![]() |
||
![]() |
FROM THE OFFICE OF PUBLIC AFFAIRS September 16, 1999LS-91 Introduction I am pleased to be here today to discuss financial modernization and the prospects for legislation. At the outset, I would like to make three points. First, the Administration strongly supports modernization of our financial services laws. This round of legislation began with introduction of a Treasury-proposed bill in 1997. We have made compromises and reached out to a broad range of groups. We are up on the Hill practically every day working on this bill. Second, we believe that legislation is clearly achievable. The passage of H.R. 10 by a 343-86 vote, with your support and Administration backing, demonstrates that unequivocally. Third, although the Administration would like to see financial modernization legislation enacted, we are ready to walk away if presented with a bad bill. We did it last year, and we will do it again if we must. Status of Legislation Let me now return to the bills that have passed the House and Senate. Both bills take the fundamental actions necessary to modernize our financial system. They repeal the Glass-Steagall Act's prohibitions on banks affiliating with securities firms and repeal the Bank Holding Company Act prohibitions on insurance underwriting. The House bill, however, takes three other steps that are of importance to the Administration:
H.R. 10 demonstrates unequivocally that a broad consensus on financial modernization is possible. The Senate bill, on the other hand, is a partisan measure that:
The President's March letter made it clear that he would veto a bill that took the form of the bill passed by the Senate. Today, I would like to focus on why these issues are of such importance to the Administration. Organizational Choice: The Subsidiary Option First, the subsidiary. We believe that financial services firms should, like other companies, structure themselves in the way that best serves their customers -- be it through subsidiaries or affiliates. We also believe that the subsidiary structure promotes safety and soundness. Risk to the deposit insurance funds will decrease, and taxpayers will benefit. A bank and its creditors -- including the FDIC -- effectively have one-way recourse with respect to the value of the subsidiary. If the subsidiary is profitable, the bank owns a valuable, diversified asset. If the subsidiary is unprofitable, the liability of the bank is limited by basic corporate law and the funding limitations of the bill. The Senate bill, however, denies that choice to large or medium-sized firms. Proponents of this approach have suggested that banks receive a substantial competitive advantage by virtue of the federal safety net. They further suggest that a subsidy would be more readily passed to subsidiaries than affiliates. We see no evidence in the markets that banks have such a substantial competitive advantage. In addition, H.R. 10 imposes significant limits on a bank's ability to fund a subsidiary. A bank could provide no greater funding than it can currently provide an affiliate. The Treasury, the FDIC, independent analysts, and economists -- including four whose studies were recently released by the Roundtable -- have uniformly concluded that any subsidy rationale for denying banks business choice is without merit. Furthermore, of the 18 other countries composing the European Union and the G-10, none requires the use of separate bank holding company affiliates for underwriting and dealing in securities. Of those authorizing links between banking and insurance underwriting, all but one allow the choice of a subsidiary or an affiliate. By allowing a choice of structure, the House bill is clearly in the mainstream of economic and legal thinking in this area. Nonetheless, we have shown flexibility on the subsidiary issue. To jump start the legislative process this year, we made important compromises. The House bill reflects those compromises. First, banking organizations would be able to conduct insurance underwriting only in affiliates. Second, banks with over $10 billion in assets would be required to retain their holding companies. And third, the Federal Reserve would write the rules for merchant banking whether it takes place in subsidiaries or affiliates. We have listened. We have compromised. And now we wait. Community Reinvestment Act Another issue critical to the Administration is preserving the relevance of the Community Reinvestment Act. As former Secretary Rubin stated, "this country will fall far short of its full economic potential, unless the least well off have a real opportunity to join the economic mainstream. Providing this opportunity is not simply a social issue or a moral issue, but an economic issue of fundamental importance to all of us." As we work to modernize our financial system, we need to make sure that CRA keeps working for our communities. The House-passed bill does just that. It requires that federally insured depository institutions have and maintain an adequate record on CRA as a condition for engaging in newly authorized financial activities. By contrast, the Senate bill would seriously weaken CRA. It fails to include this "have and maintain" requirement; it exempts small banks from CRA; it provides banks and thrifts with a "safe harbor" from CRA; and it imposes new reporting burdens on banks for a wide range of activities under CRA. Privacy Issues I would now like to focus on the Administration's views on the protection of personal financial information. Today many Americans increasingly feel their privacy threatened by those with whom