Mr. Chairman, I am Hjalma Johnson, Chairman and CEO of East Coast Bank Corp, Dade City,
Florida, and President-Elect of the American Bankers Association (ABA). I am pleased to be
here today to present the views of the ABA on modernizing the structure of our financial system.
The ABA brings together all categories of banking institutions to best represent the interests of
this rapidly changing industry. Its membership which includes community, regional and money
center banks and holding companies, as well as savings associations, trust companies and savings
banks makes ABA the largest banking trade association in the country.
Mr. Chairman, we thank you for the fast start in considering financial modernization legislation
this year, and for holding hearings early in this new session. As we all know, the path towards
the enactment of financial modernization has been long and difficult, but real progress has been
This year, proponents of financial modernization have reason to be encouraged. The fast start in
your Committee, coupled with the hearings and scheduled mark up in the House Banking
Committee, gives this legislation a significant boost. At the end of last year there was a growing
consensus among many interested parties, including the various sectors of the financial services
industry, on the need for financial modernization. It is clearly time to move forward.
We recognize that changes will be made in this legislation during the Congressional process.
However, we know that no party including ABA will get everything it wants in the final
legislation. All parties must be willing to compromise in the interest of enacting financial
modernization; we pledge to work with this Committee to achieve that goal.
In my statement today, I would like to first discuss the need for financial modernization. Second,
I will detail ABA's position on some of the elements in the Staff Discussion Draft of February
16, 1999. Further details on the securities and insurance provisions will be submitted for the
record by the ABA Securities Association and the ABA Insurance Association. These
subsidiaries of the ABA follow these issues in detail and have worked closely with members of
this Committee and others over the last Congress to help develop a workable framework for
Third, I will discuss an issue critical to ABA which is not in the Discussion Draft the unitary
thrift holding company issue. We strongly urge the Committee to address this issue. Finally, I
would like to discuss the need to resolve the debate regarding operating subsidiary authorities.
I. The Need for Financial Modernization
The virtually unanimous agreement among financial service providers that the time has come to
modernize our financial structure is perhaps the most obvious evidence of the need for reform.
Revolutionary improvements in technology and escalating competition are redefining the
financial services business. The lines between different types of financial service firms have
been blurred beyond recognition.
Today, my customers have the option to write a check on a money-market mutual fund to pay
their bills; they can have a credit card issued by a phone company; and they can get a home
mortgage from an automobile manufacturer. The list of non-traditional suppliers of financial
services competing for my customers gets longer every day. Even defining the term "financial
service" is becoming difficult in today's market.
As dramatic as the recent changes have been, they will surely be dwarfed by those that will occur
over the next few years. In this dynamic market, the ability to quickly and efficiently respond to
changing customer needs is critical. Successful firms must be flexible, innovative, and able to
offer a broad range of financial services. As a banker, I can tell you that finding ways to compete
successfully in these rapidly evolving markets without tripping over the outdated regulatory
banking framework is no easy task and it is absorbing a considerable amount of time, energy,
and resources of large and small banks across the country.
Under the current regulatory regime, banks have lost traditional market share to other financial
service providers. In fact, the market share of total assets held by banks and thrifts has fallen
steadily over the past two decades, from almost 60 percent to 25 percent. On the other hand,
securities and insurance firms like Merrill Lynch and Prudential offer everything from consumer
and commercial loans to credit cards, securities, insurance and real estate products without
having to jump through a series of regulatory hoops. Not only can these firms affiliate with each
other, but many also own FDIC-insured savings institutions or "non-bank" banks.
Bankers are working to offer the products our
customers want, although in many cases the
current framework makes this process more
difficult and expensive than it would otherwise be.
For example, Section 20 subsidiaries allow some
large bank holding companies to offer securities
underwriting services, but this is not a practical
structure for small banks or even for most mid-sized banks.
