Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. I thank the Senator. I thank him very much for his strong opening statement on this important amendment.

Mr. SARBANES. Will the Senator yield on that point?

Mr. SARBANES. Will the Senator yield for a minute?

Mr. SARBANES. I am quite prepared to concede that there are a lot of small banks that do, in fact, service their community, as the Senator has indicated by the quotes. We have never held extended hearings on this issue, but the material from the Federal Deposit Insurance Corporation says that 57 percent of small banks and thrifts have a loan-to-deposit ratio below 70 percent and that 17 percent of those have levels less than 50 percent. Conceding that there are small banks who really pay attention to their community, it is obvious that there are also small banks which are not doing that. In fact, the Madison Wisconsin Capital Times, in an editorial a couple of years ago, said: Many rural banks establish a very different pattern than reinvesting in their communities where local lending takes a lower priority than making more assured investment like Federal Government securities. Thus, such banks drain local resources of the very localities that support them, making it much harder for local citizens to get credit. I do not gainsay the examples that the Senator cited. But clearly, there are examples on the other side. And CRA, of course, is directed to get not at the good or the best actors, but the ones that are not addressing needs. The statistics from the regulators seem to indicate, and this editorial that we have--and we have other comments to the same effect--seems to indicate that there is a problem.

Mr. SARBANES. That is a reasonable point. It ought to be examined in a set of careful hearings, because, in fact, the particular institution may confront that problem, although it may be overlooking loan possibilities, which has frequently been the case and is certainly the case in many instances in which areas people were neglected in terms of the availability of credit. We have never done those kinds of hearings. We have never really looked at this problem in some sort of objective, comprehensive way. And we hear all these kinds of ad hoc stories, as it were. But, you know, there are counter-ad hoc stories. I am frank to say I don't think we ought to be making the kind of significant changes in the CRA that are in the committee bill without having gone through the sort of process I am talking about. I thank the Senator for yielding.

Mr. SARBANES. If the Senator----

Mr. SARBANES. If the Senator will yield, he simply stated the point all over again, but it hasn't squared the factual discrepancy. According to our data from bank regulatory agencies, more than 70 small, rural banks and thrifts are currently deemed not in compliance; that is, below a satisfactory rating with CRA this year alone. Since 1990, 338 small, rural banks and thrifts received CRA ratings below satisfactory. Sure, the Senator can make the same speech about those numbers, but I just want to get those on the Record, because those numbers are very significantly different from the numbers which the Senator is putting forward.

Mr. SARBANES. Those are the banks we are talking about. Those are the figures I am giving you.

Mr. SARBANES. Mr. President, I think the Senator was just asking you to yield in order to determine the procedure.

Mr. SARBANES. Mr. President, I have refrained from speaking all day. I do need to speak for a brief period of time, but I want to try to accommodate colleagues as well. If I can inquire of Senator Schumer, how much time would he need to speak, 5 minutes or thereabouts?

Mr. SARBANES. And Senator Shelby?

Mr. SARBANES. I would like to propound a request that Senator Schumer be allowed to speak and then Senator Shelby and then after Senator Shelby that I would be recognized.

