Good morning, Chairman D'Amato, Senator Sarbanes, and members of the Banking Committee. I am Tim McTaggart, Bank Commissioner for the State of Delaware, and Legislative Committee Chairman of the Conference of State Bank Supervisors (CSBS). I am pleased to have the opportunity to be here today. I had the privilege to assist the Committee during four legislative sessions, and to see the important work of the Committee at first hand. It's an honor to officially return to testify on behalf of CSBS.
CSBS is the professional association of state officials who charter, regulate and supervise the 6,475 state-chartered banks, 330 BIF-insured savings banks, and more than 400 state-licensed foreign banking offices nationwide.
Mr. Chairman and Senator Sarbanes, CSBS applauds your long-standing support of the dual banking system. Your continuing efforts and those of your colleagues on this committee to defeat state bank exam fees are very much appreciated by the nearly 7,000 state-chartered institutions we regulate.
We also commend you for your tireless efforts to modernize our financial system. CSBS supports expanded bank activities that provide a broader range of choices to the consumer, enhance competition, and do not jeopardize safety and soundness. CSBS believes that any changes to our current system must preserve safety, soundness and public confidence. The key ingredients in accomplishing this are: enhancing competition in the financial marketplace; offering opportunities for innovation in products and delivery systems; providing flexibility to regulators and bank management; and allowing the market to promote efficiency by preserving investor choice.
Regulation should not drive new products and services or new delivery systems; rather, the market should drive changes in the industry. As regulators, we must supervise these changes to safeguard consumers, depositors and taxpayers. Regulation in a market- driven environment can promote safe and sound behavior by supplying incentives for well-managed institutions, and by limiting the activities of unhealthy banks.
Many provisions in H.R. 10 advance these goals.
STATE AUTHORIZATIONS OF EXPANDED BANK ACTIVITIES
Under our dual banking system, states and the federal government independently charter and regulate financial institutions. The vast majority of banks -- 72% of the industry -- are state-chartered. They hold approximately 42% of all assets and deposits in the U.S. banking system.
A bank's charter determines its powers, and states have traditionally authorized a wide range of powers for their state-chartered banks. In fact, Section 20 of the Glass- Steagall Act has never applied to state banks that are not members of the Federal Reserve System. Today, there are 5,553 "nonmember" banks - a vast majority of the industry.
For years, state banks have conducted many non-banking activities, within the bounds of safety and soundness as determined by their state supervisors. These activities have primarily been in the area of agency and brokerage: insurance sales, real estate brokerage, sales of uninsured investment products, and travel agency. Currently, 43 states authorize discount or full securities brokerage for their state-chartered banks. Twenty-one states allow banks to underwrite municipal revenue bonds; forty-nine allow bank insurance sales, and thirty-three of these states allow insurance sales powers beyond those allowed for a national bank. Thirteen states allow their state-chartered banks to sell real estate.
As Congress considers financial modernization at the federal level, the states continue their tradition of innovation by granting new powers and creating new charters for financial institutions. In the past year, legislators and regulators acted to expand bank insurance powers in Colorado, Connecticut, Georgia, Illinois, Indiana, Louisiana, Maine, Massachusetts, Mississippi, Nevada, Pennsylvania, Utah, and Vermont. In Connecticut, Illinois, Massachusetts and Pennsylvania, these new laws marked the end of years of anti- affiliation laws that prohibited any kind of bank insurance activity. In Indiana, banks that had been able to sell property and casualty insurance since the beginning of the century finally got the authority to sell life insurance.
Earlier this year, Utah enacted legislation to allow broad insurance powers for state-chartered banks. Federal law currently prohibits insurance underwriting activities for all banks, but the Utah law envisions a time when this activity might once again be available for healthy, well-managed financial institutions.
Last year, in an effort to promote economic development and attract new capital to the state, Maine created a new uninsured wholesale financial institution charter. These institutions will not take deposits, but will be funded through equity and borrowings. They have trust powers, however, and have investment and lending powers beyond those of commercial banks.
The new community bank charter in Connecticut also seeks to encourage lending to local businesses and consumers, by making it easier for financial institutions to enter the market. This community bank charter requires slightly less capital than a traditional commercial bank charter.
The most dramatic development on the charter front, however, also came from Maine. Maine identified the most attractive qualities of all their state charters - the commercial bank, savings bank, savings and loan - and combined them into one premier charter.
The Maine law eliminates restrictions on ownership of these new institutions, and allows for a broad choice of ownership structures - stock, mutual, limited liability partnerships, limited liability corporations, and limited partnerships.
