Mr. Chairman and Members of the Committee, I am E. Lee Beard, President of First Federal
Bank in Hazleton, Pennsylvania. First Federal Bank is a $520 million asset institution held by a
unitary savings and loan holding company. Until recently, our institution like hundreds of
others was in mutual form.
I am here today in my capacity as chair of America's Community Bankers, which represents
progressive community bankers across the nation. ACB is the national trade association for
2,000 savings and community financial institutions and related business firms. We represent
institutions with more than $1 trillion in assets, 250,000 employees, and 15,000 offices. ACB
members have diverse business strategies based on consumer financial services, housing finance,
small business lending, and community development, and operate under several charter types and
holding company structures.
ACB appreciates this opportunity to testify on this committee's priority issue, financial
modernization. Mr. Chairman, you set a positive tone when you said during your recent press
conference: "My objective in our financial services modernization bill is to make financial
services more available to American consumers and cheaper than they have ever been." In a
written statement released that same day, you recognized that, "The same forces that brought the
banking, insurance, and securities industries together last year are still at work this year. They
are the market forces and technological changes that are already breaking down the barriers
between these industries." This statement recognizes that it is not government that will be
modernizing the financial system. It is the system itself, businesses, consumers, and
communities that are adapting to new circumstances. ACB believes that the government should
allow that process to continue through truly progressive legislation.
ACB urges that this legislation give consumers and the financial industry the greatest possible
range of choices. The 105th Congress made substantial progress toward meaningful financial
modernization and we appreciate your willingness to continue that work. Recognizing that you
are building on an existing system, not starting from scratch, ACB believes that your legislation
should seek to improve existing charters and holding company structures without reducing any
competitive options and consumer choices.
ACB is pleased to state today that the Committee's draft legislation, released on February 17,
meets this criterion. You have drafted a financial modernization bill that greatly improves
competitive opportunities for banks and bank holding companies and avoids taking steps
backward for either banks or savings institutions. We are particularly pleased that your
legislation leaves in place a truly modern feature of the financial system the thrift charter and
the unitary thrift holding company structure.
ACB's diverse membership makes full use of all the choices already available. We represent
institutions with a long operating history under both state and federal charters; hundreds are
owned by stockholders; and hundreds are in mutual form. ACB is also proud to represent
nationally known new corporate entrants from the insurance and securities industries. At the
same time, we are assisting newly converted mutuals coming over from the credit union industry.
My own institution recently converted to stock ownership and changed its name from First
Federal Savings and Loan Association to First Federal Bank. We also organized a unitary thrift
holding company at the time of our conversion to expand our business options. Our board
decided to adopt this ownership and corporate structure after carefully evaluating our market and
our customers' needs, and deciding that a new direction would be the best way to continue to
grow and serve our community. Many of my customers bought stock in our initial public
offering, and we remain dedicated to serving our local market in all the ways we can find that
make business and service sense.
Our bank's choice to convert to stock form and adopt the unitary holding company structure is
not necessarily the right one for all savings institutions; each should have a full range of choices
to meet the needs of their customers and communities. That is why ACB urges Congress to
expand choices for the financial industry, not reduce them. Much of the value of our bank or
any bank is based on its assets, capital, and current structure, but another component is what
our charter allows it to do. This value is there whether or not we are actually engaged in a
particular activity. Eliminating even a potential activity would adversely affect our value. When
we chose to convert from mutual to a unitary holding company structure, we based our decision
on what was best for our business, our customers, and our community. We could have chosen to
remain in mutual form, convert to a national or state bank or take the route we selected.
Financial modernization legislation should not limit in any way the options available to any of us
in the financial services industry.
The following expresses these views in another way:
Financial modernization should provide the flexibility for institutions to adapt to the rapidly
changing marketplace and to structure the delivery of financial services to their customers in the
best possible way. Why different banking firms choose a particular structure is not what is
important. What is important is that they have the flexibility to choose the structure best suited
to their business, market, and customers. Freedom to choose the most efficient organizational
structure is the best way to assure that customers will have access to low-cost, high-quality
products and services.
While ACB supports this view of financial modernization, I must give credit where credit is due.
These words come from the testimony of the American Bankers Association before the House
Banking Committee two weeks ago in promoting operating subsidiary activities. We agree with
the ABA on the need for operating subsidiary flexibility and support the substantial
improvements made to the bank charter by the Committee draft. However, it is curious that the
ABA opposes similar freedom of choice for the unitary holding company structure. Fortunately,
the Committee draft consistently protects freedom of choice for all institutions.