Mr. SARBANES. Mr. President, as I draw to a close, let me again say to the distinguished Senator from Nevada we very much appreciate his very strong and powerful statement. Exhibit 1 April 8, 1999 Hon. Paul S. Sarbanes, Senate Hart Office Building, U.S. Senate, Washington, DC. Dear Senator Sarbanes: The undersigned organizations write to express strong opposition to the Financial Services Modernization Act of 1999 as reported out of the Senate Banking Committee on March 4th. The Act would restructure the financial services industry in the United States by allowing broad affiliations among banks, insurance companies, and security firms. Currently, the law strictly limits ownership among different financial entities and between financial companies and commercial corporations. The Act seeks to ease these restrictions, without commensurate expansion of the Community Reinvestment Act (CRA) to cover insurance companies, securities firms, mortgage companies, and other financial entities allowed to affiliate with banks. The Act would undermine one of the most effective revitalization vehicles for underserved low-income and minority communities, including Hispanic American communities across the country. We have found, and research confirms, that all too often the credit and financial needs of these communities are severely underserved. Historically, many financial institutions have avoided investing in these communities due to their perceived higher level of risk. Unfortunately, ``perceived higher level of risk'' is often code for ``low- income'' or ``minority.'' But the facts show that low-income and minority communities are not inherently riskier than other communities. In fact, most financial institutions find them to be quite profitable, once they begin investing in them. Unfortunately, without the CRA, many financial institutions have not and would not be encouraged to do so. As the data show, Hispanics are the fastest-growing population in the United States. We are a growing force in the expansion of homeownership and small business development, two leading indicators of the economic well- being of this country. For example, between 1987 and 1992, Hispanic-owned business grew by over 76%, compared to 26% for U.S. businesses overall. According to a 1997 Harvard study, ``the number of Hispanic homeowners has shown the most spectacular rise'' in recent years compared to that of Whites and of other minority groups. Population projections forecast Hispanics to be the largest minority group in the U.S. by the year 2005, causing the U.S. economy to be increasingly dependent on the continued prosperity of the Hispanic American community. Without the CRA, this growth may be impeded. As reported out of the Senate Banking Committee, the Financial Services Modernization Act of 1999 would hinder that growth by weakening the CRA in the following three ways. First, ``satisfactory'' CRA rating is not required in order for financial institutions to enjoy the new powers afforded to them by the legislation, thereby allowing banks to exercise their privilege, even if they are not meeting the credit needs of the communities where they do business. Second, banks receiving a ``satisfactory'' CRA rating would be given a ``safe harbor'' from public comment on CRA performance. Since over 95% of banks receive a ``satisfactory'' rating, this would undermine the effectiveness of the law by restricting a community's right to voice its experience with banks. While a ``satisfactory'' rating provides a helpful guide to a bank's overall performance, it may not provide an accurate picture at the neighborhood level. Third, the Act proposes to exempt all small rural banks (those with less than $100 million in assets) from CRA, thereby releasing 76% of all rural banks from their CRA obligations. As with the safe harbor provision, this undermines the spirit and the effectiveness of the law by exempting most rural banks. This would have particularly adverse consequences in low-income rural communities where often the only source of credit is a small bank. Moreover, researchers have found that small banks have disproportionately poor CRA records compared to larger banks, thereby highlighting the need for CRA in rural communities and small towns. CRA is one of the strongest incentives to encourage investment in low-income and minority communities. Over the last twenty-two years, neighborhoods across the country have benefited from CRA-encouraged investments. This has resulted in increases in homeownership and business development, leading to the rebirth of many American neighborhoods. However, many communities remain underserved by capital and investment vehicles. For this reason, reinforcement, not weakening, of CRA is critically needed. We urge you to support the continued strengthening of America's communities by vigorously opposing the Financial Services Modernization Act of 1999 as reported out of Committee, and supporting amendments that would strengthen the Bill's CRA protections. Thank you. Sincerely, Rick Dovalina, National President, League of United Latin American Citizens; Arturo Vargas, Executive Director, NALEO Educational Fund; Ruth Pagani, Executive Director, National Hispanic Housing Council (NHHC); Juan Figueroa, President and General Counsel, Puerto Rican Legal Defense and Education Fund (PRLDEF); Antonia Hernandez, President and General Counsel, MALDEF; Raul Yzaguirre, President and Chief Executive Officer, National Council of La Raza (NCLR); Manuel Mirabal, President and Chief Executive Officer, National Puerto Rican Coalition (NPRC).

Mr. SARBANES. I say to the Senator, that is correct. Senator Bryan spoke to that earlier, about the effort that was made in the mid-1990s to ease the regulatory burden on the banks.

Mr. SARBANES. Will the Senator yield for a question?

Mr. SARBANES. Let me compliment the Senator from Indiana and the Senator from North Carolina for their very strong presentations and their tremendous contributions to the Banking Committee. They both came on the committee this year, and we are barely a few months into their first session and they have both made extraordinary contributions to the work of the committee and to the work of the Senate. I simply want to say, as one Senator who has been here for a while, we are very honored to have them as part of the Senate and thankful and grateful to them for the contributions they make. I wanted to ask the Senator this: In a letter we received from the U.S. Conference of Mayors, which in effect fits in with the point that both Senators were making about the importance of the Community Reinvestment Act--it is signed by close to 170 mayors from all over the country, besides the ones that are trustees and on the advisory board of the U.S. Conference of Mayors--it says: . . .As mayors, we recognize that CRA has been an essential tool in revitalizing cities around this nation. In fact, there is now increasing recognition that the strength and economic health of whole regions require strong and vibrant cities. Creating new economic activity--new businesses, new jobs, new homeowners--is key to the revival of urban areas and their surrounding regions, CRA has been a key component to creating this new economic activity. They go on later to say: Prior to the enactment of CRA, banks and thrifts routinely redlined low and moderate-income neighborhoods in our nation's cities. The modest requirement in CRA that financial institutions meet the credit needs of their communities has led to the successful channeling of billions of dollars into localities. Then they note that the bill brought out by the committee would severely weaken CRA. They say: Unless the onerous CRA provisions are addressed and CRA is preserved and strengthened, we would urge strong opposition to the Senate bill. I raise that with the Senator because it seems to me that it goes to this very point, including the pictures he was showing. We are talking about the elected officials who are right on the front line, so to speak, trying to deal with the problems of their communities, trying to bring them back and achieve revitalization and renewal. They, obviously, have come in feeling very strongly. Mr. President, does the Senator feel that this is another perspective on the very point he was trying to make of the importance of CRA--not just for the people who directly benefit from it but for the broader community, for all of us, it seems to me, here is, in a sense, an endorsement of the very position the Senator has been enunciating.

