Summary of Testimony
Financial products and services are converging in the marketplace driven by new technology, new hybrid products and new consumer demands. Reform of the nation's financial laws is needed to permit markets to evolve more rationally and to benefit consumers.
The Bankers Roundtable supports financial law modernization that attains these goals by permitting affiliation of financial services firms through common ownership and to do so without discrimination among firms. Affiliated firms need flexibility in their operations, while meeting safety and soundness requirements.
Financial law modernization should first and foremost "do no harm" to banks that remain critical providers of financial services to small business and communities and should avoid creating new statutory regimes that invite litigation and regulation.
A new approach, a streamlined measure, could well attain the fundamental goals of affiliation without discrimination and merits review by the Senate Banking Committee. This may be attained within the strong regulatory framework that Congress has put in place.
H.R. 10 falls short of the goals of financial modernization. In the area of insurance, the bill discriminates against bank providers of insurance. In the area of securities, the bill alters the regulatory framework, imposing unique burdens on banks and their regulators. In the area of the national bank charter, the bill imposes rule after rule on banks seeking to affiliate with no comparable requirements on nonbanking firms. In the area of inter agency relations, the bill alters unnecessarily the current relationships and injects instability into the decisionmaking process.
H.R. 10 takes an approach to modernization that would fuel litigation, regulation and limit marketplace flexibility.
As the Committee undertakes to review the very complex issues in H.R. 10 and financial law
modernization, The Bankers Roundtable offers any assistance it can provide to your deliberate
considerations of this important legislative matter.
Full Text of Testimony
Mr. Chairman and members of the committee, I am Dick Kovacevich, Chairman of Norwest
Corporation, a diversified, regional financial services firm. This year I am pleased to serve as
President of The Bankers Roundtable, a national association open to the nation's 125 largest
banking firms. Those firms range in size from under $1 billion to over $300 billion in assets.
I appreciate the opportunity to appear before you on a topic that is of great importance to the
banking industry and to the country updating our nation's financial laws.
Until recently, the financial services industry was composed of three distinct businesses the
securities business, the insurance business and the banking business. Each of these businesses
had its own delivery systems, its own products and its own regulatory regime. Technology and
customer preference have changed all of that.
In today's world, money and other financial assets are, more often that not, simply information.
The convergence of distinct businesses into a single financial services industry is being driven by
information technology and by customer demands for reliable, convenient and secure access to
the information that represents and protects their wealth. Technology and evolving consumer
preferences in response to technology are powerful forces and they are driving rapid, often
Above all, customers want advice. They want advice on the full range of financial products
available to them. The financial need being satisfied by an annuity, a mutual fund and a
certificate of deposit is similar-- some sort of savings for the long term. In the past, the customer
had to pay for three separate distribution systems to receive advice on these product offerings.
Financial modernization would allow affiliated companies to offer all three products, through
one distribution system, and permit the customer to decide which of these products is best for
them. Better service, greater choice, products provided in a safe and sound manner should be the
goals of financial modernization.
In today's financial services world, we must recognize the power of the market. The challenge is
and the goal should be to develop a legal framework that allows the market to do its work and at
the same time protects the safety and soundness of the financial system. And by financial
system, I mean all participants, not just banks. In today's environment, financial services
legislation should not attempt to micro-manage change, it should not diminish the role of
existing institutions and it should take advantage of the regulatory structures that have proven
themselves in the past. Unfortunately, H.R. 10 fails these tests.
We believe that there are two key principles that should guide policy. The first principle is
"affiliation" and the second is "non-discrimination."
Affiliation means that companies in the banking, insurance and securities businesses should be
permitted to have a common owner. This owner can be an insurance company, a securities firm,
a bank or a holding company. Affiliation does not mean that the risks associated with any one of
these businesses should be transferred to or assumed by another. At this stage, restrictions on the
transfer of assets and risk among separate entities, like those imposed by Sections 23A and B of
the Federal Reserve Act, should be preserved and the regulatory structures that regulate these
businesses as separate enterprises also should be preserved. There is no need to reallocate
regulatory jurisdiction simply because we permit affiliation. Issues of regulatory jurisdiction are
contentious, but they are the same whether the entities involved are affiliated or not. Allowing
affiliation will provide the value of diversification, the opportunity for enhanced operating
efficiency and the promise of better customer service, all without the commingling of risk or the
need to redesign our regulatory institutions. Affiliation is an appropriate, prudent and important
first step. Decisions to change regulatory jurisdiction will be better decisions after we have
gained experience with affiliation.
