[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
H.R. 698, THE INDUSTRIAL BANK
HOLDING COMPANY ACT OF 2007
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 25, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-25
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36-820 PDF WASHINGTON DC: 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
April 25, 2007............................................... 1
Appendix:
April 25, 2007............................................... 51
WITNESSES
Wednesday, April 25, 2007
Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance
Corporation.................................................... 9
Colby, Robert, Deputy Director, Market Regulation, Securities and
Exchange Commission............................................ 14
Connelly, Arthur R., Chairman and Chief Executive Officer, South
Shore Bancorp MHC, on behalf of America's Community Bankers.... 37
Douglas, John L., Alston & Bird LLP, on behalf of the American
Financial Services Association................................. 41
Ghiglieri, James P., Jr., President, Alpha Community Bank, on
behalf of the Independent Community Bankers of America......... 38
Isaacs, Amy, National Director, Americans for Democratic Action.. 35
Kohn, Donald L., Vice Chairman, Board of Governors of the Federal
Reserve System................................................. 12
Lackritz, Marc E., Chief Executive Officer, Securities Industry
and Financial Markets Association.............................. 43
Leary, G. Edward, Commissioner, Department of Financial
Institutions, State of Utah.................................... 17
McVicker, Earl D., Chairman and Chief Executive Officer, Central
Bank & Trust Company, on behalf of the American Bankers
Association.................................................... 40
Reich, Hon. John M., Director, Office of Thrift Supervision...... 13
Stevens, Thomas M., Immediate Past President of the National
Association of Realtors........................................ 45
APPENDIX
Prepared statements:
Bair, Hon. Sheila C.......................................... 52
Colby, Robert................................................ 71
Connelly, Arthur R........................................... 82
Douglas, John L.............................................. 87
Ghiglieri, James P., Jr...................................... 95
Isaacs, Amy.................................................. 113
Kohn, Donald L............................................... 121
Lackritz, Marc E............................................. 138
Leary, G. Edward............................................. 149
McVicker, Earl D............................................. 172
Reich, Hon. John M........................................... 183
Stevens, Thomas M............................................ 200
Additional Material Submitted for the Record
Gillmor, Hon. Paul E.:
Letter from the American Bankers Association................. 210
Letter from America's Community Bankers...................... 211
Letter from Independent Community Bankers of America......... 212
Letter from the National Association of Realtors............. 214
Letter from the Sound Banking Coalition...................... 215
Statement of Thomas J. Bliley, Jr., on behalf of the Sound
Banking Coalition.......................................... 217
H.R. 698, THE INDUSTRIAL BANK
HOLDING COMPANY ACT OF 2007
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Wednesday, April 25, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Present: Representatives Frank, Waters, Maloney, Watt,
Sherman, Meeks, Moore of Kansas, Baca, Scott, Green, Cleaver,
Davis of Tennessee, Sires, Ellison, Klein, Wilson, Perlmutter,
Donnelly, Marshall; Bachus, Castle, Royce, Gillmor, Manzullo,
Feeney, Hensarling, Brown-Waite, Barrett, Pearce, Neugebauer,
and Bachmann.
Also present: Representative Matheson.
The Chairman. The hearing will come to order. The Committee
on Financial Services meets today to consider legislation
dealing with the Industrial Bank Holding Company Act, which was
filed by myself and the ranking minority member of the
Committee on Financial Services, the gentleman from Ohio, Mr.
Gillmor. It deals with the question of whether or not the
entity known as the Industrial Loan Corporation ought to be
expanded or maintained at its current level.
I begin by saying that there's been a debate about the
ILCs. It does seem to me that those who profess to be strong
supporters of the Industrial Loan Corporation form ought to be
the ones initiating legislation. That is, if you genuinely
believe that the ILCs are an important financial institution,
how does anyone justify limiting them so that only six States
can charter them? I know of no other generally approved entity
which can only be chartered by six States.
So I understand people who think ILCs are a wonderful thing
and would therefore like to have them freely chartered. I
understand those of us who think that we should restrict them.
It is hard for me to understand a rational argument for the
status quo in which we have this entity that exists in only a
few States. Why would anyone do that?
Let me put it this way. It is inconceivable to me that
anyone starting from scratch in a situation would say, ``Okay,
here's a nice institution we ought to have; we're going to call
it an industrial loan corporation, and let's pick six States
that are allowed to charter it.'' I don't know how you would
pick the six States. I assume a dartboard would be an essential
part of that decisionmaking process. In other words we have
what is the result of a historical accident, and it seems that
we go one way or the other.
There are also people who argue that we have had the ILCs
for this considerable period and there has not been any
problem. Well, those of us who support this legislation
generally agree with that because we are trying to preserve the
status quo. Nothing that is being proposed would undo the
current situation with regard to ILCs that exist.
Indeed, we had previously been told by the State of Utah
where they are important, and I note the presence of our
colleague from Utah, a former member of this committee, whose
disagreement with us was sufficiently strong to cause him to
return. And he has been a very able advocate of the interests
of his State. But I do note that the last information we had
was that over 90 percent of the ILC assets in the State of Utah
would be unaffected by our legislation because they would meet
the test of 85 percent financial.
But I do return to the point that we have an anomaly. I can
understand going forward, I can understand going backward, but
I do not see how anyone public policy can justify staying where
we are.
Now what we find is--and people said, ``Why are you dealing
with this now if they haven't caused problems?'' But what we
are confronted with is people who have decided to significantly
expand this entity, including major commercial organizations.
Again, I understand the argument from those who say that
the distinction between commercial and banking activities is an
artificial one, that it should fall. But if you believe that,
then where's the language to repeal the restriction? Again, why
this halfway, to put it in a way that will meet the rules of
propriety, approach to a situation? What again is the
justification for maintaining the general principle of a
separation between banking and commerce and allowing this one
narrow exception?
We, I hope, will go forward. We are trying again not to
disturb the status quo. We have had some conversations with a
kind of a border area involving securities, border in the
sense, these are financial institutions and we will be--we have
been working and having conversations and I want to thank--
Chairwoman Bair is here and she has, on this as in so many
other issues, been extremely helpful.
We are trying to work out the various regulatory approaches
that should go forward. I do want to say that this has been one
of the rare occasions in my memory when the Federal Reserve has
been very flexible, and I hope that this is a pattern that we
will see going forward.
But I think we have a very reasonable approach in the
legislation. Obviously we are prepared to listen. And with
that, I will recognize the ranking member.
Mr. Bachus. I thank Chairman Frank for holding this hearing
on H.R. 698, which is the Industrial Bank Holding Company Act
of 2007. This legislation would enhance regulatory supervision
of our ILCs, grandfather existing ILCs, and at the same time,
prohibit commercial firms in the future from acquiring ILC
charters.
