FROM THE OFFICE OF PUBLIC AFFAIRS

Good morning and thank you for inviting me to speak here today.

The reform of our nation's financial services laws is one of the major achievements of this Administration. Passage of the Financial Modernization Act (the Act) culminated decades of effort by Congress and various Administrations. In the end, we believe that we achieved a bill that benefits not only the financial services industry, but consumers, communities, and the economy as a whole. We are proud to have been part of this historic legislation.

The Act's core financial activities provisions are about to take effect on March 11th, 120 days after enactment of the bill. We are well into the tremendous undertaking of implementing the many provisions of the Act. We are working closely with our colleagues at the financial regulatory agencies to accomplish this.

This morning, I would like to give you an update on our efforts at Treasury to carry out the provisions of this legislation. While the Act generated a significant number of rulemakings and studies, I would like to focus today on four areas in particular - new financial activities and merchant banking, Community Reinvestment Act, subordinated debt study, and privacy. March will truly be a busy time for us. Proposed rules on privacy have already been published. We anticipate publishing rules, studies, and requests for comments in each of the other areas. We also are moving forward to finalize proposals for the President's privacy initiative.

I would like to talk first about some of the new authority the legislation provides to financial institutions. In addition to opening up a broad range of banking, insurance, and securities activities that can now be offered by a single organization, the financial modernization bill allows for additional new financial activities. Treasury and the Federal Reserve Board have a shared role under the Act in defining these additional activities. Both Treasury and the Federal Reserve share the view that the intent of the legislation is to expand the range of permissible activities while maintaining an appropriate separation between banking and commerce. We will be working closely with the Board to ensure that new activities permitted under these provisions are truly financial in nature. We will each be putting out a housekeeping rule addressing the process for applications to conduct these new activities.

Maintenance of the separation between banking and commerce is particularly important in the area of merchant banking. Both Treasury and the Federal Reserve Board believe that the limitations included in the legislation are very important to ensure that merchant banking ownership interests are held as investments. A critical feature of our capital markets has been a traditional separation of those who allocate capital from those who compete for capital. The financial modernization legislation appropriately took a very cautious approach to lessening such separation.

Treasury and the Board are writing joint rules to ensure compliance with the statutory limitations on merchant banking activities and to place limits on transactions between depository institutions and these holdings. Such limits are essential for the protection of the safety and soundness of affiliated depository institutions. We look forward to publishing proposed rules with the Federal Reserve on these issues later this month.

We also have important follow-up work to do in the area of community reinvestment. In modernizing our nation's financial system, the Administration insisted on the principle that no bank or holding company should be permitted to expand into newly authorized lines of business -- such as insurance and securities underwriting -- without a satisfactory track record in meeting its fundamental community reinvestment responsibilities. We and our Congressional supporters fought hard for this principle, and won in the final bill.

The OCC and Federal Reserve have already published proposed rules on engaging in new activities in financial subsidiaries or financial holding company affiliates that require all affiliated banks to have at least a satisfactory CRA rating. We expect the rules to be finalized shortly. The implementation of these rules represents an important step forward for CRA.

The legislation also calls on Treasury to conduct two studies on how the bill affects financial services in low- and moderate-income communities and to persons of modest means. The first, a baseline study of the effectiveness of CRA, is due in March. This baseline study, in effect, will be the first installment of a broader study due in early 2001. We expect that the result of the baseline study will be very helpful in suggesting the lines of inquiry for the broader study. The legislation also requires the Federal Reserve to do a survey of profitability, delinquency, and default rates related to CRA lending. We look forward to the results of that study.

The law also includes a provision that requires disclosure and annual reporting on certain agreements between banks and non-governmental organizations. The bank regulatory agencies are charged with proposing implementing rules for this provision. How the bank regulators implement this rule could have an important effect on the burdens faced by financial institutions and community-based organizations in creating jobs, building housing, and restoring neighborhoods in communities across the country. We expect regulators to publish proposed rules shortly.

Financial modernization holds the promise of greater customer choice and greater economic efficiency in delivering financial services. We must remain vigilant to assure that access to capital is available for all communities.

Treasury and the Federal Reserve are jointly undertaking a study of the feasibility and appropriateness of requiring large banks and bank holding companies to maintain some portion of their capital in the form of subordinated debt. Treasury and the Board will publish a request for comment this week that asks a number of questions that we believe are important to evaluating this issue.

Proponents of mandatory subordinated debt believe that it has the potential to provide a source of market discipline, both directly, through the cost of issuing such debt, and indirectly, through monitoring of the price of previously issued debt. As the tremendous changes in the banking industry further complicated the task of supervising large banking organizations, market discipline could prove increasingly valuable in maintaining the soundness of our banks.

Our request invites comment on the potential of a subordinated debt requirement to serve as a source of market discipline. It raises issues concerning the characteristics of the subordinated debt markets and both the costs and benefits of mandatory subordinated debt issuance. We also ask how such a requirement could be structured, if implemented, and how it could be incorporated into existing capital standards and supervisory policies.

We look forward to receiving comments on these important and complex issues.

Finally, I would like to turn to the topic of privacy.

One of the first challenges of implementing financial modernization has been the development of proposed privacy rules. This is an issue that has great resonance with consumers and with lawmakers. When the President outlined his "Financial Privacy and Consumer Protection in the 21st Century" initiative last May, many viewed the proposal as ambitious. Only six months later, we made significant progress on the President's goals in the financial modernization legislation. We believe that the requirements included in the legislation for clearly stated privacy policies, for consumer notices and for the right to opt out of third-party information sharing are important advances in privacy protections for all Americans.

In developing the regulations to implement the Act's provisions, we faced the challenge of protecting the privacy of consumers while preserving the benefits of competition and innovation brought about by technology. Treasury has been pleased to have had a role in the interagency development of privacy rules implementing this statute. This has been a major undertaking, with eight agencies working together to issue consistent rules on one of the Act's most complicated and important provisions. The timetable has been very tight, but there has been a high level of cooperation among all of those involved in the process.

Proposed rules have now been issued by all of the agencies involved. We believe the agencies have taken a balanced approach that minimizes burdens on financial institutions, while providing very effective privacy protection consistent with the statute. The regulators are looking forward to receiving comments from you and, we expect, many others. After the comment period closes at the end of March, the agencies will continue to work together with the goal of achieving a uniform, consistent set of final rules.

The additional consumer choice provided in the financial modernization act is an important step in protecting financial privacy. As important as the legislation and the implementing rules are, however, this Administration believes that more can be done to protect personal financial privacy. Consumer choice for sharing with third parties should be a floor, not a ceiling.

The President has called on Treasury, working with other parts of the Administration, to develop legislation to enhance consumer privacy beyond existing law. As the President has indicated, our new proposals will address information sharing within financial conglomerates. We are looking at a range of options, with the objective of finding balanced proposals that will both enhance privacy protection and allow financial institutions to provide quality services. We are consulting with industry, consumer groups, and Congress to fulfill the President's mandate. We hope to finalize these proposals in the near term.

I believe that the question of consumer control over personal information will become more pressing as technological innovation continues. I encourage those of you who work with financial institutions to get out ahead of this issue. Indeed, some institutions already have.

The implementation of the financial modernization legislation and the continuing challenges of evolving technology will have important implications for the shape of the financial services industry in the future. I believe that the now-constant change driving financial services markets will produce -- perhaps sooner than we think -- an industry that looks very different from the one we now know. While there are a lot of uncharted waters ahead of us in this process, I believe that change will ultimately be very good for the industry, consumers, and the economy.

Thank you. I will be happy to take your questions.