[Text only of letters sent from the Commerce Committee Democrats]
The Honorable John D. Hawke, Jr.
Under Secretary of the Treasury for Domestic Finance
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
The Honorable Alan Greenspan
Chairman
Board of Governors of the Federal Reserve System
20th and Constitution Avenue, N.W.
Washington, D.C. 20551
The Honorable Arthur Levitt, Jr.
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Gentlemen:
I am writing with reference to H.R. 10, the Financial Services Competition Act of 1997. On July 17, 1997, this Committee's Subcommittee on Finance and Hazardous Materials held a hearing on H.R. 10. The record is being kept open (Tr. p. 124) in order to obtain your views on several important issues. In order to assist the Subcommittee, and in light of anticipated Subcommittee and Committee markups next month, your cooperation is requested in providing for inclusion in the record the following responses, information and documents by the close of business on Friday, August 22, 1997.
1. At the hearing, I posed the following question: A great deal of the testimony has focused on strengthening and protecting insured depository institutions. In the wake of the S&L debacle of the last decade, protecting the Federal safety net is extremely important. However, these new affiliations between banks, securities firms, and insurance companies are going to create some fairly serious conflicts. Let me ask the panel then, if there is a crisis in one or more elements of the holding company, and the bank regulator says that the available capital should bail out the bank, and the state insurance regulator says that it should bail out the insurance company, and the SEC and SIPC say it should bail out the broker-dealer and pay investors, who wins that tug of war and why?
Mr. Hawke's response was: "I don't know what the answer to that is, in all honesty." Chairman Greenspan responded: "I think I do know; and it depends very substantially on the size of the institution which is involved." And Chairman Levitt noted: "While the SEC's capital rules protect customers if the broker fails, I think you put your finger on a real problem because it is basically unclear what would happen in the event of such a failure under the proposed legislation; and I think that we have even less clarity with this legislation than we have without it." None of you, however, answered the question, and I continue to believe that we need to know the answer before we pass this bill. Please provide a direct and complete response.
2. When I posited the addition of a commercial company to this mix (referring to question 1. above), Mr. Hawke tried to assure me that this was not a significant problem because of H.R. 10's percentage and asset limitations on the banking-commerce baskets (Tr. pp. 122- 123). However, Chairman Greenspan's written statement (see pp. 3-5), as well as the analysis and charts accompanying this letter, suggest that Mr. Hawke's response was misleading. What is the truth here? Please fully explain and clarify for the record.
3. The answers to these two questions are critical given that H.R. 10 turns our financial regulators into "Keystone Kops." Section 103(b) of H.R. 10 authorizes a qualifying bank holding company to engage directly or through a subsidiary that is not an insured depository institution in any permissible activity "without approval from or notice to the Board." Thus, H.R. 10's affiliation and expanded-powers authorities are self-executing: the bank holding company and its lawyer decide that the bank can engage in new activities and it can do so without even after-the-fact notice to the Federal Reserve Board or any other regulator. In order to learn of the existence of an activity, the Federal Reserve must send examiners on the premises to look for evidence that a new activity exists. Assuming examiners discover the existence of the activity, and if it is determined that the activity raises supervisory, legal, or other problems, under section 103(d), the Federal Reserve may try to impose post-hoc conditions and/or secure corrective action by the bank holding company, and, after 180 days (when the insured bank may already have been damaged by the activity), the Federal Reserve may run after the malefactors with a cease and desist order. This looks a lot like what Congress did in the early 80s: increase S&L powers and decrease regulation, a tested formula for national disaster. Advise whether my reading of H.R. 10 is correct and, if so, how this construction is consistent with the public interest and the safety and soundness of our financial system.
4. The lack of a gate-keeper raises serious safety and soundness concerns all the more because H.R. 10 appears potentially to extend the Federal safety net under most of our economy. As noted above, section 103 would allow a qualifying bank holding company (QBHC) to engage in any "financial activity" directly or through a non-bank affiliate without filing a prior application or notice of any kind with the Federal Reserve or obtaining Federal Reserve approval. The QBHC itself would determine whether an activity is permissible.
Section 103(a)(3) defines "financial activity" to include extensive commercial activities including but not limited to "(C) providing any device or other instrumentality for transferring money or other financial assets" and "(E) providing financial, investment, or economic advisory or information services." Would (C) allow a bank holding company to own a data processor, Internet services, computer software maker, armored truck manufacturer, telephone company or air transport company? If yes, subject to what limits or conditions? Would (E) allow a bank holding company to own a newspaper, real-time financial data provider (such as Bloomberg), management consultant (such as McKinsey & Company), cable television company, or marketing researcher (such as A.C. Nielsen)? If yes, subject to what limits or conditions? What concerns does this raise?