At the outset, I want to commend the chairman and the
gentleman from Ohio, Mr. Gillmor, who both worked tirelessly
over the past several years to craft legislation on this
complex issue.
Today's hearing will hopefully help us to better understand
ILCs and the regulatory framework that surrounds the ILC
charter. As ILCs have grown in size, number, and complexity,
several supervisory and policy questions have arisen, including
whether current regulatory structure for overseeing ILCs is
adequate.
Insured ILCs are subject to State banking supervision and
FDIC oversight as State, non-member banks. Nonetheless, owners
of ILCs do not have to be bank holding companies subject to the
Federal Reserve's consolidated supervisory authority.
In the absence of Federal Reserve's supervision of ILC
holding companies, the FDIC has employed what some call a bank-
centric supervisory approach that primarily focuses on
isolating the insured institution from potential risk posed by
holding companies and affiliates, rather than assessing these
potential risks systematically across the consolidated holding
company structure. Some have suggested that this regulatory
regime does not provide sufficient protection against the
potential risk that parent companies and non-banking affiliates
may pose to the safety and soundness of ILCs.
Another matter of concern about ILCs is the extent to which
they can mix banking and commerce through the holding company
structure. An exemption in current banking law permits any type
of company, including a commercial firm, to acquire an ILC in a
handful of States. For some, this is the crux of the issue.
Certainly the separation of banking and commerce will be
discussed in today's hearing. There is also likely to be a
debate over the fairness of excluding some commercial firms
from owning or controlling ILCs when other similarly situated
commercial entities already own them.
Once again, I want to thank Chairman Frank and Ranking
Member Gillmor for their work on this important issue, and look
forward to hearing from our witnesses today on their views on
the legislation before us.
The Chairman. I will now recognize for 5 minutes one of our
members who has been most active in this, the gentleman from
Georgia, Mr. Marshall. And I will exercise my option to go to
15 minutes. The gentleman from Alabama may, if he wishes to, as
well. So Mr. Marshall is recognized for 5 minutes.
Mr. Marshall. Thank you, Mr. Chairman. I don't believe I'll
need 5 minutes. I appreciate the Chair recognizing me, and
giving me an opportunity to say a few words on this particular
subject.
It's kind of interesting. The first major problem we had in
this country with mixing business and commerce resulted in
legislation back in 1838 in New York and Georgia. Georgia
actually took the lead in 1838 in forcing the separation of
banking and commerce.
We've had other instances during our Nation's history where
we inadvisably mixed the two. I shudder to think what kind of
consequences we might have had had we not had those kinds of
rules and we saw the collapses of entities like WorldCom,
Enron, etc.
It just seems to me that we are in a very poor position to
understand all of the complexities of the typical business
operation in today's world and appreciate fully the risks
associated with mixing those complex business operations with
banking. It's tough enough for us just to regulate our banks
without mixing--attempting to additionally understand all the
complexities associated with some of our current financial
operations.
That said, clearly we have to grandfather, and it seems to
me that the grandfathering provisions we should consider
wouldn't simply stop at those ILCs that have been authorized
thus far, but might consider those ILC applications that have
been submitted in reliance upon the performance of the board
with regard to granting ILCs because there are a number of
entities that have legitimately gone out and relied upon the
expectation that their ILC application will be approved, to
their detriment if in fact this legislation is successful, and
the cutoff is actually acquiring an ILC before the legislation
is approved.
I do think that no further ILCs should be approved pending
our consideration of this legislation. And then I'll simply add
that there's a parallel here, it seems to me, between this
issue and the question of whether or not banks should own real
estate companies and other ventures that banks are sometimes
interested in.
It seems to me that the banking industry, which is
interested in not having commerce compete with banks through
ILCs, should acknowledge that in fact banks should not be
competing with commerce through business ventures like real
estate, etc.
And I think perhaps, Mr. Chairman, if the chairman will
move in that direction, it's something that we ought to
consider. I appreciate the opportunity to say a few words, and
I yield back, Mr. Chairman.
The Chairman. I now am pleased to recognize the coauthor of
this bill, the ranking Republican on the Financial Institutions
and Consumer Credit Subcommittee, the gentleman from Ohio, Mr.
Gillmor, for 5 minutes.
Mr. Gillmor. Thank you very much, Mr. Chairman, and let me
also say that I have appreciated the opportunity over the past
three Congresses to work with you on this issue.
We have been successful in the House; our amendment has
passed two Congresses in a row. It didn't make it through the
Senate, but I think that probably the third time is the charm,
and I think we may get a different result in the Senate this
time and get legislation to the President's desk.
I also want to commend Chairman Bair and the rest of the
FDIC Board for their work on this issue. I want to thank all of
our bank regulators for recognizing that the issue of the
future of ILCs is a question that Congress should address. It
is good and effective regulation that's the first line of
defense in protecting the safety and soundness of our financial
systems.
The principle here is real simple; it's the separation of
banking and commerce. And financial systems which have not
followed that principle have had a number of problems and, in
fact, have had a number of crises because of it.
The United States codified this principle after the
problems in the 1920's and the Great Depression. Over the last
several decades, loopholes and exemptions in bank law have
gradually been closed. In 1999, during consideration of Gramm-
Leach-Bliley, Congress eliminated the unitary thrift loophole,
and now it's time to close the ILC exception, which allows for
full service banking by commercial firms.
This is a kind of historical accident, and frankly it
wasn't much of a problem when there were only a few out there
in existence, but what has happened is that a number of
commercial and industrial firms have discovered this loophole,
are applying for charters, and are going to try to drive a
train right through the loophole unless Congress acts
responsibly to close that loophole.
The bill that we've introduced, H.R. 698, would bolster the
authority of the FDIC, limit the business activities of certain
ILCs already in existence, and most importantly establish a
cutoff date for new, commercially owned ILCs. Today we have
approximately 120 cosponsors on the bill, and it's my hope that
this bipartisan legislation will receive consideration in the
committee in the near future and on the House Floor shortly
thereafter.
And Mr. Chairman, I would ask that the following materials
be submitted for the record: H.R. 698 support letters written
by the Realtors, by the ICBA, by ACB, and by the ABA. Also,
submitted testimony by former Congressman Tom Bliley on behalf
of the Sound Banking Coalition, and a letter of support from
the Coalition. And I would also ask unanimous consent to enter
into the record a March 2007 GAO report which details
suggestions for collaboration among the consolidated
regulators.
[The GAO report referenced above (GAO-07-154) is available
from the Government Accountability Office--www.gao.gov.]
The Chairman. Without objection, it is so ordered.
And now, on the unanimous consent--because I mentioned
before, we've been joined here at the podium by a former
colleague, our colleague from Utah, and he does represent a
State where these are very important, so I would ask unanimous
consent that the gentleman from Utah be allowed to participate
in the hearing today.
