Hearing on Financial Services Modernization

Prepared Testimony of Mr. Robert W. Gillespie
Chairman and CEO

10:00 a.m., Thursday, February 25, 1999

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 Bankers Roundtable.

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 ongoing value.

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 approach differently.

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.

b. Affiliations

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 further.

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.

Attachment 2

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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