Good morning, Mr. Chairman, I am Bill McQuillan, president of the Independent Bankers
Association of America and president of the City National Bank, an $18 million asset size bank
located in Greeley, Nebraska. I also serve as an elected director on the Board of Directors of the
Federal Reserve Bank of Kansas City. The IBAA represents some 5,500 independent
community banks nationwide that hold nearly $375 billion in insured deposits, $445 billion in
assets, and more than $240 billion in loans to customers, small businesses and farms in the
communities they serve. We employ more than 200,000 people in our communities.
Thank you very much for inviting me to testify on H.R. 10, the "Financial Services Act of 1998,"
which completed a long, tortuous and controversial journey through the House of
Representatives by a one-vote margin on May 13, 1998.
H.R. 10, by authorizing the common ownership of the largest banks, securities firms and
insurance underwriters, would further concentrate our financial system and create additional too-big-to-fail entities. Whether to give such further impetus to the rapidly merging financial sector
of the United States, when proposed banking mergers already approach the state and national
concentration limits established by the Riegle-Neal Interstate Banking and Branching bill of
1994, is the key policy issue before this Committee. (We are also concerned about the potential
anti-competitive implications of future concentration on ATM network and credit card markets.
In this regard, we ask that the attached excerpt from our June 3, 1998, testimony before the
House Judiciary Committee on this subject be made part of the hearing record. Please see
The IBAA's ongoing analysis of H.R. 10 rests on seven standards developed by our policy
committees which reflect our concerns about the potential effects of this proposed legislation on
consumers, small business and community banking.
These concerns are:
(1) Legislation should not additionally encourage the common ownership of commercial banks
and commercial firms. It would be ironic indeed if the U.S. Congress followed this policy path
at the very time when Japan and Asia are struggling with an enormous economic and financial
crisis fueled by such "crony capitalism." Legislation authorizing the common ownership of
commercial banks and commercial firms would undermine the impartial allocation of credit
which is the foundation of our highly successful economic and financial system.
Any incremental approach, including any commercial firm ownership basket, as was provided
for in earlier versions of the bill, would gravely impair the impartial allocation of credit. The
passage by the House of Representatives of the Leach amendment eliminating the five percent
commercial firm ownership basket was a very positive development and was strongly supported
by the IBAA, the small business community, agricultural groups and consumer groups. H. R. 10
also stops new unitary thrift holding company formation as of March 31, 1998. We ask the
Committee to move this date back to when H.R. 10 was introduced in the House of
Representatives in early 1997.
But H.R. 10 remains seriously flawed in that it does not prevent the subsequent transfer of
ownership of existing unitaries to non-financial companies. Thus, hundreds of existing unitary
thrifts could continue to be purchased by commercial firms. This is an enormous loophole that
significantly breaches the separation of banking and commerce. H.R. 10 as reported out of the
House Banking Committee did prohibit this transferability. We ask that the Committee reinstate
this critical provision.
We are also concerned that every unitary thrift holding company application approval moves
regulatory and supervisory authority over complex financial entities from the Federal Reserve
(an independent agency) to the OTS (an agency that is part of the U.S. Treasury). The OTS
regulatory rules governing unitary thrift holding companies are quite different from those of the
Federal Reserve governing bank holding companies. For example, there are no capital
requirements for unitary thrift holding companies as there are for bank holding companies. We
believe that the Federal Reserve, not the OTS, is the most appropriate and best equipped agency
to regulate and supervise complex financial conglomerates as an umbrella regulator.
We have urged the Congress to place a moratorium on the approval of unitary thrift applications
by companies that cannot own a bank and we note that Chairman Greenspan also supports such a
moratorium if the Congress cannot act on H.R. 10 this year.
Without significant action closing the unitary thrift loophole and preventing the transferability of
existing unitary thrifts to companies that could not own a bank, it is our judgement that most of
the banking industry will continue to strongly oppose the enactment of H.R. 10.
In making this appeal, we remind the Committee that the banking industry felt that its support of
the expensive SAIF/ FICO legislation in 1996, which shifted a large portion of the FICO
obligation to banks, carried with it the quid pro quo of eliminating the thrift charter and the
unitary thrift holding company loophole. Many bankers are still expecting the Congress to fulfill
its commitment, as legislatively suggested in the Frist amendment.