they do business. Americans want the ability to earn, invest, and spend their money without having to expose their lives to those who process their transactions. Just as they would not expect a letter carrier to read their mail or record their correspondents, they do not expect a bank processing a check to record, store, and evaluate their personal behavior. On May 4, the President outlined the Administration's "Financial Privacy and Consumer Protection in the 21st Century" initiative. Protecting financial privacy led the list of key principles for consumer protection. In particular, the President recommended enactment of legislation to provide consumers notice and choice before their financial information is shared or sold -- the right to say "no." When the President announced this agenda in May, some may have viewed his proposals as ambitious. But only two months later, the House passed with overwhelming bipartisan support a bill providing notice and choice before personal financial information can be shared with third parties. Although the House bill was an important step forward, we believe that it should be improved. First, we believe that customers must have notice about how financial services firms share information with affiliates. It strikes many as untenable to suggest that a customers' personal financial information should be transferred without their knowledge, even if to an affiliate. Second, we believe that customers should be able to exercise choice about whether confidential financial information is shared even if among affiliates. We believe that Americans should have the opportunity to participate in the modern means of electronic payments and receipts without subjecting themselves to behavioral profiling. Our buying patterns and preferences. Our assets, liabilities, earnings history and net worth. Even our accidents and losses. This is among our most personal information. In many ways, it describes who we are as individuals. Many Americans would not expect such information to be recorded, consolidated, and used to make decisions about them without their knowledge and consent. Third, we need to ensure that any privacy protection regime is workable. It must balance the consumer's need for privacy with the need to maintain efficient banking and payment systems. Fourth, we believe that medical privacy should be addressed in comprehensive legislation rather than incompletely and ineffectively in a financial modernization bill. Fifth, an affiliate-sharing exception is far broader than most may realize. H.R. 10 would allow any financial services firm not affiliated with a bank or thrift to share information with any affiliate, financial or non-financial -- anything from a tax preparer to a private investigator. Even with respect to financial services holding companies that do include banks, the affiliate sharing exception of H.R. 10 is extremely broad. A bank could share information with a telemarketer without customer notice and choice provided that the telemarketer were a portfolio company of a merchant banking or insurance investment affiliate. And a bank could share information with any company engaging in activities "incidental" or "complementary" to financial activities -- travel agents, for example. Sixth, we should ensure that any new federal legislation add to as we believe H.R. 10 does, but should do so more clearly rather than preempt existing protections in federal and state law. Seventh, we should prevent exceptions from swallowing the rule by enacting enforceable prohibitions on re-use of shared data beyond the purpose for which it was shared. Other Issues There are other issues in which the Administration has a strong and continuing interest. First, let me say just a few words about banking and commerce. We have a serious concern that the Senate bill would allow a mixture of banking and commerce through a vague and broad definition of merchant banking. As we read S. 900, a bank affiliate could purchase and operate indefinitely and on a day-to-day basis any company, provided that it labeled the activity "merchant banking." We strongly prefer the House version, which places some limits on this activity -- limits consistent with my understanding of what merchant banking really is. In addition, the Administration has opposed creation of new unitary thrift holding companies, and has also opposed allowing the approximately 600 existing unitaries to transfer ownership to non-financial companies. We hope that the conferees will see the matter likewise. Second, we oppose both bills' piecemeal modification of the Federal Home Loan Bank System. Neither bill does anything to address two fundamental problems in the System -- investment arbitrage and lack of mission-focus in the Federal Home Loan Banks' advance business. In addition, we are especially concerned with a provision in the House bill that would allow each Federal Home Loan Bank to cut its capital requirement in half and thereby effectively increase the System's taxpayer subsidy without any commensurate return in public benefits. Third, we continue to be concerned about the insurance provisions of the bill, which impose needless impediments to bank insurance sales. Lastly, we are concerned that the securities provisions of the Senate bill do not contain adequate consumer protections. Conclusion I believe it is incumbent on all of us who want to financial modernization legislation to be enacted this year to continue to press for legislation that addresses the President's concerns. He will sign legislation, if it's the right legislation. |
![]() |