Mr. SARBANES. I ask unanimous consent that when the Senator from Wyoming concludes that the Senator from Massachusetts be recognized.

Mr. SARBANES. Mr. President, will the Senator yield to me for 2 minutes without losing his right to the floor?

Mr. SARBANES. Mr. President, I yield to the distinguished Senator from Nevada.

Mr. SARBANES. Mr. President, I have refrained from taking a lot of debate time this afternoon, because a lot of our colleagues want to speak. I recognize that. Of course, the temptation is very great to sort of rise every time the chairman of the committee speaks. He has done that at some length here this afternoon. So I am not going to do it now, because I have colleagues here. I hope before we get to 7 o'clock I will get a chance to have a few minutes to make a statement. But I want to say that there is kind of an Alice-in-Wonderland quality to this debate. The chairman pulls these figures out of the air. I don't really know where they come from. I asked him where they come from. He says there have been 16,000 something examinations of banks under $100 million in nonmetropolitan areas. I don't know where he gets that figure. The figure from the Federal Deposit Insurance Corporation is 11,445. He says only 3 have been found in substantial noncompliance; the figure is 18, and another 320 have been found a need to improve. This chart is from the FDIC. The Chairman says only three--it is not only three. I want to make that point.

Mr. SARBANES. Mr. President, reserving the right to object, I think the agreement should be ``or a designee,'' and Senator Bryan is going to offer the amendment.

Mr. SARBANES. A lot of money, but there is a big difference between a billion and a trillion. That is one of the problems with this debate, I underscore.

Mr. SARBANES. I yield.

Mr. SARBANES. My arithmetic--first of all, I do not concede the figures. In any event, even if I accept them, it is 1 billion, not 1 trillion.