I thank the ranking member. It is important that we get the
diversity of views.
I will now recognize the chairwoman of the Financial
Institutions and Consumer Credit Subcommittee, but I also want
to explain. In about 5 minutes, I will be going around the
corner to testify on the issue of fishing safety. The City of
New Bedford, which I represent, is the leading fishing port in
the country and we've had some safety issues. So I will be
abstaining myself for a few minutes, but I will be back. We do
appreciate--and I mentioned some of the regulators, Mr. Reich,
it is very helpful to us to have had the cooperation of all the
regulators in this as we have worked together on this
operation, and we appreciate that, and the SEC as well.
The gentlewoman from New York is now recognized for 5
minutes.
Mrs. Maloney. Thank you, Mr. Chairman. I appreciate your
holding this hearing to discuss a bill that you and Mr. Gillmor
have worked so hard on, and I join Mr. Gillmor in hoping that
the third time is a charm. As he mentioned, there is a strong
cross-section of support for this bill.
And in the bill, this committee has struggled to balance
the need for the financial services that ILCs can provide with
the primary imperative to preserve the safety and soundness of
the banking system. This bill, in my view, has largely
succeeded in doing that.
I am particularly sensitive to this issue since the savings
and loan crisis, the bailout of the savings and loans crisis,
was really the first issue that I voted on when I came to
Congress, so I am keenly attuned to safety and soundness
issues, and I hope we won't confront that again.
For the past year, the debate over ILCs has been largely
shaped by the application of big commercial concerns and major
auto companies--their push to own ILCs. Many members felt that
these large companies were exploiting a loophole in Federal
banking laws to merge commerce and banking, a combination that
traditionally has been tightly restricted in the United States.
Last year, the Government Accountability Office issued a
report specifically addressing these type of applications,
saying that allowing commercial firms to own ILCs would ``pose
unnecessary risk,'' to the Federal Government's deposit
insurance funds. Though the FDIC does have authority over
insured ILCs, the GAO concluded that the fact that this
authority does not explicitly extend to ILC holding companies,
and therefore is less extensive than the authority that the
consolidated supervisors have over banks and thrift holding
companies, means that from a regulatory standpoint these ILCs,
in their opinion, pose more risk of loss to the bank insurance
fund than other insured depository institutions operating in a
holding company.
In the wake of the GAO report, the Federal Reserve,
including former Federal Reserve System Chairman Alan Greenspan
and current Chairman Ben Bernanke, call for changes that would
extend the regulations that apply to banks and bank holding
companies to the ILCs and the companies that own them.
The need for new legislation arises in large part because
of the change in the ILC industry over the past 20 years. ILCs
were created in 1910 as limited purpose institutions to allow
workers for big companies to get credit when they couldn't
otherwise get loans. But according to the GAO report, ILC
assets grew more than 3,900 percent between 1987 and 2006 to
more than $155 billion, up from $3.8 billion.
ILCs also changed their character from small, community-
based entities to large, company-based ones. From 1987 to 2006,
the number of ILCs actually declined 42 percent, dropping to 61
from 106. As of March 2006, 9 of the country's ILCs were among
the 271 financial institutions in the United States that hold
more than $3 billion in assets. Six ILCs own more than 80
percent of the assets in the ILC industry with more than $125
billion in assets and $68 billion in FDIC-insured deposits.
Large ILCs divide between those that are owned by financial
companies, subject to functional regulation by the SEC, such as
Merrill and Morgan Stanley, and those that are owned by
commercial firms, such as Target and GE. The bill very sensibly
treats them differently and includes limits on activities to
non-grandfathered entities to make sure that this distinction
is preserved. I support this distinction but only to the extent
that it is squared off soundly with safety and soundness, which
is first on the agenda for this committee.
I look forward to the testimony. I see that Sheila Bair is
back before us again; we have kept her very busy in this
Congress. I look forward to all of the testimony. Thank you.
Mr. Scott. [presiding] Thank you. The gentleman from
California, Mr. Royce, is recognized for 3 minutes.
Mr. Royce. Thank you, Mr. Chairman. Thank you very much for
holding this hearing as well, and I want to thank our witnesses
today for their testimony.
It has been mentioned that ILCs have been in existence in
this country for, oh, I guess, about a hundred years. And it's
very, very recently, I think, that the charter has garnered a
great deal of attention. I encourage an open and honest debate
on this, but I believe some of the criticisms of ILCs are
misguided.
The amount of regulatory authority over the relationship
between the ILC and their parent company continues to be a
point of criticism for those who are opposed to the existence
of ILCs, and some have expressed concern that an ILC might be
used to subsidize a parent's cost to capital. Others have
suggested that the ILC regulatory structure, in their view, is
deficient because some ILC parents are not subject to
supervision at the holding company level.
Well, just the beginning point I'd like to lay out is that
industrial loan companies are regulated in a similar manner to
all other federally insured depository institutions. They are
subject to the same minimum capital standards, and subject to
the same prompt corrective action provisions as every other
bank we oversee in this committee. They must adhere to sections
23A and 23B of the Federal Reserve Act, just as all other FDIC-
insured depository institutions do.
And as you know, these two provisions in the Federal
Reserve Act subject all ILCs to very strict rules when it comes
to relationships with any of their affiliates. Just to go down
the rules very quickly: an ILC's total covered transactions
with any affiliate cannot exceed 10 percent of the bank's
capital; the ILC's total covered transaction with all
affiliates combined cannot exceed 20 percent of the bank's
capital; and with few limited exceptions, covered transactions
must be fully secured with qualifying capital, and an ILC
cannot purchase a low qualifying asset from an affiliate.
In addition, an ILC must deal with an affiliate on market
or arm's length's term. It cannot, as a fiduciary, purchase
securities or other assets from an affiliate unless permitted
by statute or court order and the ILC cannot purchase
securities while an affiliate is a principal underwriter for
those securities. Neither the ILC nor its affiliate may
purchase any advertisement or make any agreement stating or
suggesting that the ILC shall in any way be liable for the
obligations of the affiliate.
So that's the law. That's the current law. And in closing,
the bill put forth today does nothing more than shield
incumbent banking institutions, in my view, from competition.
While I welcome the discussion on the fate of future industrial
loan companies, I am concerned this bill could have some
unintended consequences, which could have adverse impacts on
the financial services industry and the economy as a whole.
Industrial loan companies have proven their ability to create
more competition in the industries, resulting in better prices
and services for consumers in this country.
Mr. Chairman, thank you again for holding this hearing, and
I look forward to hearing from our witnesses.
Mr. Scott. Thank you. The gentlelady from California, Ms.
Waters.
