EMBARGOED UNTIL 10 A.M. EDT
Text as Prepared for Delivery
June 3, 1997
Mr. Chairman, I appreciate this opportunity to discuss with you Treasury's approach to financial modernization. You, along with the members of this Committee, have played a critical leadership role on this issue. I look forward to working with you in the weeks ahead.
With me today is Jerry Hawke, Treasury Under Secretary for Domestic
Finance, who has played an important role in developing the Treasury's
The Treasury has a very simple objective in modernizing financial
services: to do so in a way that will benefit consumers, businesses,
and communities, enhance the competitiveness of our industry worldwide,
and protect the safety and soundness of our financial institutions.
The stakes here are enormous. The Bureau of Economic Analysis
estimates that in 1995, Americans spent nearly $300 billion on
brokerage, insurance, and banking services. Even if increased
competition from financial modernization were to reduce costs
to consumers by just 1 percent, that would be a savings of $3
billion a year. And, as I'll explain a bit later, substantially
greater savings than that may be likely.
Today, our nation's financial marketplace is exceptionally strong.
Unprecedented numbers of Americans have access to credit. We
have the most reliable, liquid markets anywhere. Our financial
institutions are innovative, and function effectively in a highly
competitive global economy.
However, Mr. Chairman, in the midst of all this progress, we're
still operating under an outdated legal and regulatory structure.
The Glass-Steagall law may have been appropriate when we had a
dramatically different financial system. But there have been
enormous changes since then.
The old lines that once separated the insurance, securities, and
banking industries have increasingly blurred as new financial
products and services have appeared. And regulatory and judicial
rulings continue to erode many of the barriers that were put in
place to restrain competition among financial services firms.
Our goal now is to create a regulatory and legal environment in
which: 1) consumers benefit from lower costs, increased access,
better services and greater convenience; 2) financial services
providers operate on a level playing field; 3) financial institutions
can offer products and services without maneuvering through a
maze of archaic laws; and 4) we protect the deposit insurance
funds and safety and soundness.
Mr. Chairman, let me now share with you five key elements in our
financial modernization proposal. Under Secretary Hawke, in his
remarks, will spell out our suggested approach in further detail.
First, we would propose to break down barriers that inhibit or
prevent competition among various providers of financial products
and services. So, we would permit banks, securities firms, and
insurance companies to affiliate with one another.
Second, we would give firms the choice to organize their financial
activities in the most efficient way they see fit -- either as
a subsidiary of a bank, or as an affiliate of a bank holding company
regulated by the Federal Reserve Board.
Third -- and perhaps the most difficult question in this debate
-- is whether to permit companies that include banks to engage
in non-financial activities, the so-called "banking and commerce"
As we examined this issue, we recognized that people on all sides
have strongly held views about this issue. There are, for example,
some who believe that permitting broad affiliations between banking
and commercial firms could have not only economic implications
but also important cultural and social effects. We think the
issue needs to be further debated by Congress before settling
on a final approach.
I believe that Treasury can be most helpful by providing two possible
alternative legislative models.
Under the first model, Congress could decide to permit some modest
measure of non-financial activity for bank holding companies.
In such a case, it would be sensible to set a high threshold
to qualify the organization as predominantly financial.
Under the second model, Congress may decide not to relax limits
on non-financial activities of firms affiliated with banks, while
permitting bank holding companies and bank subsidiaries to engage
in the broad range of financial activities.
Let me now turn to the fourth item in our approach -- the creation
of a new wholesale financial institution. WFIs would be banks
which accept only wholesale uninsured deposits, but they would
not be considered banks for the purpose of holding company regulation.
Lastly, we believe that we should move closer to a system of regulation
by function, whereby specific financial activities would be regulated
by the appropriate federal or state agency, regardless of where
these activities are conducted. In this way, consumers would
receive consistent regulatory protections. The Federal Reserve
would continue to be responsible for consolidated supervision
of bank holding companies but through streamlined procedures.
And we would propose to create a council that would help improve
coordination among the various financial services regulators.
With all these changes, of course, we must ensure that any and
all financial modernization proposals are safe. In the past eight
years, we've made great strides in restoring safety and soundness
to our financial system. We're mindful of the S&L experience
and are committed to avoiding anything of this sort again.
For financial institutions, our proposal for expanded activities
provides greater safety and soundness protections than current
law. For example, banks would have to be well-capitalized -- the
highest regulatory capital category -- and well-managed to qualify
for broader affiliations. And they would have to meet important
prudential safeguards that prevent subsidiaries or affiliates
from weakening the depository institution.
The Treasury approach would also enhance existing consumer safeguards.
We would provide for important disclosures -- in plain, straightforward
terms -- so buyers can understand whether or not the products
they purchase from financial services providers are insured.
And finally, this proposal comes with an absolute commitment to
safeguard communities. This Administration will not accept any
weakening of the Community Reinvestment Act in any legislation.
In the past, when we have permitted greater competition in the
financial services industry, consumers of financial products have
benefited significantly. Even more dramatic savings have accrued
to consumers after the government has lifted barriers to competition
in other industries.
As I mentioned earlier, the Bureau of Economic Analysis estimates
that in 1995, American consumers spent nearly $300 billion on
fees and commissions for brokerage, insurance, and banking services.
That figure would more than double, if we were to add the transaction
costs of companies, in addition to consumers. Based on the efficiencies
that could be realized from increased competition, it's not unreasonable
to expect ultimate savings to consumers of 5 percent from increased
competition in the securities, banking and insurance industries
-- as much as $15 billion per year. These savings would be substantially
greater if you include costs to companies, as well as consumers.
The bulk of these savings should come as financial services firms,
driven by increased competition, adopt best-practices.
Consumers would benefit in other ways, as well. A range of financial
institutions could offer consumers, farmers, and small businesses
greater choice of products. And our proposal could improve access
for under-served consumers by encouraging new competitors to find
profitable opportunities in overlooked markets.
Mr. Chairman, I share the views of others who feel that the time
has come to modernize the rules of our financial services system.
Such a move, if done with due regard for safety and soundness,
will benefit the broad range of users of financial services:
consumers, small and large businesses, communities, and state
and local governments. A more rational system, with a level playing
field and appropriate safeguards, is in everyone's interest.
Mr. Chairman, we look forward to working with you and the members
of this Committee in the time ahead.