We Are Moving Toward a Financial Services Industry
By increasing choices available to financial firms and avoiding cutbacks in existing options, the
Committee's draft legislation implicitly acknowledges that we are dealing with one industry the
financial industry not a host of imperfectly walled-off competing industries that must be
protected from one another. By starting from this premise, Congress can avoid the thankless
task of being a referee between segments of the industry. Instead, Congress can focus on making
sound public policy decisions and setting essential rules of the road, such as safety and soundness
requirements and investor protections. Businesses and customers can determine for themselves
what services they will offer and buy.
My customers already understand that there is a single financial industry. They never ask if we
are a thrift or a bank. They simply ask what products and services we provide, at what cost, at
what level of risk (such as, are the products insured or not), and do we offer good service. If
First Federal Bank can provide the full range of services and meet the needs of our customers, we
and our community can prosper together. This committee's goal should be to let all of us keep
the flexibility we already have and increase it as much as possible, then let the market, rather
than government, be the arbiter
Fortunately, there are already examples in today's financial system that provide a road map for
positive legislation. The first example is provided from my own part of the industry: thrifts and
the thrift holding company structure. The second example is the nation's mutual funds. Each of
these financial delivery structures can be used by a diverse array of firms to serve their
Let me explain how this works in practice. For years, securities, insurance, and non-financial
holding companies and bank holding companies have owned savings associations. These thrifts
generally operated as traditional housing and consumer lenders have given their holding
companies the ability to offer an important array of financial services to their customers.
Recently, a number of additional firms have applied for thrift charters. The intentions of these
diversified firms are consistent with long-standing precedent, although their relative numbers and
their public profile are now higher. The Office of Thrift Supervision (OTS) has carefully
reviewed each of these applications to satisfy itself that they present viable business plans and
that the thrifts will comply with all applicable safety and soundness, consumer, and community
reinvestment laws. Where these applications are approved, the OTS will carefully supervise the
transactions between the thrift and its holding company to ensure that the they are on an
appropriate arms-length basis.
The OTS does not generally seek to regulate the capital and activities of the holding companies
themselves. Regulated firms, such as securities and insurance companies, are already regulated
by their functional regulators. Publicly held holding companies are also regulated by maybe the
toughest financial regulator of all: the marketplace. Every day, these firms must demonstrate to
their owners that their earnings and business prospects justify their continued confidence.
Mutual funds provide another example for a more flexible financial system. In recent years,
many types of financial firms, including banks and thrifts, have become involved in the mutual
fund sector. It is neither a question of a bank, thrift or some other company "getting into" the
mutual fund business, nor one of a mutual fund "getting into" banking or "getting into"
insurance. Mutual funds, like thrift deposit and loan products, are simply another financial
service and delivery channel a firm may offer to its customers. Of course, every mutual fund,
like every thrift, must meet strict statutory and regulatory requirements, regardless of its
affiliation. Like those parts of the thrift industry affiliated with diverse firms, mutual funds with
connections to other types of firms have compiled an exemplary record of service to the public.
The Need for Financial Modernization
While parts of the financial industry thrifts and mutual funds, for example can already
participate in the evolving modernized structure, commercial banks and bank holding companies
(BHCs) have been left behind in some respects. They face significant limitations on their ability
to offer financial services beyond what has traditionally been called banking. The Glass-Steagall
Act hampers affiliations between the banking and securities industries. Although the Federal
Reserve has loosened Glass-Steagall substantially via Section 20 subsidiaries, the law remains an
anti-competitive anachronism. Bank holding companies may only acquire securities firms that fit
within arbitrary size limits, while major securities firms are unable to acquire banks.
In a similar vein, the Bank Holding Company (BHC) Act does not permit banks to affiliate with
insurance underwriting companies. Beyond that, the BHC Act limits banks to affiliations with
firms "closely related" to banking. Banks that wish to sell insurance products face a patchwork
of state and federal statutes, as well as court and agency interpretations that sometimes permit
and sometimes prohibit insurance activities.
Congress should not change these laws merely for the convenience and profit of the banking
sector or that of the financial industry as a whole. It should change them to improve economic
efficiency and competition. Despite their loss of market share, depository institutions remain a
vital source of credit to businesses and consumers. The Federal Reserve conducts the nation's
monetary policy through its links to major commercial banks. An inefficient commercial
banking sector is bad for business, consumers, and the economy. Congress can eliminate the
inefficiency caused by outdated statutory restrictions by adding options to the bank charter and
bank holding company structure.
