Hearing on Financial Services Modernization

Prepared Testimony of Mr. James L. Pledger
Savings and Loan Commisioner
State of Texas

10:00 a.m., Wednesday, February 24, 1999

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 modernization:

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


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 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.

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 positive.

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 holding companies.

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.


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 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 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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