Simply put, the bank regulatory structure needs to
be modernized to allow all institutions the option
to enter lines of financial business without having
to jump through costly regulatory hoops. Not all
banks will choose to offer all services. But the decision of what products and services to offer
should be a business judgment that each individual institution is free to make. It simply makes
no sense to perpetuate a system that limits free and fair competition. Doing so means that
customers will not be well served.
Ensuring that consumers are well served should, of course, be a primary focus of the Committee.
The costs and lost efficiencies of the current system are ultimately borne in large part by the
consumers of financial services.
This legislation is also important to our country's international competitiveness. Despite our
archaic laws, this country is the international leader in financial services to the great benefit of
our economy. However, we cannot maintain that leadership unless our laws are brought up-to-date.
ABA's Position on Key Provisions of the Staff Discussion Draft
Basic structure: The ABA strongly supports the basic underlying structure for financial
modernization contained in the Discussion Draft. It provides a clean framework for the
affiliation of all financial firms without some of the unnecessary regulatory provisions that have
been contained in bills considered over the last few years. We believe this core part of the bill
provides a solid basis from which the Committee can proceed.
Securities provisions: Mr. Chairman, as you and members of the Committee know, the ABA
through its affiliate, the ABA Securities Association (ABASA) worked long and hard to
contribute to many of the capital markets and securities provisions in the bill reported from this
Committee last Congress. ABASA had many constructive dialogues on these issues with
members and staff of this Committee and the House Banking and Commerce committees. In
addition, numerous discussions with the federal banking regulators, the Department of the
Treasury, the SEC and various industry trade groups were held.
ABASA will submit a more detailed statement for the record in support of the capital markets
and securities provisions of the Discussion Draft. However, in summary, the ABA and ABASA
support the provisions in the Discussion Draft. ABA had agreed to support the language in last
year's Committee product, but the new language is far preferable in a number of ways that will
be detailed in ABASA's submission.
Insurance provisions: The treatment of insurance has for many years been one of the most
troublesome aspects of financial modernization legislation. The Discussion Draft contains a new
approach to the insurance issues. Again, ABA had agreed to support the compromise provisions
contained in last year's Senate Banking Committee approved version of financial services reform
legislation. However, the Discussion Draft, as released, contains a preferable approach, which is
cleaner and less complex. ABA supports it.
A more complete discussion in support of the insurance provisions in the Discussion Draft will
be provided in a statement to the Committee prepared by our affiliate organization, the American
Bankers Association Insurance Association (ABAIA).
Subchapter S provision: We support the provision providing for a study of expansion of the
Subchapter S treatment of small banks. We greatly appreciate the interest of several members of
this Committee in this important topic, and particularly the efforts of Senator Allard. The ABA
strongly supports changes to Subchapter S along the lines of those that have been advocated by
Senator Allard and others. Of course, this ultimately is a matter within the jurisdiction of the
Finance Committee. We sincerely hope that members of this committee who also serve on the
Finance Committee will take the lead in pushing Subchapter S modernization within that
Elimination of SAIF special reserve: The ABA supports the provision to eliminate the SAIF
special reserve. In truth, this artificial reserve was created for Congressional budget reasons
which, as we understand it, no longer apply. Thus, it really is a matter of good accounting to
repeal the special reserve provision.
CRA provisions: We appreciate the fact that CRA is potentially one of the most controversial
aspects of this legislation. In general, bankers across the country strongly support the purpose of
CRA, and indeed there is no industry more involved in developing and serving their communities
than the banking industry. On the other hand, it is no secret that bankers have had problems with
both the implementation of CRA and the fact that it does not apply to our competitors. On page
3 of this statement, there is a graph of market share of assets held by various types of financial
institutions. It clearly shows the incredible decline of market shares held by banks and thrifts.
Looked at another way, it also shows how the assets within the financial industry subject to CRA
have shrunk rapidly. During this same period of time, CRA requirements on banks have been
increased. Thus, increasing requirements are being placed on an ever smaller relative base.