The committee draft would make substantial improvements, particularly by permitting banks to
freely affiliate with securities and insurance firms at the holding company level. It demonstrates
that financial modernization legislation need not as it should not damage those features of the
bank charter that are already modernized. For example, the Comptroller of the Currency's
(OCC) Part 5 rule gives national banks the opportunity to apply to offer a full range of financial
services through operating subsidiaries. Due to legal uncertainty, this rule has been utilized by
only a few institutions. The committee draft would ratify this rule for national banks with total
assets under $1 billion that operate without a holding company. While ACB believes the asset
and holding company limitations are not necessary, this legislation would clearly permit
community banks to take greater advantage of the operating subsidiary option. That provides a
useful, but limited, opportunity to strengthen the national banking system.
The Federal Reserve and others are concerned that, if banks are permitted to offer new financial
services through their subsidiaries they will use that form of organization exclusively. My own
bank's experience demonstrates that these fears are not well founded. We elected to operate
within a unitary thrift holding company for a variety of reasons, including the opportunity to
establish holding company affiliates which can provide services outside of the bank's customer
base, with no risk to the bank's capital, and with a different name from the bank. For instance,
our holding company operates a title insurance affiliate that serves customers of our bank and
those of other lenders. On the other hand, we have a subsidiary of the bank (FIDACO) which has
an investment in the Hazleton Community Development Corporation (HCDC). HCDC was
established in 1991 as a for-profit community development organization designed to promote
economic improvements within the city of Hazleton, Pennsylvania.
The key point is, we made these choices holding company affiliate or bank subsidiary for
business reasons, not to comply with arbitrary regulatory requirements. I am sure that national
banks and their holding companies would make the same mix of choices under the OCC's Part 5
and the committee draft.
The OCC has also successfully increased the ability of national banks to offer insurance services
and annuities to their customers. Fortunately, the committee draft draws lines between state and
federal control over banks' insurance sales without adopting a host of confusing new legal
standards. The insurance language in H.R. 10 dramatically increased in scope and complexity as
it moved through the 105th Congress. ACB is concerned that these provisions now included in
the current House version of H.R. 10 are internally inconsistent, rather than being carefully
balanced. It could take years of litigation to sort them out. In the meantime, consumers could be
denied competitive and efficient insurance services.
This language, inherited and adapted from the work of the last Congress, is apparently intended
to diminish fears that the OCC will engage in a wave of unwarranted preemptions of state
insurance laws. Based on the history of the OCC since the 1860s, such fears are groundless. The
limited preemptions approved by the OCC have been upheld by the Supreme Court in a series of
9 to 0 decisions. The OCC's actions have increased competition and customer service and have
harmed no one. The committee draft recognizes that the current system of OCC regulations is
not broken. Current law has achieved a balance of state and federal jurisdiction that best protects
and advances consumer interests.
A few ACB members operate with a national bank charter, and its health is important to us for a number of additional reasons. Most directly, Federal thrifts and state-chartered banks may generally only offer as principal those products and services permissible for national banks (agency activities are not covered by this limitation). More broadly, as national banks gained the flexibility to offer insurance services, states have extended that flexibility to their own state-chartered commercial banks and removed restrictions on state chartered savings banks. Finally, a strong national bank charter could benefit many firms, including holding companies that chose to operate both a bank and a thrift. For example, Citigroup operates both a national bank and a federal savings bank, using those charters where they make the most business sense. Congress should allow both charters to retain their flexibility and enhance them wherever possible.
The Value of the Thrift Charter Unitary Holding Company Structure
Just as the Committee draft increases the competitive flexibility of banks and bank holding
companies in various dimensions, it retains the current options for thrifts and their holding
companies. This benefits all thrifts and, indeed, the entire financial industry and its customers.
This is most certainly not an issue that concerns just a handful of big companies trying to "get
into banking" through the thrift charter. My own bank is a prime example. We determined that
organizing as a unitary thrift holding company was our best business option. That is why First
Federal joined the list of about 875 unitaries in the financial industry. We do not know all of the
services our customers and communities will need in the future; market needs cannot be
predicted. But, without the flexibility and adaptability of the unitary structure it might well be
impossible for First Federal and the other unitaries to serve changing customer needs without
coming to Washington every time we want to offer a new product.
Our holding company already operates a title insurance agency that provides title searches and real estate settlement services in northeast Pennsylvania. The firm, Abstractors Inc., provides services for customers of First Federal Bank and receives customer referrals from other banks and finance companies. We are also seeking a state license to offer trust services through another holding company subsidiary, Hazleton Bancorp. It is very important to my bank and its community to retain the flexibility that we have under current law.
