985 and 1995, the number of banks and thrifts declined by approximately 34 percent. This consolidation has already increased the concentration of deposits among the nation's largest bank hold companies (BHCs). The ten largest BHCs now control 25.6 percent of deposits, up from 17.4 percent in 1984. The resulting concentration is affecting even the nation's largest markets. For example, the Federal Reserve Board found that based on an index that the Justice Department uses to measure possible antiturst violations, better than 40 percent of the nation's 308 largest metropolitan markets are highly concentrated. In many rural markets, a few banks dominate 90 percent of the business. Bank consolidation and concentration is likely to increase further as the full effects of interstate branching are felt. Today, 27 percent of all bank assets are owned by banks headquartered in another state, up from 11 percent in 1987. Many industry analysts are forecasting the emergence of a “barbell" like effect in the structure of the banking industry. In the near future, we can expect to see a handful of megabanks operating nationally, with several hundred to several thousand small banks remaining to serve rural markets or specialized niches, and few institutions remaining in the middle. Significantly, the banking consolidation that has occurred thus does not seem to have benefitted consumers. In fact, it is likely to be costing them money. Consumer survey after consumer survey confirms that big banks tend to charge consumers higher prices than do smaller institutions. No doubt one of the reasons for these higher prices is that the large banks exercize more market power than smaller ones do in the local markets they dominate. The massive restructuring of banking and the finance industries means that capital is flowing further, faster, and with the potential for less responsiveness to local community concerns than ever before. Giants banks with their far flung deposit gathering networks have no great vested interest in the long run properity of specific local communities, which means that in making credit decisions they will tend to be less sensitive to community effects and more concerned about short run profits. As small, locally-oriented institutions are acquired by the megabanks, the residents of local communities will find that the decisions about the future vitality of their localities are being determined in the board rooms of nationwide banking corporations. Thus, to the degree that cross-ownership of financial companies increases consolidation it threatens to unleash new disinvestment forces, at least for some local communities. Through disinvestment or deposit draining, large financial giants can vacuum up deposits in one area and invest those funds elsewhere. Such disinvestment can trigger, accelerate, or prolong an area's economic downturn. Small firms and small, family farmers are the ones likely to be hit the hardest by consolidation. These customers are enormously dependent upon banks for financing. Yet, large banks lack the same institutional compatibility with small businesses that small banks have. Surveys show that big banks provide only a tiny fraction of the financial for small firms. The demise of locally-based institutions could lead to curtailed credit availability to the most locallybased firms in particular. Consolidation trends within banking also have implications for community development activities. The evidence suggests that big banks with extensive networks are less willing to make smaller-size and non-standardized loans. This stems from the desire of these institutions to achieve certain economies of scale by batch processing their loans. Large banks tend to employ certain operational characteristics, such as: reductions in lending authority of loan officers at the local level; standardization of loan underwriting criteria; and, decreased reliance on characterbased factors. Thus, consolidation could result in tightening the lid on credit availability for affordable housing and community development initiatives, at time when public funding for these efforts has already been cut way back. In sum, these trends need to be considered much more carefully before sweeping financial modernization legislation is acted upon. To the extent that cross affiliations between banks and other types of financial firms fuels the trend toward increasing concentration, lawmakers must craft effective safeguards to protect consumers and communities from the harmful effects of these |