Mr. Chairman and Members of this Committee, my name is John Finneran. I am a Senior Vice
President and the General Counsel of Capital One Financial Corporation, headquartered in Falls
Church, Virginia. I appreciate the opportunity to testify today on behalf of the Association of
Financial Services Holding Companies (the "Association"), of which Capital One is a member.
The Association is a non-profit organization of approximately 45 member companies with
combined assets in excess of $1 trillion. Its members are holding companies that own
commercial banks, insurance companies, thrifts, credit card banks, non-bank banks and industrial
loan companies as well as a diverse group of non-depository affiliates.
Since we began business as a separate company in 1994, Capital One has been one of the fastest
growing, most successful companies in the United States. Through its subsidiary credit card
bank and thrift, Capital One has become one of the world's largest issuers of credit cards and a
direct marketer of consumer and small business lending products. We are also a pioneer in the
direct marketing of wireless telephone service through our subsidiary, America One
As of the end of 1998, Capital One had $17.4 billion in managed loans outstanding and nearly 17 million customers in the United States, Canada and the United Kingdom. We have over 10,500 employees based in Virginia, Texas, Florida and the U.K.
In each of the last four years, Capital One surpassed its goals of achieving annual earnings
growth and annual return on equity of at least 20%. In 1998 alone, we added nearly 5 million net
new customers and are currently adding new customers at an astounding pace of 20,000 net new
accounts a day. To support that account growth, our Company hired 4,500 more employees
during 1998 and expects to hire at least 3,500 additional employees in 1999 across all of our
On behalf of the Association and Capital One, I want to thank you, Mr. Chairman, for offering
your draft proposal. It is a narrowly tailored bill which accomplishes meaningful financial
modernization without undermining important existing regulatory safeguards or the ability of an
institution to choose the most efficient way to conduct its business and to pursue marketplace
innovations that will benefit consumers. I especially want to offer our appreciation and support
for the decision to retain the status quo with regard to the unitary thrift holding company
structure. Unlike recently introduced legislative proposals from the House and measures from
the last Congress, your bill would achieve true modernization, providing for a repeal of Glass-Steagall and other antiquated barriers without imposing unnecessary artificial restrictions on the
range of activities engaged in by unitary thrift holding companies. In sum, your bill would
enhance flexibility, increase global competitiveness for U.S. financial institutions, and increase
innovation and competition for the benefit of consumers in the U.S.
CAPITAL ONE UNITARY THRIFT HOLDING COMPANY
In the last Congress, there was much debate about the ability of unitary thrift holding companies
to engage in non-financial activities. Lost in that debate, however, was any appreciation for the
regulatory framework that ensures the safety and soundness of thrifts and tightly controls any and
all relationships between thrifts and their non-financial affiliates. Also overlooked were the real
benefits to consumers that can come from the unitary structure.
When Capital One applied for its thrift charter in 1995, we went through an application process
that is substantially identical to the application process necessary to establish a de novo bank.
Before granting our application, the Office of Thrift Supervision (the "OTS") had to be satisfied
that, among other things: we had a sound business plan; we provided for adequate capital and
reserves; we had capable and experienced management; and the thrift's business would be
conducted separately from that of its affiliates. Our thrift, like all other thrifts, is prohibited from
making any loans or extending any credit to its non-bank affiliates. The OTS has examination
and supervisory authority over both our thrift and our holding company. In the annual safety and
soundness examination process, the OTS examines not only the thrift, but also each of the
affiliates to satisfy itself that the non-bank activities pose no threat to the thrift.
We established the thrift to bring a greater array of financial services to consumers. In addition
to consumer credit cards, our thrift presently offers deposit products, unsecured consumer loans,
and credit cards to small businesses. Our goal is to build one of America's premier consumer
franchises by offering the best products available in the marketplace in each customer segment.
We "mass customize" our products to individual needs. We now offer literally thousands of
product variations and have created more choice, wider access to credit and lower borrowing
costs for many consumers and small businesses. The thrift is an important part of our ability to
continue to expand our product offerings and is a vital component of Capital One's future growth.
REGULATORY FRAMEWORK FOR UNITARY THRIFT HOLDING COMPANIES
The history of the affiliation issue is directly tied to the history of the thrift industry itself. In
exchange for foregoing a diversified asset base and focusing on residential lending, thrifts
received certain benefits such as the bad debt loss reserve incentive and membership in the
Federal Home Loan Bank System. Among the benefits conferred by Congress was the right to
affiliate with non-bank entities through the thrift holding company structure. Although certain of
these benefits have been eliminated over the years, and additional requirements have been
applied to thrifts to narrow and strengthen thrifts' consumer finance focus, Congress has
steadfastly continued to recognize the benefit of retaining the affiliation rights for thrifts.
