I am William A. Fitzgerald, chairman and CEO of Commercial Federal Bank of Omaha,
Nebraska. Commercial Federal is an $8.9 billion asset institution headquartered in Nebraska,
with operations in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, and Oklahoma. I also
serve as second vice chairman of America's Community Bankers. I am here today to present the
association's views on financial modernization and H.R. 10. ACB is the national trade
association for 2,000 savings and community financial institutions and related business firms.
The industry has more than $1 trillion in assets, 253,000 employees and 14,500 offices. ACB
members have diverse business strategies based on consumer financial services, housing finance,
and community development.
As a progressive voice for more competitive banking and financial services, ACB seeks to
preserve the flexibility of the thrift charter and holding company structure, while improving the
bank charter. This will provide maximum choice for all financial firms, enabling them to adapt
to the needs of their customers and communities.
The Changing Role of Banking
The share of consumer assets that banks and thrifts hold has decreased over the years. In the
past, consumers typically did a vast majority of their financial business with banks and thrifts.
They now use a wider variety of financial services, including insurance and securities products
and mutual funds, to meet many of their day to day and long-term financial needs. At the same
time, many securities and insurance firms offer almost every banking product, one way or
Despite these changes, consumers, homebuyers, students, and small businesses still rely, to a
great extent, on depository institutions to meet their credit needs and as a secure place to keep
their savings. However, the ability of banks and thrifts to provide these essential services is
weakened by the legal restrictions on their ability to offer the full range of financial products that
their customers demand. This is especially troubling, because now that the era of big
government is over, our reliance on the private sector to provide affordable credit is key to
economic growth and vitality.
Banks and thrifts are a crucial source of credit for economic development purposes, providing
loans to business, state and local government, and consumers. If banks and thrifts are weakened
by competitive inequities, they will be less able to play their vital role in private-sector economic
development. While true financial modernization legislation would strengthen the banks and
thrifts, its ultimate purpose is not to bolster any particular financial sector, but to ensure that all
parts of the economy have access to the credit, investment, and deposit services they need.
Competing Industries or Different Business Options?
ACB believes that the public interest would be best served if all financial firms had the choice to
include in their corporate family firms that offer the services of a bank, thrift, insurance
company, securities firm, or mutual fund. Such ability to choose would improve
competitiveness and increase the public's access to financial services.
H.R. 10 takes a fundamentally mistaken approach to financial modernization. Rather than
seeking to improve the public's access to financial services, it seeks to mediate among various
sectors. Policy makers should recognize that we are moving toward an integrated financial
industry with a variety of options that can be offered by all financial firms. For example, the
thrift charter with its focus on consumer and home finance is available for use in a wide
variety of business structures. Hundreds of thrifts are in the mutual form of organization, while
many have converted to stock form. Some are owned by diversified financial firms, and others
by bank holding companies. A small number of commercial firms have thrift affiliates within
unitary holding companies. Finally, hundreds of stock thrifts operate in non-diversified unitary
Mutual funds provide a similar example. In recent years all types of financial firms, including
banks, have become involved in the mutual fund sector. It is neither a question of a bank or
insurer "getting into" the mutual fund business, nor one of a mutual fund "getting into banking"
or "getting into insurance." Mutual funds, like thrifts, are simply another business option
available to any firm that believes it can best serve its customers' financial needs by offering
This approach would leave ample room for functional regulation. Thrifts and mutual funds
provide good examples of how this already works. The thrift regulator supervises the thrift and
ensures it meets its responsibilities as a thrift, regardless of its other affiliations. Similarly,
virtually any firm may provide mutual fund services, as long as the mutual fund meets its
statutory and regulatory requirements.
Another section of our testimony includes our views on specific provisions in H.R. 10.
However, even if these provisions are improved, ACB believes that the bill's approach is
fundamentally flawed. Unless Congress recognizes that it is dealing with one industry the
financial industry rather than a series of competing industries that need to be protected from
one another, it will assume the role of referee. Instead, Congress should set the rules of the road
and allow the marketplace with appropriate safety and soundness requirements and investor
protections to determine the services each firm can offer.
ACB had hoped that the Alliance for Financial Modernization which we helped organize
would advance proposals consistent with these principles. The Alliance included representatives
from virtually every financial sector. While we shared a vision of financial modernization, we
like the House of Representatives were unable to reconcile conflicting agendas.
