Statement of Witness on Representation
Robert W. Gillespie appears before the Senate Banking Committee in his capacity as Vice President of The Bankers Roundtable.
Mr. Gillespie is Chairman and Chief Executive Officer of KeyCorp, a diversified financial services company.
The Bankers Roundtable is a national trade association, the membership of which is open to chief
executive officers and senior management personnel from the largest 125 banking institutions in
the United States. Mr. Gillespie's remarks are made on behalf of the membership of The
Mr. Chairman, Senator Sarbanes and members of the Committee, I am Robert Gillespie,
Chairman and CEO of KeyCorp, an $80 billion diversified financial services firm based in
Cleveland serving customers in all 50 states.
I am pleased to appear before the Committee today on behalf of The Bankers Roundtable. The
Roundtable is a trade association whose membership is open to the largest 125 United States
banking firms. The Roundtable's mission is promote the business of baking and finance and to
encourage development of sound banking and financial policies and practices. I currently serve
as Vice President of the Roundtable and will serve as President beginning in April.
Financial Law Modernization
Mr. Chairman and members of the Committee, I am pleased to address you on the need for
financial law modernization. This Committee is well-positioned to move quickly on such
legislation, based on the progress made during the last Congress in airing the various policy and
legal issues. For new members of the Committee, your
experience with financial institutions in your states no doubt provides you a clear appreciation of
the dynamic marketplace for financial services.
The Roundtable has advocated financial law modernization for over two decades. Today, we are
fortunate that all sectors of the market agree on the need for change to existing laws that will
result in reduced barriers to competition and permit greater utilization of new technology. There
is no doubt that you are considering changes to the law in a time in which the benefits are clear
enhanced services to consumers and a stronger, more secure financial system.
Permitting firms to offer diverse product lines without the inefficiencies created by current law
will lead to better delivery systems, new and more innovative products, better use of expensive
technology and a more customer-responsive financial system.
The Roundtable has indicated to the Committee last year that revisions of our nation's laws that will permit our markets to evolve is the best policy approach. These revisions can be undertaken as they will occur against a backdrop of a very strong financial system, operating in a framework that provides for safety and soundness and helps avoid systemic threats. Indeed, financial law modernization
that strengthens our financial institutions in and of itself will enhance safety and soundness.
Simply put, this Committee will act against a backdrop that favors modernization and will permit
the Committee to act with the knowledge that safeguards already are in place to support new
product and service authorities.
Principles for Legislation
Since the need for action is self-evident, it would be useful to set forth some brief principles that
guide the Roundtable's analysis of proposals to update our nation's financial laws.
Affiliation and cross-selling. The key principle of financial law modernization is the authority for firms to offer, without arbitrary and costly legal impediments, diverse financial products. The ability of firms to transmit to customers, through subsidiaries or affiliates, the benefits of affiliation and cross-selling of products is essential and should be authorized with the least regulation and the maximum support for market evolution.
Nondiscrimination. To realize the benefits of affiliation and cross-selling, it is fundamental that laws and regulations should not discriminate against firms that take
advantage of new authorities, thereby frustrating congressional intent that firms be able to engage
in new activities.
"Do No Harm." Congress should not undermine existing bank structures and should not weaken
institutions that choose not to affiliate or cross-sell products. Banks remain central to the
economic health of our country and of our communities. Legislation should "do no harm," by
building on existing industry strengths and existing regulatory structures where they have
Avoid new regulation and litigation. Congress should undertake the least legislative changes needed to attain modernization of financial laws. Current law has permitted firms to undertake limited affiliations and cross selling of products; removing remaining barriers to such affiliations and sales should be the center post of legislation. Congress should avoid creating a rash of new legal rules or safeguards as this will engender new regulation and encourage new litigation. For example, court cases have addressed the inter-relationships of regulatory agencies and the agencies themselves have the ability to work on an interagency basis to resolve issues; to the
degree possible, legislation should avoid injecting new rules on jurisdiction that confuse regulatory relationships.
