FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you for that very kind introduction. I can't think of a more interesting and challenging time to be discussing financial institutions policy. The Senate is debating a major financial reform bill this week. World leaders and finance ministries across the globe have been working around the clock to seek solutions to the international financial crisis. The New York Times, in describing the President's meeting with the Prime Minister of Japan noted, "the mechanics of bailing out banks is not the usual stuff of meetings between prime ministers and presidents, but the session today is bound to focus on those subjects." Ten days ago, at the Council on Foreign Relations, the President called this, "the biggest financial challenge facing the world in a half-century," and outlined six steps we should take to help contain current financial turmoil.

What some of you might have missed is the announcement one week ago by Secretary Rubin of the issuance of the new 20 dollar note. This new currency incorporates several security features that have proved effective against would-be counterfeiters: an enhanced watermark; an enhanced security thread; fine-line printing patterns; color-shifting ink; and a larger portrait that is the most noticeable change. It is this last feature -- the portrait -- that I want to use to begin our discussion today of financial modernization here and in Great Britain.

The portrait is of our seventh President, Andrew Jackson. What many people forget is that President Jackson also fought something now referred to by historians as the "bank wars." Jackson was an opponent of the Second Bank of the United States -- which tried to act as a central bank before we had such an institution in the world of finance. Jackson's concern was it enjoyed privileges, such as being the repository for U.S. gold and silver, while being unaccountable to the people. It wielded enormous financial power but answered to no one. The dispute led to the censure of the President in the Senate by his political opponents. But in the end, as President Jackson told Martin Van Buren, "the bank, Mr. Van Buren, is trying to kill me but I will kill it." And kill it he did.

My point in raising President Jackson is to highlight an issue that is critical to analyzing HR 10, the Financial Services Act of 1998, currently before Congress. The issue is accountability -- a subject that our founders struggled with as they put together our three branches of government-- a structure that differs markedly from the parliamentary system in which the Financial Services Authority (FSA) operates in Great Britain. It is an issue that was at the forefront when the founders created the American form of government. Alexander Hamilton emphasized accountability in the Federalist Papers, as he looked at Great Britain at that time, "In England the king is the perpetual magistrate ... he is unaccountable for his administration."

Most Executive Branch officials, such as myself, are accountable to an elected President and removable at will by him. Not so with the members of the Federal Reserve Board; they are independent and not removable by, or necessarily responsive to, an elected President. If H.R. 10 were enacted, as Secretary Rubin pointed out in his testimony before the Senate Banking Committee on June 17, the accountability of an elected Administration for economic policy would be lost with regard to financial institutions policy, as banks would gravitate from the national banking system to the Fed.

Banks would gravitate to the Fed because H.R. 10, in repealing the provisions of the Glass-Steagall Act that restricted the ability of banks and securities underwriters to affiliate with one another, creates the "financial holding company." Only a financial holding company benefits from the repeal of Glass-Steagall. And financial holding companies are the exclusive domain of the unelected Federal Reserve Board.

As the Senate Banking Committee report states, "The core of the legislation is the creation of a new type of bank holding company called a financial holding company.' ... The financial holding company vehicle allows for a broader range of financial services to be affiliated, including commercial banking, insurance underwriting and merchant banking."

The bill closes the door on the Office of the Comptroller of the Currency (OCC), which is accountable to our elected President, by explicitly nullifying current regulatory authority for national bank operating subsidiaries to engage in a broader range of financial activities and by permitting them to engage in such activities only to the extent they act as an agent.

Arguably, financial institutions policy is the most critical element of our economic policy. The sound health of the financial system is the basis for American commerce and is critical to the economic livelihood of the American people. The Administration has been a consistent proponent of financial modernization, having proposed reforms of its own in 1994 and 1997. But, as Secretary Rubin has explained, the financial services industry can already engage abroad in the activities at issue in financial modernization legislation here at home. Thus, we have an important issue, but we are currently competitive. The crucial thing is to get the solution right.

Certainly, as we examine the problems generating the current world economic crisis, we often find ineffective bank supervision and regulation to be a common problem in emerging economies. If any area of policymaking should reflect accountability to the people, it should be this area. And Andrew Jackson is not the only President who has shown us the importance of this principle.

President Franklin Roosevelt showed us in the first few days of his first term how a vigorous, accountable Executive could make dramatic and needed economic policy changes through the banking system at a time of dire threat to the U.S. economy. He did not have to wait for a board to act -- he acted. Let me take you back to early March 1933-- bread lines, unemployment of almost 25 percent, scarcely a bank in the country open for business because of massive runs by depositors, fear loose through the country. On March 12 President Roosevelt spoke to the American people from an oval room in the basement of the White House. He began this way: "I want to talk for a few minutes with the people of the United States about banking...." He went on to outline in the first "fireside chat" a vigorous response to the economic crisis then facing the United States. President Roosevelt had declared a bank holiday across the land and was explaining why he did that and how the banks would reopen over time. The program worked, and within three days 4,507 national banks regulated by the OCC reopened.