Improving the Bank and Thrift Charters
A linchpin of a modernized financial industry would be improved and more flexible banking and
thrift charters. Banks and thrifts must continue to be the primary providers of credit and deposit
services to consumers and businesses. To strengthen this role, banks and thrifts need to be able
to offer the full range of financial services at any level. H.R. 10 deals with part of this issue by
proposing a very broad definition of financial activities that are permissible for financial holding
Expanded holding company authority is helpful, but many institutions particularly smaller ones
will find it more economical and efficient to pursue new activities within the depository
institution itself or through separately capitalized subsidiaries. They should be able to offer a full
range of financial services either in the depository institution itself, through a subsidiary, or
through a holding company affiliate based on their business judgment and particular needs.
Corporate separation, if needed, can be achieved as effectively using the bank-subsidiary model
as with the holding company format. The rules of capitalization and their enforcement not the
formal structure are the key factors.
Applying H.R. 10's flexible definition of "financial" to all corporate levels would deal with a
number of deficiencies in the current bank and thrift charters and holding company structures,
Bank holding company acquisitions of securities firms are subject to arbitrary limits under the Federal Reserve's section 20 rulings (though those limits have been substantially liberalized);
National banks may sell insurance virtually anywhere, but must do it through an agency located in a place of 5,000 or lesser population;
Bank holding companies may not acquire an insurance underwriter;
The OCC's Part 5 which has the potential to permit a broad range of financial activities in bank subsidiaries will undoubtedly be challenged in lengthy litigation as it is fully implemented; and,
Thrifts may sell insurance only through service corporations or holding company affiliates.
Unitary Thrift Holding Companies and the Thrift Charter
Some are claiming that the ability of thrifts to affiliate with non-bank firms through the unitary
thrift holding company is some kind of new "loophole." This is wrong. In 1967 the Savings and
Loan Holding Company Amendments continued the long-standing policy permitting a unitary
thrift holding company (a company with a single thrift) to engage in any activity that was not
detrimental to the thrift's safety and soundness. In contrast, the 1970 Bank Holding Company
Act Amendments limited banks to affiliations with firms closely related to banking.
H.R. 10 continues to distinguish between affiliations permitted for banks and thrifts. It requires
financial holding companies (FHCs) that own banks to divest their commercial activities. In
contrast, unitary thrift holding companies in existence or applied for by March 31, 1998 may
retain all their existing activities and add other non-financial activities. (Unfortunately, newly
formed thrift holding companies are restricted to activities permitted under today's version of the
Bank Holding Company Act; it denies them both the broad affiliation rights available to unitary
thrifts and the financial affiliation rights available to FHCs. This issue is discussed in more
detail in another section of this testimony.)
Critics of the unitary thrift holding company structure complain that it is an unfair competitor.
This is misguided. The bank and thrift charters and their holding companies each have their own
strengths and weaknesses. Banking firms enjoy unlimited commercial lending authority and are
well suited to conducting overseas business. The thrift charter is well suited to housing and
consumer lending; the Qualified Thrift Lender test requires thrifts to devote 65 percent of their
assets to home mortgages, consumer, and education lending. In addition, thrifts' commercial
loan authority is limited to 10 percent of assets, with an additional 10 percent available to small
businesses only. No thrifts operate foreign branches or do foreign lending. The thrift charter is
an excellent consumer banking platform, not an unfettered mixture of banking and commerce.
Most significantly, complaints about "unfair competition" ignore the fact that any bank may own
and operate a thrift or convert to a thrift charter. Similarly, a thrift may convert to a banking
charter. So, any institution may shift charters if it believes that is necessary to be competitive.
While there is increasing interest in the thrift charter, there is no unseemly rush to charter thrifts
and thrift holding companies. Office of Thrift Supervision (OTS) Director Seidman has noted
that, "The number [of thrifts] leaving OTS jurisdiction still surpass those coming under our
supervision." (Speech before the Exchequer Club, January 21, 1998) And, the OTS is closely
scrutinizing applications from major firms, such as insurance companies, to ensure that the thrift
will be operated safely, soundly, and with full regard to Community Reinvestment Act
Interestingly, most of the major firms that have recently applied for thrift charters are primarily
devoted to financial services. H.R. 10 itself would permit any financial firm to affiliate with full
service commercial banks. Even commercial applicants e.g. GE Capital and Ford are seeking
to convert banks or financial firms they already own into thrifts.