Banking Committee Preliminary Staff Draft
Mr. Chairman and members of the Committee, our preliminary view of the Banking Committee
staff draft for a modernization bill is very positive and the Roundtable feels the measure meets
many of our principles. Naturally, as you would expect, there will be some topics that we would
a. In General
Overall, the measure represents a streamlined approach that emphasizes freeing the market from
current restraints and permitting competition among firms that are already heavily regulated. The
draft avoids creating a large amount of new legislative language that would lead to regulation and
litigation and basically views modernization as removing product restraints, not removing
restraints while layering on a rash of new legal and regulatory structures. This approach of
removing restraints will lead firms to getting about the business of competing to serve customers,
not seeking regulatory protection or judicial intervention.
The draft is based on a view that firms already compete in these markets and the permission to
better deliver products and services will facilitate further competition. Competition in these
markets already occurs with regulators exercising enormous
authority to address any threats to safety and soundness or to customer protections.
Likewise, the approach in the draft looks to the realities of rapidly evolving markets and new
hybrid products. While banking was a very static business for decades, financial services today
is a dynamic market with a great velocity of change. The draft bill takes the approach that
providing a rash of new product explanations will provide no long lasting benefit in light of rapid
product development. Whether it is an insurance product, a banking product or a securities
product and who the regulator is generally are secondary considerations to consumers and other
market participants. The draft provides for functional regulation by existing regulators with
existing authorities, which are extensive. The authority exists among these regulators to work
through regulatory responsibilities.
Removing limits on affiliation and cross marketing of products creates no new burden on regulators that they have not already had to address. Bank regulators and insurance regulators currently oversee bank underwriting and offering of credit-related insurance. Bank and securities regulators currently oversee bank involvement and ownership of mutual funds and securities firms. Insurance regulators have to
address insurance firms offering hybrid products and bank-like services. Securities
regulators today oversee securities firms involved in lending and ownership of banks. Simply
put, regulators already address issues related to firms offering diverse product lines. The draft
envisions removing the impediments to a more rational integration of products and services; this
creates no gap in the regulatory oversight and supervision that already exists.
The key section of the staff draft on affiliations is Section 104. This section provides a clear
message to the marketplace regarding conflicting laws firms must be able to affiliate in order to
offer products and services; legal and regulatory requirements that impede this affiliation, in
effect discriminating overtly or indirectly against firms because of their affiliations, are
unacceptable. This brief section is critical and has been crafted carefully to make this message
clear and unambiguous, in part by providing less language for interpretation or litigation.
As to banking and commerce, the Roundtable has supported incremental steps in this regard and has noted that almost every legislative proposal has suggested some authority for limited cross ownership of banking and commercial firms. The staff draft would set forth a percentage larger than prior proposals as well as suggesting an
approach for commercial firm ownership of banks. The Roundtable believes that a limited
integration would be workable, but must provide some degree of comity between banks and
commercial firms in terms of size an understanding of the asset size distinctions among banks
and commercial firms should be considered so that some degree of an even playing field
emerges. We would look forward to working with the Committee as you discuss this item
c. Insurance Issues
Insurance sales and underwriting present very difficult issues, primarily because of the interplay
of federal and state laws and regulators. Much of the debate has been based on fear of regulators
and fear of a competitive advantage, either by corporate structure or regulatory fiat. The staff
draft approaches this issue in a well-reasoned fashion that the Roundtable can support.
Recent events support the staff draft approach. Rather than go through the long history of conflicts among banks, insurance companies, insurance agents and state and federal regulators, it might be worthwhile to view the staff draft's provisions in
light of recent, real world events. In part, the staff draft appears to reflect a view that removing the barriers to product offerings will occur in an existing and extensive
regulatory framework, where some disputes are resolved and some are not.
The value of the staff approach may be found in answering this question-- what goes
on today that evidences a need for extensive new regulation?