Mr. SARBANES

Mr. SARBANES. Mr. President, as I have indicated earlier in the course of the opening debate on this issue, we are very anxious on our side to have financial service modernization legislation, and most of us subscribe to the proposition of allowing affiliations between banks, security firms, and insurance companies. However, as I have indicated, that is not the only issue before us. We have to consider that question in the context of addressing important questions of providing credit in all communities in our country; namely, the Community Reinvestment Act issue. We have to consider how these activities are to be done, whether they are to be done solely in an affiliate, outside of the banking structure, or whether banks will have the opportunity either to use the affiliate or to do it in an operating subsidiary. We have the important issue of the long historical separation between banking and commerce, which has prevailed in this country. And we have other aspects of the legislation which I think are of importance, including important provisions with respect to consumer protection. As we have indicated earlier, we were not able to support this legislation in the committee and the legislation was brought to the floor on an 11-to-9 vote. The alternative, which we have now offered, just offered, and which is at the desk, is, in effect, the bill that the committee reported last year on a 16-to-2 vote with the one substantial change of providing for the operating subsidiary approach. That is now contained in the alternative, the substitute amendment which I have sent to the desk. Last year some very careful compromises were worked out in order to move this legislation forward on a consensus basis. Unfortunately, that has not been the case this year, and the legislation that was developed in the committee was reported by the majority but contained no supporting vote from any of the Democratic members of the committee. The proposal before us, S. 900, the bill from the committee, is strongly opposed by a great number of civil rights groups, community groups, consumer organizations, and local government officials. People within the financial services industry have mixed views on some of the provisions of S. 900, and of course the President has indicated that he will veto the committee bill. Unfortunately, we have this sharp contrast with last year's bipartisan approach. I think it is fair to say that none of the industry association groups oppose the substitute. They have been caught in the switches, so to speak, on this issue, and subjected to considerable persuasion. But I think it is fair to say that the provisions that are in the substitute will pass muster. These provisions also are fairly close to what the House Banking Committee has done by a 51-to-8 bipartisan vote. So we think the approach contained in the substitute just sent to the desk stands the greatest chance of finally being enacted into law. This substitute amendment, in effect, would put us on a path, at the end of which we could obtain the President's signature and get legislation. Let me briefly seek to contrast the substitute and S. 900, the bill brought from the committee. It should be clearly understood that there is an intense view on this side of the aisle, and I believe shared by at least a few on the other side of the aisle, that the Community Reinvestment Act has really been a very significant and constructive public policy. It has improved the availability of credit in low- and moderate-income communities. There is example after example, and we will put those in the Record as this debate develops, where the CRA lending and investments have brought life to previously neglected communities and given people not only hope, but the ability to move up the American ladder of opportunity. It has helped to alleviate credit needs and improve services in rural areas and on Native American reservations. It has had a significant impact on home ownership amongst minority groups, African Americans and Hispanic Americans, whose numbers in terms of home ownership have increased dramatically, and everyone who goes and observes that phenomenon reports back that the CRA has had a considerable role to play in that very important objective. The President has stated: [W]e should all be proud of what [CRA] has meant for low and moderate-income Americans of all races. Although we still have a long way to go in bringing all Americans into the economic mainstream, under CRA the private sector has pumped billions of dollars of credit to build housing, create jobs and restore hope in communities left behind. It is for this reason that farm groups, labor unions, mayors all across the country, community development corporations, Hispanic organizations, Asian American, Native American--this has had a significant impact on the Indian reservations across the country--and civil rights groups all support retaining the effectiveness of CRA. I will include in the Record at the end of my remarks letters from these various organizations detailing their very strong view about CRA, and in effect their support for this substitute. The substitute requires that banks should have at least a satisfactory CRA rating before they can affiliate with securities and insurance firms, and that they would have to maintain that rating to continue the new affiliation. These provisions are essential in order to maintain the effectiveness of CRA within the expanded holding company structure. Capital, management, and CRA performance are at issue when an institution files an application for deposit insurance, a charter, a merger, an acquisition or other corporate reorganization, a branch or the relocation of a home office or branch. If you are going to allow banks for the first time in a comprehensive way to engage in insurance and securities activities, then it is important that those banks, before they can do that, meet the CRA test. Otherwise, you are going to have a situation in which financial institutions could enter into additional activities, even if they were deficient in their CRA performance. As the FDIC Chairman, Donna Tanoue stated: The bank and thrift regulatory agencies consistently take into account an insured institution's record of performance under CRA when considering an application to open or relocate a branch, a main office, or acquire or merge with another institution. As this legislation would enable institutions to enter into additional activities, it would seem consistent that CRA compliance should continue to be a determining factor. Last year, we worked out these CRA provisions in the bill that was reported out of the committee. And the consensus, a 16-2 vote, contained these important CRA provisions. This year, the provision requiring a satisfactory rating as a precondition of expanded affiliations is absent from the committee- reported bill. There are two provisions in the committee-reported bill which we feel very strongly contribute to undermining the application of CRA. This substitute amendment, unlike the committee bill, requires banks have and maintain satisfactory CRA ratings in order to engage in and maintain expanded affiliations. To fail to do so would allow banks, for the first time, to move out in terms of the activities they can engage in, in a comprehensive way--both securities and insurance--without the bank that is going to do that having to meet the CRA test. It does not apply, the CRA, to the insurance and securities activities, although many CRA advocates want to do exactly that. It only requires that the