In any case, ACB believes that the danger of mixing banking and commerce is overstated.
However, those who have such concerns with respect to banks should not have the same concern
about providing thrifts with more flexible affiliation options. While banks and thrifts have many
common features deposit insurance, capital requirements, and strict safety and soundness
regulation, to name three clear differences remain. Banks enjoy unlimited commercial lending
authority, which raises concerns that if affiliated with commercial firms those banks could
misuse that authority. In contrast, thrift's commercial lending authority is strictly limited, as
indicated earlier. Further, thrifts must meet a qualified thrift lender test that requires them to
devote a substantial share of their assets to home mortgages, consumer loans, or student loans.
As OTS Director Seidman has pointed out in a recent interview, "having a depository institution
where only 10% of the assets can be in unrestricted commercial loans and anything more up to
20% must be in small business loans is not exactly how you create a keiretsu." (USBanker,
March, 1998, p. 42)
Given these differences between the asset powers of banks and thrifts, Congress should reaffirm
holding companies' competitive choice: if you wish to maintain a substantial commitment to
your commercial business, you may only affiliate with a thrift and you must maintain its
commitment to housing and consumer lending. You must also abide by its limitation on
commercial loans. On the other hand, if a bank's commercial lending authority is critical to your
business plan, then your commercial affiliations must be limited. This presents firms with a
trade off between two desirable business options rather than a one-size-fits-all government
Congress should not be misled by fear mongering claims that unitary thrift holding companies
pose any special risks. According to Treasury Undersecretary John Hawke, "there is no history
of problems attributable to the unitary holding company format." (Speech before the
Association of American Law Schools, January 8, 1998). OTS Director Seidman made a similar
point just two weeks later regarding commercial affiliations, saying that, "So far, our experience
with the relationship between a commercial or major financial entity and a subsidiary or
affiliated thrift has been good, and devoid of any serious problems," (Speech before the
Exchequer Club, January 21, 1998). Nevertheless, in recent testimony Director Seidman
indicated that the OTS will examine whether the agency should increase is regulatory oversight
of these holding companies to supplement its careful supervision of all transactions between
thrifts and their holding companies.
Of course, regardless of the type of holding company regulation, all depository institutions must
adhere to the same statutory capital, prompt corrective action, regulatory restrictions, and
supervisory standards. Bank and thrift regulators must ensure that activity at the holding
company level will not increase risk to the depository institution or to the FDIC.
Dual Banking & Dual Chartering Increasing Market Choice
The thrift industry strongly supports the system of dual chartering, providing for both state and
federal chartering of banks and thrifts. It leads to a creative tension between state and national
chartering authorities, which is the primary value of the dual banking system. ACB sees a
similar value in the creative tension between the banking and thrift charters, one that is adding to
business and consumer choice.
One element of that creative tension is the ability of diverse companies to affiliate with thrifts.
Most recent thrift applications by these companies have been for federally chartered institutions.
However, a state-chartered savings bank may also become a "unitary" if it agrees to meet the
qualified thrift lender test under the Home Owners' Loan Act. As a result, thrift holding
companies for state-chartered savings banks may also expand into diverse businesses.
While there has been a recent spate of interest in federal thrift charters, hundreds of federal thrifts
have converted to state charters since 1989. Many were responding to state-initiated
improvements in banking charters. States have enacted modernized savings bank laws, improved
existing state charters, or provided parity among all state charter types.
Last year, Maine provided the latest example of an improved banking charter available to all
depository institutions in the state. Maine's commercial banks and thrifts now operate under a
universal bank charter that permits them to engage in the full range of financial activity,
providing the tools that enable them to compete in a dynamic banking environment. In addition,
Maine's depository institutions may affiliate with any firm, though this flexibility is still limited
by federal restrictions.
Michigan took another approach in 1995, creating a state savings bank charter. The charter was
designed to give Michigan's thrift industry all federally chartered at the time a state option
that would allow them to maintain their home lending focus. Other states have taken similar
approaches to improve the flexibility of their charters.