Ms. Waters. Thank you very much. Good morning ladies and
gentlemen. I want to thank Chairman Frank and Ranking Member
Bachus for holding today's hearing on H.R. 698, the Industrial
Bank Holding Company Act of 2007.
Industrial loan companies, that is ILCs, state-chartered,
FDIC-insured banks, were first established early in the 20th
century to make small loans to industrial workers. Today's
ILCs, which are supervised to some extent by the FDIC as well
as by the chartering State, have grown dramatically in number
and size and scope of activity. From 1997 to 2006, the assets
held by Utah ILCs increased nearly 500 percent, from $25
billion to $150 billion, and the deposits held by Utah ILCs
increased by more than 800 percent, from $11.9 billion to $107
billion.
A special exemption in current law, however, permits any
type of company, including a commercial or retail firm to
acquire an ILC in a handful of States, principally Utah,
California, and Nevada, and to avoid the activity restrictions
and supervisory requirements imposed on bank holding companies
under the Federal Bank Holding Company Act.
ILCs were mostly small, local institutions that had limited
deposit taking and lending powers until 1997 when Utah changed
this law to permit Utah-chartered ILCs to call themselves banks
and exercise the same powers as state-chartered commercial
banks, resulting in the stampede of ILCs. Thus, Utah-chartered
ILCs now may engage in any type of lending activity. The ILC
charter is also a way for companies to avoid the activity
restrictions and consolidated supervisory capital, managerial,
and community reinvestment act requirements imposed on bank
holding companies under the Bank Holding Act.
CRA has been an effective tool to require banks to make
investments in low- and moderate-income communities. So should
ILCs be subject to CRA? In 1997, the number of Utah ILCs had
tripled and now there are more than 30 ILCs chartered in Utah,
including a number that are owned by commercial companies such
as General Electric, BMW, Pitney Bowes, and Sears. Home Depot
is seeking to acquire an existing ILC.
The largest ILC at the time of the exemption adopted in
1987 had assets of less than $400 million. The largest ILC
today has more than $62 billion in assets and $54 billion in
deposits, making it the 12th largest insured bank in the United
States by deposits.
Importantly, the ILC exemption does not limit the
chartering of new ILCs. Utah and other States that are
grandfathered by the exemption may continue to grant new ILC
charters without limit.
Congress maintains the separation of banking and commerce
and reaffirmed this policy in the Gramm-Leach-Bliley Act of
1999, when it closed the unitary thrift loophole and authorized
banks to affiliate only with companies that are generally
engaged in financial activities.
Congress determined in the GLB Act that with regard to
financial affiliations, a bank holding company could only
affiliate with a full service securities or insurance firm if
the bank holding company held all its subsidiary depository
institutions well-capitalized and well-managed in its
subsidiary depository institutions, maintain at least a
satisfactory CRA rating.
The ILC exception disadvantages bank holding companies and
undermines these requirements by allowing some financial firms
to operate federally insured ILCs without meeting these
requirements. The parent companies of exempt ILCs are not
subject to consolidated supervision under the Bank Holding
Company Act. For this reason, the GAO concluded that ILCs may
pose a greater risk to the deposit insurance funds than banks
operating within the bank holding company structure.
Since 1956, consolidated supervision has been a fundamental
component of bank supervision in the United States. It provides
the board with both the ability to understand the financial
strength and risk of the overall organization and the authority
to address significant management, operational capital, and
other deficiencies within the overall organization before these
deficiencies pose a danger to a subsidiary bank in the Federal
safety net.
The FDIC itself has acknowledged that it does not have the
same supervisory, capital, and enforcement authority with
respect to the holding companies of an ILC that the Board has
with respect to bank holding companies. The ILC exemption also
allows foreign banks to enter the banking business in the
United States without meeting the requirements in the Bank
Holding Company Act that the bank be subject to comprehensive
consolidated supervision in its home country.
I believe this loophole must also be addressed. Therefore,
I am pleased to hear from our witnesses today on ILCs, and I
yield back the balance of my time.
Mr. Scott. Thank you, Ms. Waters. We'll get right to the
witnesses. Just one point I wanted to mention, BMW and Target
have ILCs and I think that brings up 2 questions that might be
significant here this morning. Number one, how do we tell the
average American why Ford and Home Depot should not be able to
have what these other companies have? And number two, what
studies have been done or what evidence or information do we
have that BMW or Target are threatening to destroy our system
of banking?
So with those questions, we'll get right to our witnesses.
We'll start with Chairman Sheila Bair of the Federal Deposit
Insurance Corporation. Thank you.
STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL
DEPOSIT INSURANCE CORPORATION
Ms. Bair. Thank you very much. Members of the committee, I
appreciate the opportunity to testify on behalf of the Federal
Deposit Insurance Corporation concerning Industrial Loan
Companies. The FDIC strongly supports efforts to provide
statutory guidance on the key issues regarding the ILC charter,
especially the issue of commercial ownership.
Many of the issues surrounding ILC ownership involve
important public policy considerations that are best left to
Congress for resolution. This hearing and congressional
discussions regarding possible legislative solutions are
encouraging developments that hopefully will lead to the
resolution of key ILC-related issues by the end of the year.
ILCs have existed for almost 100 years, and for most of
that time they operated similar to finance companies, providing
loans to wage earners who could not otherwise obtain credit.
ILCs have proven to be a strong, responsible part of our
Nation's banking system and have offered innovative approaches
to banking. Many have contributed significantly to community
reinvestment and development. For example, a nonprofit
community development corporation operates an ILC designed for
the express purpose of serving the credit needs of people in
east Los Angeles. Other ILCs serve customers who have not
traditionally been served by other types of financial
institutions such as providing credit for truck drivers to buy
fuel far from home. The record to date demonstrates that the
overall industry has operated in a safe and sound manner and
that the FDIC has been a vigilant, responsible supervisor of
that industry.
ILCs represent a very small part of the overall banking
industry, composing less than 1 percent of the almost 8,700
insured depository institutions in this country, and only 1.8
percent of the assets. Of the 58 existing ILCs, 43 are either
widely held or controlled by a parent company whose business is
primarily financial in nature. These ILCs represent
approximately 85 percent of ILC assets and 89 percent of ILC
deposits. The remaining 15 ILCs are associated with parent
companies that may be considered non-financial.
There has been significant growth in the ILC industry since
the passage of CEBA in 1987 when the industry had $4.2 billion
in assets. Over the years, total ILC industry assets have grown
to $212.9 billion. Most of the growth has occurred since 1996
and has been concentrated in a small number of financial
services firms.
In addition to the growth in the ILC industry, the
character of ILCs has been changing. In the current business
environment, many ILCs tend to be more complex and differ
substantially from their original consumer lending focus. In
many instances these ILCs serve a particular lending, funding,
or processing function within a larger organization or directly
support one or more affiliate's commercial activities.
