Statement of 
                        Julie L. Williams
                Acting Comptroller of the Currency

                            before the

U.S. Senate Committee on Banking, Housing, and Urban Affairs 
                         Washington, D.C.

                          June 25, 1998



     Mr. Chairman and members of the Committee, thank you for
inviting me to testify on H.R. 10, the Financial Services Act of
1998.  I commend you for holding these hearings and for
recognizing the importance of financial modernization to our
nation's economy, as well as to its consumers and communities. 
While H.R. 10 takes some important and promising steps toward
modernizing our financial system, it also contains major flaws
that, on balance, make it more damaging than progressive for the
financial services industry.  I'd like to briefly highlight
several issues in this regard.

     First, there has been much discussion about the impact of
various provisions of H.R. 10 on the agencies that supervise
financial institutions -- turf.  Some have suggested that
allowing a choice between conducting additional financial
activities  either in bank holding company affiliates or through
subsidiaries of the bank itself, would upset the delicate
balance of roles between the various federal financial
institution regulators.

     In fact it is necessary to allow this choice in order to
maintain the current -- and successful -- balance we now have. 
Today, the range of activities that may be conducted in bank
subsidiaries -- state and national -- is substantially
equivalent to the range of activities that a holding company
affiliate may conduct.  H.R. 10 significantly alters this
balance by requiring banks to conduct virtually all newly
authorized types of activities in holding company affiliates.

     In other words, what is at issue here is whether you
preserve the balanced perspective that has made our banking
system innovative, strong and successful.

     The second issue of whether allowing banks to choose
between the subsidiary or the holding company affiliate
structure would be consistent with safety and soundness. 
Experience here shows that the activities in question are not
inherently any riskier than other activities that banks have
conducted for decades.  Many of the proposed new financial
activities in fact have been conducted for years -- safely and
profitably -- by subsidiaries of state-chartered banks and by
other U.S. bank subsidiaries that operate overseas.
     Moreover, we support imposing additional supervisory
safeguards where bank subsidiaries conduct new types of
financial activities to ensure that they enhance the safety and
soundness of their parent bank, and protect the bank from
downside risk.  For example:

     The amount the bank could loan to the subsidiary would be
     capped.

     The amount the bank could invest in the subsidiary would be
     capped.

     The bank's loans to the subsidiary would have to be fully
     collateralized by high quality collateral.

     The amount of the bank's investment in the subsidiary would
     have to be deducted from the bank's capital in determining
     the bank's regulatory capital adequacy and the bank would
     have to be well-capitalized even after deducting that
     investment.  This last safeguard prevents losses in the
     subsidiary from ever depleting the bank's capital for
     regulatory capital adequacy purposes.

     In short, there is no compelling safety and soundness basis
for depriving banks of the ability to decide how best to
structure their own businesses -- quite the contrary.  As the
FDIC has said, allowing a prudent diversification of activities
in bank subsidiaries, subject to safeguards such as those I have
mentioned, enhances safety and soundness and reduces the risk to
the deposit insurance funds.

     Third, some supporters of H.R. 10 contend that banks enjoy
a subsidy not available to other financial institutions and that
banks are able to gather funds at lower cost and pass those
savings on to their subsidiaries, resulting in an unfair
advantage over competing firms.  Many researchers -- and
certainly many bankers -- will argue, however, that the costs of
regulation imposed on banks outweigh the value of any lower cost
funds banks are able to gather.

     But let's assume for the moment that some net subsidy
actually exists. There is a simple answer to prevent its
transmission from the bank to a subsidiary. You need only apply
to funding transactions between banks and their new subsidiaries
the same limitations provided for funding transactions between
banks and their affiliates.  This way, if there were a net
subsidy, its transfer to the subsidiary would be prevented to
the same extent it is prevented for affiliates.

     Fourth, H.R. 10 would effectively roll back the role of CRA
by diverting resources and income from new growth lines of
business away from banks and thus away from supporting CRA.

     And finally, I'd like to note an issue that is both a
philosophical and a practical one.  America's financial system
and the opportunities it makes available to our people are the
envy of the world.  A big part of our success has been the
result of letting free markets work and letting businesses
decide how to compete most effectively and efficiently -- unless
there is a compelling public policy need to intervene.

     As we undertake financial modernization, we should try to
build upon -- and expand upon -- the best elements of our
current system.  Unfortunately, in major respects, H.R. 10 does
not do this.

     The treatment of bank insurance activities is a glaring
case in point.  H.R. 10 would protect some insurance product
providers and, in some cases, exclude others, including banks. 
In general, H.R. 10's standard of permissibility for banks to
conduct insurance activities is so complex and so unclear that
many banks will be unwilling or unable to figure out just what
they are allowed to do, and consumers will be deprived of the
potential cost and convenience benefits that can come from
increased competition.  I know that you have heard a lot about
this issue.  But it's difficult to fully appreciate the
complexity and lack of clarity in this standard without mapping
out the steps a banker would have to take to figure out what
insurance activity was permissible under H.R. 10.  Such a map is
not only hard to follow -- it's full of road blocks and dead
ends.

     Mr. Chairman, H.R. 10 requires a major reconfiguration
before it can serve as the framework for our nation's financial
system in the next century.  I urge you and your colleagues to
take the necessary time, and let's fix it so we have it right.