Please also comment on the breadth of the so-called "merchant banking" activities contemplated in (G). The provision appears to permit QBHCs to own an equity investment in any type of business, for a "reasonable" period, as long as the company does not actively manage the company except as is necessary for "appreciation and ultimate sale or other disposition of the investment," in an amount without limit and without prior notice or approval from any federal regulator. Is this correct?
5. Section 111 of H.R. 10 authorizes the Federal banking regulators (Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance Company) to impose, by regulation or order, firewall safeguards. I am unable to find any text requiring these regulators to adopt substantially similar requirements or even to consult with one another so that we do not end up with charter wars and regulatory races to the bottom to the detriment of the public interest and the safety and soundness of our financial system. Please comment on the need for coordination and consistent requirements applied to the same activities.
6. All of you seem to support the need for financial modernization legislation in order to level the competitive playing field and to provide an even and effective regulatory scheme to protect depositors, investors, consumers, and taxpayers. It is not clear that H.R. 10 passes that test. For example, it would appear that H.R. 10 contemplates that bank holding company systems would be subject to varying levels of regulatory scrutiny by the Federal Reserve depending on whether it is a traditional bank holding company or one of the new "qualified bank holding companies" and that there are further differences between the latter, depending on whether the parent is a financial firm or an industrial concern. Commercial companies and the securities and insurance firms are lobbying us to substitute for them a risk assessment model of regulation instead, and the banks are crying foul, promising to kill the bill unless we unburden them from Fed regulation on the same terms as everyone else. Please submit any recommendations for resolving this conundrum and improving the structure of regulation in this bill.
Mr. Greenspan, it would be helpful to the Subcommittee if you would submit for the record an analysis in both narrative and chart form of the Fed's understanding of what the regulatory landscape would be under H.R. 10 for traditional bank holding companies, qualified bank holding companies, and also the new wholesale financial institutions.
7. Title III of H.R. 10 merges the bank and thrift charters, regulators, and insurance funds. Section 316 authorizes any company that is or has applied to become a unitary thrift holding company by the date of enactment to engage in any activity permissible for its or its affiliates under the Home Owners' Loan Act. I am advised that HOLA generally does not impose activities restrictions on unitary thrift holding companies. Could Microsoft or Ford file with the Office of Thrift Supervision an application to form a de novo Federal savings association any time before the enactment of H.R. 10 and, upon receiving approval, grow the thrift without limitation? How many unitary thrift holding companies are there? Please provide a list of all applications filed this year to date. Please also provide a chart comparing the powers authorized for national banks vs. thrifts.
Section 322 authorizes national banks to charter up and exercise "all the powers and privileges authorized by the Director of the office of Thrift Supervision for a Federal saving association" except for service corporation real estate development. OTS's predecessor, the Federal Home Loan Bank Board, approved various commercial activities for service corporations over the years that would thus become permissible for bank subsidiaries. These include distributing heating and air conditioning equipment, operating a hotel, repairing mobile homes, manufacturing solar hot water heaters, chartering air craft, and other activities that currently are not permissible for a bank subsidiary. What limitations, if any, would apply? Would national banks have to comply with specific safety and soundness conditions included in any agency legal opinions or orders, if approved? If not, should they?
8. H.R. 10 appears to violate several elements of the Basle Core Principles for effective banking supervision. Please discuss, and explain the consequences. Given that H.R. 10 significantly weakens safety and soundness regulation, why does it not contain Federal deposit insurance reform and/or other provisions to cut back the Federal safety net under the financial system envisioned by this bill? Should it? If so, please provide specific recommendations.
9. In response to a question from Representative Pallone, Mr. Hawke replied that "for decades banks have been able to execute securities transactions on behalf of bank customers. This is nothing new, and I think it is significant that we do not come before this hearing with any litany of complaints or a demonstration of abuses." (Tr. p. 88) However, just last week, for example, NationsBank announced a $29 million settlement to resolve class-action claims brought against the bank by customers who had bought investments through the bank's brokerage subsidiary (Wall Street Journal, Monday, August 4, 1997 at B5). While the SEC and self- regulatory organizations aggressively publicize their disciplinary proceedings and the NASD operates an "800" telephone number hotline so that investors can obtain the disciplinary and civil liability records of broker-dealers' registered representatives, there is no corollary for banks. While the banking agencies are required to "publish and make available to the public" final orders issued in connection with enforcement proceedings (12 U.S.C. sec. 1818(u)), the releases do not describe the nature of the violation and the enforcement action taken. Rather, they only list the docket number, names and parties involved, type of action taken, date of the action and whether the action was by consent. Please provide us with a table or chart, with narrative explanation, identifying all complaints and enforcement actions against banks in connection with securities activities/transactions for the last 10 years.
Thank you for your cooperation and attention to this request.
Sincerely,
JOHN D. DINGELL
RANKING MEMBER
Enclosures
[NOTE: To obtain enclosures, please contact the Commerce Committee, Democratic Staff, 2322 Rayburn House Office Building, (202) 225-3641]
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