Under this kind of ownership model, consolidated
supervision may not be present and the current supervisory
infrastructure may not provide sufficient safeguards to address
safety and soundness issues and risks to the Deposit Insurance
Fund.
To address these developing concerns, the FDIC has taken a
number of actions regarding ILCs since this committee's last
hearing on the topic. In July 2006, the FDIC Board of Directors
adopted a 6-month moratorium on all applications for deposit
insurance and change in control notices for ILCs.
During this pause in processing ILC applications, the FDIC
sought public comment on 12 specific questions that focused on
developments in the industry, the supervisory framework, and
the issues surrounding commercial ownership. In response, the
FDIC received more than 12,600 comment letters.
The 6-month moratorium allowed the FDIC to evaluate public
and industry comments, assess developments in the industry, and
consider how to best supply the Corporation's statutory powers
for oversight of these charters. It is clear that the most
significant concern regarding ILCs is their ownership by
companies engaged in non-financial activities.
Based on the FDIC's analysis, the FDIC Board recently voted
to extend the moratorium for an additional year. Under the
extended moratorium, the FDIC will not take any action on any
application for deposit insurance or any change in control
notice for any ILC that would be controlled by a company
primarily engaged in commercial activities.
Although commercially owned ILCs have not resulted in
serious problems to date, the FDIC will continue to closely
monitor existing ILCs that currently are controlled by
commercial companies in light of the concerns that have been
expressed.
The moratorium extension does not apply to ILCs that would
be controlled by a company engaged only in financial activities
or that would not be part of a holding company structure.
In addition to providing the FDIC with time to examine the
appropriate supervisory structure for the changing ILC
industry, extending the moratorium provides additional time for
Congress to consider legislation. Although the FDIC is not
endorsing any particular legislative approach, H.R. 698 does
provide a workable framework for the supervision of ILC holding
companies.
In closing, ILCs have a good safety and soundness record to
date and have proven to be a strong, responsible part of our
Nation's banking system. Yet the types and number of ILC
applications have evolved in recent years and these changes do
pose potential risks that deserve further study and raise
important public policy issues.
The FDIC has a responsibility to consider applications
under existing statutory criteria and make decisions. While it
is appropriate to proceed cautiously, the FDIC cannot defer
action on these matters indefinitely.
The current statutory exemption providing for the ILC
charter is quite broad. By providing clear parameters to the
scope of the charter, Congress can eliminate much of the
uncertainty and controversy surrounding it. Resolving these
issues will enhance the value of the ILC charter going forward.
The FDIC looks forward to working with Congress in the
coming months as you work to bring these matters to closure.
This concludes my statements, and I will be happy to answer any
questions the committee might have.
Thank you, Mr. Chairman.
[The prepared statement of Chairman Bair can be found on
page 52 of the appendix.]
Mr. Scott. Thank you. Thank you very much. Now we'll hear
from Mr. Donald Kohn, Vice Chairman of the Board of Governors
of the Federal Reserve System.
STATEMENT OF DONALD L. KOHN, VICE CHAIRMAN, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Kohn. Thank you. I am pleased to be here today to
provide the Federal Reserve Board's views on Industrial Loan
Companies and H.R. 698. The Board commends the committee for
considering the important public policy issues raised by the
special exemption for ILCs.
ILCs are state-chartered and federally insured banks that
have virtually all the powers and privileges of other insured
banks. They operate under a special exception to the Federal
Bank Holding Company Act that allows any type of company to
acquire an ILC and avoid the restrictions Congress has
established to separate banking and commerce. The exception
also creates a special safety and soundness risk by allowing a
company or foreign bank that is not subject to supervision on a
consolidated or group-wide basis to acquire an insured bank.
By its nature, the exception creates an unlevel playing
field that gives a growing number of firms a competitive edge
over other community-based, regional, or diversified
organizations that own an insured bank. When the special
exception was adopted in 1987, most ILCs were small, locally
owned institutions with limited powers. The size and activities
of ILCs, however, have expanded significantly in recent years.
Today many are controlled by large, internationally active
firms.
Importantly, there is no limit on the number of ILCs that a
handful of grandfathered States may charter or on the size that
these institutions may attain. If left unchecked, the growth of
ILCs threatens to undermine the policies that Congress has
established governing the separation of banking and commerce
and the proper supervisory framework for companies that own a
federally insured bank.
That is why we believe congressional action is needed. Only
Congress can address the full range of issues created by the
ILC exception in a comprehensive and equitable manner. H.R. 698
takes an important step by granting the FDIC new consolidated
supervisory authority for the corporate owners of ILCs that are
not already supervised by a Federal agency.
H.R. 698, however, would not fully address the other
important regulatory and competitive issues raised by the
exception. For example, the bill would allow additional firms
to acquire an ILC and derive up to 15 percent of their revenues
from commercial activities.
This commercial basket is sizeable and at odds with the
decisions made by Congress in the Gramm-Leach-Bliley Act to
maintain the separation of banking and commerce. The Board
believes that Congress should consider carefully the costs and
benefits of changing the Nation's policies concerning the
mixing of banking and commerce in a comprehensive way rather
than to allow this policy to be eroded through the exploitation
of a loophole.
H.R. 698, as introduced, also would allow the owners of
ILCs to avoid the CRA, capital, and managerial requirements
that apply to financial holding companies, and it would allow
foreign banks that are not subject to consolidated supervision
in their home country to acquire an FDIC-insured ILC.
These advantages granted, ILC owners would perpetuate
competitive imbalances, provide incentives for firms to
continue to exploit the exception, and undermine the prudential
framework established for all other domestic and foreign firms
that own an insured bank. The Board believes the best way to
address these issues is to close the ILC loophole going
forward. This approach recognizes the simple fact that ILCs are
insured banks. It would prohibit additional firms engaged in
commercial activities from acquiring ILCs, and would require
that any new financial owner of an ILC operate under the same
activity restrictions and regulatory framework that apply to
bank holding companies.
For reasons of fairness, the Board also supports
grandfathering those firms that currently own an ILC, subject
to appropriate restrictions. This mirrors the approach that
Congress took in 1970, 1987, and 1999, when earlier banking
loopholes were used in unintended and potentially damaging
ways.
Thank you for the opportunity to testify on behalf of the
Board. We would be pleased to continue to work with the
committee in developing and improving legislation that
addresses the very important public policy issues raised by the
ILC exception.
[The prepared statement of Mr. Kohn can be found on page
121 of the appendix.]
Mr. Scott. Thank you very much, Mr. Kohn. Now we will hear
from the Hon. John Reich, who is the Director of the Office of
Thrift Supervision.
STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, OFFICE OF
THRIFT SUPERVISION
Mr. Reich. Thank you. Good morning, Mr. Chairman, Ranking
Member Bachus, and members of the committee. I appreciate the
opportunity to testify on H.R. 698, introduced by Chairman
Frank and Mr. Gillmor to address the activities, ownership, and
control of Industrial Loan Companies. I applaud your leadership
and the work of other members of the committee who cosponsored
this legislation.
H.R. 698 addresses several pending policy issues with
respect to the key areas of the permissible activities and
oversight of companies that own or control or seek to acquire
or control an ILC. For our part, at the Office of Thrift
Supervision, we appreciate the recognition in H.R. 698 of the
important and continuing role that the OTS has in our oversight
and supervision of several of the largest companies that
currently own and control ILCs.
OTS has statutory authority for the consolidated
supervision of General Electric, Merrill Lynch, Morgan Stanley,
Lehman Brothers, American Express, USAA, Bell Financial, and
General Motors. The eight ILCs within these OTS-regulated
savings and loan holding company structures control about two-
thirds of the ILC assets in the country as of December 31,
2006.
Functional regulation and consolidated regulatory oversight
have been important considerations by the committee. H.R. 698
maintains a clear focus on the enterprise-wide safety and
soundness of holding companies that own or control institutions
with access to the Federal safety net.
The bill also is sensitive to the potential exposure of the
Federal safety net by a company that owns or controls an ILC by
focusing on the interrelationships within an ILC holding
company and how the ILC is integrated within the structure.
Effective oversight of holding companies requires adequate
regulatory controls to monitor and intervene when necessary
without unduly interfering with the ongoing business operation
and activities of an enterprise. It's a balance, requiring
judgement based on expertise in a wide range of areas.
As detailed in my written statement, the OTS focuses and
tailors its holding company supervision based on the complexity
of the structure and the level of risk inherent in the holding
company enterprise. Comprehensive holding company supervision
is a combination of ongoing offsite monitoring, targeted
reviews of key businesses or functions, and regular onsite
examinations.
This approach permits OTS to understand the business and
its inherent risks as well as the affiliations and the
transactions of the enterprise. It also enables us to assess
the potential impact of the broader economy, the insured
depository institution, and the potential exposure to the
Federal safety net.
As currently drafted, H.R. 698 preserves OTS's statutory
oversight of savings and loan holding companies that own or
control ILCs, promotes functional regulation while promoting
consolidated regulatory oversight and it maintains a risk-based
focus on companies owning or controlling institutions with
access to the Federal safety net. For these reasons, we support
H.R. 698 as introduced by Chairman Frank, Congressman Gillmor,
and other sponsors on the committee.
Thank you, and I'll be happy to take questions.
[The prepared statement of Director Reich can be found on
page 183 of the appendix.]
The Chairman. Thank you, and next we have Mr. Robert Colby,
who is the Deputy Director of the Division of Market Regulation
of the SEC. Mr. Colby, thank you. Please go ahead.
STATEMENT OF ROBERT COLBY, DEPUTY DIRECTOR, MARKET REGULATION,
SECURITIES AND EXCHANGE COMMISSION
Mr. Colby. Thank you. I'm very pleased to have the
opportunity this morning to describe the Securities and
Exchange Commission's program for supervising U.S. securities
firms on a consolidated basis and how this provides protection
to all regulated entities in the consolidated group including
industrial loan companies that are the topic of this morning's
hearing.
And I appreciate the discussions we've had with Chairman
Frank and his staff about possible amendments to H.R. 698 that
would avoid subjecting U.S. securities firms already supervised
by the Commission under comprehensive and effective program to
a second and duplicative consolidated supervision regime.
The Commission currently supervises five of the major U.S.
securities firms on a consolidated or group-wide basis. For
such firms, referred to as Consolidated Supervised Entities, or
CSEs, the Commission oversees not only the U.S.-registered
broker dealer, but also the holding company and all affiliates
on a consolidated basis. These affiliates also include other
regulated entities such as foreign registered broker dealers
and banks as well as unregulated entities such as derivatives
dealers.
Four of the CSEs, Goldman Sachs, Lehman Brothers, Merrill
Lynch, and Morgan Stanley own ILCs that account for 1.1-, .7-,
7.2-, and 1.2 percent of their consolidated assets
respectively. Three of the firms, Lehman Brothers, Merrill
Lynch, and Morgan Stanley also own thrifts that account for
3.8-, 1.7-, and less than one one-hundredth of one percent of
their consolidated assets respectively.
The CSE program provides consolidated supervision to
investment bank holding companies that's designed to be broadly
consistent with the Federal Reserve oversight of bank holding
companies. This prudential program is crafted to allow the
Commission to monitor for and act quickly in response to
financial or operational weakness in a CSE holding company or
its unregulated affiliates that might place regulated entities,
including U.S. and foreign registered investment banks and
broker dealers or the broader financial system at risk.
When a CSE firm has a regulated entity in the consolidated
group that is subject to oversight by another functional
regulator, the Commission defers to that functional regulator
as the supervisor of the regulated affiliate. We also share
relevant information concerning the holding company with our
fellow regulators both domestically and internationally. The
Commission's CSE program has been recognized as equivalent to
that of other internationally recognized supervisors, including
the U.S. Federal Reserve, for purposes of the European Union's
Financial Conglomerate Directive.
While maintaining broad consistency with the Federal
Reserve holding company oversight, the CSE program is tailored
to reflect two fundamental differences between investment bank
and commercial bank holding companies. First, the CSE program
reflects the reliance of securities firms on market-to-market
accounting as a critical risk and governance control. Second,
the design of the CSE program reflects the critical importance
of maintaining adequate liquidity in all market environments
for holding companies that do not have access to the external
liquidity provider.
The Commission's concern regarding the need for group-wide
risk monitoring, which developed over the course of a number of
years beginning with the Drexel Burnham liquidation in 1990,
was paralleled by the European Union's Financial Conglomerate
Directive, which essentially requires non-EU financial
institutions doing business in Europe to be supervised on a
consolidated basis.
In response, in 2004, the Commission crafted a new,
comprehensive consolidated supervision program that was
intended to protect all regulated entities within a group,
including broker-dealers. The rule restricted CSE eligibility
to groups with large and well-capitalized broker-dealers. The
Commission believed that it could only supervise on a
consolidated basis those firms engaged primarily in securities
business and not holding companies that are affiliated with the
broker-dealer as an incident to their primary business
activities. To this end, the rule effectively requires that the
principal broker-dealer have a tentative net capital of at
least $5 billion.
