I would like to commend you, Senator Faircloth, for convening this important hearing with Comptroller of the Currency Gene Ludwig. Comptroller Ludwig has been a leader in a number of areas. Under his direction, the OCC has deployed its resources in response to the evolution of a risk-based capital system. Comptroller Ludwig has also participated actively and creatively in the Administration's work on electronic commerce. In connection with that work, Comptroller Ludwig has become a valued spokesman for the need to improve access to banking services for the 24 million Americans that currently are unbanked and are consequently vulnerable to abuse in the marketplace. In addition, this Comptroller has taken the lead in promoting community development lending and has been a forceful advocate for the need to eliminate lending discrimination.
At the same time, during Comptroller Ludwig's tenure, the OCC has been expanding national bank powers. Last November, Comptroller Ludwig issued a new regulation, known as "Part 5", that will allow national banks to establish or acquire subsidiaries that engage in activities that the Comptroller determines to be "part of" or "incidental to the business of banking", even if they are activities that are forbidden to the parent bank itself. The activities of bank subsidiaries can now include underwriting and dealing in securities, underwriting insurance and real estate investment.
The new Part 5 comes at a time in which all the federal bank regulators are in the process of lowering regulatory standards on banks that had been imposed as a matter of safety and soundness. The FDIC recently adopted a regulation that would allow certain state-chartered banks to invest in real estate without applying to the FDIC for prior approval. This regulation changes the operation of a provision of the Federal Deposit Insurance Corporation Improvement Act that was enacted in response to some of the largest and most publicized thrift failures.
And, within days of the Comptroller's announcement of Part 5, the Federal Reserve proposed to eliminate necessary regulatory safeguards on bank holding companies. As we explored in the last hearing of this Subcommittee, the Federal Reserve has proposed eliminating most of the so-called firewalls that are imposed on the operations of bank affiliates that underwrite and deal in securities. These firewalls have served important purposes, the most significant being protection of FDIC-insured banks and the taxpayers who stand behind the Bank Insurance Fund.
The regulatory actions of the OCC, the FDIC and the Federal Reserve, taken together, represent a major change in the manner in which the bank regulators approach safety and soundness concerns. There appears to be a competition in laxity taking place that is permitting banks to engage in regulatory arbitrage. At today's hearing, we focus on the OCC's Part 5 regulation -- its rationale and statutory basis-- as well as its significance in connection with the actions taken by the FDIC and the Federal Reserve.
The Comptroller's statutory authority for the issuance of
Part 5 has been questioned. As one legal expert has written:
Until 1963, the OCC shared this view. However, in 1963, the OCC decided to construe liberally the "incidental to banking" provision contained in the National Bank Act. The OCC determined that it had the authority to promulgate regulations permitting banks to establish operating subsidiaries engaged in businesses that banks could engage in directly. Up until this year, the OCC permitted banks to establish operating subsidiaries in order to house departments of the bank.
The OCC's new Part 5 is a significant and radical departure from even this liberalized practice because it now allows banks to own subsidiaries for reasons beyond the convenience of the bank. The new regulation permits operating subsidiaries to be owned and acquired in order to conduct activities that are categorically impermissible for the bank itself.
The result is a regulation that provides this Comptroller and all subsequent Comptrollers with the discretion to determine what is "part of' or "incidental to banking." This broad discretion could allow a bank subsidiary to engage in virtually any new activity. Given the unprecedented statutory basis upon which this discretion relies, I would strongly urge the Comptroller to implement this regulation with great caution and deliberation, if at all.
For example, I understand that an application has been submitted to the OCC that would permit a bank to engage in real estate development through its subsidiary. The real estate development would be limited to land that is part of the bank premises. Nevertheless, such activity is an unprecedented departure for a national bank as well as a bank affiliate.
I also understand that an application has been submitted that would permit a bank to engage in securities underwriting through a subsidiary that would not be permitted in the bank itself. I have serious doubts about whether a bank subsidiary should be able to engage in securities activities that the bank itself cannot do. If such activities are approved, they should be subject to no less stringent firewalls than historically have been required of a bank affiliate.
I look forward to reviewing these issues with the
Comptroller and thank you, Senator Faircloth, for scheduling this
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