My name is James L. Pledger. I am the Texas Savings and Loan Commissioner. 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. We appreciate the opportunity to be here and offer ACSSS' views on financial reform and the modernization of the financial services industry.
First, we strongly support the Senate's effort and commitment to move this legislation forward.
Mr. Chairman, ACSSS particularly applauds the efforts you have made with your discussion
draft and proposal to move financial modernization to a more free market approach for both
banks and thrifts. We believe this is right way to go and clearly preferable to the approach taken
by the House in H.R.10. We believe that the result will be a stronger, more competitive banking
system with better access to capital and adequate supervisory safeguards to avoid abuse.
There are several issues that we believe are essential to fair and effective financial
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 - We need to make our financial
institutions stronger and more competitive. 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.
Ideally, this process should take the best of each charter and combine them to enhance the ability
of banks and financial institutions to compete.
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 market share 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 earlier restrictions on interstate branching.
We believe this legislation will enhance the competitiveness of our banking sector. But in the
process, no banking charter should lose powers and authority as a result of modernization, unless
a distinct safety and soundness concern exists.
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 regulation 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
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
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 that 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. ACSSS would encourage you to mirror the state bank
example and designate the FDIC as the sole federal regulator of state S&Ls.
UNITARY THRIFT HOLDING COMPANIESState and federal thrift regulators have had experience in regulating extremely diversified
corporations that own savings associations or state savings banks through unitary thrift holding
companies. I have been involved with diversified holding companies for nearly 25 years. The
experience with these holding companies has been very positive. Diversified holding companies
have expanded the available sources of capital for financial institutions, which has been
extremely helpful when capital injections were 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 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 a valuable and effective competitive tool available for banks and thrifts to combat a vast array of unregulated competition that has gained significant market share on our financial institutions.
As you know, H. R. 10 proposes to ban unitary thrift holding companies and grandfather existing companies. There is no compelling reason to ban new unitary thrift holding companies.
Critics of unitary thrift holding companies have sought to characterize this diversified authority
as a loophole. But Congress expressly authorized diversified companies to own savings
associations and for these holding companies to engage in a broad range of activities. This
authority has existed since 1967 more than 30 years. Although every effort has been made to
characterize diversified holding companies as dangerous and fraught with supervisory concern,
no instances of severe supervisory problems have been associated with diversified ownership.
In fact, just the opposite. 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. This vehicle was valuable then and the experience since then has been very
As the Committee considers the expansion of commercial affiliation and activity rules relative to
bank holding companies, we suggest that it is inconsistent and counterproductive to
simultaneously curtail the diversified activities of unitary S&L holding companies.
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
Grandfathering of Unitary Holding Companies
If any form of grandfathering similar to the provisions of H. R. 10 becomes necessary, existing
S&L holding companies should receive a broad grandfathering without onerous provisions for
termination of such important rights. Furthermore, any grandfathering date should be extended so
as not to penalize holding companies formed prior to enactment of the legislation.
The companies that acquired failed thrifts in 1988 are an excellent example. 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.
However, we hope that grandfathering will not be necessary and that authority for unitary holding companies will continue to be available.
USE OF THE WORD "FEDERAL" BY CONVERTING THRIFTS
We strongly support 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 the use of "Federal" they found that such use would violate a criminal statute (18
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 your modernization
legislation and make it available to federal savings associations converting to any type of state
chartered financial institution.
In conclusion, Mr. Chairman, we sincerely applaud your efforts to move this legislation forward.
Financial modernization is necessary and it will contribute to the enhanced competitiveness of
our nation's banking sector. Thank you again for permitting us to present our views.
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