The second principle that should guide legislation is non-discrimination. Simply put, banks, insurance companies and securities firms that affiliate should not be discriminated against simply because they are affiliated. One great value of affiliation is the ability to use
existing delivery channels to deliver the entire array of financial services products. Customers
want and in fact demand better service and greater value at lower costs. Rules to permit
nondiscriminatory affiliation permit that to happen and customers are the real winners.
To allow discrimination against one delivery channel in order to promote another is to look
backward. Customers want convenience and they demand efficiency. Their ability to obtain
convenient, efficient service should not depend on the type of entity that operates the location
where they do business. Non-discrimination must be a key principle of financial services
I would like to make two additional points. First, I would hope that as this Committee considers
legislation in this area it follows the principle of "Do No Harm." Banks are but one part of the
financial services industry, but they are the part that provides, among other things: (1)
community lending and support services to individuals who would otherwise be denied, (2)
critical lending support to our nation's small businesses, and (3) the engine that pulls our
economy out of difficult times. There is an overriding value in having a strong, healthy and
vibrant banking system, a system that easily fits within the overall structure of a modern
financial services industry. New legislation should neither weaken our banks nor diminish the
value of a banking charter.
Second, two decisions by the United States Supreme Court have addressed the relationship of
federal and state law and the scope of the national bank charter. We believe that those decisions,
the products of lengthy litigation over long standing statutory law, provide certainty to the financial services industry and represent one area of the law which is now settled
and should be free from further costly litigation. Legislation should not open up this settled area
of the law to new litigation.
Mr. Chairman and members of the Committee, the remainder of my written testimony elaborates
on what we find wrong in H.R. 10 both its specifics and its approach and a possible new
approach for action. I believe the following information restates the goals of financial law
modernization, the issues presented in H.R. 10 and the need to approach this major undertaking
with this clear set of goals.
Central Goals for Financial Law Modernization
The Bankers Roundtable believes the goals listed here meet business, consumer and public
policy interests as Congress seeks to revise the nation's financial laws.
Affiliation will permit greater competition among providers of financial services that will result
in new and innovative products for consumers in a context of strong safety and soundness
Permitting distinct businesses the ability to come together under a common owner would create
flexibility for financial service providers that would result in better use of technology, greater
market evolution to meet customer demands and greater ability for management to address and
Flexibility will not diminish continued strong safety and soundness regulation, it will only
streamline operational and product and service rules. The Banking Committee has taken steps in
that direction in the important 1996 regulatory burden relief law. The banking agencies are
committed to streamlining supervision while not reducing their oversight role by relying more on
risk- and market-driven approaches to regulation.
Flexibility will be attained in part through less regulation, less litigation and less arbitrary characterization of products and services, permitting greater use of new
hybrid products. In short, legislation should improve the current system and, at the least, "do no
An enhanced American financial system, benefitting consumers and strengthening the charters
and franchises of all providers should operate without discrimination.
Balanced regulation of American financial services providers-- large or small, diversified or
single line-- is critical. There should be no room for discrimination simply because two financial
service providers are affiliated with each other.
H.R. 10 Falls Short of These Goals
H.R. 10 falls short of the goals of financial law modernization in many key areas. While the
Roundtable appreciates those sections of H.R. 10 that permit expanded business opportunities
and affiliations among financial service providers, these good initiatives are overwhelmed by
nearly 300 pages of anti-competitive and unmanageable provisions that run contrary to the very
competitive benefits the public would get from real financial law modernization.
Later, the specific examples of the harmful effect H.R. 10 would have on the financial services
industry are highlighted.
A New Approach
Mr. Chairman and members of the Committee, the Roundtable urges you to consider a simpler
and more effective approach to financial law modernization that would do no harm and permit
affiliations among financial institutions.
One option for the Committee to consider is to repeal the affiliation provisions of the Glass
Steagall Act (referred to as Sections 20 and 32) and authorize the Federal Reserve Board to
permit bank holding companies to own subsidiaries that engage in activities that are "financial in
nature," a term that would include insurance and securities activities.
This approach would achieve the most important goals of financial modernization for all parties
in a clearly understandable fashion. Holding companies could own banks, insurance companies
and securities firms. No industry would be protected from competition and no industry would be
hobbled in competing. The existing authority of national banks-- and state banks-- to conduct
their businesses and to own subsidiaries engaged in financial activities would be neither
increased nor decreased so they would not be harmed. All existing legal precedents would
remain intact as a guide to regulators and businesses and all consumer protections would remain
in place. Bank, securities and insurance regulators would work cooperatively-- through
interagency coordination, sharing information and employing other established techniques to
implement new legislation.