As discussed elsewhere in this testimony, the federal thrift charter has its own unique strengths.
For example, it is particularly attractive to institutions seeking to operate in more than one state.
In 1978, the Supreme Court determined that the Federal thrift regulator could establish uniform
nationwide rules governing the sale of financial products by federal thrifts. The OTS and its
predecessor have used this authority primarily to enable thrifts to offer traditional loan and
deposit products under uniform federal standards. All thrifts, not just those in unitary holding
companies, use these standards to offer products economically to millions of consumers.
Thrift regulators have used their preemption authority judiciously. For example, though federal
law explicitly permits thrifts to sell insurance, the OTS has not sought to preempt state laws that
prevent federal thrifts from using that authority; subsidiaries of Federal thrifts must be separately
capitalized and meet state licensing requirements.
The Office of Comptroller of the Currency (OCC) has continuously sought ways to make
national banks more competitive. The OCC's new Part 5 rule permitting national bank
subsidiaries to offer new services is just one of a decades' long line of decisions designed to
make national banks more competitive. In a string of four 9-0 decisions the Supreme Court has
supported the OCC's rulings. Despite these improvements in the national charter, thousands of
commercial banks have remained state-chartered.
In summary, every chartering authority the Office of Thrift Supervision, the Comptroller of the
Currency, and each state is working to ensure that their institutions can meet consumer and
business needs in an increasingly competitive marketplace. Despite the inevitable differences
among the charters, all FDIC-insured depository institutions savings associations, savings
banks, and commercial banks must meet the same strict capital and supervisory standards. In
both 1989 and 1991, Congress removed much of the regulators' discretion that had permitted
some institutions to remain open after their capital fell to dangerously low levels. Under prompt
corrective action requirements, a regulator must impose increasingly strict requirements for
undercapitalized institutions and must close institutions if they fall below two percent capital.
This ensures that stockholders, not depositors or the FDIC, will bear most or all of the risk of
failure. The differences among charters, tempered by strict safety and soundness requirements,
allow for improved services to customers and communities under safe and sound conditions and
keep the nation's financial system diverse and competitive in every market.
The Thrift Charter in Action
The thrift industry remains a critical component of housing finance. According to the Office of
Thrift Supervision, thrifts originated more than $59 billion in single-family mortgages during the
first quarter of 1998, more than double the $28 billion in the first quarter of 1997. (OTS Press
Release, June 3, 1998) And, the industry devotes more of its capital to housing finance than does
the banking industry. Every $1.00 of thrift capital supports $6.05 in home mortgages, plus an
additional $2.06 in mortgage originations held by investors. By contrast, every $1.00 at a
commercial bank supports $1.72 in home mortgages and just 54 cents in mortgage originations.
(OTS & FDIC Call Reports) The OTS has found that the home lending commitment of thrifts
extends across the industry. For example, thrifts owned by firms engaged in non-banking
activities hold "more of their assets in mortgage loans and related securities 73.7 percent than
the thrift industry average 70.6 percent." (OTS Background Paper, Holding Companies in the
Thrift Industry, January, 1998; emphasis added) Banks have only 32.6 percent of their assets in
mortgage loans and related securities.
Real Estate Development
Thrifts' real estate activities are not confined to housing loans. Through their service
corporations, they also develop real estate, including acquiring property and constructing homes
and commercial buildings. For example, Financial Federal Trust & Savings Bank of Olympia
Fields, Illinois through its real estate development subsidiary, Financial Properties -- renews
middle-income housing in mature Midwestern communities. That renewal strengthens the tax
base, revitalizes the home building sector, and gives new hope to those who aspire to own their
In another instance, a $70 million Texas institution, Dalhart Federal S&L Association, has been
prudently developing real estate since 1971 and survived the Southwest real estate collapse of
the mid-1980s. Although a small institution, Dalhart Federal has constructed and sold a number
of new single-family homes recently averaging about 10 each year providing clear benefits to
its rural community.
To address any concerns that might arise concerning the safety of real estate development,
Congress acted in 1989 to require that all real estate development activities be conducted in a
separately capitalized service corporation. The service corporation capital must be deducted
from that of the savings association, no more than three percent of assets can be reinvested in the
service corporation, and at least one percent must be used for community development activities.