Until 1991, states were also able to authorize their banks to engage as principal in a wide range of expanded activities. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) restricted such state bank activities to those permitted to national banks, unless the FDIC determines on a case by case basis that the activity poses no significant risk to the deposit insurance fund. Under this standard, the FDIC has approved most applications for additional activities by state-chartered banks.
BENEFITS OF STATE INNOVATIONS
A key benefit of our dual banking system is that it provides for innovations at both the state and the federal level. In fact, state initiatives have spurred most advances in U.S. bank products and services. Everything from checking accounts to adjustable-rate mortgages, from electronic funds transfers to interstate branching, originated at the state level. A state bank was the first to offer a NOW account, and state banks developed the automatic teller machine. Because states can act individually to authorize new products and services, banks in other states and the federal banking agencies have an opportunity to learn from these state-chartered banks' experience. When new activities emerge one state at a time, systemic risk is minimized. If an activity proves too risky, unprofitable, or harmful to consumers, it is much easier for a single state to change its law than for the federal government to reverse itself.
When changing federal law, as is proposed in H.R. IO, we must preserve the states' ability to experiment independently with new products and services, new structures and new delivery methods. State-authorized powers are the bridge that brought us to this point. Now that we are here, we must not bum that bridge. Federal law should not become the only avenue for innovation in the banking system. Otherwise we will close the book on the dual banking system that has served our country, and our economy, so well for so long.
PRESERVATION OF REGULATORY FLEXIBILITY
Regulation and supervision of banking in the United States, like banking itself, evolved over time, largely in reaction to historical events with no grand structure or design. As a result, the United States today has a multiplicity of supervisory agencies at both the state and federal levels.
Critics of this system of multiple regulators have called it redundant and inefficient. On the contrary, CSBS believes that, with coordination and cooperation, a diversity of regulators actually strengthens the U.S. banking system by providing an environment that nurtures innovation and flexibility in both regulation and banking products and services. In protecting the safety and soundness of the nation's banking system, we believe that two sets of eyes are better than one. The comparatively lower failure rate for state banks versus national banks during the late 1980s and early 1990s, we believe, demonstrates the particular value that is brought to the examination process by the cooperation of the states, the FDIC, and the Federal Reserve.
The lack of a monopolistic regulatory environment has also created a healthy
dynamic tension among regulators, resulting in a wider range of products and services
available to consumers, lower regulatory costs, and more effective, more responsive
Choice in the regulatory environment can have many of the same benefits that it has in the business environment. Knowing that banks have a choice, regulators work smarter and more effectively. Dedication to the safety and soundness of the financial institutions we regulate is our goal, and it is essential that we have the necessary resources to ensure safety and soundness. Without an alternative, however, an expensive, inefficient and arrogant regulatory regime could easily develop that would burden and restrict financial institutions - disadvantaging them in the marketplace - resulting in a less healthy banking system.
SUPERVISION OF NONBANKING ACTIVITIES - RISK-BASED SUPERVISION
As we learned all too well during the savings and loan crisis of the 1980s, the key to expanding powers is effective supervision. Therefore, we believe that the state and federal banking agencies must supervise any banking organization that engages in additional activities from the top down, and from the bottom up. CSBS is pleased that H.R. 10, as passed by the House, recognizes this regulatory principle.
The structure in H.R. 10 is appropriate because it does provide for comprehensive supervision at the top. This concept is familiar to this committee, as you codified it in the "Foreign Bank Supervision Enhancement Act of 1991,11 in response to the failure of BCCI.
CSBS believes that the Federal Reserve, with its joint responsibilities of protecting the safety and soundness of the banking system and promoting stability and growth for the economy, is well suited to serve in this umbrella regulatory role for the new qualified bank holding companies. Virtually all of the large holding companies now operate and are managed as integrated units, especially in their management of RISK. As it is managed on a comprehensive basis, this global holding company risk must be supervised on a comprehensive basis as well.
Effective comprehensive supervision of the entire organization - using the concept of RISK-based supervision - allows regulators to protect safety and soundness while minimizing regulatory burden. Experience shows that enacting rigid requirements into statutory language almost inevitably creates loopholes that may be exploited, while limiting the regulators' flexibility to address these loopholes. Regulatory guidelines, which regulators could adapt for institutions on a case-by-case basis, are a better approach than rigid statutory requirements. The types of restrictions appropriate for large institutions may not be suitable for small ones, and vice versa.
A consolidated model of supervision, with a RISK-based approach to examination and regulation, allows for an expansive view toward powers while protecting supervisory authority to guard safety and soundness. The RISK-based model, developed and accepted by the Federal Reserve Board, the FDIC, and the state banking supervisors, allows a tailored approach to supervision that focuses examination resources on a bank's greatest risks. This approach - using computer aided analysis -- allows examiners to look beyond the traditional "snapshot" view of a bank's condition to how an institution with a variety of business activities will respond to changing market conditions.