This is one of the many examples of how a vigorous executive can operate as Alexander Hamilton envisioned, when he defended a strong Presidency by saying, "Energy in the Executive is a leading character in the definition of good government ... It is essential to the steady administration of the laws" ... and "to the protection of property . . . ." From a legal policy perspective, the loss of accountability and energy in distancing financial institutions policy making from an accountable, vigorous President and placing it under an independent board is at the heart of the Administration's objections to H.R. 10. I should emphasize, as Secretary Rubin has, supervision of banks is -- and should be -- apolitical. Capital standards, reporting requirements, and examination procedures are already uniform regardless of which federal agency takes the lead. But banking policy is a different matter.

There are other serious problems with this one-size-fits-all, holding company structure proposed by H.R. 10. The Administration believes financial service firms ought to be able to organize themselves in a way that makes the most business sense, just as other businesses do across the economy.

There are good business reasons why one firm may prefer operating through a subsidiary instead of an affiliate. Holding companies can be expensive to form, particularly for small banks. Bank management may wish to retain the earnings flows from a new venture generated by an existing line of the bank business, or use the new venture to diversify earnings. By restricting business choice, H.R. 10 limits the ability of market participants to make their own judgments about how to lower costs, improve services and provide benefits to customers.

Not only can flexible operating subsidiaries reduce risk for banks, they also reduce risk for the federal deposit insurance funds. That is why three former chairs of the FDIC wrote an editorial supporting Treasury's view of H.R. 10. They pointed out a bank's ownership interest in a subsidiary is an asset of the bank. Therefore, if the bank were to fail, the FDIC could sell the bank's stake in the subsidiary and use the proceeds to reduce any loss the FDIC might otherwise incur. By contrast, the FDIC generally would have no authority to sell assets of a failed bank's affiliates.

Another serious legal policy objection to the bill is the manner in which it discriminates against banks and in favor of insurance companies. This discrimination is achieved in part by depriving the OCC of judicial deference afforded other federal agencies under the Supreme Court's Chevron decision. H.R. 10 essentially reads out this important decision of law from new legal questions regarding national bank insurance powers. Solicitor General Seth Waxman, in a recent speech, outlined why the Supreme Court concluded in Chevron that courts should defer to an Executive agency's interpretation of a vague or ambiguous statute. First, as I stated earlier, Executive Branch agencies are accountable to the elected President, whereas the courts are not accountable to either Congress or the President. Second, agencies have comprehensive fact-finding abilities and expertise on issues involving regulated industries. Third, and especially important to our financial sector, judicial deference to agency interpretations will promote uniformity, predictability, and finality in regulatory decisions.

All of these factors strongly counsel against removing judicial deference to OCC interpretations, especially in one of the most heavily regulated industries, governed by a highly complex legal framework.

Another unfortunate result of H.R. 10, and the shift of assets out of national banks and into holding company affiliates, is the adverse impact this will have on the goals of the Community Reinvestment Act (CRA).

This shifting out of national banks will reduce resources covered by CRA, a key tool in the effort to expand capital in economically distressed areas. The bill would undermine the remarkable progress that has been made in the areas of urban economic revitalization and financing for affordable housing and small businesses. Community groups estimate that over $397 billion has been pledged since 1992 to needy communities through CRA.

Finally, there are many more technical problems with H.R. 10 that cause concern to the Administration. For example, Section 118 would limit the ability of the OCC and the OTS to examine, request reports from, and take enforcement action against functionally regulated insurance and securities affiliates of bank holding companies. Under the provision, both the OTS and the OCC must meet rigid standards to justify an on-site examination or to take an enforcement action against a regulated subsidiary. Section 118 thus would take away from regulators one of their most important tools to ensure safety and soundness: the ability to act promptly to prevent or contain risks to the institutions that they supervise based on their seasoned judgment.

As Peter has pointed out so well in his remarks, Great Britain has made a remarkable achievement in the consolidation of financial services regulation in the Financial Services Authority. But Great Britain is a parliamentary system. The FSA is accountable to a parliament that is controlled by the Prime Minister's party and whose members include the Prime Minister and his Cabinet. In fact, FSA members are appointed and removed by the Treasury.

The U.S. system is much different, of course. We achieve accountability in the Executive Branch by being appointed and removable at will by an elected President. It is a good system. One that has stood the test of time -- and now is the oldest, functioning government on the planet.

In the view of many, it is no coincidence that this form of government has also generated the globe's strongest economy. The stability and predictability afforded by a strong, stable Presidency -- the responsiveness ensured by an accountable Executive Branch all contribute to a system that makes possible the successful "pursuit of happiness" for so many Americans.

I agree with The Wall Street Journal, which recently emphasized that, "[T]he U.S. doesn't run on parliamentary system. Its system is based, instead, on the concept of a powerful president under an equally powerful legislative branch." It went on to quote Bob Hormats, the former Assistant Secretary of State, who said, "The U.S. presidency is seen as a more stable office than the office of prime ministers anywhere."

We need to retain flexibility, accountability, and stability through any reform of our financial institutions policy. H.R. 10 is found lacking in these critical areas.