Treasury Secretary Robert E. Rubin appeared Wednesday before the National Policy Council to discuss the administration's accomplishments in the area of banking and credit and to outline its goals for this Congress. Mr. Rubin cited deficit reduction as a major factor in lowering the cost of credit, and the community development bank bill as a means of making credit more widely available. He also cited Community Reinvestment Act reform as a step that benefits both banks and consumers. Here are excerpts from his speech.
Community Reinvestment Act reform emphasizes performance over paperwork. We've replaced 12 old CRA tests with three simple tests - a lending test, a service test, and investment test.
Whether a bank is complying with the CRA is going to be based on its actual performance - what loans were made, what services were provided, what investments were made in the community - not on paperwork.
Making the CRA work better gets more capital into our communities, it makes it easier for working families to own their homes, easier for our small businesses to grow, and easier for family farms to find backing they need. It also makes certain that banks don't simply raise deposits in a community while ignoring credit needs of that community.
There was an interesting item in a magazine put out by the Cato Institute the other day written by Federal Reserve Board Governor Lawrence Lindsey, defending CRA against its critics.
Let me quote from what he wrote: "Economic opportunity is a cornerstone of American capitalism. Spreading opportunity widely benefits not only the individuals directly affected, but all of us with a stake in our democratic capitalist system." Governor Lindsey has estimated that CRA is responsible for channeling $4 billion to $6 billion a year into low- and middle-income neighborhoods.
The new rules we are now implementing need to be given an opportunity to work. It is far too early to think of trying something different.
Accordingly, the administration will strongly oppose any effort to weaken the CRA legislatively. We strongly support sensible regulatory reform. The Vice President has led an aggressive effort to deal with the question of regulation. But we will vigorously fight any effort to roll back the work just finished.
That brings me to the last point I'd like to make with respect to financial markets.
Earlier this year the administration outlined its proposal for reforming Glass-Steagall.
We have at the moment industries that are pushing far ahead of our legal structure. It's precisely the situation that required changing the old interstate banking restrictions. The problem is twofold. One, we have an antiquated legal structure that must be modernized. Second we have a system that is balkanized, a patchwork and piecemeal system. We must change it to allow our financial services industry to operate with greater efficiency.
Thus, the final element in our program of financial modernization is to break down the walls between investment banking, commercial banking, insurance, and other forms of financial services, while preserving protection for taxpayers and depositors.
For six decades, our laws have, in effect, divided up the markets among the providers of various financial services. However good the reasons may have been at one time for so doing, in our judgment those laws are now outmoded. Dividing up markets amongst the providers of the various financial services deprives Americans not only of the convenience of buying a variety of services from single source, but also of the benefits of heightened competition among suppliers.
We want to bring down the barriers to permit more competitive and efficient operations in our financial services industries and our financial markets. There is broad conceptual agreement - that's a very important point - broad conceptual agreement and support for financial modernization on both sides of the aisle and in both house of Congress. There is real potential for the first time in a long, long time to get a good bill in this Congress. But there are a few points to be made.
There are differences in the various proposals. The best approach is to not only take down the barriers between banking and securities, but also to take down the barriers between banking and insurance. There may be tactical reasons to avoid the insurance question at the moment, but I believe that a Congress dedicated to a thorough review of government regulations should include insurance in financial modernization before that Congress completes its work.
In addition, we believe it would be useful for the legislation to establish a national Council on Financial Services - drawn from the regulatory community and coordinated by Treasury - to provide a forum for policy coordination on modernization issues, to define what activities should be considered by financial activities, and to deal with other financial modernization questions as they arise in a rapidly changing world.
I also believe we should permit the marketplace to decide what organizational structure is best for each operation. It would be a mistake to impose a more rigid holding company structure on all diversified institutions, to remove to new affiliates the large numbers of activities now being performed safely and lawfully in our banks, or to preclude banks from conducting lawful activities through their subsidiaries.
Let me give just one example of how flexibility may be advantageous. If a bank is able to conduct a new activity through its own subsidiary, the bank itself will realize the profits of the activity. At the same time, any exposure to its depositors or the FDIC would be limited to the amount of its investment in the subsidiary, which would be restricted by regulation under our proposal and which would not count toward the bank's regulatory capital. If the bank were forced to move that activity to a sister company, it no longer realizes the benefit of that profit.
Safety and soundness is not the issue here. I do not believe there is difference that affects safety and soundness between a subsidiary structure and a sister corporation structure. The issue is the same in either case - observing requirements so you don't have a piercing of the corporate veil problem.
The decisions about what product lines to place in what portion of the organizational chart should be made by the companies themselves, not by the government in Washington.
