Good morning, Mr. Chairman and Members of the Committee. I am Joseph Bracewell, Chairman and CEO of Century National Bank, a $111 million community bank located here in Washington, D.C. I am pleased to have the opportunity to testify on behalf of the Independent Bankers Association of America regarding S. 1405, the "Financial Regulatory Relief and Economic Efficiency Act of 1997."
I would like to thank Senators Shelby and Mack who have been consistently committed to reducing regulatory burdens on financial institutions. Once again, they, along with the other co-sponsors of S. 1405, have taken steps to lift the regulatory yoke from the backs of our nation's bankers. Their bipartisan efforts during the last two Congresses, which have reduced the red tape and paperwork burden on community banks, are greatly appreciated.
Excessive regulatory and paperwork requirements impose a disproportionate burden on community bankers, diminishing our ability to serve our communities, attract capital, and support the credit needs of small business and small farm customers. Because credit unions and other nonbank institutions that perform "bank-like" functions and offer comparable bank products and services are not subject to the same laws and regulations as community banks, we are competitively disadvantaged. Also, disparate regulatory treatment impedes our ability to serve our customers' financial needs and increases costs paid by consumers.
IBAA Supports S. 1405
IBAA is pleased to announce its general support of S. 1405 because it would help to eliminate some of these disadvantages. I would like to specifically mention a few provisions that the IBAA wholeheartedly supports. Of particular benefit, for example, would be: 1) provisions that would expedite procedures followed by national banks to form holding companies; 2) provisions allowing national bank directors to hold office for up to three years; 3) provisions allowing national banks to merge with their subsidiaries or nonbank affiliates; and 4) provisions that would require bank regulators to develop a joint system allowing banks and their affiliates to file call reports electronically, and to make call report data available to the public in electronic format, as well as the new requirement mandating a single reporting form and simplified call report instructions. We also support the provision that would require the Federal Reserve to pay interest on sterile reserves.
The fact is, many changes made by S. 1405 would remove duplicative, unnecessary restrictions that either no longer make sense or are now inappropriate. The bill, taken as a whole, could help enhance the competitiveness of all banks without jeopardizing the safety and soundness of our financial system.
Additional Regulatory Reforms
IBAA would like to urge the Committee to continue its regulatory relief efforts by: 1) considering the repeal or modification of additional burdensome consumer protection and disclosure laws; 2) continuing evolution towards a tiered regulatory system; and 3) adding Federal Home Loan Bank reform provisions to S. 1405.
Consumer protection and disclosure laws, such as the Community Reinvestment Act, RESPA and TILA, should be continually reexamined to determine their costs and benefits and, where appropriate, whether they should be modified.
IBAA also urges this Committee, the Congress and the regulatory agencies to continue building a tiered regulatory system that recognizes the differences between community banks and large, multi-national or regional banks that pose different levels of risk to the banking system. The ideal tiered banking system would have size cutoffs adjusted annually for inflation, thereby allocating the cost of regulatory and paperwork burdens relative to the risk of the institution. Excellent examples are the 1995 amendments to the CRA regulations and exam procedures which established a streamlined, less burdensome exam for institutions with less than $250 million in assets. Senator Shelby proposed, as reported in the press yesterday, to accord banks of less than $250 million in assets an exemption from CRA. This proposal, which would move this important marker forward, would be strongly supported by the nation's community bankers. Also, a tiered structure would be an important step toward restoring true equity in regulation, leveling the playing field within the financial services industry and, most importantly, enhancing customer service.
We also recommend that you amend the bill by adding provisions in S. 1423, the "Federal Home Loan Bank System Modernization Act of 1997." Access to the Federal Home Loan Bank System advances has become increasingly important as community banks search for alternative sources of funding. IBAA supports S. 1423 because it would modernize the FHLB System by expanding System membership criteria, allow for voluntary membership, and improve the System's capital structure.
Troublesome Provisions
IBAA has reservations about changes made by section 305 which would amend bank merger provisions in the Federal Deposit Insurance Act (FDIA) and the Bank Holding Company Act (BHCA). Both Acts currently authorize the appropriate regulatory agency to ask both the Attorney General and federal banking agencies to issue a report reviewing whether or not a particular bank merger is anti-competitive. Section 305 would eliminate the antitrust analysis requested from the other banking agencies, leaving antitrust review to the Department of Justice and the agency processing the application. Because the IBAA, in reviewing the recent history of merger activity, finds that the current dual antitrust review of bank mergers has assured that competition continues, we prefer that the current regulatory review process be maintained.
Business Checking Accounts and Sterile Reserves
At this time, I would like to briefly mention two issues found in sections 101 and 102 of the bill that the IBAA was not asked to specifically discuss, namely the payment of interest on sterile reserves and business checking accounts.
The IBAA has reservations about allowing the payment of interest on business checking accounts, which issue has been vigorously debated at recent meetings of IBAA policy-making bodies. There are strong differences of opinion among community bankers about this subject. As you know, thanks to amendments made to the Federal Reserve Act, banks are currently prohibited by law from paying interest on commercial checking accounts or demand deposits.
A clear majority of community bankers view this prohibition as an outdated restriction that places community banks and their small business customers at a competitive disadvantage. They argue that small businesses have been priced out of managed accounts, while large corporations benefit from access to interest bearing transaction accounts. These bankers believe that they need to be able to offer interest on commercial checking accounts to retain commercial customers. A significant minority feel that smaller banks can offer cost-effective sweep accounts if they want to, and changing the law would increase the cost of funds for smaller banks and make it more difficult for them to compete with other financial institutions.
In light of the fact that there are conflicting views, the IBAA is split on the preferred method of providing deposit-related services. As a result, members of the IBAA recently passed a resolution that supports amending rules applicable to money market deposit accounts to permit one unrestricted inter-account transfer each day. This would enable community banks to remain competitive in providing cash management services to their commercial customers. It also would enable commercial customers to earn a return on their funds, and have funds readily available for use in a demand deposit account.
With respect to the Federal Reserve's payment of interest on sterile reserves, the IBAA believes that this is long overdue. It is time for banks to receive interest from the Federal Reserve on these idle funds. We are pleased that the Federal Reserve supports this provision which it deems key to its conduct of monetary policy.
Conclusion
In closing, I would like to reiterate the IBAA's strong support of the
Banking Committee's efforts to enact regulatory reform legislation. While we
may not support every section of S. 1405, the bill is undoubtedly another step
forward toward helping community banks to commit more of their resources to the
business of banking. Thank you again for the opportunity to testify. I look
forward to answering any questions that the Committee has on these very
important issues.
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