(2) The IBAA strongly supports the establishment of an umbrella regulator for diversified
financial services firms and feels the only federal regulator equipped for this job is the Federal
Reserve. H.R. 10 does meet this test except as regards unitary thrifts.
(3) Our future regulatory and supervisory structure must be so designed as to best insure that the
FDIC's deposit insurance funds are protected from being raided should a huge financial
conglomerate collapse. At issue is the emergence of large financial conglomerates including, for
example, a large commercial bank and a firm underwriting property and casualty insurance . . . a
very risky business. If the property and casualty firm were to fail, it would be in the nation's
foremost interest to protect banking and the American taxpayer, and to build in maximum
insulation of the insurance firm from the federal safety net unique to banks, including deposit
insurance. We are concerned that such insulation can never be complete, and recall that the
House Banking and Commerce committees heard ample testimony questioning the efficacy of
firewalls. Testifying before the House Banking Committee on February 28, 1995, Chairman
Greenspan warned against placing too much faith in firewalls because "under stress they tend to
This being the case, it still is crucial that there be maximum insulation of risky activities
conducted in a financial conglomerate from the commercial bank component, in order to protect
first the FDIC fund and then the American taxpayer. We also support the position of Chairman
Greenspan as conveyed to the IBAA in his letter of May 19. The Chairman wrote: "H.R. 10
would prohibit operating subsidiaries from engaging as principal in activities that are not
permissible for the parent national bank, primarily insurance underwriting, securities
underwriting and dealing, merchant banking, and real estate investment and development
activities. In my opinion, H.R. 10 provides important protection to the deposit insurance fund
from the risk of loss from these activities by requiring that these activities be conducted in a
holding company rather than in a bank subsidiary and, thus, not with the support of the safety
The IBAA also believes that ongoing mergers and acquisitions are establishing too-big-to-fail
entities presenting systemic risk to the financial system and the economy that future
administrations and regulators will always bail out if they run into serious problems.
(4) In any financial modernization bill, there should be provisions for meeting the funding and
liquidity needs of institutions that serve local markets and communities, but don't have access to
capital markets. The Federal Home Loan Bank System reform language in H.R. 10 meets this
test, as does the Hagel bill (S. 1423). This is a very positive feature of the bill for community
banks and their customers.
This March, the IBAA testified before this Committee in support of S. 1423, the "Federal Home
Loan Bank System Modernization Act of 1997," as introduced by Senator Hagel and co-sponsored by some eleven other Senators including the Majority Leader. Community banks
need, in light of the increased difficulties of attracting and maintaining their core deposit base, a
reliable source of funds to meet the credit demands of the communities they serve. Community
banks need the type of long- term funds that the FHLB system can provide to match long-term
lending needs. Thousands of community banks have joined a Federal Home Loan Bank (FHLB),
but others have been unable to do so since they cannot meet the current FHLB membership test
requiring at least 10 percent of assets to be mortgage assets. Additionally, many community
banks do not have sufficient eligible collateral to support the FHLB's advance requirements.
The language in H.R. 10 and the Hagel bill would enhance Federal Home Loan Bank
membership requirements as well as collateral requirements for advances.
(5) The level of regulation should be commensurate with the systemic risk institutions present to
the financial system and the economy. Consumer protection regulation, in turn, should be even
handed and either lifted for all or applied to all, since it represents a competitive cost factor.
H.R. 10 does not meet this standard and, in fact, the Waters lifeline banking amendment, as an
example, is applied only to banking organizations and accordingly is a step backwards. The
Waters amendment would require that in order to engage in new activities under this bill, any
financial holding company's depository institutions must offer and maintain low-cost basic
banking accounts. A similar standard does not apply to services offered by non-depository
(6) Access to the payments system should only be open to FDIC-insured depository institutions
so as to limit risks to the payments system. We oppose the provision in H.R. 10 which
authorizes the establishment of a new charter for investment bank holding companies
("woofies") able to access the Federal Reserve System's payment services and take uninsured
"Woofies" would be prohibited from accepting retail (under $100,000) or any FDIC insured
deposits. Such woofies, however, would have access to the discount window and the payments
system. Under H.R. 10, commercial firms could own a woofie (in other words, be a "wholesale
financial institution holding company") and could expand commercial business only through
internal growth, not through acquisition. This growth restriction applicable to a commercial firm
owning a woofie is different from the five percent revenue limitation applicable to a woofie
engaged in the commodities business.