The CSE program has five principal components. First, CSE
holding companies are required to maintain and document a
system of internal controls that must be approved by the
Commission at the time of initial application. Second, before
approval, and on an ongoing basis, the Commission examines the
implementation of these controls. Third, CSEs are monitored
continuously for financial or operational weakness that might
put at risk regulated entities within the group or the broader
financial system. Fourth, CSEs are required to compute a
capital adequacy measure at the holding company level that's
consistent with the Basel standard. Finally, CSEs are required
to maintain significant pools of liquidity at the holding
company where these are available for use in any regulated or
unregulated entity within the group without regulatory
restriction.
I'd like to point out that these five principal components
are implemented in conjunction with the authority to protect
regulated entities within the groups. When potential weaknesses
are identified, the Commission has broad discretion under our
rules to respond. For example, the Commission could mandate
changes to a firm's risk management policies and procedures,
effectively require an increase in the amount of regulatory
capital maintained at the holding company, or require an
expansion of the pool of highly liquid assets held at the
parent.
These powers are not theoretical abstractions. All three of
these steps have been taken at various CSEs over the past 2
years.
This program of consolidated supervision reduces the
likelihood that weakness within the holding company or an
unregulated affiliate will place a regulated entity including
the ILC or the broader financial system at risk. My written
testimony describes in greater detail the means by which we
monitor the financial operational condition of the holding
company.
In conclusion, while we generally support the goals of H.R.
698, the bill as introduced would subject the CSEs that are
already highly regulated under the Commission's consolidated
supervised program to an additional level of duplicative and
burdensome holding company oversight. We believe the bill
should be amended to recognize the demonstrated ability of the
Commission to comprehensively supervise the consolidated groups
that are overwhelmingly in the securities business, especially
given the heightened focus on these issues in an area of
increased global competitiveness.
Because the Commission has established a successful
consolidated supervision program based on its unique expertise
in overseeing securities firms, the CSE should be carved out of
this legislation in the same way as the holding companies
supervised by the Federal Reserve and OTS.
Thank you again for the opportunity to speak on behalf of
the Commission.
[The prepared statement of Mr. Colby can be found on page
71 of the appendix.]
The Chairman. Thank you, Mr. Colby. And finally I want to
again welcome Commissioner Leary from the Department of
Financial Institutions, State of Utah. He has been very
accommodating in appearing before the committee and helping us
in our deliberations. Commissioner, thank you, and please
proceed.
STATEMENT OF G. EDWARD LEARY, COMMISSIONER, DEPARTMENT OF
FINANCIAL INSTITUTIONS, STATE OF UTAH
Mr. Leary. Good morning. Thank you, Chairman Frank, Ranking
Member Bachus, and members of the committee. Thank you for the
opportunity to share Utah's view on H.R. 698, the Industrial
Bank Holding Company Act of 2007.
I am Edward Leary, commissioner of financial institutions
for the State of Utah. I have been involved with banking for 33
years, first as a community banker, then 15 years in various
bank examiner positions with the Utah department and for the
last 15 years as its commissioner.
The Utah Department of Financial Institutions views H.R.
698 as unnecessary and an effort to restrict and restrain
state-chartered industrial banking without a valid safety and
soundness concern or a crisis. Utah believes there is good
supervision and good regulatory model over the industry without
a question of the competency of the regulators in that there
has not been an industrial bank failure warranting this change
in public policy.
I believe that I am here today because of the success of
that regulatory model, not its failure. Utah, in partnership
with the FDIC, has built a regulatory model to which the
financial services market has reacted favorably.
This regulatory model is not a system of lax regulation and
supervision or inadequate enforcement. Utah industrial banks
are safe, sound, and appropriately regulated by both the State
which charters them, and the FDIC, which is the relevant
Federal regulator and deposit insurance provider.
I am told the articulated threat which warrants passage of
this bill is a potential threat of misuse of the charter by
holding companies which are non-financially oriented. This bill
seeks to remove a potential threat even before the threat has
materialized or manifests itself.
We should be clear. We are talking about an industry today
that constitutes 1.8 percent of banking assets. This is not a
systemic crisis that threatens banking.
An analysis of the numbers as of December 31, 2006,
developed by Utah, indicates that we hold 88 percent of all
industrial bank assets. Based upon our knowledge of the holding
companies, we estimate that 86 percent of Utah industrial bank
assets would be considered held by financial entities,
constituting 22 companies, and 14 percent by non-financial
entities, constituting 9 companies.
Our analysis is that 7 of Utah's industrial banks,
representing approximately 80 percent of our assets are subject
to consolidated Federal agency supervision at the holding
company level. The Federal agencies we considered are: one, the
Federal Reserve, with jurisdiction over our 2nd largest bank;
the OTS, with jurisdiction over our largest, 3rd, and 4th
largest banks; and the SEC, with jurisdiction over our 6th
largest bank.
The record of the last 18 months is that no de novo
industrial bank charter was approved by the FDIC from November
4, 2005, until March 20, 2007. H.R. 698 will dismantle a Utah
industrial banking industry of 31 charters and a regulatory
structure that has matured over 20 years with a record of safe,
sound operations to forestall one entity from being granted a
charter.
This bill, with its provisions that are designed to block
any and all conceivable ways in which a retailer may employ an
industrial bank charter today or in the future are
disappointingly anti-competitive and anti-consumer. The
targeted large retailer withdrew its application with the
application having never been accepted by the Utah department.
H.R. 698 provisions are being justified under the text of
preserving the prohibition against the merging of banking and
commerce. The broad brush strokes of this bill include as
collateral damage large financial arms of entities which have
been in the financial arena for decades, such as Daimler
Chrysler and Ford.
The former submitted an application for an industrial bank
charter in May of 2005, which was approved by my State a year
ago. Now, under the provisions of this bill, we will not be
allowed to proceed. This is a disappointing outcome when other
auto lenders have a bank charter.
The supporters of 698 present the bill as a compromise
piece of legislation. I am challenged to determine how this
bill is a compromise when industrial banks do not receive
additional powers or authorities or have any of the current
restrictions lifted, let alone given the right to issue
commercial mal accounts as has previously been passed by this
committee.
As a State regulator, what is most disappointing to observe
is that while this committee is aggressively moving H.R. 698, a
bill which restricts and limits the one segment of state-
chartered banking that could be identified as innovative and
creative, Congress has not taken seriously the threat to State
banking of the broad, Federal preemption of State laws by the
Comptroller's office. Many State commissioners believe that
without congressional intervention, the diminishing assets
under State charter will eventually render the State banking
system irrelevant.
In conclusion, the industrial banking industry represents
1.8 percent of total banking assets. This is not an industry
which threatens the safety and soundness of banking. The
regulatory model is not a parallel bank regulatory system in
that 80 percent of Utah assets are subject to Federal agency
oversight at the holding company level.
Thank you for allowing me the opportunity to express my
thoughts and for your willingness to listen to a State
regulator.
[The prepared statement of Mr. Leary can be found on page
149 of the appendix.]