Another key element of the thrift charter is that it is available to any firm that has the financial
and managerial strength to qualify. As we have seen, a diverse array of firms have applied for
and obtained thrift charters. But, a bank holding company may also operate a thrift, and, a bank
itself may convert to a thrift charter. For example, Citigroup does much of its "banking" outside
of New York through a thrift. Similarly, a commercial bank in Iowa converted to a thrift and is
now opening branches in its parent holding company's grocery stores.
In exercising these choices, there are logical tradeoffs involved. As a trade-off for the unlimited
commercial lending authority provided by the banking charter, an institution cannot affiliate with
commercial firms. For the affiliation rights provided by the thrift charter, an institution must
strictly limit its commercial lending, among other limitations of the Qualified Thrift Lender Test.
The decision is theirs to make. Consumers, businesses, and communities all benefit from the
diversity of services that results from these individual business decisions.
Homebuyers are one major beneficiary. Thrifts maintain a high percentage of their assets in
mortgage loans and related securities 73.7% for thrifts owned by non-banking companies,
70.6% for thrifts as a whole. By contrast, banks have only 32.6% of their assets in mortgage
loans and related securities. The National Association of Home Builders and the National
Association of Realtors have pointed out that, "thrifts have demonstrated a pattern of serving
low- and moderate-income borrowers. In many markets, thrifts are the leading source of
residential construction and development loans." (joint letter, June 12, 1997)
The recent applications from diverse financial firms provide a marketplace validation of the
value of the thrift charter and holding company structure. The financial strength of today's thrift
industry, reflected by record profits, record capital levels, and a fully funded deposit insurance
fund, is a testament to the flexibility and effective business options the thrift charter provides.
Proposals to Harm the Thrift Charter and Holding Company
Given the record of the thrift charter and holding company structure, Congress should hold it up
as a model for modernization. Unfortunately, some have proposed to take away many of the
unitary thrift holding company affiliation rights for companies that had not applied for a charter
by a certain date October 7, 1998 in last year's Senate bill and the new H.R. 10. Some of those
firms might be satisfied with the improvements in the bank holding company structure provided
in financial modernization legislation. Others might not, and some of the applicants would still
not qualify for a bank charter. There is no reason to cut off this successful, market-tested
business option as of October 7, 1998 or any other arbitrary date.
Some have also proposed that existing thrift holding companies with non-financial affiliates be
prohibited from being acquired by other firms. These artificial constraints on mergers,
acquisitions, and divestitures would clearly decrease the franchise value of existing holding
companies and reduce economic efficiency without any substantive public policy justification.
Prospective thrift holding companies would also lose business options because of newly imposed
Critics justify these limits by citing their concerns about mixing banking and commerce. We do
not share these concerns. But, regardless of one's position on this issue, policy makers should
understand that unitary thrift holding companies do not mix banking and commerce in any
meaningful manner. Thrifts may not lend to commercial affiliates under any circumstances.
And, thrifts' permissible commercial lending is strictly limited to 20 percent of assets, half of
which must be small business loans. The unitary thrift structure is a flexible platform for
consumer banking, not large-scale corporate lending.
Thrifts and Thrift Holding Companies Already Subject to Strict Regulation
Congress can be confident that that if it leaves the thrift charter, unitary holding company structure, and regulatory system in place, thrifts will continue to be vigorously regulated. The OTS and the Federal Deposit Insurance Corporation impose the same or even tougher capital and examination standards on thrifts as those imposed on commercial banks. Protection of thrifts and banks operating in holding company structures is equally vigorous. In some cases, thrift regulation imposes special requirements; for example, thrifts may not make any loan to an affiliate engaged in activities prohibited for bank holding companies.
While undergoing vigorous supervision, combinations of thrifts and commercial firms have
added demonstrably to the stability of the thrifts involved. They have compiled an exemplary
safety and soundness record. The OTS reported that only 0.3 percent of enforcement actions
against thrifts and thrift holding companies from January 1, 1993 through June 30, 1997 were
against holding companies engaged in non-banking activities. In short, the industry's experience
with well segregated commercial affiliates has been the opposite of what the critics contend.
Indeed, major firms have injected billions of dollars in capital into the thrift industry, providing
an added level of stability. The OTS is careful to ensure that all transactions between thrifts and
their diversified holding companies comply fully with the law primarily sections 23A and 23B
of the Federal Reserve Act and otherwise do no harm to the thrift itself.