The safety and soundness record of unitary thrift holding companies suggests that there is no
reason for Congress to deviate from this long-standing position. Specifically, there is no record
of any thrift failure that has resulted from the existence of the affiliation authority. In sum, the 35
years of experience with commercial affiliation has not presented any serious safety or soundness
The strong safety and soundness record no doubt in part results from the extensive requirements
imposed by Congress and the OTS on unitary and multiple holding companies. First, federal
thrifts are prohibited from making any loans or extending credit to commercial affiliates not
engaged in activities permissible for bank holding companies. Second, thrifts are subject to a
Q.T.L. requirement that 65% of assets be in mortgages, mortgage-related investments, education
and certain consumer and small business loans. The OTS also imposes minimum capital
requirements on subsidiary thrifts as well as restrictions on dividends and other capital
distributions. There are additional regulations to further ensure the safety and soundness of
unitary thrift holding companies and subsidiary thrifts. These include:
Our experience at Capital One offers compelling evidence that the operation of a thrift holding
company and its affiliates are subject to extensive regulation. As I mentioned earlier, both our
thrift and the holding company are subject to the examination and supervisory authority of the
OTS. In addition, our credit card bank is regulated by the Board of Governors of the Federal
Reserve System and the State of Virginia's Bureau of Financial Institutions; our credit card bank's
U.K. operations are not only regulated by the Federal Reserve and Virginia Bureau but also by
the bank regulatory agency in the U.K. -- the Financial Services Authority; and our Canadian
operations are subject to a variety of Canadian federal and provincial regulatory schemes. All of
these regulatory bodies examine Capital One for safety and soundness as well as compliance with
consumer protection laws and regulations.
Notwithstanding the existence of these strong institutional safeguards, in the past several weeks
the long-standing opposition to the thrift charter from certain industry groups has resurfaced. In
continuing to advocate elimination of what they characterize as the "unitary thrift loophole,"
these parties have re-asserted that the affiliation authority allows for an unhealthy mix of
"banking and commerce." The use of the term "loophole" ignores the extensive legislative
debate that took place thirty five years ago which resulted in the carefully crafted grant of
affiliation authority for savings and loan holding companies in exchange for a commitment to
residential and consumer lending. This structure has since been reaffirmed by the Congress in
every major banking bill.
These detractors refuse to acknowledge the long-standing fundamental distinctions between the
thrift charter and the commercial bank charter, most notably that thrifts are prohibited from
lending to commercial affiliates. As Director Seidman noted in her testimony to the House
Banking Committee on February 12, 1999, "this prohibition serves as an absolute limitation on a
thrift's ability to engage in the types of affiliate commercial lending that are at the heart of the
concern about mixing banking and commerce." In addition, as referenced above, only 20% of a
thrift's assets, half of which must be in the form of small business loans, may be applied to
commercial lending. The additional requirement that 65% of thrift assets be devoted to
mortgages, mortgage-related investments, education, and certain consumer and small business
loans, further distinguishes thrifts from traditional commercial bank lending activities. In short,
it is entirely unfounded to argue banking and commerce concerns in the same context as
commercial affiliation rights of unitary thrift holding companies.
Some critics of financial modernization are concerned that further mixing of financial services
and commerce, in any form, could result in a less stable financial structure, one vulnerable to an
"Asian" type of banking crisis. In fact, there is little similarity between the banking structures in
Asia and the United States. The crisis in some of the Asian countries (and elsewhere) resulted
from an unhealthy linkage between government and banking, and unsound bank lending practices
undertaken to carry out governmental industrial policies and practices.
Many of these failures are also attributable to the absence of an effective regulatory system, such
as bank-level capital requirements, and uniform accounting standards. Perhaps most importantly,
many of these financial institutions were not subject to the pervasive safety and soundness
requirements and regular careful scrutiny by experienced regulators as all financial institutions
are here in the U.S. In sum, the "Asian experience" is in no way relevant to U.S. savings and
loan holding companies' operations and activities.
BENEFITS OF RETAINING THE PRESENT UNITARY THRIFT HOLDING COMPANY
The case for leaving intact the current law governing unitary thrift holding companies does not
rest solely on the positive safety and soundness record. During times of economic hardship, the
unitary holding company structure has been a valuable source of capital, benefiting the thrift
industry and ultimately, taxpayers. In February, 1995, the Association commissioned an
independent study of the thrift holding company experience. That study found that the
preponderance of evidence suggests that commercial firms should continue to be permitted to
acquire control of thrifts. The study further showed that access to capital reduces the likelihood
of failure and that a holding company can reduce portfolio risk and reduce sensitivity to similar
economic cycles by affiliating with commercial firms. Finally, the study demonstrated that non-bank or commercial activities reduce the likelihood of failure by a holding company.
The conclusion of the study was best illustrated by the thrift industry experience during the
1980's. In the face of dramatic thrift losses, several commercial firms made investments which
prevented even larger losses to the thrift insurance fund and expedited the recovery process.
Director Seidman, in her recent testimony before the House Banking Committee, noted that over
$3 billion was infused into 79 failed thrifts by commercial firms during this period. This
investment was especially important because the commercial banking industry was unable or
unwilling to provide the capital. The ability of these diversified commercial entities to acquire
thrifts substantially benefited the industry, the SAIF, which insures the deposits of its customers,
and ultimately the taxpayers.
The unitary thrift holding company model also provides substantial consumer benefits. As
Director Seidman noted in her testimony to the House Banking Committee, "competition has
been enhanced as existing thrifts and new entrants have provided more choices for consumers
through innovative products and new service delivery systems." Furthermore, customers with
multiple accounts with holding company affiliates can be treated as a single customer
relationship thereby improving operating efficiency, reducing costs and reducing customer
information errors. This is particularly important for low and moderate income customers who
traditionally have found it more difficult to obtain a full range of financial services from multiple
In conclusion, Mr. Chairman, we are grateful for your recognition that a narrow, focused piece of
legislation offers the best model for modernization. Your proposal addresses pressing
marketplace needs, and advances the goals of increased efficiency, global competitiveness, and
operational flexibility in a regulatory context that assures continued safety and soundness and
consumer protection. Your proposal also maintains the current savings and loan holding
company structure that has served American consumers for 35 years. Thank you for the
opportunity to testify and we look forward to working with you and the other Members of the
Committee on this important legislation.
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