The ABA, therefore, would support a Congressional review of CRA, which we would suggest
include a number of issues, such as:
the paperwork burden;
competitive implications of applying CRA to banks and not direct competitors, many of which
are taking funds out of communities that would have traditionally gone to local banks;
the practical impact of the CRA evaluation system, under which banks with satisfactory or
outstanding ratings can still have their applications challenged and delayed despite those ratings;
the issue of how CRA protests are handled by regulators, community groups, and banks, and
whose interests are being served.
While we know there are strong feelings on this Committee, it is our hope that the potential
controversy over CRA would not delay action on financial services modernization. We note that
you, Mr. Chairman, have indicated that you would be open to working out some agreement on
CRA in the context of this financial modernization bill, and then proceeding to a more thorough
review of CRA later this year. If Committee members wish to address the issue in this fashion,
we would pledge to work with all Committee members to reach an agreement on CRA within the
context of this bill and to participate in any later review that may take place.
Commercial basket provision: Since the beginning of the last Congress, we have indicated that
we could support a limited basket, although we did not have to have a basket to support a bill.
The ABA believes a limited basket could be valuable for community development in certain
situations. For example, in many small towns, there is a crying need for credit and for
investment capital in main street businesses. I am aware of instances where a local
businessperson is retiring and would like to sell a critical business in a community. The problem
is that often the purchaser needs some small help in terms of capital investment in addition to
credit. For want of such a capital investment, this critical business may be closed, triggering
even greater problems for businesses and residents of the community. Allowing a bank holding
company to make such investments, even on a limited basis and only with excess capital above
the well-capitalized regulatory standard, would help ease this problem and help local
We would like to make sure, however, that the commercial basket does not become so large that
it becomes a back door way to co-mingling banking and commerce in a general sense. In that
regard, we have generally supported commercial baskets in the five to ten percent range, and
ABA, therefore, believes that a 25 percent basket is too large.
Home Loan Bank System reform provisions: The ABA strongly supports the proposed
provisions on Home Loan Bank System reform, which have been put forth previously by Senator
Hagel and others. We particularly want to compliment Senator Hagel for his strong leadership
on this issue, and we appreciate Senator Bayh's interest this year. As Senator Hagel has stated on
a number of occasions, many smaller communities, particularly rural communities, are suffering
from a lack of available credit. The problem is that local banks in many of these communities
are fully "loaned up." As mutual funds, securities firms, and insurance companies have
expanded, some of the funds that previously had been available in those communities have been
"sent to Wall Street." At the same time, it is extremely difficult for smaller banks to tap the
national capital markets.
While the proposals on Home Loan Bank reform contain a number of important provisions that
we support to modernize the System, we want to especially emphasize a very important provision
permitting more flexibility for community banks to use the System to directly address this critical
issue of bank liquidity. We strongly urge the Committee to include the Home Loan Bank System
reforms in the financial modernization bill. These reforms are of great interest to community
banks, and would be very helpful in gaining community banks support for the legislation.
Unitary bank holding company provision: Under this proposed provision, commercial
companies could enter the banking business by gaining control, either through a de novo charter
or by acquisition, of a national bank. The revenues and assets of that bank would be limited to a
percentage of the bank holding company's total revenues and assets. The ABA is strongly
opposed to this provision because of our basic concerns about mixing banking and commerce.
Under this provision, it appears that a large commercial company could own a bank of significant
size. While there are clearly differences of opinion among Senators on this Committee about the
appropriateness of mingling banking and commerce, it is the position of the ABA that with the
exception of a limited basket the intermingling of banking and commerce should not be further
Extending for three years the BIF-member FICO assessment rate: When Congress enacted
the so-called BIF/SAIF legislation in 1996, it transferred a significant proportion of the
obligation to pay interest on FICO bonds from SAIF-insured institutions to BIF-insured
institutions. (FICO bonds are bonds that were used to fund a portion of the thrift rescue in the
1980s.) As the legislative history indeed, the legislative language clearly indicates, it was the
intention of the Congress at that time to come back and address issues relating to the thrift
charter and unitary thrift holding companies in the next Congress.