bank, as a condition of affiliation, meet the CRA performance standards. As Secretary Rubin has stated: If we wish to preserve the relevance of CRA at a time when the relative importance of bank mergers may decline and the establishment of non-bank financial services will become increasingly important, the authority to engage in newly authorized activities should be connected to a satisfactory CRA performance. Let me turn to the other CRA issues that are, in effect, posed by the substitute as compared to the committee-reported bill. The second provision of the committee bill that weakens CRA is its safe harbor for banks with a ``satisfactory'' or better CRA rating. This is, banks would be deemed in compliance with CRA if they had in each of their three preceding examinations received a satisfactory rating. Groups, in fact, would not be able to comment about CRA performance unless they could carry the very heavy burden of providing substantial, verifiable information to the contrary. The Federal bank regulatory agencies oppose this provision. They agree that a satisfactory CRA rating is not conclusive evidence that a bank is meeting the credit needs of all of its communities. On the contrary, they welcome comments from the public regarding the CRA performance of the institutions they supervise. For example, Ellen Seidman, Director of the Office of Supervision said: [w]e generally find that the information received from those few who do comment on applications is relevant, constructive, and thoughtful, and frequently raise issues that need to be considered. In order for us to reach a supportable disposition on an application, and satisfy our statutory responsibilities, we need to have public input. Public comment is especially useful in the case of large banks serving multiple markets, because regulators sample only a portion of these markets to determine the institution's CRA rating. Public comment provides an opportunity for community members to point out facts and data that may have been overlooked in a particular examination. In fact, the provision that is in the committee bill would preclude looking at anything that took place prior to the past examinations if those examinations produced a satisfactory rating. It is very clear that this safe harbor provision of the committee bill would stifle public comment on banks' and thrifts' CRA performance. This is so because nearly all banks and thrifts receive satisfactory or better CRA ratings, well up into the 90s, 90-percentile figures. The committee majority asserts that the public comment process has been routinely abused, but that assertion is not supported by the record. We get these sort of examples that are brought in. There has never been a full-scale hearing on this issue. All of the statistical information from the regulatory agencies indicate that there has not been abuse of the public comment process. The vast majority of applications reviewed on CRA grounds are approved in a timely manner. Many do not receive any adverse comments. Very few applications that receive adverse CRA comments are delayed. The substantial, verifiable information would really knock community groups and ordinary citizens out of being able to comment in any meaningful way. As the FDIC Chairman Tanoue stated, ``Public comments relating to CRA should not bear a burden of proof that is not imposed on public comment related to any other aspect of a bank's performance.'' The regulators take in all these comments and then they make their judgment. There seems to be a presumption here that when people come in and make a comment that somehow they then carry the day. Nothing could be further from the truth. The regulators collate all these comments, consider them, and proceed to make their judgment. And the number of instances in which CRA has been raised is a very small percentage of the total. The third way in which the committee bill attacks CRA is the exemption for rural institutions with less than $100 million in assets. This would obviously have very severe consequences for low- and moderate-income rural communities which depend heavily on small banks for their credit needs. It is asserted that these small banks, by their nature, serve the credit needs of their local communities. However, historically, in the ratings made by the regulators, small banks have received the lowest CRA ratings. Although many small banks do serve the needs of their communities, observers note that some small banks often invest in Treasury bonds rather than in their own communities. Some have argued that you need an exemption in order to relieve the regulatory burden. The fact of the matter is, as the Federal bank regulators revised the CRA regulations in 1995 to reduce the cost of compliance for small banks, the new rules provided a streamlined examination for small banks. They exempted small banks from reporting requirements. And they emphasized the institution's actual performance rather than paperwork. The FDIC, the OTS, and the OCC support the application of CRA to small banks. FDIC Chairman Tanoue stated: Although the vast majority of institutions satisfactorily help to meet the credit needs of their communities, not all institutions may do so over time, including small institutions. Some institutions may unreasonably lend outside of their communities, or arbitrarily exclude low- and moderate-income areas or individuals within their communities. We believe that periodic CRA examinations for all insured depository institutions, regardless of asset- size, are an effective means to ensure that institutions help to meet the credit needs of their entire communities, including low- and moderate-income areas. Before I turn to that subject, let me again stress how critical the flow of credit, which has resulted from CRA, has been to the redevelopment of low- and moderate-income areas. The bill brought out of the committee, S. 900, would really close down opportunity for large numbers of people in these low- and moderate-income communities to really improve themselves, to move to home ownership, to open small businesses, to carry out the sort of community renewal which gives them a better neighborhood in which to live. I have heard these assertions, but we can take you through instance after instance in which the impact of CRA has been such as to provide hope to communities and to lift them up and to enable people to move up the ladder of opportunity. I do not know what could be more consistent with an American goal or objective than to give people this opportunity to advance. And particularly the financial institutions, which are subject to these CRA requirements, are prepared to abide by them. Many of them have given testimony about the beneficial impact it has had on the community and the beneficial impact on their relationship with the community. Let me turn to the banking and commerce issue. Another aspect of the committee bill--and this is an important part of the substitute--that differs significantly from the substitute amendment is its approach to the separation of banking and commerce. In an important respect, the committee bill breaches the separation of banking and commerce, and this could lead to biased lending decisions and may well ultimately put the taxpayer-backed deposit insurance funds at risk. Now, this separation of banking and commerce is a longstanding principle in American law, dating back over now almost 140 years to the National Bank Act of 1864, which specifically forbids banks to engage in or invest in commercial or industrial activities. Under existing