savings associations acquired by these companies has had to be sent over to the Resolution Trust Corporation ("RTC") to be resolved at the taxpayers' expense.

By our estimates, during the 1980's and primarily since 1985, these commercial and industrial holding companies infused at least $1.5 billion dollars into the thrift industry in acquiring savings associations and continued to infuse capital after acquiring these thrifts to the tune of at least an additional $1 billion dollars. This represents money that did not have to be taken out of the pocket of the taxpayer.

Let me cite some specific examples that illustrate these points. One recent transaction involves First Federal Savings and Loan Association of Rochester, New York, an institution that was clearly in troubled condition in early 1991. In a transaction not involving government assistance, the thrift was recently acquired by CT Financial, a major financial services firm that is ultimately controlled by BAT Industries, a diversified commercial corporation headquartered in the United Kingdom.

As part of this acquisition, CT Financial immediately infused $188 million in new capital into the thrift, causing the thrift to come into compliance with all of its fully phased in capital requirements. This badly needed capital infusion would not have been possible had the law prohibited affiliations between a thrift and a commercial company. Moreover, the acquirer in this case has the financial and managerial resources to support the thrift going forward. The taxpayer is thus protected.

Other examples abound. In 1985, the Ford Motor Company acquired First Nationwide Bank, FSB, San Francisco, California. Since then, Ford has infused approximately $1.2 billion into First Nationwide, including the purchase price, to maintain and improve the thrift's capital position. Without this capital infusion First Nationwide would not be in capital compliance and would likely have been turned over to the RTC.

Since 1983, ITT Corporation of New York has infused a total of $35.6 million dollars into ITT Federal Bank, FSB. Weyerhaeuser Corporation has infused over $70 million in cash into its subsidiary thrift institution since the acquisition in August, 1985.

In

The Westinghouse Corporation provides another example. 1990, Westinghouse acquired two Illinois thrift institutions in troubled condition and infused substantial capital at the time of their acquisition.

Time does not permit me to describe each situation in as much detail as I would like. The bottom line, however, is that our experience with commercial and industrial firms affiliating with thrifts has been entirely positive. Such affiliations have

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provided an important source of fresh capital, brought significantly increased management expertise to the thrift business, and fostered improved profitable business strategies. The American taxpayers have been saved several billion dollars and the American consumers have benefited from improved thrift operations.

The Administration's proposal would bring like advantages to the nation's banks. We believe the Administration proposal is carefully structured to achieve these goals in a manner that is entirely consistent with the principles of safety and soundness. In fact, for the following reasons, I believe the proposal is even more stringent in its paramount orientation toward taxpayer protection than is current law.

1. Well-Capitalized Banks Only

First and foremost, a commercial firm could own a bank only indirectly through ownership of a financial services holding company and then, only if the bank was and remained strongly capitalized.

Regulators would have powerful tools to apply to banks within such a structure that fall below minimum capital standards.

The

For example, a holding company whose bank falls below minimum capital standards would face a choice: it could bring bank capital back to minimum standards; sell the bank; or become subject to bank capital standards on a consolidated basis. commercial company would also be prohibited from paying dividends unless it received prior approval to do so from banking regulators. For these reasons, among others, commercial companies would have the strongest possible incentive to build and maintain bank capital at high levels. This provides the most important single protection for taxpayers.

2. Firewalls

The bank would be effectively insulated from its commercial affiliates through strong firewalls.

For example, a commercial parent and its commercial affiliates would be absolutely barred from borrowing from the bank, the financial services holding company that directly owns the bank, or any subsidiaries of the financial services holding company. This would prevent banks from making biased or unsafe allocations of credit to commercial affiliates.

In addition, banks, their financial services holding companies and other financial services holding company subsidiaries would be strictly prohibited from (a) purchasing the financial assets or securities of their commercial parent or commercial affiliates; (b) issuing guarantees, acceptances or

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letters of credit to their commercial parent or commercial affiliates; and (c) extending credit to any customer of their commercial parent or commercial affiliates other than on an arm's length basis consistent with the Federal Reserve Act.

Stringent dividend restrictions would also apply to an undercapitalized bank. This and other limitations would prevent the bank's financial services holding company or its indirect commercial parent from "milking" the assets of the bank.

Finally, the bank regulator would have broad regulatory authority to establish any other funding firewall necessary to prevent unfair conflicts of interest.

3. Safety Net Confined to Bank

Only the insured bank would have access to deposit insurance, the Federal Reserve's discount window, or the federal payments system. Financial and commercial affiliates would have no such access. This principle is critical. The federal safety net cannot be extended to these entities without eroding market discipline, exposing the taxpayer to additional losses, and unfairly subsidizing the activities of affiliates.

4. Abusive Tie-Ins

Some people claim that diversified, commercial firms would force customers to use their affiliated bank. That kind of practice has been against the law for many years, and the current reform proposal would extend the "anti-tieing" provisions to such companies.

5. Concentration of Power

Critics have argued that the Administration proposal could result in inappropriate concentrations of economic power. The federal antitrust laws have protected against undue concentrations of economic power for over a century. There is no reason to think that these laws would suddenly become ineffective if commercial firms are permitted to own banks. Further, there is no problem of undue concentration in banking; on the contrary, the United States has more banks per capita than any other country. Undue concentration should be the least of our worries.

CONCLUSION

I very much appreciate the opportunity to appear before you today. We have discussed some very important and timely issues. The OTS will not hesitate and, in fact, has not hesitated in taking the necessary supervisory action against thrifts owned by commercial and industrial firms to ensure that regulatory violations are corrected and that the safety and soundness of the thrift is maintained.

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to ensure that

I know that we all share the same goals financial services reform protects the taxpayer, benefits the consumer, is fair to investors and enables our financial service companies to compete effectively in the modern world. The pending Administration proposal is, in my judgment, the best way to achieve these goals.

Mr. ROWLAND. Thank you, Mr. Ryan. I note that your statement addresses the administration's bill in detail. Our interest today is in the case study before us. Without objection, we will hold the record open for additional submissions on the broader points addressed in your testimony.

Mr. RYAN. Thank you, Mr. Chairman. [Testimony resumes on p. 66.]

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