Rep. Jim Leach recently sent the following letter to 36 bank chief executives. In it, the House Banking Committee chairman defends his bill to repeal Glass-Steagall and lift a number of regulatory burdens as the best deal the banking industry is going to get in the House.
Rep. Leach was responding to a letter the chief executives sent last week to House Speaker Newt Gingrich. The bankers criticized, among other things, the five-year moratorium the legislation would impose on the Comptroller of the Currency's ability to expand insurance powers.
The letter was edited slightly for space.
I have reviewed your Oct. 11 statement concerning financial modernization and would like to make several points related to your concerns about the Glass-Steagall and regulatory relief measures that could be considered on the House floor in the near future.
First, on the substance, there is a self-evident need for financial modernization in this country to enhance competition in the financial services industry. For the past 60 years, federal law has restricted affiliations between banks and securities firms. While these restrictions contained in the 1933 Glass-Steagall Act may have made some sense at the time that Act was passed, they are not appropriate for today's financial world. It is simply unrealistic for commercial banks to be precluded from offering financial products of customer choice. It is also unrealistic to legislatively maintain constraints on market competitiveness for securities firms, as well as for banks.
Banking indicators today are strong, unparalleledly so, in all respects but one - market share, which is eroding to the point where commercial banks could become anachronistic unless they are more comprehensively empowered. In this regard, you might wish to review certain distinctions between investment and commercial bank activities.
Securities firms today offer every product that a bank can offer, but without the layers of regulation that banks face. Banking products that securities firms or their affiliates can provide include transaction accounts, CDs, brokered deposits, as well as mortgage, consumer, small- business, and commercial loans. They also offer credit cards, fiduciary accounts, investment advice, and travelers checks.
While banks often may not, securities firms may organize and distribute mutual funds, engage in a complete range of commodities transactions, offer real estate brokerage services, and operate full-service offices at any location in any state without geographic restriction.
H.R. 1062 provides banking organizations with the most far-reaching securities powers ever seriously considered by Congress. The bill would allow bank holding companies to:
*Underwrite and deal in all securities - including corporate equity and debt - with no limitations on volume;
*Sponsor, manage, control, and distribute all types of mutual funds;
*Conduct merchant banking, venture capital, and similar investment banking activities.
The legislation contains more flexible, workable firewalls, e.g., no cross-marketing firewalls, more flexible credit enhancement firewalls, more workable provisions for common directors and officers.
In addition, it would expand permissible holding company activities from those that are "closely related to banking" to any activity that is "financial in nature" or "incidental to financial activities."
Bank eligible securities activities would be protected by generally keeping those activities in the bank, with important flexibility to keep future banking products in the bank even if they have some securities characteristics.
The legislation also would establish new, expedited bank holding company application procedures and reduced reporting requirements.
The repeal of Glass-Steagall will level the playing field in the banking and financial services industry. It represents wholesale congressional authorization of new bank powers, not piecemeal regulatory erosion of outdated laws.
As for your criticism of the bills "push out" provisions, I can only say I'm a bit nonplussed to respond in that they have not been finalized and none of your banks have seen the draft we are working on. You may wish to withhold judgment.
Second, there exists a pressing need for regulatory relief in the banking industry. Paperwork and its attendant cost are the norm in banking today, and they are becoming increasingly costly for society. In fact, the banking industry is probably subject to more laws and more minutiae than any other American industry, with the banking statutes rivaling the tax code in complexity.
You suggest that Glass-Steagall reform and regulatory relief are not a sufficient benefit to the banking industry in contrast with the Comptroller's moratorium. In this context, I would draw your attention to a recent report of the Conference of State Bank Supervisors commenting on the OCC insurance moratorium vis-a-vis regulatory relief, which states: "There's some amazing stuff in H.R. 1958, and we'd hate to see the industry lose its best chance at substantive regulatory relief in this Congress."
Important regulatory relief provisions of H.R. 1858 include getting the Department of Housing and Urban Development out of Respa enforcement; exempting banks with less than $50 million in assets from HMDA requirements, and allowing the Fed to exempt institutions above that size if it deems the burden of compliance to exceed its benefit to the public; protecting institutions from incriminating themselves through self-testing for fair-lending practices; allowing healthy banks with a satisfactory CRA rating to open new branches without seeking approval from their federal regulators; and eliminating branch applications and requirements for automated teller machines.
Third, the history of efforts to reform Glass-Steagall have foundered in Congress over insurance industry objections. Recognizing this historical problem, I worked diligently to try to keep Glass-Steagall reform insurance-issue neutral. However, many in the insurance industry argued that silence was not neutrality because of the actions, hints, and alleged statements coming form the Comptroller's office. They therefore prevailed with the leadership of the House to place a moratorium on OCC initiatives not sanctioned by Congress.
