Chairman. Alfonse D’Amato’s Senate Banking Committee is attempting to rush a massive rewrite of the nation’s financial laws through the Senate before adjournment of the 105th Congress.
The legislation–HR 10– would create huge conglomerates–some with a trillion or more dollars in assets–and would merge banks, insurance companies, securities firms and, in many cases, industrial and other non-financial firms under common ownership. These conglomerates would dominate the financial industry, creating serious regulatory problems, putting new strains on the federal safety net and the taxpayer-supported deposit insurance funds. The end result would be far reaching concentration of the nation’s economic resources, further limiting competition in the financial industry to the detriment of consumers and communities.
HR 10 contains major flaws:
1. Inadequate Regulation–HR 10 places heavy new burdens on the financial regulatory system, but does nothing to strengthen and coordinate the system as the General Accounting Office and other experts have recommended for years. Regulation will be scattered among six federal agencies and authorities in the 50 states. Insurance companies will be allowed to be full partners in federal financial services holding companies without being subject to federal safety and soundness regulations. Except in extraordinary circumstances, Federal regulators could not even set capital standards or examine the insurance companies which become part of a financial holding company under HR 10. Yet, these insurance companies will be large enough to bring down holding companies containing banks insured by taxpayer-supported funds. HR 10 follows the same pattern of expanded powers, deregulation and haphazard supervision which characterized the approaches to the ill-fated savings and loan industry in the 1980s.
2. Too-big-to-be-allowed to fail–HR 10’s wipe out of the Bank Holding Company and Glass Steagall Acts will create conglomerates which will be so powerful and so big that regulators will deem them “too big to fail.” If these conglomerates fall on bad times, they will be bailed out by taxpayer monies for fear that their demise would damage the economy and bring down insured banks in the same conglomerate. The taxpayer funds needed to bail out these new conglomerates would dwarf the sums expended in the savings and loan debacle of the 1980s.
3. Acceleration of Mergers–HR 10 is an open ended invitation for more and bigger mergers in the financial industry. Already, the mergers of the nation’s biggest banks have created concern about concentration of financial power, higher fees and diminished service for consumers and the potential for further limiting delivery of credit to communities, small businesses and underserved neighborhoods. Congress is plowing ahead with HR 10 before determining what effect the current wave of financial consolidation–much less the concentration dictated by HR 10–has on the economy.
4. Redlining and racial discrimination–HR 10 would allow insurance companies that engage in redlining and other discriminatory practices to be acquired by federal financial holding companies. As an important safeguard against redlining, banks are required to report by census tract where they make mortgage loans under the Home Mortgage Disclosure Act. But, insurance companies would not be required under HR 10 to make similar reports which would identify where they write policies or make investments. Even an insurance company which has been found in flagrant violations of the Fair Housing Act would be permitted to acquire a bank under HR 10.
5.. Privacy–HR 10 creates a multitude of affiliates which will be able to exchange information on consumers. This will include everything from an individual’s health history to the smallest details of buying, employment and investing patterns. There will be few details of an individual consumer’s life that will not be in the files of the conglomerates created by HR 10. At the very minimum, the Committee should require that no information be exchanged between affiliates or provided to other parties unless the consumer has given specific and contemporaneous permission in writing. Penalties for non-compliance should be sufficiently severe. to provide a deterrence to such practices.
6.. Diminishing the Community Reinvestment Act (CRA)–HR 10 requires that non-bank activities be pushed out of the bank structure into Federal Reserve holding company affiliates where CRA does not apply. Efforts to extend CRA-like responsibilities to the holding company affiliates has been successfully opposed by lobbyists from the securities and insurance industries. The Comptroller of the Currency currently authorizes bank operating subsidiaries whose income flows to the bank directly and is evaluated by examiners in considering a bank’s ability to meet community credit needs. This authority would be largely wiped out by HR 10. The Committee needs to extend CRA to the Federal Reserve’s holding company affiliates that will enjoy directly and indirectly the benefits of the federal safety net. If the Committee lacks the will to extend a community responsibility to the affiliates, it should, at the minimum, retain the Comptroller’s operating subsidiary authority.
7. Self certification and no applications–HR 10 allows banks and financial firms to affiliate without prior approval from the Federal Reserve Board. There is no application requirement. The firms simply self certify that they are in compliance with various regulatory requirements. Not only does the absence of an application process raise safety and soundness questions, but it also eliminates the opportunity for public comment and the requirements that the regulators determine whether a merger serves the “convenience and needs” of affected markets. [During the Committee markup, this provision was modified to require a “prior notice” to the Federal Reserve 60 days in advance of an acquisition of an institution with $40 billion or more in assets. The provision continues to exclude comment from the public]
8.. Banking and Commerce–Fearing the potential for dangerous conflicts of interest and anti-competitive effects, a wide array of consumer, community, labor, independent bank, rural and farm organizations, senior citizen groups and small businesses have opposed vigorously proposals to allow the mixture of banking and commerce. House Banking Chairman Jim Leach succeeded in eliminating efforts to authorize new baskets of banking and commerce, but HR 10, as reported by the Senate Banking Committee, contains a far reaching grandfather clause which will allow securities firms and insurance companies to carry their existing commercial and industrial holdings into the new financial holding companies alongside insured banks. Grandfather clauses have a habit of becoming permanent. HR 10’s grandfather clause allows these combinations of banking and commerce to continue until 2008 with the Federal Reserve allowed to extend the loophole until 2013. In addition, the existence of the grandfathered companies will encourage other financial holding companies to lobby future Congresses for equal treatment and the right to merge with industrial corporations.
On compromises involving banking and commerce, the Senate should heed the warnings of Paul Volcker, the former Chairman of the Federal Reserve Board, who argues that “limited exceptions to a general rule [on banking and commerce] breeds complications and inequities.” “…you will be presented in the years ahead with the argument that the compromises are arbitrary and inequitable. An enlarged phalanx of lobbyists will appear, dedicated to enlarging whatever room for maneuver has been achieved.”
9. Deletion of Life-line bank accounts for low and moderate income families–The Banking Committee eliminated provisions adopted by the House which would have required banks to provide bank accounts for low and moderate income families at a reasonable cost. On the one-hand, the Committee adopted provisions which would enhance the franchise value of banks, securities firms and insurance companies by tens of billions of dollars, but refused to provide low income families the opportunity to have bank accounts.
Mergers and turmoil in world markets–The nation’s banking system is in a period of a major transition as big banks continue on a merger binge that is bringing radical change to the financial landscape. World markets and the banking systems in Asia and Russia–where major U. S. banks and securities firms have risky investments– are in turmoil. This is not the time for the Senate to add to the uncertainty by rushing forward with a largely corporate drafted deregulation bill that raises so many questions and risks for the future of our financial system.