The "bite" of this provision, again, is that it breaches the walls separating banking and
Additionally, we are concerned that the establishment of woofies opens up the potential for new,
specialized charters that could be superior to a banking charter because they could be exempt
from banking regulations. And very importantly from a public policy standpoint, since woofies
can also be owned by bank holding companies, wholesale deposits could be moved from the
insured bank to the uninsured woofie, which could narrow the deposit insurance fund base and
lead to a de-stabilization of the deposit insurance funds. We also have payments system
concerns. The woofie issue is highly contentious and should not be made part of this bill.
(7) Any financial restructuring should include new retail powers for banks, including--within the
parameters of safety and soundness--unrestricted insurance agency powers and the power to sell
mutual funds and other financial products and services, including annuities. Such retail sales
authority presents little risk and we see no reason why it shouldn't be exercised either through a
holding company affiliate or an operating subsidiary of a bank.
In dealing with bank sales of insurance products, we believe that any roll back of an existing
authority of banks, whether chartered at the federal or state level, is flat out anti-competitive and
would reduce choice for consumers. We ask that two separate letters to the IBAA--one from the
Acting Comptroller of the Currency dated May 28 (please see Attachment 1) and one from the
General Counsel of the Federal Reserve Board (please see Attachment 2)--providing these
agencies' views of HR 10's impact on bank insurance authority be included in the record. A
reading of the positions taken by the Federal Reserve and the OCC on this subject shows that
there is a significant difference of opinion on the bill's impact on the insurance sales activities of
national banks. This is unfortunate and confusing for community bankers who regard the sale of
insurance products as increasingly necessary. These differing interpretations suggest that the
insurance language in H.R. 10 as passed by the House needs to be revisited and clarified.
Even without this clarification, these are some of the areas where we have problems with the
existing insurance wording of H.R. 10.
The IBAA strongly opposes H.R. 10's requirement of having to purchase an insurance agency
that has been in existence for at least two years in order to enter the insurance agency business or
to expand beyond state lines. Such a market entry requirement is pure protectionism and
precludes an institution from starting up its own licenced agency. The fact that the House chose
to sunset this provision in five years does not remove the blatantly self serving nature of this
Similarly, the limitations on a national bank's ability to sell title insurance is designed to protect
existing title insurance interests and cannot be justified on a public policy basis.
Most important, we believe it is essential that the bill clearly and unequivocally preserve the
Supreme Court's Barnett decision, and not roll back the protection that Barnett affords national
banks against restrictive state laws governing bank insurance sales. There is some question
about whether the existing language in H.R. 10 accomplishes this. This should be remedied.
We are pleased that H.R. 10 liberalizes the current law to allow subsidiaries of national banks to
sell insurance as agent from any location.
Mr. Chairman, let me conclude by indicating that the IBAA recognizes the enormous
commitment by many individuals which led to the passage of H.R. 10 in the House of
Representatives. The IBAA policy bodies have carefully reviewed the legislation every step of
the way. This is where we are today. Against the backdrop of the ongoing, unfettered approval
of unitary thrift applications which continue to erode the separation of banking and commerce
and the passage of the Leach amendment eliminating the commercial lending basket, joined with
the welcomed Federal Home Loan Bank Reform language, IBAA policy bodies again reviewed
our position on H.R. 10 a short time ago. We concluded that the negatives in the bill still
continue to outweigh the positives. During this review we also concluded that the operating
subsidiary of a national bank should not have absolute parity with a holding company--the
position of Chairman Greenspan. If progress can be made on the unitary thrift holding company
front, if language can be devised quieting the unease community bankers have about the
insurance language in the bill, if the woofie issue can be eliminated, and if the positive features
in the House bill--including the Leach/Bereuter/Campbell "no commercial basket" amendment--can be preserved, we will convene our policy bodies promptly to again evaluate the bill.
We appreciate your invitation to have us testify this morning on the issues in H.R. 10 which are
so crucial to the future of community banking.
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