law, a commercial firm, such as General Motors or Microsoft, may not own a bank or be owned by a bank. We have tried to draw a line there. There has been some fuzzing of that line, but not much. In 1956, the Congress enacted the Bank Holding Company Act, which prohibited commercial firms from owning banks and prohibited holding companies owning two or more banks from owning commercial firms. This policy was strengthened by the Bank Holding Company Act Amendments of 1970, which extended the prohibition on owning commercial firms to holding companies owning just one bank. In other words, it drew a very sharp line. In submitting the 1970 amendments, President Nixon said: The strength of our banking system depends largely on its independence. Banking must not dominate commerce or be dominated by it. Now, why do we have this principle of separating banking and commerce in U.S. law? Because allowing banks to affiliate with commercial firms raises concerns relating to risk to the deposit insurance fund, the impartial granting of credit, unfair competition, and concentration of economic power. A bank affiliated with a commercial firm would have an incentive to make loans to that firm, even if the firm were less creditworthy than other borrowers. The bank would have a similar incentive not to lend to the firm's competitors, even if they were creditworthy. Financial experts have pointed out these dangers. Secretary Rubin testified that mixing banking and commerce: . . . might pose additional, unforeseen and undue risk to the safety and soundness of the financial system, potentially exposing the federal deposit Insurance funds and taxpayers to substantial losses. . . . Equally uncertain is the effect such combinations might have on the cost and availability of credit to numerous diverse borrowers and on the concentration of economic resources. The leading economist Henry Kaufman warned that mixing banking and commerce would lead to conflicts of interest and unfair competition in the allocation of credit. In his view: . . . a large corporation that controls a big bank would use the bank for extending credit to those who can benefit the whole organization. . . . The bank would be inclined to withhold credit from those who are or could be competitors to the parent corporation. Thus, the cornerstone of effective banking, independent credit decisions based on objective evaluation of creditworthiness, would be undermined. Public interest groups have made the same point. Consumers Union testified that it opposes: . . . permitting federally-insured institutions to combine with commercial interests because of the potential to skew the availability of credit, conflict of interest issues, and general safety and soundness concerns from expanding the safety net provided by the government. The difficulties experienced in Asia demonstrate the risks associated with mixing banking and commerce. Both Secretary Rubin and Chairman Greenspan testified that the financial crisis in Asia was made worse by imprudent lending by banks to affiliated commercial firms. In other words, if you cross that line and put the commercial firm in the bank-- as it were, in the same pot--you run a heavy risk, as was exemplified in the Asian financial crisis, of imprudent lending. Former Federal Reserve Chairman Paul Volcker wrote, recent experience with the banking crises in countries as different in their stages of development as Japan, Indonesia and Russia demonstrate the folly of permitting industrial financial conglomerates to dominate financial markets in potentially large areas of the economy. The substitute amendment tries to sustain this line between banking and commerce. The committee bill crosses this line in a number of respects. First of all, it permits bank affiliates to acquire any type of company in connection with merchant banking activities. However, the committee bill drops certain safeguards that are in the substitute and that were in last year's bipartisan bill. Those safeguards allowed merchant banking investment to be held only for such period of time as would permit the sale of the investment on a reasonable basis. It precluded the bank affiliate from actively participating in the day-to-day management of the company. The committee bill drops those safeguards. In effect, it would allow a bank holding company to operate commercial companies of any size and in any industry for an unlimited period of time. This would break down the separation of banking and commerce. The substitute restores the safeguards that were in last year's bill. Secondly, both the committee bill and the substitute amendment allow holding companies that own banks to engage in activities that are financial in nature or incidental to such financial activities. But the committee bill goes further by authorizing holding companies to engage in activities that are complementary activities that are financial in nature. It provides no definition or limitation of these complementary activities and, therefore, raises the danger that these complementary activities would be commercial in nature and cross the separation between banking and commerce. The substitute does not permit those complementary activities. Finally, the committee bill does not close the unitary thrift company loophole. That loophole refers to the fact that a company that owns just one thrift, called a unitary thrift holding company, may also own a commercial firm. There are currently over 500 thrifts owned by unitary holding companies. The vast majority of these are owned by financial firms. Now, both the committee bill and the substitute would prohibit the creation of new unitary thrift holding companies by commercial firms. However, there is a sharp difference in that the committee bill would allow a commercial company to acquire any of the 500 existing unitary thrift holding companies. Now, obviously, if they can do that, if hundreds of commercial firms, in effect, can acquire a unitary thrift holding company, they can effectively obliterate the separation between banking and commerce. Financial leaders and banking industry groups advise the committee to prohibit commercial firms from acquiring control of thrifts. Chairman Greenspan recommended that financial services modernization legislation at least prohibit, or significantly restrict, the ability of grandfather unitary thrift holding companies to transfer their legislatively created grandfather rights to another commercial organization. Secretary Rubin observed that, ``without such a limit on transferability, existing charters may tend to migrate to commercial firms and could become a significant exception to the general prohibition against commercial ownership of depository institutions.'' Both the ABA and IBAA--the American Bankers Association and the Independent Bankers Association of America--wrote to Senators yesterday expressing their support for closing the unitary thrift holding company provision, including restricting transferability of existing unitaries. Now, let me turn briefly to some important consumer protection provisions that are in the substitute amendment, but that are not in the committee bill, and which we think make the substitute more desirable legislation than the committee bill. Obviously, if you are going to have a financial services modernization bill, you must ensure adequate consumer protection. We need to be sure that consumer protections keep pace with changes taking place in the financial market. In recent years, banking securities and insurance products have become more similar. A wider variety