In the opinion of the Roundtable, no problems exist for insurance or banking interests. While
many argue that new products and new services need new constraints, it may be argued that
existing cross marketing of services creates no problems and no problems would be created by
removing final legal or regulatory impediments to full service sales and underwriting.
The VALIC case in 1995 determined that annuity sales represented sales of an investment product eligible for national banks and restated the ability of the OCC to define new bank products. The Barnett case in 1996 determined that insurance agency is permissible for national banks despite state laws to the contrary, upholding an OCC interpretation of section 92 of the National Bank Act. Both cases were heralded by the insurance industry as disasters and prompted their call for remedial legislation.
Yet, one may ask-- what has happened since 1995 and 1996 to support these fears? Has the
OCC aggressively preempted state laws and regulation or has the OCC evidenced a desire for
state insurance regulators to oversee bank insurance activities and worked with those regulators
to develop cooperative procedures? The latter is the case. Has the banking industry sought
advantageous carve outs from state laws or has the industry worked with state insurance
regulators to insure they fully comply with state insurance laws? The latter is the case. Has the
insurance industry been forced out of markets by bank participation or has the industry held its
position? The latter is the case.
In short, the reality since these court cases has been a banking industry interested in getting on
with competition not one seeking some competitive advantage. Further, the OCC has not done
anything beyond what it indicated it would do support state regulation, reserving any action to
cases where states discriminate against banks simply because they were banks.
d. Community Reinvestment Act
The provision in the staff draft for certainty and validity of Community Reinvestment Act ratings
makes sense and does not place any undue burden on those who believe a bank has not met its obligations under the law. Banks need to meet their CRA obligations, but should not have applications delayed where no new information has come forward since the time of a bank's last examination. A broader review of CRA may require separate consideration by the Banking Committee and should not delay action on financial law modernization, an idea referenced by Chairman Gramm in his preliminary comments on
legislation this year.
e. Problem Areas
There are a few areas that are central to financial law modernization that the Roundtable believes
should be addressed differently than as suggested in the Banking Committee staff draft.
1. Operating Subsidiaries (Section 122)
The flexibility to offer new products and services in a diverse range of corporate structures should be a key ingredient of modernization. To best serve customers, managements need the ability to deploy products through structures that facilitate
such deployment. Bank operating subsidiaries provide an important vehicle to deliver services.
Operating subsidiaries offer alternative methods to holding company affiliates without displacing
such affiliates. The subsidiaries pose no safety and soundness problem and, indeed, according to
the FDIC may enhance bank stability. Proposals for subsidiaries to engage in new principal
activities are accompanied by capital limits and imposition of transaction limits contained in
Sections 23A and 23B of the Federal Reserve Act. Finally, there is no competitive advantage for
a subsidiary, insulated from a bank and any purported subsidy available to a bank. Operating
subsidiaries are separate corporate structures and do not trigger bank liability.
The Roundtable supports maximum flexibility in the use of corporate structures to deliver
financial services. The proposal in Section 122 of the draft to permit banks under $1 billion in
assets to enjoy the use of operating subsidiaries for a broader range activities than larger
institutions represents unwarranted discrimination, is founded in no economic rationale and will
weaken the national bank charter.
Attached to this testimony is a recent Roundtable staff article on the bank subsidy argument. [Attachment 1] Submitted separately to the Committee for its file are two longer documents on bank operating subsidiaries and the subsidy issue.
2. Home Loan Bank System Mission Expansion (Title IV- Sections 402, 404)
The draft bill lists reform of the Federal Home Loan Bank System as a discussion item.
Language to reform the Federal Home Loan Bank System certainly merits review by the Banking
Committee. The Roundtable encourages a thorough review of the Bank System membership
rules, capital requirements and governance procedures.