In that next Congress, 1997 and 1998, the House of Representatives had an extensive debate on
thrift charter and unitary thrift holding companies. Different approaches were contained in
versions of the House legislation. Ultimately, the House settled on a provision which, basically,
prevented commercial firms from buying or chartering a thrift going forward, while maintaining
the current thrift charter as is and grandfathering existing unitary holding companies. This same
provision was adopted by the Senate Banking Committee, although no final Senate action was
In the 1996 BIF/SAIF legislation, the Congress provided a two-step timetable for having BIF-institutions assume part of the FICO obligations from SAIF-institutions. For the first three years,
BIF institutions were to pay at a rate of roughly 1.30 basis points of domestic deposits, while
SAIF institutions paid at a rate of 6.50 basis points. (Note that because there are more BIF-insured deposits than SAIF-insured deposits, BIF institutions are paying considerably more than
the one-fifth of the FICO obligation that this rate differential would seem to imply in fact, BIF-institutions pay two-thirds of the total FICO obligation.)
Under the 1996 law, as of January 1, 2000, both BIF and SAIF members will pay slightly over 2
basis points for FICO. The legislative history clearly shows that this three-year phase-in was
designed to give Congress time to address issues relating to the thrift charter and unitary thrift
holding companies. In fact, it was the stated intention of key Members of Congress to seek a
merger of the two charters into a new, expanded charter, and to merge the deposit insurance
As is discussed further below, the strong preference of the ABA would be to proceed to address
the unitary thrift issue as part of financial modernization this year. We are very concerned that if
it is not addressed this year, it may prove to be too late to address it in the future. In fact, many
banks have told us this is the most important issue to them. However, if this Committee decides
that it does not wish to address the unitary thrift issue at this time by preventing both the
chartering and sale of thrifts to commercial firms in the future then a three-year extension of
the second step in the FICO assessment rate would be appropriate. This would give Congress
additional time to address issues relating to the thrift charter and unitary thrift holding company.
Although we recognize there are differences of opinion about the banking and commerce issue,
from talking with Senators on this Committee, it is our belief that there is a desire to address
these issues at some point. Extending the timetable for FICO would send a signal to, and provide
an incentive for, industry groups to work with this Committee to resolve these issues once and
for all. The provision would also carry forward the clear Congressional intent, at the time of the
enactment of the BIF/SAIF legislation, that parity was to be achieved after these issues had been
III. The Unitary Thrift Holding Company Issue Needs To Be Addressed
ABA believes that the unitary thrift holding company issue should be directly addressed in the
financial modernization bill. We would strongly support an amendment to the Discussion Draft
to address the unitary thrift issue. This is an issue of critical importance to bankers, particularly
Again, to many bankers it is the most important issue in this debate.
At the heart of the unitary thrift issue is whether it is appropriate to mix commerce and banking.
Mr. Chairman, we recognize that you and others on this Committee may disagree with our views
on this issue. However, we believe that commerce and banking should not be allowed to mix in
the wholesale fashion permitted under the unitary thrift concept. It is noteworthy that both
Federal Reserve Chairman Greenspan and Treasury Secretary Rubin have now testified in
support of prohibiting the chartering or purchase of thrifts by commercial companies going
If the current unitary thrift situation which allows any commercial firm to enter the banking
business merely by buying a thrift is not addressed soon, commerce and banking will certainly
be mixed. For example, Microsoft or General Motors could buy a small thrift with what would
amount to them as spare change. Note also that such a small thrift could then be merged with a
very large bank, as long as the resulting institution were run as a unitary thrift.
