April 30, 1998

The Honorable Alan Greenspan
Chairman
Federal Reserve System
20th and Constitution Avenues 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 Chairmen Greenspan and Levitt:

As you know, I have consistently indicated that I would support financial services modernization legislation, including repeal of the Glass-Steagall Act, if, and only if, that legislation provided both true separation and functional regulation, and meaningful protections for investors, consumers, and taxpayers. Accordingly, yesterday Chairman Bliley and I submitted a package of consumer protections to the Republican Leadership that are necessary for me to be able to support and work for the enactment of H.R. 10.

At the same time, I am informed that Rep. Boehner has asked Chairman Bliley if we would consider the enclosed LaFalce-Vento amendment, particularly as it relates to the operating subsidiaries of national banks. I also am informed that Rep. Boehner is considering a proposal from Rep. Baker's staff going back to the Commerce Committee language on the "unlimited grandfather" and having a 10 percent or 15 percent commercial basket for everyone, including banks.

First, I respectfully request the views of the Federal Reserve on the proposal to expand the commingling of banking and commerce beyond the current limits in the bill printed in the report accompanying House Resolution 403. In that regard, I would note Chairman Greenspan's July 17, 1997 testimony to this Committee warning us "to move with caution in addressing the removal of the current legal barriers between commerce and banking," along with all of the commentary and analysis in the wake of bank-broker-insurance megamergers warning about the danger of extending the Government safety net under broad swaths of our economy. I have grave misgivings about forming Japanese-type keiretsu (financial and corporate cross-shareholdings with a bank as the centerpiece) in this country. Serious problems in their system have been exposed in the ongoing financial crisis in that country. Such arrangements have corroded the corporate governance and other mechanisms that are necessary to maintain transparent, efficient, and innovative markets and economies, and have complicated and hindered the ability of central banks and Governments to craft and execute effective recovery plans in the event of a crisis. I would appreciate the benefit of your views.

Secondly, I respectfully request the analysis and views of both the Federal Reserve and the SEC on the LaFalce-Vento amendment, particularly the section designated [2. OP-SUBS] so that we might respond intelligently to Rep. Boehner's request. Please explain what the op-sub proposal would permit and, among other things, whether the bill's commercial basket limitations would apply to these op-subs, whether there are "OCC-lite" limitations similar to the bill's "Fed- lite" limitations, and whether there are securities deference provisions, like a requirement for OCC consultation with the SEC with respect to the spin-off or sale of a broker-dealer op-sub, parallel to those that the bill presently applies between the Federal Reserve and the SEC.

Obviously, I respect the position of the Department of Treasury with respect to operating subsidiaries with full financial and nonfinancial powers (excluding real estate development). But, also equally as obvious, this proposal undermines true separation and taxpayer protections. It also would weaken consumer and investor protection, if the Federal Reserve and the OCC are played off against one another. Given the extreme importance of this issue, I have the following additional questions with respect to operating subsidiaries:

1. What activities does H.R. 10 allow in an operating subsidiary and how would this benefit banks?

2. What activities are required to be conducted in a holding company affiliate and why, and with what benefits to banks and with what protections to the Government safety net and taxpayers?

3. Treasury officials have indicated that this debate is at base a turf fight based on practical implications. They argue that the advantages of the national bank charter have eroded over time and that, to add insult to injury, national banks today have to pay more for examinations than state-chartered Fed member banks. They say that they are concerned with a flight from the national system on that basis when exacerbated by the effects of H.R. 10. Please respond to this argument, giving specifics, and also please advise us whether H.R. 10 discriminates against national banks vs. state-chartered banks, again providing specifics. If there is an imbalance, with or without H.R. 10, please identify what it is and how it might be addressed other than by authorizing risky merchant-banking and securities- and insurance-underwriting activities in bank operating subsidiaries.

4. In a March 26 document encaptioned "The Treasury's Principal Concerns About H.R. 10," the Treasury Department made the following argument (underlining supplied):

"The choice between the subsidiary structure and the holding company affiliate structure should be a business decision, not a governmental dictate. Allowing the subsidiary structure has manifest advantages. First, a bank's conduct of new activities in a subsidiary diversifies the bank's assets and income -- providing a cushion against losses in other lines of business. Second, conduct of activities in a subsidiary may allow bank management to better direct the activity. Indeed, a recent OCC study concludes that overseas subsidiaries of banks earned higher returns and ran lower risks in conducting securities activities than did holding company affiliates. Third, if the bank were to fail, the FDIC could sell the subsidiary and use the proceeds to protect depositors -- something it could not do if the activities were conducted in an affiliate. Taxpayers would thus be better insulated from loss. Finally, flexibility in organizational structure maximizes the potential for synergy with existing financial products -- better enabling market participants to meet their customers' full range of financial services needs. While for some companies an affiliate structure may be optimal, for others it may be the subsidiary structure.

"Moreover, forcing a financial services company -- as a prerequisite for engaging in new activities -- to transfer resources from its bank to its holding company would deplete the bank's resources, leave the bank's earnings less diversified, and thus increase risk to the deposit insurance funds."

Please respond in detail to each of these points.

5. Several commentators have concluded that allowing national banks to own operating subsidiaries engaged in a broad range of new activities not permitted to the bank itself would extend the safety net (both FDIC deposit insurance and access to the Federal Reserve's discount window and payment system) to the operating subsidiary and greatly increase the financial exposure of the FDIC and the American taxpayer. In addition, they say that such operating subsidiaries would create an unfair playing field in the market for financial services. Please indicate whether you agree or disagree, and explain why.

6. What additional firewalls (e.g., 23A and 23B, capital deductions, enhanced corporate separateness, restrictions on credit enhancements, loan prohibitions, FDIC protections) would you recommend for these operating subsidiaries? Please explain the reason for each.

7. Lastly, but by no means least, what impact would the operating subsidiary proposal have on the American public? Why should John Q. Public care?

Thank you for your cooperation and assistance in this matter. Given the tight timetable, I would appreciate receiving your responses by noon on Monday, May 4, 1998.

Sincerely,

JOHN D. DINGELL
RANKING MEMBER

Enclosure

cc: The Honorable John Boehner, Chairman
House Republican Conference

The Honorable Tom Bliley, Chairman
Committee on Commerce

Members, Committee on Commerce

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