The proposal to expand the acceptable collateral that may be used to secure System advances, however, raises serious questions. Banks under $500 million in assets could secure advances to support community development, rural development, small business and agricultural loans. Part of the support for this proposal goes as well to providing liquidity for smaller banking institutions. On all counts, serious questions exist about this concept. If smaller institutions need liquidity more direct methods are available. Selecting banks under $500 million discriminates among banking institutions without justification. Expanding the System mission does not make sense when the System's overall operation is under review. Finally, the new collateral would alter the risk profile of the System, away from less volatile home financing to more risky small business, agricultural and other undefined loan types.
Addition to Staff Draft
In keeping with the idea of removing archaic restraints to market evolution, an addition to the bill
would make a great deal of sense and not present any major revision of the draft. Currently,
banks operate their insurance agency activities under Title 12 of the United States Code, Section
92, that provides for such services to be operated from a place of less than 5000 population. In
the age of the Internet and with the explicit recognition of bank and bank subsidiary authority to
engage in agency activities in the staff draft, this "place of 5000" restriction makes no sense. To
that end, the Roundtable encourages the Committee to eliminate this element of Section 92. To
be clear, Section 92 should be retained, only the language on place of 5000 should be deleted.
This change to the bill would be in line with modernizing the financial system and would not
appear to present a controversial item. Language attached to this testimony accomplishes this
end. [Attachment 2]
Mr. Chairman and members of the Committee, the Roundtable supports your early action on financial law modernization. The sooner the Committee acts, the sooner the financial services community may take action to improve customer service and
strengthen financial institutions. The market is strong, the regulatory infrastructure
is in place and the need for action is clear. This is an opportune time for revising our laws to
position our institutions to remain strong and competitive and to support our nation's economy
well into the future.
The Roundtable remains committed to working with you in this critical undertaking.
Language on Bank Insurance Agency
Revised Section 92 -- Agency Authority
Sec. _____ NATIONAL BANK INSURANCE AGENCY ACTIVITIES.-- "The eleventh
paragraph of section 13 of the Act of December 23, 1913 (12 U.S.C. 92) is amended by striking
the language and inserting the following:
"In addition to the powers now vested by law in national banking associations organized under
the laws of the United States, any such association may, under such rules and regulations as may
be prescribed by the Comptroller of the Currency, act as the agent or broker for any insurance
company authorized by the authorities of the State in which said bank is located to do business in
said State, by soliciting and selling insurance and collecting premiums on policies issued by such
company; and may receive for services so rendered such fees or commissions as may be agreed
upon between the said association and the insurance company for which it may act as agent:
Provided, however, That no such bank shall in any case assume or guarantee the payment of any
premium on the insurance policies issued through its agency by its principal: And provided
further, That the bank shall not guarantee the truth of any statement made by an assured in filing
his application for insurance."
This language rewrites Section 92, that authorizes national bank insurance sales, eliminating the requirement that national bank insurance agency take place from a place of 5000 or less. Since Section 92 is retained, no need exists to restate the Barnett decision or other court rulings. The language modernizes the law by deleting references to fire and life insurance and by adding the word "broker," which reflects modern practice.
The modification of current Section 92 would be as follows:
"In addition to the powers now vested by law in national banking associations organized under the
laws of the United States any such association
located and doing business in any place the
population of which does not exceed five thousand inhabitants, as shown by the last preceding
decennial census, may, under such rules and regulations as may be prescribed by the
Comptroller of the Currency, act as the agent or broker for any fire, life, or other insurance company authorized by the authorities of the State in which said bank is located to do business in said State, by soliciting and selling insurance and collecting premiums on policies issued by such company; and may, receive for services so rendered such fees or commissions as may be agreed
upon between the said association and the insurance company for which it may act as agent:
Provided, however, That no such bank shall in any case assume or guarantee the payment of any premium on the insurance policies issued through its agent by its principal: And provided further,
That the bank shall not guarantee the truth of any statement made by an assured in filing his
application for insurance."
(Overstrike = deletion; bold = addition.)
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