Insurance & Investments
The thrift industry offers insurance services, both through their service corporations and through
holding company affiliates. A savings association in Montana kept open the only independent
insurance agency in town by using its service corporation authority. If that institution had not
stepped in, the agency would likely have had to close.
In Virginia, Acacia Federal Savings Bank and its holding company, the Acacia Group, is developing the concept of full service customer delivery by combining lending, insurance, and investment services. Similarly, Chesterfield Savings of Chicago has been offering investment and annuity products for many years.
Savings banks in Connecticut, Massachusetts, and New York provide low-cost savings bank life
insurance to their customers. Some 1,112,000 policy holders benefit from this convenient and
Several financial firms have sought thrift charters to enable them to offer trust services to their
securities and insurance customers. A major retail securities firm, Edward Jones, plans to offer
the trust services of Boone National S&L Association throughout its network of over 4,000
offices. Many more traditional thrifts have been offering trust services for a number of years.
Bank Holding Companies
Bank holding companies of all sizes recognize the value of the thrift charter. For years, Citicorp
has conducted all of its retail banking operations outside New York through its thrift, Citibank,
FSB. Citicorp calls the federal thrift charter "the premier legal vehicle for extending consumer
and mortgage credit on a multistate or nationwide basis." Treasury Undersecretary Hawke
agrees, saying earlier this year that, "The federal thrift charter is fabulous.For anybody doing a
nationwide consumer finance-type business, a federally chartered thrift is ideal." (emphasis
added) Recently, the president and CEO of State Financial Services Corp. of Hales Corners,
Wisconsin, Michael J. Falbo, explained why he plans to maintain a recent thrift acquisition as a
separate affiliate, telling the American Banker newspaper that, "Adding a thrift charter provides
us with a great deal of flexibility." (June 4, 1998) OTS statistics indicate that approximately 15
percent of federal savings associations operated within holding companies are in bank holding
The Strength of the Thrift Charter
The most recent OTS report on thrift earnings demonstrates that the savings industry remains a
major force in the financial services sector and a bulwark of housing finance. The nation's 1,195
OTS-supervised thrifts earned $1.87 billion in the first quarter of this year (a first quarter record
and the second highest in industry history). The industry's capital increased to a record 8.40
percent. Upon releasing these figures, OTS Director Seidman said that, "The industry's
underlying strength, especially its high capital levels, puts it in a good position to respond
effectively to future changes in the business climate." (OTS Press Release, June 3, 1998)
Every segment of the thrift industry shares in its robust condition. According to the OTS press
release, "All but one of the 1,195 OTS-supervised thrifts met or exceeded minimum capital
requirements, and 1,116, or 98 percent, were in the highest capital category well capitalized
at the end of March."
Similarly, the thrifts' primary insurance fund, the FDIC's Savings Association Insurance Fund
(SAIF), is in a very strong position. The strength and flexibility of the thrift charter helped make
it possible for the industry to make a special payment of $4.5 billion (equal to nearly a year's
earnings) into the SAIF in the fall of 1996, bringing the fund to the statutory target of 1.25
percent of insured deposits. By December 31, 1998, the FDIC projects that SAIF could hold an
amount equal to 1.45 percent of insured deposits well above its statutory requirement.
While SAIF and its commercial bank counterpart, the Bank Insurance Fund, are both at or near
historically high levels, independent studies have shown that a combined fund would be stronger
than either standing alone. ACB strongly recommends that the funds be merged, regardless of
the outcome of the financial modernization legislation. But let me be perfectly clear, the thrift
industry will not agree to reduce the strength and flexibility of its charter and holding company
structure in exchange for a merger of the funds.
Comments on H.R. 10
The following are ACB's specific comments on H.R. 10 as it passed the House:
Before it passed H.R. 10, the full House wisely struck committee language that would have
eliminated the thrift charter provisions that had barely survived a motion to strike in the
Banking Committee. Even so, the remaining thrift holding company provisions do unjustified
damage to firms that have not yet formed holding companies, while stigmatizing those that
applied before an arbitrary cutoff date.