This is a critical point there is almost no difference between a thrift and a bank today. The tax
incentive for thrifts to engage in housing finance has been eliminated, and the Qualified Thrift
Lender test has been steadily eroded to the point where the great majority of commercial banks in
the country qualify, or could easily qualify with minor asset adjustments, as thrifts. The only real
difference is the ability to hold large commercial loans; but even this can be circumvented by
selling off those loans or by setting up a commercial finance affiliate.
Thus, if Congress passes financial modernization without addressing the unitary thrift issue, it
is highly likely that our country will have permanently crossed the bridge to full banking and
commerce. In a very short time, we will almost certainly see large commercial firms owning
large banks. These banks will technically have thrift charters, but for all practical economic
purposes, they will be banks.
In fact, since discussions in Congress began regarding the possibility of closing the unitary thrift
option, interest in acquiring and chartering unitary thrifts has intensified. Seventy non-depository
firms including some large manufacturing companies either have an application pending or
have already been granted a thrift charter. (See Table 1 for more details).
The Parallel Banking System
The unitary thrift issue raises concerns even beyond the mixing of banking and commerce. As I
noted above, there is little practical difference between a bank and a thrift. Yet there is a big
difference in how their holding companies are regulated. In particular, the Office of Thrift
Supervision (OTS) focuses its supervision on the subsidiary thrift, while the Federal Reserve
imposes supervision at the holding company level. Most importantly, the Fed imposes capital
requirements on bank holding companies, while there is no such requirement on thrift holding
Failure to deal with the unitary thrift holding company issue would mean that Congress will have
blessed two parallel banking systems, one with much stricter regulatory standards than the
other. Economic theory tells us that resources will flow into firms with more regulatory
advantages and out of those with less regulatory flexibility. Some day soon, the OTS could even
supplant the Federal Reserve as the principal "umbrella" regulator of our banking system.
In the past, the unitary thrift holding company had not been used much because the thrift crisis
and the deposit insurance premium differential tarnished the thrift charter. However, this is no
longer the case, in large part as a result of thrifts recapitalizing the Savings Association Insurance
Fund (SAIF) and commercial banks assuming a large share of the FICO obligations. Moreover,
liberalization of the Qualified Thrift Lender test has also enhanced the usefulness of the charter
by permitting thrifts to engage in a wider variety of banking services. The applications from non-depository institutions (noted in Table 1) clearly show the renewed interest in unitary thrift
holding company charters. Over time, particularly with commercial interests taking advantage of
the unitary thrift approach, billions of dollars will flow to that side of the parallel banking
Unitary Thrift Charter Applications
as of December 31, 1998
Paine Webber Group, Inc.
Legg Mason Inc.
A.G. Edwards, Inc.*
Merrill Lynch & Co., Inc*
The Capital Group Companies, Inc.
T. Rowe Price Associates
Franklin Resources Inc.
Morgan Keegan Inc.
Everen Capital Corporation
Manufacturing & Other Companies
Ford Motor Company (Manufacturing: Auto)
Archer-Daniels-Midland (Manufacturing: Agriculture)*
Hillenbrand Industries, Inc. (Manufacturing: Coffins, Urns)*
Temple-Inland, Inc. (Manufacturing: Paper and Forest Products)
Farm Bureau (Trade Group for Farmers and Agricultural Interests)
General Motors Corporation (Manufacturing: Auto)
Excel Communications, Inc. (Telecommunications)*
B.A.T. Industries/Imasco (Tobacco)*
UKROP's Super Markets, Inc. (Supermarkets)*
Deere, Co. (Manufacturing: Ag Equipment)
Other Nonbank Financial Companies
First Alliance Mortgage Company (Mortgage Co.)*
Partners First Holdings, LLC (Credit Card)
American Express Company (Diversified Financial)
First American Financial Company (Finance Company)
State Farm Mutual Auto Insurance Co.*
American International Group
The Hartford Group
Aid Association of Lutherans*
Sun America, Inc.
