James S. Riepe, vice chairman of T. Rowe Price Associates Inc., testified on financial reform before a House Commerce subcommittee last week.
The Baltimore-based investment management firm serves as an investment adviser to the T. Rowe Price family of no-load mutual funds as well as individual and institutional clients.
Edited excerpts of Mr. Riepe's remarks follow.
Today's financial services marketplace is no longer dominated by banking, nor is it likely to be in the future.
Commercial banks' share of the U.S. credit market has declined to about 15%, compared with 21% for pension and mutual funds. Mutual funds have close to $4 trillion of assets, compared with $3 trillion in bank and thrift deposits. As never before, our economy depends primarily on the U.S. capital markets, not any single provider.
The historical role of banks as the primary source of capital to businesses has been significantly altered. In the 1990s, the U.S. capital markets have raised more than $4.7 trillion. The growing securitization of the credit markets has significantly shifted asset raising from traditional lending to the capital markets. The jobs and security of millions of Americans - and the success and dynamic growth of American businesses - depend upon the functioning of these markets.
If financial services reform is to succeed, it must embrace a regulatory oversight structure that respects and accommodates the divergent requirements of each of the business sectors that make up the financial services marketplace.
The securities, banking, and insurance industries all historically have been and presently are subject to extensive governmental oversight. But the regulations governing each of these businesses rest on different premises, have different public policy objectives, and respond to different concerns.
Our securities markets are based on transparency, strict market discipline, creativity, and risk taking. The federal securities laws reflect the nature of this marketplace and accordingly do not seek to limit risk taking, nor do they extend any government guarantee. Rather, the securities laws require disclosure of all material information, focus on investor protection and the maintenance of fair and orderly markets, and prohibit fraudulent and deceptive practices.
Banks, by contrast, are supported by federal deposit insurance. Bank regulation, therefore, seeks to prevent bank failure and to protect the government from potential losses as the insurer of bank deposits. It seeks to do so by limiting the risks that banks take in their lending, investment, and other activities; by restricting the transactions between banks and their affiliates; and by conducting bank examinations, investigations, and enforcement actions largely out of the public view.
It would be fundamentally inconsistent with the very nature of the securities markets to impose bank-like regulation on securities firms affiliated with banks. To do so could only impair the ability of individual companies to serve their customers and compete effectively. More worrisome still, it could compromise the continued successful operation of the existing securities regulatory system-and even jeopardize the functioning of our broad capital markets. This would risk the loss of a priceless and vital national asset.
SEC Chairman Arthur Levitt aptly described the difference between securities regulation and bank regulation: "Bank regulators defend their institutions from failure. We defend our institutions' right to fail."
From this perspective, much of the debate on financial service reform simply misses the mark. Bills like HR 10, the Financial Service Competitiveness Act of 1997, proceed from the premise that the task before Congress is banking reform. This focus is far too narrow, because it disregards other core participants in the financial services industry as well as the interest of our capital marketplace.
Viewed in this broader context, legislative reform should have three components: strong functional regulation, bank regulation that focuses on the bank rather than on the holding company, and enhanced regulatory coordination.
Each subsidiary in the new holding company should be regulated by function. All entities offering the same product should be subject to the same rules promulgated and enforced by the same expert regulator. This would assure that we preserve the competence and proven effectiveness of our current regulatory system, including the successful oversight historically exercised by the SEC, by federal banking regulators, and by state insurance commissioners.
To protect the safety and soundness of a bank with a holding company, all appropriate safeguards should be applied to the bank-and not to the holding company or its nonbank affiliates. Similarly, administrative efforts to monitor and enforce applicable requirements should be accomplished through examinations of, and enforcement against, the bank.
The regulators of each of the holding company subsidiaries should cooperate closely with each other in carrying out their respective responsibilities by, for example, sharing information about regulated entities and coordinating enforcement actions.
In my judgment, if implemented appropriately in legislation, these principles would address any potential risks while imposing no undue restrictions.