My name is James L. Pledger. I am the Texas Savings and Loan Commissioner and, in that capacity, I am responsible for the regulation and supervision of all state chartered savings and loan associations and state savings banks in Texas. I am also a director and past chairman of the American Council of State Savings Supervisors (ACSSS), the national professional association of state thrift institution regulators, and it is in that capacity that I appear today. I want to express our appreciation for the opportunity to be here and offer ACSSS' views on financial reform and the modernization of the financial services industry.
As the nation's state thrift institution regulators, there are several issues associated with financial modernization that we believe are essential to a fair and effective financial modernization bill:
Strong Continued Support for the Dual Banking System in which the states can offer effective alternatives to federal bank and thrift charters and continue to serve as the primary source of innovation in the banking system
Steadfast Adherence to the Principle of Chartering UP - No financial institution charter should face a reduction of powers and authority as a result of financial modernization
Continuation of Unitary Thrift Holding Companies No safety and soundness issue justifies elimination of this important competitive vehicle
CHARTERING UP IS ESSENTIAL TO MODERNIZATION. Modernization should not reduce bank powers for any charter. Ideally, this process should take the best of each charter and combine them to enhance the ability of banks and financial institutions to compete. No banking charter should lose powers and authority as a result of modernization, unless a distinct safety and soundness concern exists.
Banks and other depository institutions have continually lost market share to less regulated competition: mortgage banking companies; retail companies with internal credit card facilities; securities firms that offer the equivalent of deposits; and a broad range of non-depository lenders. These businesses have gained at the expense of banks because they face much less regulatory intrusion than their banking competitors and because of pervasive statutes that restrict the ability of banks to compete, such as the Glass Steagall constraints on combinations of banking and securities and previous restrictions on interstate branching.
If this effort at financial modernization does not result in effectively "chartering-up" for financial institution charters, it will be very difficult to call it modernization. There is simply no reason to eliminate or reduce the powers and authority of any financial institution charter.
Coordination of Multiple Regulator Environment
ACSSS supports the relaxation of affiliation restrictions between the banking, securities and insurance industries. But a broader range of business activities also means a broader group of state and federal regulators involved in the regulations of these more diversified businesses. ACSSS believes that in order to assure continued effective regulation of insured depository institutions, the responsibility for coordination of these multiple regulators should rest with the chartering banking regulator and the bank's primary federal regulator.
Bank regulation provides the most frequent visitation and the most comprehensive examination and supervision of all the governmental regulatory processes that are likely to be involved with these more diversified financial companies. Since bank regulators will be on-site at these institutions most often, they are likely to identify potential problems more quickly.
Because of the diversified nature of thrift holding companies, we have already experienced these multiple regulator situations and, when appropriate, we have not hesitated to call in insurance, securities and other regulators with jurisdiction over matters involving the institutions we regulate. To the extent that this multiple regulatory jurisdiction impacts the safety and soundness or the effective operation of insured depository institutions, financial institution regulators must be able to act promptly to address and resolve problems without jurisdictional confusion.
Therefore, we encourage the Congress to provide explicitly that the responsibility for regulatory coordination rests with the chartering bank regulator and the bank's primary federal financial institution regulator.
Merger of Insurance Funds
ACSSS supports the merger of the federal deposit insurance funds. A merger of the funds would make the combined fund less sensitive to concentrated losses and more broadly homogenize the group of insured institutions. Both of these characteristics would improve the risk profile of the funds.
The Federal Thrift Charter and the OTS
First, it is important to recognize that there is no overriding business or safety and soundness reason to eliminate the savings association charter. How the Congress chooses to deal with the federal thrift charter and how these institutions will be subsequently regulated, in ACSSS' view, is a matter totally within your discretion. In the same respect, we strongly support the legal and constitutional right of states to offer whatever types of financial institution charters and regulatory structures they believe to be in their respective best interests.
We fully support provisions requiring the FDIC to ensure that state chartered thrift institutions are adequately regulated. The states have a long and very positive relationship with the FDIC and we are equally committed to ensuring that all depository institutions in this country are operated in a safe and sound manner.
FDIC Primary Federal Regulator of State S&Ls
ACSSS has contended for many years that the primary federal regulator of state chartered savings associations should be the FDIC as insurer of the deposits, similar to the structure applicable to state banks. The regulatory structure imposed on state S&Ls by FIRREA created a unique double layer federal regulatory structure which has proven costly and duplicative. As a result, state chartered S&Ls have almost disappeared through conversion to other charters because the regulatory structure is uncompetitive. If the Senate addresses the regulatory structure issue, ACSSS would encourage you to mirror the state bank example and designate the FDIC as the sole federal regulator of state S&Ls.