CCC Holdings, Inc.*
Equitable Companies Inc.
American General Corporation
TIAA Board of Overseers*
Allstate Insurance Company*
AmerUs Group Company
Grange Mutual Casualty Co.
New Jersey Mfg. Insurance Co.
CNA Financial Corporation
First American Trust
Lumbermens Mutual Casualty Co.
Metropolitan Life Insurance Co.
ReliaStar Financial Corp.*
GUARD Insurance Group, Inc.
Guardian Life Insurance Co.
INA Holdings Corporation
Washington Mutual, Inc. *
Peyton Financial Service Corp.
National Association of Mutual Ins. Co.
Nationwide Insurance Enterprises*
New York Life Insurance Co.
Shelter Mutual Insurance*
AAA/Auto Club Services, Inc.
Massachusetts Mutual Life Insurance Co.
Polish National Alliance
American Sterling Corporation
Greentree Financial Services
Some unitary thrifts have argued that to prohibit sales of thrifts to commercial companies
deprives them of franchise value. However, to allow sales, even if new charters are prohibited,
means that any commercial company can enter the banking business by purchasing a small
existing thrift. Subsequently, that thrift can then be expanded via acquisition of other banks or
thrifts. In other words, a prohibition on sales is necessary to make any unitary restriction
Furthermore, existing thrifts could still be sold to any bank, thrift, securities firm, insurance
company, or other financial firm. There would be thousands of potential buyers. Finally, the
reason that the thrift charter has become of such great interest to commercial firms is largely
because Congress acted in 1996 to greatly reduce thrifts' SAIF and FICO premiums in the future
and to liberalize the thrift charter to closely resemble a bank charter. Note that almost every
commercial firm that has chartered or bought a thrift plans to run it as a bank, not a traditional
mortgage-focused thrift. Yet, that same 1996 legislation contained a trade-off a commitment
that the thrift charter and unitary issue would be addressed in the next Congress. These are the
two sides of the same coin. Some unitary thrifts, however, want to just keep the benefits of the
BIF/SAIF legislation which made the charter attractive to commercial companies while
ignoring the other side of the coin a commitment to addressing the unitary issue.
IV. Operating Subsidiaries
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.
This principle of "freedom to choose" has led us to historically support the operating subsidiary
approach. The choice of organizational structure will clearly vary from company to company.
Some banking firms will choose to offer some products and services through holding company
affiliates; others may find it more efficient to use an operating subsidiary of the bank; and some
others may choose to provide some products, where permissible, directly through the bank. Why
different banking firms choose a particular structure is not what is important. What is important
is that they have flexibility to choose the structure best suited to their business, market, and
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. In addition to these
benefits, there are some important public policy benefits of allowing banks to conduct new
activities in an operating subsidiary. For example, the bank subsidiary structure creates stronger
and more stable institutions; is less costly and less complex; is more user-friendly for most
community banks; will make U.S. banks more competitive in world markets; and, as community
groups have pointed out, will keep resources in the bank for purposes of the Community
Reinvestment Act (CRA).
I would like to elaborate a bit on the very important issue of safety and soundness. Under an
operating subsidiary structure, the earnings of the subsidiary flow directly to the bank. This
means that conducting new activities in an operating subsidiary will help to diversify the bank's
income stream. This diversification will lower the risk profile of the bank, reducing the
probability of failure and the potential risk to the deposit insurance fund.
The importance of an operating subsidiary for bank safety and soundness was articulated in a
joint article by former FDIC Chairmen Helfer, Isaac, and Seidman. The article (which is attached
to my testimony) states:
The big difference between the [operating subsidiary and holding company affiliate] comes
when the activity is successful, which presumably will be most of the time. If the successful
activity is conducted in a subsidiary of the bank, the profits will accrue to the bank.
Should the bank get into difficulty, it will be able to sell the subsidiary to raise funds to shore up
the bank's capital. Should the bank fail, the FDIC will own the subsidiary and can reduce its
losses from the failure by selling the subsidiary.