As a state bank supervisor, I have observed that this RISK-based model has allowed the state system to simultaneously bolster regulation for safety and soundness, expand powers, and - by forcing us to focus and coordinate our resources -- reduce regulatory burden. These efficiencies in regulation have developed because of our system of multiple regulators.
Importantly, we are not comfortable with a "functional regulation" model that disregards the bank regulators' responsibility for the overall safety and soundness of the entire organization. As we have seen throughout this debate, interested parties do not agree on exactly what "functional regulation" is, or on how it would work in practice. We would like to reiterate our conviction that comprehensive supervision at the top of an organization is absolutely necessary to protect insured deposits, consumer interests, and - for very large organizations -- the stability of our financial system as a whole. To accomplish this, coordination and cooperation is necessary among all regulators involved with an institution.
To further this necessary cooperation and coordination, we have formed a joint task force with the National Association of Insurance Commissioners (NAIC) and the North American Securities Administrators Association (NASAA). The purpose of these task forces is to share information and coordinate our supervision of financial institutions toward our mutual goal: a wide range of safe, responsible, accessible financial services for our states' citizens. Seven states, including my state of Delaware, have independently developed plans for the coordinated supervision of bank insurance sales by state banking and insurance departments.
Forty-nine states currently allow bank insurance sales, and thirty-three allow insurance sales powers beyond those permitted for national banks. The issues now under discussion are how to regulate these banks, and the appropriate extent of consumer protection provisions. We believe the system of "coordinated regulation" now developing at the state level -- which recognizes the role of both the bank and insurance regulator -- could serve as a model for all banks selling insurance.
ACTIVITIES OF FOREIGN BANKING OFFICES
A significant portion of the assets that state bank supervisors oversee are held by foreign banks. These international banks operating in the United States have different structures; most are wholesale, uninsured operations that are prohibited from taking insured deposits.
We believe that "national treatment" means parity of treatment, not identical treatment. H.R. I 0 attempts to provide national treatment to foreign banking organizations operating in the United States. This is the right thing to do. While foreign banking organizations operate under different structures, equivalent treatment is important. These international banks, operating in the United States add important sources of liquidity to our markets and provide many opportunities for US companies to export their products to overseas markets.
CONCERNS ABOUT MODERNIZATION WITHOUT LEGISLATION
CSBS does have some CONCERNS about the course financial modernization will take without the input of the Congress. We are particularly concerned about the ability of the Office of Thrift Supervision to oversee the burgeoning sector of unitary thrift holding companies.
The growing number of unitary thrift holding company applications from non- banks raises questions in four principal areas.
First, what requirements does the Office of Thrift Supervision (OTS) contemplate for entities that plan to operate outside a traditional branch network? Second, does the OTS plan to evaluate its overall supervisory approach to unitary thrift holding companies, given the significant increase in applications and the size and scope of the non-bank firms applying for unitary thrifts? Third, given the rapidly growing number of non-bank commercial firms that are expanding into banking under the federal thrift charter, what supervisory policies and procedures will the OTS follow to minimize potential risks to the Savings Association Insurance Fund (SAIF), including risks created by the activities of commercial affiliates? Finally, how does the OTS intend to apply the federal Community Reinvestment Act (CRA) to these entities?
These four issues have important implications for the chartering and regulation of thrift institutions, the safety and soundness of the SAIF, and the application of CRA to insured depository institutions.
Expansion of unitary thrifts, without an adequate regulatory structure to ensure safety and soundness, echoes the origins of the savings and loan crisis, when thrift powers were expanded without appropriate supervision.
We have posed these questions to OTS Director Seidman, and appreciate her thoughtful response. We particularly commend the OTS for acknowledging the need to review its supervision of unitary thrift holding companies, and the need for an internal review of its current procedures.
State bank supervisors are an integral part of this nation's bank regulation system. State regulation and supervision is professional, cost effective and efficient. State banks are well capitalized, profitable, and serving their customers. Restriction of state powers, state bank structures, and state regulation weakens the system as a whole. Preserving the authority of each state to decide the bank structure, products and services that best suit their citizens' needs, strengthens the system.
We believe that H.R. 10 is a good beginning to modernizing our federal banking system. It recognizes that the lines between traditional banking and other financial services are disappearing. It provides for a system of comprehensive oversight. We look forward to working with you. Mr. Chairman, and with the other members of the Committee, in adapting our dual banking system for the 21st century.
I would be happy to answer any questions the Committee may have.
Home | Menu | Links | Info | Chairman's Page