No Modification of Qualified Thrift Lender Test
ACSSS opposes modification of the Qualified Thrift Lender Test. This restriction is an extremely complicated requirement. ACSSS is concerned that the imposition of additional investment and portfolio restrictions would make thrift institutions less competitive - rather than more competitive. Modernization should not result in any charter becoming less competitive.
Unitary Thrift Holding Companies
Many state thrift regulators have had experience in regulating extremely diversified corporations that own savings associations or state savings banks through unitary thrift holding companies. Our experience with these holding companies has been very positive. In many cases, these holding companies expand the available sources of capital for financial institutions which has been extremely helpful when capital injections are necessary. They often bring a broader range of business experience to the banking sector and, to our knowledge, there have been no serious supervisory problems associated with diversified ownership.
In regulating such holding companies, financial regulators have a full arsenal of enforcement tools that can be used against the holding company or any affiliate thereof, including officers, directors or agents. Likewise, the same standards for transactions involving bank affiliates are applicable to these holding companies and their affiliates. Sections 23A and 23B of the Federal Reserve Act and Regulation O are effective constraints on abuse in these areas. Transactions with holding company affiliates are carefully scrutinized for conflicts of interest and subsidiary financial institutions are required to maintain the same capital levels and supervisory standards that are required for all depository institutions. There are also restrictions on dividends and other capital distributions. All of these are very effective tools to regulate these diversified entities.
Unitary thrift holding companies should be retained as one of the most valuable and effective competitive tools available to banks and thrifts to combat the vast array of unregulated competition that has gained significant market share on our financial institutions.
As you know the House legislation, H. R. 10, proposes to ban unitary thrift holding companies and grandfather existing companies. But there is no compelling reason to ban new unitary thrift holding companies. This authority has existed since 1967.
As the Committee considers the expansion of affiliation and activity rules relative to bank holding companies, we suggest that it is inconsistent and counterproductive to simultaneously curtail the similar activities of existing unitary S&L holding companies. Until a final conclusion is reached on whether, or to what extent, such affiliations should be allowed, it is premature to restrict these relationships for thrift institutions.
With the positive historical experience that has occurred with unitary holding companies and the ability to effectively regulate the relationship between financial institutions and their diversified holding company affiliates, we believe that unitary thrift holding companies should NOT BE ELIMINATED. In taking this position, we have not sought to endorse an advantage for unitary thrift holding companies. In fact, we support expanding the broader diversification provisions of the thrift holding company to allow similar authority within bank holding companies.
Grandfathering of Unitary Holding Companies
If any form of grandfathering similar to the provisions of H. R. 10 becomes necessary, we believe a convincing case can be made that existing S&L holding companies should receive a broad grandfathering without provisions for termination of such important rights and we believe the grandfathering date should be extended so as not to penalize holding companies formed prior to enactment of the legislation.
Many diversified companies acquired failed S&Ls in 1988 at a time when the federal government was desperate to find entities to inject additional capital into the thrift industry. They acquired these institutions with a reasonable expectation that they would be able to continue to own and operate them in the normal course of business and, at some time, sell what they bought - a financial institution that can be owned by a non-banking business. To require such a company to divest major portions of its business activities in the event of a merger or other normal business transaction is the equivalent of taking away their authority to grow and expand. Grandfathering, if necessary, should be permanent and fully transferable to successor owners.
Use of the Word "Federal" by Converting thrifts
One provision in the House legislation that we strongly support is the authority for federal savings associations converting to a state chartered financial institution to continue to use the word "Federal" in their name. Over the past few years, many institutions have sought to retain their historical identity after conversion to a state charter by continuing to use the word "Federal" in their name. The OTS has chartered savings associations using the words "State" and "National" in their names. But when institutions sought to continue to use the word "Federal" they found that such use must be specifically authorized or it would violate a criminal statute (18 USC 709).
A reasonable nexus exists for the use of the word "Federal" because such institutions continue to be federally insured. ACSSS encourages you to include such a provision in any modernization legislation. We also encourage you to ensure that such use is available to federal savings associations converting to any type of state chartered financial institution.
Conclusion
In conclusion, Mr. Chairman, we sincerely applaud your efforts to move this legislation forward.
Thrift institutions have been subject to unreasonable uncertainty as to the continued existence of
their charters and activities for entirely too long. It is time to resolve these issues so that thrift
institutions can move forward and serve their customers under whatever charter and form of
ownership they deem appropriate and in their best interest.
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