A streamlined approach is possible in part because of the strength of the regulatory architecture
that Congress has wisely created. Over the past 140 years and, particularly in the past ten years,
Congress has put in place a regulatory structure that would permit the affiliation of firms without
the creation of new regulatory authorities. For example, Congress enacted Section 23B of the
Federal Reserve Act in 1987 to protect against certain practices that might occur between banks
and securities firms when they were permitted to affiliate. Congress adopted this safeguard in
1987 and some ten years later we still don't have the affiliation, but this evidences the type of
safeguards already in place.
On consumer benefits, let me note that I believe that modernization of our nation's financial laws
will produce consumer benefits in and of itself. One can easily see new products, stronger
companies of all sizes to offer those products, new delivery outlets on the Internet, the mails,
television and so on and geographic freedom for consumers to access their services.
On consumer protection, I would make two points. First, it may be premature to craft new
consumer protections at a time when we don't know what the new products or their delivery
mechanisms will be. We should permit the markets to evolve. Further, the regulators, as I noted
earlier, have enormous powers individually and collectively to address any practice that is seen
as adverse to consumers. Also, as you know, in a highly competitive market, insensitivity to
consumer needs and concerns has serious business repercussions.
Second, I think the Committee should broaden the reach of consumer protection to all financial
services, if such protection is needed. Consumers should be protected regardless of the delivery
channel they choose and singling out one industry for such regulation just leaves consumers
vulnerable when they shop outside that industry. In other words, if a consumer protection is
necessary for a certain product, then it should exist along with the product not just one of the
institutions that offers the product.
Overall, consideration of a streamlined approach would leave in place clearly defined and well
established legal and regulatory authorities and would not undermine existing laws or require the
creation of entire new legal regimes.
In line with recommending a streamlined approach, a summation of the key failures of H.R. 10 is
Section 104 of the bill authorizes state insurance regulators to impose burdens on bank insurance activities that are greater than those imposed on insurance companies. It does that
by providing that discrimination against banks of the kind permitted in an Illinois state law is
protected from challenge under the Supremacy Clause of the Constitution. The Illinois law, for
example, would permit insurance agents to sell insurance and loan products together, but would
prohibit a bank employee from doing the same thing. If this were not enough, the bill goes on to
say that even greater discrimination against banks may be permissible.
Section 305 of the bill provides that national banks and their subsidiaries may expand insurance
agency activities only by purchasing an existing insurance agency. No other provider of
financial services is subject to this requirement.
Section 306 prohibits national banks and their subsidiaries from underwriting or selling title insurance. No other provider of financial services is subject to this prohibition.
National Bank Charter.
The national bank charter is adversely impacted by H.R. 10. While afforded new authority to
underwrite municipal revenue bonds, almost every other provision of H.R. 10 is adverse to the
national bank charter. Instead of building on this valuable charter, H.R. 10 would remove
flexibility, confuse the legal authority of the regulator and spur litigation-- again, not the goals of
For example, the national bank ability to employ operating subsidiaries is impacted by a limit on
what products and services may be offered in the subsidiary. Ironically at a time when
safeguards and insulation of subsidiaries and affiliates of banks have never been stronger, the bill
would seek to limit a valuable management tool in favor of holding company affiliates. This is
unnecessary and moves toward the restrictions placed on savings and loans that limited their
Further, the ability of the national bank regulator to oversee bank activities is undermined by express authority for other regulators to seek jurisdiction over bank products. Apart from views on where activities should be conducted, these insurance and securities provisions create incentives for litigation and instability for existing bank products, including those that might be modified in the future to meet customer demands. Limiting the preemptive
authority to protect banks from discrimination and the deference to agency interpretations would
be major steps to undermining the bank charter, even for banks that do not seek to affiliate.
Also, many provisions in H.R. 10 apply only to national and state banks. For example,
depositories in a financial services holding company would have to offer a to-be-defined low cost
consumer account. Yet, no such requirement applies to insurance firms to offer reduced
premium products or to securities firms to provide discounted mutual fund fees or brokerage
services. Again, H.R. 10 runs contrary to a level competitive marketplace.
While there has been greater agreement among industries in the securities area, it is worth noting
that Section 206 of H.R. 10 contemplates SEC meddling in the provision of banking products.
Further, the entire section is a convoluted overlay of new regulatory restrictions on existing
banking and securities law that is unnecessary and will lead to new regulation. The prohibition
on merchant banking activities in a bank operating subsidiary also appears unnecessary.
Inter Agency Relations.
H.R. 10 attempts, under the guise of financial law modernization, to undertake regulatory changes. The legal changes noted in the securities and insurance areas undermine the balance of authority over banking activities-- the Federal Reserve, SEC and state insurance
commissioners would have the ability to reach into the jurisdiction of the national bank regulator,
which should not be allowed, and to do so without any reciprocity to assert jurisdiction over
activities under the supervision of these regulators. In short, unlike current law that either
assigns jurisdiction or permits agencies to accommodate one another with formal and informal
arrangements, provisions of H.R. 10 would inject instability in agency jurisdiction and
relationships. This is unnecessary.