Under the adopted version of H.R. 10, unitary thrifts applied for after March 31 could not use
their full existing affiliation rights. In fact, these new holding companies may not even use the
financial holding company powers granted under the bill's new section 6 of the Bank Holding
Company Act. Instead, they are generally relegated to the "closely related to banking" powers
under the old section 4(c) of that Act. ACB urges the Senate to strike the thrift holding company
restrictions in H.R. 10 completely. However, the anomaly created for new thrift holding
companies should, at a minimum, be corrected by clarifying that thrift holding companies may
use all the financial powers that H.R. 10 would grant to bank holding companies.
As indicated, H.R. 10 is particularly unfair to firms that have not formed holding companies,
while appearing to give an advantage to those who have. This freezes a dynamic sector of the
financial industry at a single point in time March 31, 1998 ignoring the rapid changes the
industry is experiencing. Today, about 140 new unitary holding companies are formed every
year, and a like number are dissolved. Even though over 800 unitary holding companies exist
today, they must be allowed to change and restructure as required by the dynamics of the
Limitations on the entry of new thrift holding companies are unsound public policy and are a
significant step backward for companies that might form thrift holding companies in the future.
Not only do they lose the potential for unitary affiliations, they are not even provided the
financial holding company powers that the bill grants to bank holding companies.
It would be far better for Congress to simply leave the full unitary holding company option in
place for those companies that chose to qualify for it by maintaining the requisite housing and
consumer lending commitment.
While H.R. 10 contains many flaws that prevent it from being true financial modernization, Title
I, subtitle G provides a very positive basis for modernizing the Federal Home Loan Bank system.
These provisions will benefit commercial banks and thrifts, as well as depository institutions that
are small community based lenders. Although there has been some disagreement about a few of
the sections, such as investment authority, the subtitle does include vital elements that must be a
part of any FHLBank system legislation considered: equalized membership rules and a capital
structure flexibly set within a risk-based framework. S. 1423, a bill that this committee held
hearings on, also addresses these important issues and addresses most of the concerns raised with
the FHLBank system provisions in H.R. 10.
Commercial & Savings Banks
The OCC has identified a number of areas where H.R. 10 scales back national banks' insurance
powers or significantly restricts how national banks may sell insurance. These cutbacks and
restrictions could have severe effects on state-chartered banks that operate under parity statutes.
H.R. 10 places severe limitations on the activities of national bank subsidiaries under the OCC's
Part 5 regulation. This regulation permits national banks to apply to offer through a subsidiary
new financial products incidental to banking. H.R. 10 would limit subsidiaries to agency
activities, such as insurance and securities sales. That would deny financial firms the flexibility
to offer many new financial products, such as insurance and securities underwriting, through the
corporate structure that is often the most efficient and effective for them and their customers.
This is a dramatic step away from financial modernization.
Unfortunately, the House voted to eliminate the commercial activities basket for new financial
holding companies. This provision was important to many primarily financial firms that engage
in a limited amount of non-financial activities. The loss of this flexibility makes the continuation
of the full unitary thrift affiliation powers that much more important.
These provisions the elimination of new unitary thrift affiliation authority, the failure to extend
financial holding company authority to thrifts, the cutback on national bank insurance and
operating subsidiary authority, and the elimination of the modest commercial basket all show
how H.R. 10 still fails to meet the true test of modernization. In too many cases, each half-step
forward is accompanied by two steps backward.
Risk to Public Companies
The financial holding company provisions pose particular concerns to publicly held companies. Each depository institutions affiliated with FHCs must:
The Federal Reserve may order divestiture of the new FHC activities if an affiliated depository
institution fails to meet any of these requirements. While each of these requirements have
positive features, whether a given institution meets all of them is subject to interpretation by
individual examiners. And, the requirement to offer low-cost basic banking accounts is entirely
new. Congress should be careful to avoid some of the experiences under the Community
Reinvestment Act a seemingly simple statute which led to significant compliance costs.
True financial modernization legislation would strengthen private sector mechanisms that
provide credit and other critical financial services. It would expand, not reduce, choices for
financial firms by improving the bank charter, while maintaining the thrift charter and holding
company structure as an option for firms that wish to pursue a housing and consumer focus.
Unfortunately, the House-passed version of H.R. 10 fails to meet that test. It is too focused on
dividing turf among competing financial industry segments, rather than permitting firms to use
all the tools available to best serve their customers and communities. The Senate can do better.
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