FROM THE OFFICE OF PUBLIC AFFAIRS

1. Financial Activities of Companies owning Insured Depository Institutions

· Companies that own banks (bank holding companies) and meet certain qualifications would -- subject to certain safeguards -- be permitted to engage in any financial activity, including the full range of:

· securities activities;

· insurance activities;

· investment advisory activities and mutual fund sponsorship; and

· merchant banking.

· Likewise, financial companies could own banks.

2. Financial Activities of Insured Depository Institutions and their Subsidiaries

· National banks (and state banks to the extent permitted by state law) would be authorized, subject to certain safeguards, to conduct any financial activity through subsidiaries (except that national bank subsidiaries would not be authorized to engage in real estate development).

· National banks would be permitted to engage in the full scope of activities that had previously been permissible for national banks or federally chartered thrifts (except investing in real estate development).

· National banks (and state banks to the extent permitted by state law) would be permitted to act as general agents for the sale of insurance. National banks would be prohibited from engaging directly in insurance underwriting other than what is currently permissible (e.g., credit-related insurance).

· National banks (and state banks to the extent permitted by state law) would be permitted to underwrite and deal in municipal revenue bonds in addition to other securities activities currently permissible in the bank.

3. Nonfinancial Affiliations

Two alternative approaches will be suggested:

· Under the "basket" approach (Alternative A), bank holding companies that derive some significant percentage (specified by Congress) of their gross revenues in the U.S. from financial activities could derive the remainder of their revenues from nonfinancial activities.

· In addition to the "basket" limitation, we would suggest prohibiting any affiliation between a bank holding company and a nonfinancial firm having assets in excess of a specified amount (calculated to approximate the 1,000 largest nonfinancial companies).

· The federal thrift charter would be eliminated after two years, and existing unitary thrift holding companies (which presently have no activity restrictions) would be given a grandfather exemption from the "basket" test (terminable upon a change of control).

· Under the "financial-only" approach (Alternative B), bank holding companies would not be permitted to engage in any nonfinancial activities.

· The existing thrift charter would be preserved, and thrift holding companies would retain their current authority to engage in any lawful activity.

4. Capital Protections and Other Safeguards

· The following safeguards would apply if a bank holding company or a subsidiary of a bank engaged as principal in activities not permissible for a national bank to engage in directly:

· The bank would have to remain "well capitalized" -- that is, to be in the highest regulatory capital category, with capital exceeding normal requirements.

· The bank would have to deduct from its regulatory capital the entire amount of its equity investment in any subsidiary engaged in such activities. Thus even if the investment were to be a total loss, the bank would still be well-capitalized.

· The bank would have to be well-managed.

· Any company controlling the bank would have to give an undertaking that if the bank’s capital fell below the well capitalized level, it would be promptly restored.

· Existing limits on loans and other transactions between banks and affiliated companies (sections 23A and 23B of the Federal Reserve Act) would be extended to bank subsidiaries engaged in such activities. Thus any transactions between the bank and the subsidiary would have to be conducted at arm’s length, could not exceed 10 percent of the bank’s capital, and would have to be fully collateralized. (In addition, the bank’s transactions with all affiliates, including the subsidiary, could not exceed 20 percent of the bank’s capital.)

· Banks could not be held vicariously liable -- under the "piercing the corporate veil" theory -- for obligations of a subsidiary or other affiliate that the bank had not assumed.

· Bank regulators would be specifically required to assure that banks observed principles of corporate separateness.

· Under Alternative A, banks would be prohibited from extending any credit to, or for the benefit of, any nonfinancial affiliate. (Alternative B would permit no nonfinancial affiliates.)

5. Federal Reserve Regulation of Holding Companies

· The Federal Reserve would continue to approve the formation of, and to supervise and regulate, all bank holding companies.

· The Federal Reserve would be able to require financial reports from holding companies if they are not reasonably available from other sources. The Board would have access to information that was provided by the holding company or any of its units to other regulatory organizations.

· Federal Reserve examinations of a bank holding company would be limited, to the fullest extent possible, to holding company units that could have a materially adverse effect on the safety and soundness of a bank affiliate.

· The Board would, to the fullest extent possible, make use of examination reports made by, or on behalf of, regulators of holding company units.

· The Federal Reserve would be permitted to set consolidated capital requirements for a bank holding company if:

· the holding company and the bank fell into size categories (to be defined) that could raise questions about systemic risk if problems were to arise;

· the holding company’s insured depository institutions account for a predominant percentage (to be defined) of the holding company’s total assets; or

· an insured depository institution owned by the holding company has been less than well capitalized for more than 90 days, and the holding company engages in activities not permissible for a national bank to engage in directly.