SAIF Special Reserve
ACB is pleased to support legislative language in the Committee draft that would repeal the
SAIF special reserve. This language is similar to language introduced separately by Senators
Enzi and Johnson. ACB appreciates their leadership on this issue. We note that similar
language was included in the Committee's regulatory relief bill this year and this Committee's
version of H.R. 10 last year. Repealing the special reserve is the FDIC's top legislative priority
and will give the agency needed flexibility in administering the Savings Association Insurance
Fund. Mr. Chairman, ACB strongly urges you and your colleagues to do whatever you can to
ensure that this provision is enacted this year.
ACB also strongly supports Federal Home Loan Bank modernization legislation proposed by
Senators Hagel and Bayh. This proposal was listed as an "undecided issue" in the committee
draft released on February 17. We hope that the committee will decide to include it in the
financial modernization bill, or find another appropriate way to enact it into law. The FHLBank
System has been an unsung hero in providing housing opportunities through the private sector.
This legislation would enable the System to continue to meet housing and community
development financing needs into the twenty first century.
The Hagel/Bayh bill provides constructive approaches to governance and regulation of the
System. It addresses the issues that must be part of System modernization, including: voluntary
and equal membership requirements, an appropriate risk-based capital structure, and improved
access to the System for small, community based depository institution. The bill also balances
the System's mission and capacity by acknowledging its finite risk capacity, as well as the need
to assure both the stability of the System's capital base and the fulfillment of its housing and
community development finance responsibilities.
Financing Corporation Funding
ACB vigorously opposes the proposal to extend the unequal FICO funding for three years beyond
January 1, 2000. This "undecided issue" threatens to recreate a problem that Congress resolved
just two and a half years ago. We cannot understand why anyone in Congress would propose to
reopen the BIF/SAIF debate. In the fall of 1996 Congress faced and resolved a dangerous
disparity between the FDIC's two deposit insurance funds, BIF (Bank Insurance Fund) and SAIF
(Savings Association Insurance Fund). SAIF-insured institutions were paying deposit insurance
payments of 23 cents per $100 of deposits (23 basis points). BIF-insured institutions were
paying almost nothing. Institutions with SAIF deposits were taking vigorous steps to transfer to
BIF coverage, and market forces were causing other transfers.
At the urging of the FDIC, the Federal Reserve, Treasury, and the Office of Thrift Supervision,
Congress resolved this problem. First, SAIF-insured institutions were required to make an
extraordinary, one-time payment of $4.5 billion to capitalize the SAIF. That equalized the
reserve positions of BIF and SAIF. Second, Congress reallocated the FICO interest payment so
that BIF and SAIF institutions shared the burden. Until then, SAIF-insured institutions paid all
of the interest on FICO bonds (issued to pay depositors in failed institutions). Those payments
had diverted premium dollars that otherwise would have gone to capitalize SAIF. Both of the
steps Congress took in 1996 resolved the massive premium disparity that threatened to
destabilize the deposit insurance system by keeping SAIF weak and diluting BIF through deposit
To address concerns of BIF members, Congress decided to require SAIF-insured institutions pay
for three years a FICO premium at a rate 5 times the rate for BIF institutions. Extending this
inequity for an additional three years would reopen the wounds of the BIF/SAIF debate from the
late-eighties and mid-nineties. It would risk recreating the premium disparity and give SAIF
institutions a renewed incentive to revive their deposit-shifting plans.
Taking these risks is certainly not needed to redress any inequity between SAIF and BIF
institutions. In fact, since 1996, SAIF-insured institutions have paid FDIC assessments totaling
83 basis points on their deposit base, or about $6 billion. In contrast, BIF members have paid a
total of 2.5 basis points, totaling less than $700 million. Finally, this Committee should consider
the fact that a well-capitalized SAIF-insured institution with $100 million in deposits has paid
$830,000 for FDIC insurance since 1996, while the same-sized BIF member has purchased the
same federal insurance for only $25,000.
Frankly, none of the institutions BIF or SAIF that are paying FICO interest until 2019 were
responsible for the crisis of the 1980s. Those institutions responsible were closed long ago and
their stockholders rightly lost their investments. Resolving the BIF/SAIF/FICO problem in 1996
was handled in the most even-handed way Congress could devise and the solution has proved
manageable for the industry. Both BIF and SAIF are now healthy, as are virtually all the
members of each fund. Assessments should be equalized for all FDIC-insured institutions
starting in January, 2000, as provided for under current law.
ACB urges the Committee to act promptly on its financial modernization proposal that would
provide new competitive options for financial firms without reducing or eliminating firms'
ability to provide competitive products and services. I hope that as this debate moves forward,
all elements of the financial industry will view what flexibility you find in current law as an
opportunity, rather than a threat. This approach will help Congress make a major step forward
for the financial system and, more importantly, for the customers and communities it serves.
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