of financial products is available through banks. This increases potential customer confusion about the risks of the product the customer is buying, who is selling it, and whether or not it is insured by the FDIC. Measures such as disclosure to customers and licensing of personnel can help keep such misunderstandings to a minimum, and such a provision should be included in any financial services modernization bill. Unfortunately, the committee bill fails to include a number of important consumer protection provisions that passed the committee overwhelmingly last year, and which we have now included in the substitute that is now before the body. Very quickly, on insurance sales, while some of the provisions of last year's bill relating to insurance sales have been substituted into the committee bill--that was done in the committee--but more remains to be done. The substitute amendment would require Federal bank regulators to establish mechanisms for receiving and addressing consumer complaints--something that is completely absent in the committee bill. The substitute amendment would provide that Federal regulations would supersede State regulations when the Federal regulations afforded greater protection for consumers. The committee bill allows State regulations to prevail even if it offers less protection to consumers. With respect to securities activities, the committee bill provides less protection for consumers than does the substitute amendment. Currently, banks enjoy a total exemption from the definitions of ``broker,'' ``dealer'' and ``investment advisor'' under the Federal securities law. Because of this blanket exemption, consumers who purchase securities from banks do not receive any of the protections of the securities laws, which in many ways are superior to those offered by the banking laws. For example, broker-dealer personnel have an obligation to recommend to their clients only transactions that are suitable based on their client's tolerance for risk, overall portfolio, and so forth. Bank personnel have no such obligation. Broker-dealer personnel must pass licensing exams and are subject to continuing education requirements. Bank personnel are exempt from these requirements. Disciplinary histories of broker-dealer personnel are made publicly available to investors. No such history is available regarding bank personnel. Broker-dealer managers have a duty to supervise their sales personnel, which is enforceable under the Federal securities laws. Bank managers do not. Finally, customer disputes with brokerage firms are subject to arbitration, which offers a specialized, quicker and cheaper forum for settling disputes. No arbitration exists for customer disputes with banks. Now, the committee bill, like the substitute amendment, would repeal the total exemption banks enjoy from the definition of broker and dealer. Also, like the substitute amendment, the committee bill contains a number of exceptions that allow certain securities activities to continue to take place directly within banks. However, the exceptions in the committee bill are significantly wider than those in the substitute amendment. Let me just mention some of those important differences. The committee bill allows a bank trust department conducting securities transactions to be compensated on a transaction-by- transaction basis, just like a broker. Where the substitute amendment allows a bank to sell unregistered securities exclusively to sophisticated investors, the committee bill allows a bank to sell unregistered securities to all investors. Finally, the committee bill prohibits the SEC from determining that a new product is a security and, therefore, must be sold by an SEC- registered broker-dealer, unless the Federal Reserve concurs. Over time, this will move even more securities activities directly into banks. The substitute amendment would afford the SEC the first opportunity to define new products as securities. The committee bill also leaves the SEC with less authority over bank- advised mutual funds and with less ability to protect investors in those funds. Now, the substitute amendment requires the Federal banking regulators to issue regulations regarding the sale of securities by banks and bank affiliates. The bank regulators would have established mechanisms to review and address consumer complaints. The committee bill does not include this provision. No one of these provisions that I made reference to may seem to be of major import. But all of them taken together, I think, indicate that the protections for consumers that are contained in the substitute amendment significantly exceed those that are in the committee-reported bill. Another area in which the committee bill departs from last year's agreement regards a special deposit insurance assessment paid by thrifts. Prior to 1996, thrifts paid a higher assessment rate than banks did for interest payments on certain bonds issued to pay for the resolution of the savings and loan crisis, so-called ``FICO bonds.'' In 1996, Congress acted to close this assessment differential on FICO bonds. The rates were to be equalized until January 1, 2000, and the bill that we reported last year left the 1996 agreement intact. The committee bill now before us would extend this assessment differential for another 3 years, so that thrifts would continue to pay a higher assessment rate for another 3 years. This may well lead institutions to shift their deposits from the thrift insurance fund to the bank insurance fund, which might well create stability problems for the thrift insurance fund. Chairman Tanoue has written that this provision serves no positive public policy purpose. And it is not in the substitute amendment that is now before us. Let me now turn to an issue in which my colleague, the chairman of the committee, has spent a considerable amount of time here on the floor today in pointing out the differences between the substitute that is now before us and the committee bill. All of these provisions I have thus far enumerated were essentially contained in the bill that was reported last year by the committee on a 16-to-2 vote. The one area in which the substitute amendment differs from last year's bipartisan bill is its treatment of operating subsidiaries and banks. Last year's bill contemplated that principal activities, such as underwriting securities and insurance, would take place in a holding company's subsidiary rather than bank subsidiaries. Certain agency activities such as sales of insurance were permitted in bank subsidiaries. This approach was supported by the Federal Reserve. It was opposed by the Treasury Department. That was an important difference last year. It remains an important difference this year. As the legislative process has proceeded, the Treasury Department has agreed to significant additional safeguards regarding the scope and regulation of bank subsidiaries' activities. With these safeguards, it appeared to us that banks should be given the option of conducting financial activities in operating subsidiaries. That approach is contained in the substitute amendment now before the Chamber. President Clinton has indicated that he will veto the reported bill in part because ``it would deny financial services firms the freedom to organize themselves in a way that best serves their customers.'' Let me talk a bit about the safeguards, the changes in the sense that the Treasury has agreed to, which I think now warrant allowing the banking institution to have a choice. They wouldn't be required to do it in an op-sub. They could still