FROM THE OFFICE OF PUBLIC AFFAIRS

Objectives

• Protect the federal deposit insurance funds and the safety and soundness of our financial system.
• Reduce costs and increase access to financial services for consumers, businesses, and communities.
• Promote innovation and enhance the worldwide competitiveness of the U.S. financial services industry.

Key Elements

• Permit affiliations between depository institutions and companies engaged in the full range of financial activities (e.g., brokering, underwriting, and dealing in securities; merchant banking; sponsoring mutual funds; selling and underwriting insurance).
• Give management a choice among different organizational models -- so that a company engaged in these financial activities could be the parent of a depository institution, a subsidiary of such an institution, or a holding-company affiliate of such an institution.
• Apply strict safeguards designed to keep FDIC-insured depository institutions safe and sound.
• Require depository institutions with nonbanking affiliates or subsidiaries to be well-capitalized (i.e., in the highest regulatory capital category) and well-managed.
• Require any company that owns the institution to guarantee that the institution will remain well-capitalized.
• Require that the institution conduct any loan or guarantee transactions with its affiliates or nonbanking subsidiaries at arm’s length. Limit loan and guarantee transactions with any one affiliate or nonbanking subsidiary to 10 percent of the institution’s capital, and with all affiliates and nonbanking subsidiaries combined to 20 percent of the institution’s capital. Require such transactions to be fully collateralized.
• If the depository institution conducts nonbanking activities through a subsidiary, require the institution to deduct from its assets and tangible equity capital the entire amount of its investment in the subsidiary -- so that even the complete failure of the subsidiary will not bring the institution’s regulatory capital below the well capitalized level.
• Provide two alternative models for dealing with the question of allowing companies affiliated with depository institutions to engage in any nonfinancial activities (the so-called "banking and commerce issue").
• Alternative A (the "basket" approach): Permit a company to own a bank if it derives some high percentage of its gross revenues from financial activities (thus permitting the company to derive a certain percentage of its revenues from nonfinancial activities). But prohibit banks from forming affiliations with one of the 1,000 largest nonfinancial U.S. companies. Eliminate the federal thrift charter two years after enactment, facilitate expedited conversions of thrifts to bank charters, and grandfather thrift holding companies’ current right to engage in nonfinancial activities.
• Alternative B (the "financial-only" approach): Do not permit companies that own banks to engage in any nonfinancial activities. Preserve the thrift charter and the right of nonfinancial companies to acquire thrifts.
• Under either approach, permit any company (financial or nonfinancial) to acquire a "wholesale financial institution" that would have access to the payment system and be subject to the Community Reinvestment Act, but would have no retail depositors and no federal deposit insurance.
• Expand functional regulation, particularly of non-traditional securities activities performed in banks. In addition, permit states to apply state laws to bank insurance activities as long as these laws do not impair the operations of national banks.
• Streamline Federal Reserve supervision of holding companies in several areas including capital, reporting, examinations, and approvals.
• Enhance consumer safeguards by requiring federal banking agencies and the SEC to prescribe consumer protection rules for retail sales of nondeposit investment products offered by any depository.
• Require these rules to be designed to avoid customer confusion about the nature and applicability of deposit insurance and SIPC insurance.

Benefits of Financial Modernization

By removing barriers to competition in financial services, financial modernization could:

• Lower costs for users of financial services. The Bureau of Economic Analysis estimates that in 1995, consumers spent $293 billion on brokerage charges, investment counseling, bank service charges, insurance commissions, and pension handling expenses.
• There is room for improvement. Federal Reserve economists have estimated that bank cost inefficiencies amount to 13-20 percent of total banking industry costs. Studies done in 1993 and published in the Journal of Banking and Finance estimate insurance cost inefficiencies at 35-50 percent.
• If deregulation in other industries is any guide, it is not unreasonable to expect that consumers could ultimately save $15 billion a year from increased competition in financial services (5 percent of $293 billion).
• Increase convenience and consumer choice by permitting depository institutions, insurance companies, securities firms, and other financial institutions to offer consumers, farmers, and small businesses a wider range of products. In addition, the option of one-stop shopping should save consumers time and money. 
• Improve access for under-served consumers by encouraging new competitors to find profitable opportunities in overlooked markets.