House Commerce Committee Chairman Thomas J. Bliley, R-Va., said this week he will offer an amendment to Glass-Steagall repeal legislation that will require banks to move many securities activities into separately capitalized affiliates. He discussed his views on the issue in a statement to the committee; excerpts follow.
Commercial banking is no longer taking deposits and making loans. Today, banks are involved in a myriad of financial transactions in which capital is raised through the private placement of equity and debt. Banks issue negotiable instruments derived from the securitization of mortgages, assets, and commercial receivables. Indeed, to the extent that they have been permitted to do so through section 20 affiliates, banks are a significant factor in the underwriting of corporate debt and equity.
And yet all these activities are conducted in a regulatory environment that was designed to provide extraordinary levels of government oversight of lending backed by federally insured deposits. The safety and soundness of the bank and the protection of the federal deposit insurance fund are the primary goals of the regulators and the laws that direct them. Investor protection and competitive equality with other financial service providers are implicit rather than explicit obligations of the regulators, and as such are assigned a lower, albeit still significant, level of regulatory priority.
Although the government gives an advantage to banks in the form of federal deposit insurance, government regulation of their competitors gives an advantage to brokers by protecting them from some types of competition. One example is the regulatory limit placed on the amount of securities business a section 20 broker-dealer affiliate of a bank can do.
Perhaps more important, government regulation insures that only brokers can exploit opportunities that require quick action and structural flexibility. The built-in delay of the bank approval process insures that banks will not be able to move quickly enough to offer competition. Government regulation has become such an interference with the development of legitimate business that one bank regulator apparently feels obligated to regularly encourage banks to interpret the regulations placed upon them in the least restrictive and most expansive manner.
We are not addressing the arcane subjects of bank and broker regulation. The issue before us is nothing short of the complete restructuring of the capital-raising mechanism underlying the strongest, most vibrant, and most innovative economy in the history of mankind.
The Banking Committee has framed the issue for us and adopted legislation that makes a number of significant policy decisions. It is up to the members of the House to debate and decide these policy choices at the committee level. The Commerce Committee, however, will not fail to meet its responsibility to move this issue to the floor for debate and resolution.
Their legislation asks members to accept the model of the bank holding company as the framework for regulation of financial services in this country. Brokers are to be allowed to affiliate with banks only through the mechanism of the bank holding company, and in so doing will become subject to regulation by the bank holding company regulator.
Furthermore, brokers will now become subject to the limitations on business imposed on bank holding companies. Thus securities firms with affiliated insurance companies over a certain size will find themselves unable to participate in newly structured opportunities. Those who slip under the restriction threshold do so only temporarily and will be required to divest themselves of insurance companies in five years. Put another way, brokers cannot enter banking as brokers.
Banks, on the other hand, are permitted to enter the securities business as banks. The Banking Committee bill does not require banks to move all of their existing securities activities into broker-dealers. Indeed, as reported to this committee, the bill would increase the types of securities business that could be done within the general banking operation itself, and particularly within separately identified divisions or departments of the bank dedicated to securities activities.
Banks are to be unrestricted in the types of securities business in which they may engage. Nor are they required to discontinue any existing business relationship or to divest themselves of corporate affiliates engaged in any existing businesses. Clearly the public policy promoted by the legislation reported by the Banking Committee is that banking reform requires a reorganization of only the securities business.
Although these issues are appropriately framed by the Banking Committee for consideration by the Congress, their import is so great that it is beyond the authority of any one committee to resolve the conflicting public policies contained within them.
It became clear that issues of public policy arise that make technical improvements in the operation of the bill premature, and equally clear that to attempt to do so would only jeopardize the prospect of enacting historic legislation modernizing our financial services industry.,
For example, whether an accommodation on a capital requirement for a separately identified division is possible is subject first to the determination of whether such an accommodation is desirable. I believe, as did Chairman Leach in his original bill, that securities business should be conducted in a separately capitalized broker-dealer affiliate of the holding company and not within the bank or its separate divisions.
Unlike past instances where this measure has come before our committee, we will not allow our disagreements over these issues to become an excuse to become destructive of the greater goal of enacting long-overdue modernization of financial services regulation.
Consequently, it is my intention to ask the members of the committee to report out the legislative product of the banking committee without recommendation or amendment. This will move the process forward to the floor of the House and ultimate resolution by the members.
I have obtained the consent of the chairman of the Rules Committee to allow an amendment on the floor that will address the issue of moving new securities activities out of the bank and into a broker-dealer affiliate of the holding company.
I recognize that others on the committee may dissent from this decision, and markups are being held at the subcommittee and full-committee levels to provide them with the opportunity to state their positions and vote against any and all amendments to the bill at the committee level.