do it in an affiliate. They could have a choice between the two as a matter of their own organizational preference. Last year, the Treasury was clear that they would not do real estate in the operating-sub. And they continue to hold to that position this year. In addition, the Treasury last year agreed that insurance underwriting may not take place in a bank subsidiary. This prohibition on insurance underwriting would be in addition to an explicit prohibition on real estate development conducted by bank subsidiaries to which the Treasury agreed last year. So we have these two areas now that were provided for and placed outside of the op-sub umbrella. On merchant banking, the Treasury has agreed that the Federal Reserve shall have the authority to define merchant banking activities and bank subsidiaries. This meaningful step on the part of the Treasury will contribute to bank subsidiary activities being structured in a prudent fashion. Merchant banking presents a potential breach in the separation of banking and commerce. The possible dangers would be increased if two different regulators were to define separately the dimensions of permissible merchant banking activities. Then to avoid the possibility that would happen--that the dimensions of the permissible merchant banking activities would be defined by two different regulators who would have different concepts--in the substitute, we have the provision that the Federal Reserve would have the exclusive authority to define merchant banking activities and bank subsidiaries. The Treasury has also agreed that the Secretary and the Federal Reserve should jointly determine which activities are financial in nature, both for a holding company subsidiary and for a bank subsidiary. Both the Secretary and the Federal Reserve would jointly issue regulations and interpretations under ``the financial in nature'' standard. This would eliminate a potential competition between bank regulators. Further, to place activities on an equal footing, the same conditions would apply to a national bank seeking to exercise expanded affiliation through a subsidiary as a holding company seeking to exercise those affiliations. These conditions are that banks be well capitalized, well managed, and in compliance with CRA. The Treasury also supports the application of the functional regulation of securities and insurance activities taking place in bank subsidiaries just as it applies to holding company subsidiaries. These provisions are all reflected in the substitute amendment. In addition, the Treasury supports a requirement that national banks with total assets of $10 billion or more retain a holding company, even if they choose to engage in expanded financial activities through subsidiaries. This is designed to preserve the oversight that the Federal Reserve now has over the Nation's largest commercial banks through their holding company. So this was an effort by the Treasury to accommodate one of the concerns that had been repeatedly expressed by the Federal Reserve. Furthermore, the substitute amendment contains certain additional safeguards that the Treasury Department now supports for financial services modernization legislation. Every dollar of a bank's investment in a subsidiary would be deducted from the bank's capital for regulatory purposes. In this way, the bank would have to remain well capitalized, even after deducting the investment in the subsidiary, and even should it lose its entire investment. Secondly, a bank could not invest in a subsidiary in an amount exceeding the amount the bank would pay to a holding company as a dividend. And, thirdly, the strict limits that now apply to transactions between banks and their affiliates would apply to transactions between banks and their subsidiaries. These restrict extensions of credit from banks to their affiliates guaranteed by banks for the benefit of their affiliates and purchases of assets by banks from their affiliates. All such transactions must be at arm's length, and fully collateralized, and the total amount of such transactions between a bank and all of the affiliates is limited. In total, these safeguards pertaining to the regulation of bank subsidiaries should eliminate any economic benefit that may exist when activities are conducted in bank subsidiaries rather than holding company subsidiaries. The provisions regarding the scope of activities permitted for bank subsidiaries should remove any opportunity for regulators to compete with one another to the detriment of the safety and soundness of the banking system, or the separation of banking and commerce. FDIC Chairman Tanoue testified: From a safety-and-soundness perspective, both the bank operating subsidiary and the holding company affiliate structures can provide adequate protection to the insured depository institution from the direct and indirect effects of losses in nonbank subsidiaries or affiliates. This position of the current FDIC Chairman was echoed by three former Chairmen of the FDIC in an editorial that I printed earlier in the remarks. On the basis of the provisions agreed to by the Treasury Department and the testimony given by the FDIC-- And I want to underscore the efforts on the part of the Treasury Department to address questions that had been raised last year; in other words, what we are containing in the substitute differs from what the Treasury was putting forward last year and has encompassed all of these various safeguards which they have sought to develop-- [it was our judgment that] permitting bank operating subsidiaries can be consistent with the goals of preserving safety and soundness, protecting consumers, and promoting comparable regulation. Therefore, we have included the operating subsidiary provisions in this substitute amendment and regard it as a meaningful step toward enactment of financial services modernization legislation. Let me simply close with these observations. The substitute amendment now before the body achieves the primary objective of financial services modernization; namely, allowing affiliation of banks, securities firms, and insurance companies. It does so while preserving safety and soundness, protecting consumers, providing for regulatory parity, and promoting the availability of financial services to all communities. The committee bill, S. 900, falls short of these goals. It undermines the Community Reinvestment Act. It does not provide bank operating subsidiaries with the scope sought by the Treasury Department. Its protections for consumers are substantially less than in the substitute. And, finally, it enables the separation of banking and commerce to be breached with respect to the unitary thrift holding companies. For all of these reasons, the President has declared he will veto it in its current form. I believe that the substitute amendment, the one that is now before the Senate and on which at the conclusion of this debate we will vote, represents a balanced, prudent approach to financial services modernization. It is legislation which has broad acceptance within the industry. In many ways, it is comparable to the activities of the legislation of the House Banking Committee. I am frank to say that I clearly think it is the approach most likely to achieve the enactment of financial services modernization legislation. If Members want financial services modernization legislation, if Members want to manufacture a legislative vehicle that can go all the way through to Presidential signature and become law, then Members should vote for the substitute amendment. I yield the floor.