· Bank holding companies not meeting any of these criteria would presumptively be excluded from consolidated capital requirements, although the Board could impose such requirements (for an individual holding company or class of companies) if it determined that it was needed to avert a material risk to the safety and soundness of a subsidiary bank presented by unusual risk in the holding company’s activities, or particular characteristics of its financial structure.

· Where the Federal Reserve did impose holding company capital requirements, it would be required to develop rules for excluding from the holding company’s consolidated assets and capital: (1) the assets and capital of those company components subject to capital requirements of other regulatory authorities; and (2) the assets and capital of other company components capitalized in line with norms for firms engaged in the same line of business.

6. Thrift Charter, Regulation, and Deposit Insurance

· Under Alternative A (the "basket" approach to nonfinancial affiliations), there would be a two-year conversion period by the end of which all federally chartered thrifts would convert to bank charters, and all remaining state-chartered thrifts would be treated as banks for federal bank regulatory purposes.

· OTS and OCC would be merged at the end of the conversion period.

· The authority of unitary thrift holding companies to engage in nonfinancial activities would be grandfathered, and would terminate upon a change in control.

· Each of the banking agencies would be required to adopt programs to promote housing finance and to accommodate the conversion of thrifts, including the development of guidelines that assured that former thrifts could continue to specialize in residential mortgage finance.

· With the elimination of the OTS, the FDIC Board would be restored to its original three-member size.

· The FDIC’s Bank Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF) would be merged.

· Under Alternative B (the "financial-only" approach to bank affiliations), the thrift system would be left as it is today.

· OTS and OCC would be kept intact (although the prohibition against combining functions of the two agencies would be lifted).

· No conversion of thrifts would be required, and unitary thrift holding companies would retain their diversified affiliation authority.

· BIF and SAIF would be merged.

7. Wholesale Financial Institutions

· Wholesale financial institutions (WFIs) could be chartered as either national banks or state member banks.

· WFIs would not have FDIC insurance and could not accept retail deposits.

· The OCC and Federal Reserve would supervise WFIs and set their capital requirements.

· Owners of WFIs would not be treated as bank holding companies, could therefore engage in any lawful business.

· WFIs would be subject to Community Reinvestment Act (CRA) requirements.

8. Functional Regulation of Insurance and Securities Activities

· Insurance activities of banking organizations would be subject to normal state insurance regulations, if those regulations do not discriminate against financial institutions. States could not apply to national banks laws that had the purpose or effect of discriminating against, or had a disproportionately adverse effect on, financial institutions.

· Securities activities of banking organizations would be regulated as follows:

· The Securities Exchange Act’s exemption of banks from broker and dealer registration would be narrowed to permit SEC regulation of activities other than traditional banking activities.

· The SEC would be required to amend its net capital rule to avoid a de facto pushing out of broker-dealer activities from the bank.

· SIPC insurance would not apply to broker-dealer activities conducted in the bank.

· Products traditionally provided by banks would not subject to SEC broker-dealer regulation, and the primary banking regulator and the SEC could jointly exempt new banking activities.

· The Investment Company Act’s application to banking activities would be updated and clarified. Banks’ exemption from the Investment Advisers Act would be narrowed.

· The SEC, rather than the banking agencies, would handle registration of bank-issued securities and periodic reporting by banks having securities registered under the Securities Exchange Act of 1934.

9. Consumer Protection

· The banking agencies, in consultation with the SEC, would be required to prescribe rules regarding banks’ retail sales of nondeposit investment products, in order to avoid customer confusion about the nature and applicability of FDIC and SIPC insurance, and to protect against conflicts of interest and other abuses.

· Such rules would address such matters as sales practices, qualifications of sales personnel, incentive compensation, and referrals.

· The rules would require simple, direct and understandable disclosures, such as the following:

"not fdic-insured or sipc-insured

"not guaranteed by the bank

"may go down in value."

· Customers could prevent sharing of confidential customer information between banks and their nonbank affiliates.

· The National Council on Financial Services would periodically assess the effectiveness of such regulations, and could adopt regulations more stringent than those of the agencies.

10. National Council on Financial Services

· A National Council on Financial Services would be created.

· Among other functions, the Council would do the following:

· Prescribe (under Alternative A) the method for applying the gross revenues test for measuring the extent of a bank holding company’s financial activities;

· Consider whether additional activities are financial;

· Impose additional firewall restrictions, if determined to be necessary, between banks and their affiliates, including subsidiaries of banks;

· Review the adequacy of consumer protections to determine whether modifications are needed; and

· Resolve differences among the agencies on such questions as whether an activity is "financial," or whether a particular product or activity is insurance, securities, or banking.

11. Time Frame for Modernization

· Under Alternative A, modernization of bank activities and affiliations would occur two years after enactment. The two-year period would accommodate unification of the bank and thrift charters, as well as the respective federal regulators.

· Under Alternative B, the thrift system would remain intact. Thus modernization of bank activities and affiliations would begin nine months after enactment.