If the company is instead owned by the bank's parent, the profits of the company will not directly
benefit the bank. Moreover, should the bank fail, the FDIC will not be entitled to sell the
company to reduce its losses.
Requiring that bank related activities be conducted in holding company affiliates will place
insured banks in the worst possible position. They'll be exposed to the risk that the affiliates will
fail without reaping the benefits of the affiliates' successes.
Moreover, offering nontraditional financial products and services does not increase the risk
profile of the bank, regardless of whether these activities are conducted in an operating subsidiary
or a holding company affiliate. Let me cite a few examples. First, banks already engage in a
variety of securities and insurance activities, some within the bank or operating subsidiary and
some through the holding company. None of these activities has led to safety and soundness
Second, U.S. banks have successfully offered a variety of financial services (including securities
and insurance underwriting) in foreign markets through branches or bank subsidiaries for many
years. These activities have not led to safety and soundness problems.
Third, strong safeguards are already in place. There are strict regulatory limits on capital
investment, terms and conditions of credit extensions, and other transactions between banks and
their subsidiaries. In addition, FDIC can impose additional capital requirements for institutions
engaging in non-traditional activities. The SEC, the security exchanges, and the security industry
self-regulatory organizations also impose financial adequacy regulations, affiliate transaction
requirements, standards of conduct, and reporting and examination requirements on securities
As you are well aware, Mr. Chairman, the issue of operating subsidiaries was a major stumbling
block to efforts to reform our financial system in the last Congress. We would not want this to
impede the process this year, and we hope that a reasonable approach can be found that will
bridge the gap in this area. We note that Treasury Secretary Rubin recently took an important
step in bridging the gap when he indicated support for provisions on this issue in a bill put forth
by Representative LaFalce. Mr. Chairman, you have also made a valuable contribution to the
debate by putting forth the concept of additional flexibility for banks under $1 billion in assets.
This approach could be helpful to small banks wishing to engage in joint ventures. We pledge to
work to achieve an agreeable approach that can help move this legislation forward.
One concept that may not have received adequate consideration is a proposal originally advanced
by the Treasury Department in its 1997 draft legislation. This proposal, as amended in the House
Banking Committee, would impose certain financial requirements on banks wishing to engage in
underwriting activity in an operating subsidiary. For example, the bank must be well-capitalized
(e.g., 10 percent risk-based capital-to-assets ratio) after deducting its capital investment in the
operating subsidiary. This imposes a capital restriction on all banking institutions regarding the
size of the underwriting subsidiary they can operate. In many cases, these requirements make it a
practical necessity to use a holding company structure rather than an operating subsidiary when
the underwriting entity is large relative to the bank.
If one runs the numbers on the larger banks, securities firms, and insurance companies, the
practical result of these requirements is that no bank no matter how big will be able to
acquire a significant underwriting entity through an operating subsidiary, but rather would have
to run it through the holding company.
Mr. Chairman, the goals of financial modernization are to strengthen our entire financial system
and to promote more competition to the benefit of consumers. Whatever financial modernization
bill is finally enacted will form the framework for our financial system for decades to come. And
history has shown us that once new rules are in place, they are very difficult to change. Simply
put, the financial structure that is ultimately put in place here must be done carefully and
correctly, or it can have severe long-term consequences.
As a banker, I understand the importance of financial modernization. I need the ability to offer
new products and services in order to meet the needs of my customers. At the same time, we
strongly urge the Committee to address the unitary thrift issue as part of this legislation.
Last year, remarkable progress was made. Industry groups, which have debated modernization
for so long, even reached a consensus on key issues. We are so close that we should move
forward now, as this Committee is doing. While contentious issues remain, we believe we can
work with the leadership of the insurance and securities industries, and with the Congress, the
regulators and Treasury to achieve a balanced product with broad support. The ABA pledges to
work to that end.
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