Overall Uncertainties Created by H.R. 10
With all the specific problems of H.R. 10 outlined above, a fair question is whether the
Banking Committee should simply consider some amendments to remove these problems rather
than take the streamlined approach suggested earlier.
As someone who wants very much to see our financial laws modernized, I must tell you that, in
my judgement, this cannot be accomplished simply with H.R. 10. As I outlined here, H.R. 10
presents many specific problems which are outlined above and which merit serious review by the
Committee. H.R. 10 also has significant impact on our existing financial laws and the
Committee should carefully review the impact of those changes would have on our financial
Below are some issues for the Committee's consideration in this vein.
First the bill will be a source of litigation. This arises for several reasons.
Stand Alone Provisions. The bill employs stand alone language, that is, in many sections, such as
those dealing with insurance-- Sections 104 and most of Title III-- the bill creates new law.
These sections would not have the benefit of prior regulatory review and rulemaking or judicial
interpretation that attaches to laws such as the securities laws, the Banking Holding Company
Act or the Federal Reserve Act. These stand alone provisions would be subject to litigation at
every turn on the meaning of terms and the intent of Congress for new business activities.
Established business practices under existing laws might be called into question. For example,
the insurance language as set forth in H.R. 10 may mean that litigation will result on existing
bank agency activities as the holding of the Barnett decision, that reasserted the ability of federal
regulators to act against discriminatory state laws, would be diminished.
Complexity. The bill is so complex that even where it works within existing statutory
frameworks it creates new bases for litigation. Rather than simplifying the current statutory framework, H.R. 10 bends, twists and further complicates the Byzantine structures of banking and financial laws. For example in the area of insurance, the bill states, in Section 301, that the McCarran Ferguson Act, that governs insurance regulation, is "the law of the land." What this does, why is it there and what are its implications for business practices
would be a source of litigation. In the securities area, Section 206 of H.R. 10 adds layers of new
regulation on bank products in an attempt to pull apart hybrid products for purposes of agency
jurisdiction that is, the SEC may act to seek jurisdiction over banking products that may have
some securities elements. In the bill's definition of insurance in Section 304, state insurance
commissioners are encouraged to try to regulate products that have some aspect of insurance and
that is to be determined through a complex reference to the Internal Revenue Code what this
means and how it operates would be the subject of litigation and, as noted below, new regulation.
Second, the bill will be a source of much new regulation.
At a time when a central goal of modernization is to streamline business operations, enhance
business flexibility and the Banking Committee itself is looking to reduce regulatory burden on
financial firms, H.R. 10 invites a whole new array of regulation. All of the stand alone
provisions of the law in the insurance area would be subject to new regulation by state
legislatures and their insurance commissioners and the securities provisions of the law invite
new SEC regulation of banking activities.
New language and new layers of regulation throughout the bill, including new consumer
sections, will enhance rather than reduce burden at the very time we have the most extensive
regulatory system in the world.
The need for flexibility in our rapidly changing marketplace should be a hallmark of financial
H.R. 10 falls short of this goal and instead
calls for removing some rules, but then replaces them with an entire new set of restrictions,
regulations and discriminatory treatments;
limits the flexibility of management to offer services by limiting corporate structures, the bill
restricts the use of bank operating subsidiaries;
provides open-ended incentives for challenging new hybrid products; and,
imposes new requirements, under the guise of consumer safeguards, on banks even before
products are created thus limiting market innovation.
Action on Financial Law Modernization
Do all of these concerns mean that no new language may be created to reach financial modernization, that no litigation may result, that no inflexibility may exist and that no
regulation may be expected? To all four points, the answer is "no."
Of course, some new law may be necessary, some litigation may occur, some inflexibility may
result and some regulation may be forthcoming. But, it should not be on the scale and magnitude
contemplated in H.R. 10. Also, I believe modernization may be accomplished while keeping the
need for new language and the potential for expanded regulation and litigation to a minimum.
H.R. 10 would deter flexibility and spur litigation and regulation, when the goals of reform
should be to spur innovation for consumers and competition among financial service firms.
Mr. Chairman, the Committee has an important task before it and I want you to know of the
support of The Bankers Roundtable. We encourage you to move with a streamlined approach
through a legal structure that ultimately permits the benefits of competition to be available to
consumers. I urge the Committee to carefully and deliberately examine all the options.
Thank you for considering our views and I would be pleased to answer any questions you may
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