Thank You and Good Morning
Last fall as we were concluding our deliberations on the Gramm-Leach-Bliley Bill I suggested to Chairman Phil Gramm that it would be necessary for the Banking Committee to follow our bill drafting efforts with extensive oversight hearings. At the time, I had no specific hearing ideas in mind, but it was clear that a bill with as many significant components as Gramm-Leach-Bliley would bear careful oversight scrutiny.
In that spirit, the Securities Subcommittee held an oversight hearing in April on the NARAB provisions of Gramm-Leach. As everyone will recall, the NARAB provisions call for cooperative action by a majority of U.S. states and territories. Such a provision, requiring cooperative efforts from multiple players is a good example of a clear need for oversight .
Today we are holding a second oversight hearing. Because of both the significance of the issue and the overlapping jurisdiction, my colleague, Senator Bennett, Chairman of the Financial Institutions Subcommittee and I agree that a joint hearing of our two subcommittees will best serve this purpose.
The merchant banking provisions were among the most hotly debated, and carefully considered provisions of the bill. Opponents of including merchant banking had two particular concerns. The first concern focused on the implications of extending the government insurance of liabilities through the Federal Deposit Insurance Corporation to subsidiaries of banks or activities of banks which are outside the definition of financial services or financial products. This extension of the FDIC insurance umbrella was thought by many to be inappropriate.
The second concern we heard was that a historic separation had been maintained between "commerce" and banking and that separation had served the country well for many years and should not now be altered. Both of these concerns are legitimate and worthy of our careful consideration.
As the Gramm-Leach-Bliley deliberations came to a close we addressed the first issue by restricting merchant banking activities, at least for the first five years, to either securities or insurance subsidiaries of the newly authorized financial holding company. Therefore, no merchant banking activities will be conducted either in the bank, or a subsidiary of a bank, for at least five years.
Dealing with the "commerce and banking" issue was a bit more complex. The separation of banking and commerce- as we knew it for many years occurred at the bank level with the passage of Glass-Steagall in the 30s and at the holding company level with the passage of the Bank Holding company Act amendments in 1970. Additionally, banks and bank holding companies currently have some merchant banking authority either through SBICs, direct investment authority, or through Edge Act Corporations as regulated by Reg K. State chartered banks have similar authority through section 24 of the Federal Deposit Insurance Act. The complexity of the issue was heightened by the clear need to create a "two way street" allowing depository institutions access to the securities and insurance industries, and each of those industries opportunity to enter the banking or thrift businesses. As securities and insurance companies had full merchant banking authority, restrictions on merchant banking had the potential to, in effect, make the two way street a one way street as a financial holding company with tight restrictions on merchant banking would be unappealing for securities firms in particular.
With those considerations in mind, a balanced approach to merchant banking became part of the final bill which had all the earmarks of a true compromise, in that it was not the first choice of anyone, but ultimately supported by most parties.
The bill also provides that the Federal Reserve Board and the Secretary of the Treasury may issue regulations implementing this Act to "assure compliance," "prevent evasions," and "protect depository institutions."
On March 17th the Treasury and the Federal Reserve Board issued interim rules and a request for comment on proposed regulations on the merchant banking provisions.
Our oversight hearing today will focus on the interim rule and proposed regulation. Our focus today will be to examine the extent to which these proposals reflect the intent of Congress in implementing the merchant banking provision or if, as some have suggested, they go well beyond the intent of the legislation and have policy implication which differ from Congressional intent.
For our hearing today we will have two panels. The first will include two distinguished representatives from the executive branch. The Honorable Gary Gensler, Under Secretary for Domestic Finance, Department of the Treasury and the Honorable Laurence H. Meyer, Member of the Board of Governors, Federal Reserve System.
On our second panel we have five representatives of industry. We have, from Boston Massachusetts (Senator Kerry may be in attendance and wish to introduce him) Frederick Fritz, President of BancBoston Capital; from New York City (Sen. Schumer may wish to introduce) Jeffrey Walker, Managing Partner, Chase Capital Partners; Marc E. Lackritz, President, Securities Industry Association; I am particularly pleased to welcome a Minnesotan today, John P. Whaley Partner, Norwest Equity Partners, and Joseph S. Bracewell, Chairman and CEO, Century National Bank. Mr Bracewell is from Washington D.C., but he today is representing the Independent Community Bankers of America which was first started in Sauk Centre, Minnesota. Welcome to each of you.
Before we hear from the first panel I will ask for opening comments from my Senate colleagues.
We will now hear from our first panel. After the first panel concludes, we will immediately hear from the second panel. Mr Gensler, you may proceed.