Thus, I was directed by the leadership of the House to provide a provision in this bill that had the effect of ensuring the status quo and restraining the Comptroller's office.
You have reason to be concerned with some aspects of the moratorium, but please understand that the House leadership insisted on an industry- balancing compromise in order to advance an industry-empowering bill. In this regard, I stress that the insurance industry has always prevailed on amendments on the House floor and the tradeoff for this provision is an understanding that no other amendment will be offered.
Unless this approach is adopted, the chairman of the Rules Committee has made clear that he will insist on an amendment substantially rolling back bank insurance powers. In the strongest terms, I would accordingly urge that you be cautious in reaching unrealistic and exaggerated conclusions based on a relatively modest restraint on the Comptroller. It is not valid, for instance, to suggest as Treasury has, that this provision is a rollback. Indeed, the provision containing the moratorium language contains a number of significant advances for the banking industry.
In the case of annuities, it expands bank authority in ways that are not now law. I would note that there are very few serious attorneys who believe that the Comptroller has much more discretion to authorize any new insurance powers. To the degree there is current discretion within the OCC, the moratorium language, as modified within the Banking Committee, contains a modicum of flexibility.
In fact, a careful reading of the OCC moratorium language would indicate that its effect is extraordinarily restrained. In contrast with current law, which stipulates that the OCC can authorize insurance activities as "incidental to" banking, the moratorium, if adopted, would permit the Comptroller to authorize new activities, including insurance activities, that are "part of" banking.
The distinction may not be a hairsbreadth, but I have grave doubts in the final measure it is deserving of hullabaloo opposition.
The moratorium language in essence reaffirms only what has always been the intent of the law. Where it goes precisely beyond current law, the language of the moratorium is favorable to the banking industry in that for the first time in statute the right of banks to sell annuities is sanctioned.
In addition, the bill exempts annuity sales of banks from state anti- affiliation statutes.
While concern has been expressed that under the provisions of the OCC moratorium contained in the regulatory relief bill a state insurance commissioner can define certain core banking products as insurance, it must be understood that this can happen today. Banking industry problems lie with the McCarran-Ferguson Act, which requires that the business of insurance be regulated by the states and not with the provisions of this legislation.
Finally, I have spoken with regulators and bankers in recent weeks and recognize that a number of extraordinary apprehensions exist regarding this legislation. The Comptroller fears that his office will be subject to regulatory arbitrage and is particularly concerned with my preference for placing wholesale banking institutions under Fed rather than OCC jurisdiction. I opted for the Fed rather than OCC supervision of wholesale banks because these wholesale banks do not have deposit insurance and therefore their primary interactions with the federal government are their access to the payment system and the discount window of the Fed.
The Fed, therefore, is the most appropriate agency to monitor wholesale banks. It is in the best position to assess whether they pose a threat to the payment system or may need assistance from the discount window.
It must be stressed that the goal of this legislation is to establish a wise regulatory format, not a scheme in which sophisticated politics and governmental empire-building reins supreme.
As for banking concerns, I recognize that many institutions would like to go further than simply dealing with historical Glass-Steagall restraints. But I doubt that an approach can be crafted much differently which would have prospect of passing the House. Despite the fact that the politics of Congress and the directives I have received may not be totally appreciated by all industry groups, I nonetheless believe a credible and constructive - indeed historical - bill has been crafted which can credibly be taken to the House floor and thence to conference.
It is thus my view that those of you who have written members of Congress expressing understandable frustration with one provision of the bill may want to reconsider whether it is in your interest to block the bill itself or favor its passage despite the provision that you find imperfect.
I realize the Comptroller has reflected to many banks apprehension about the bill as it is currently crafted, but I frankly wonder whether institutions such as yours really want to precipitate the defeat of landmark legislation of reform Glass-Steagall as well as the most comprehensive regulatory relief bill the banking industry has been provided in recent years.
If, upon reflection, you conclude that Glass-Steagall reform should go forward, I would appreciate a clarification of your views.
Finally, let me stress that as chairman of the banking committee, my agenda is to advance greater empowerment, less costly regulation, and greater industry harmonization.
But I would stress that as a committee which referees between interest groups, it is difficult to get the balance right. The process is always evolving. I am greatly concerned, for instance, that in separate legislation the balance may not be exactly right with regard to "pain sharing" on Fico liabilities and this issue might have to be reviewed as the process of BIF/SAIF resolution moves along.