The Chairman. I'm going to begin with that. Your suggestion
that we don't pay attention to State regulators is really
unfounded, and I vigorously disagree with your assertion that
we are ignoring the implications for federalism of the
preemption decision.
Many of us in this committee last year were quite active in
opposing that. When party control changed, frankly, and some of
us had the opportunity to do something about it, we held off
because of the pendency of the Wachovia decision. And, frankly,
contrary to the suggestion you made implicitly, I think it
would have been irresponsible for us to have jumped in while
the Wachovia decision was pending, because there was a real
issue there. The Supreme Court voted 5 to 3, I think, if
Justice Thomas hadn't recused, looking at the past, it would
have been 5 to 4. Well, a 5 to 4 decision suggested there was
some real uncertainty. And, no, we couldn't act until we knew
that.
Now many of us do plan to act, and the gentlewoman from New
York and I have had several conversations about this. I don't
know that we--I don't think, to be honest, that we're in a
position to have the votes to overturn that. We do plan to ask
the Comptroller and the Office of Thrift Supervision, who are
the ones who now have preempted, to tell us what they plan to
do with regard to enforcement. And that includes trying to
restore, in my judgment, some State visitation rights. So I
just want to clear up what I think is an erroneous suggestion
that we have been indifferent to that. And as I said, we would
have started on it quicker, but we waited for Wachovia. We have
had these conversations.
Second, I just want to ask you, would you favor legislation
that removed the restriction on the granting of ILC charters to
only those six States that were grandfathered?
Mr. Leary. I have been asked in numerous forums, Mr.
Chairman, how I address that issue that only six, I believe the
exemption granted in--
The Chairman. No, I just asked you--no, excuse me, Mr.
Leary. Excuse me. History isn't the fact here. I'm asking you
as a matter of public policy if you would support our removing
that restriction and allowing every State to do it.
Mr. Leary. I have no problem with that, provided that the
safety and soundness and the--
The Chairman. Well, I have no problem with--are you in
favor--would you support such a bill?
Mr. Leary. I am.
The Chairman. What about the fundamental distinction
between banking and commerce that's in Gramm-Leach-Bliley?
Would you support that? I say that because some advocates of
the ILC say really that's a mistake to have that, to maintain
that restriction. Would you maintain it or abolish it?
Mr. Leary. I went on record last time when I was in front
of the subcommittee saying I do not favor repeal of the Bank
Holding Company Act, no. I'm a lifelong regulator; I believe in
slow, measured steps towards this system. I believe what Utah
created is a safe and sound system. I am articulating, I hope--
The Chairman. So you would maintain the distinction between
banking and commerce?
Mr. Leary. I would work towards a system where this could
be more competitive than it currently is.
The Chairman. I don't understand that. Would you maintain
the distinction between banking and commerce?
Mr. Leary. I do not believe that I would.
The Chairman. So you would do away with the distinction--
you would do it more slowly than some others might. But you--
Mr. Leary. I would do it, as I tried to say, in slow,
measured steps.
The Chairman. Okay, and I think that puts it fairly. I
think that's a defensible and actual position with which I
disagree. I do not think it is a defensible and actual position
to say that we should maintain the distinction between banking
and commerce and allow six States to be exceptions from it. You
haven't maintained that. Others have. And I do think it's--
people ought to understand the implications of what we are
doing.
Let me ask Chairwoman Bair, who has a major role in this,
and whose administrative limbo we hope to--I notice that the
Pope is thinking of doing away with the kind of ambiguous
category. We should do at least the same for you.
[Laughter]
The Chairman. But one--look, the House is going to pass a
bill that I believe is fairly restrictive. I also understand
that the Senate is probably not going to pass a bill similar to
ours. Indeed, there are days, of course, when one wonders
whether the Senate will ever pass any bill at all on anything,
but that's a broader set of questions.
If we were to go to a House-Senate conference in which
something very much like the bill the gentleman from Ohio and I
have sponsored had passed the House, and a bill had passed the
Senate that allowed for some things. It's no secret. The
commissioner mentioned, for instance, the Daimler Chrysler and
Ford situations.
There is a GM thing, and we appreciate it, and as you know,
when GM wanted to sell to Cerebus, we communicated that we
thought that was a situation that could get resolved. It's not
a secret that the Senate is probably going to do, I believe
something, not quite as restrictive as--if the Senate were to
pass legislation that allowed for some continuation but with
some restriction--or let's put it this way. If you were given
the authority, not that you asked for it, but if you were given
the authority to grant sort of limited extensions, would you
have the power now to enforce that? I guess that's the
question. That if there is--there will be two questions.
Is there a hybrid of some sort? And the gentleman from Ohio
and I want as little of that as possible. I'm not encouraging
it or asking for it, but I recognize that it may happen. If it
does, it does seem to me then the one critical question will
be, what will be the enforcement, the capability of the FDIC to
impose these restrictions and subsequently to enforce them?
Would you address that?
Ms. Bair. The Fed and FDIC both agree that the current
exception is quite broad. So for us to come in and say, certain
categories of commercial owners can have ILCs and certain
categories cannot, I don't see how we can do that under the
existing framework, which is again where we think legislation
would be very helpful. We're not taking a position about where
to draw the line, but we think clarification would be very
helpful. So, once Congress clarifies what those parameters are,
yes, we would have--or we could use our existing enforcement
authority regarding the ILC. And assuming we were given holding
company authorities, we would be able to supervise them.
The Chairman. And we would do that for all of the agencies.
And I do want to say in closing, we appreciate the cooperation,
frankly, that we've seen from all of the agencies here. And
maybe you have--the fact that were all able to cooperate so
well may to some extent alleviate the FSA envy that appears to
have run through the American financial entities in which the
lament the fact that there are so many of you and dream of
having only one.
Since that dream is not going to come true, we are pleased
that you were able to show them an ability to cooperate in this
situation.
The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman. My first question I'll
just ask all the regulators is, I'll start with Chairman Bair
maybe and work across. Have ILCs, including those owned by
commercial firms, posed safety and soundness problems to a
greater or lesser extent than those depository institutions
owned by traditional bank holding companies?
Ms. Bair. No. The safety and soundness record to date is
very comparable to that of other types of depository
institutions. That was acknowledged in the GAO report. I would
also add that actually the commercially-owned ILCs have the
better safety and soundness record. Among commercially-owned
ILCs, as well as Utah-chartered ILCs, there has never been a
failure.
Mr. Bachus. Okay. Anybody?
Mr. Kohn. No, sir. I don't think that the ILCs to date have
posed an unusual safety and soundness issue. But as all of us
have pointed out in our testimony, we're really at the cusp of
a change, a wave of change, in how the ILC charter has been
used. Some of those changes are very recent, and therefore the
amount of deposits and assets in ILCs have grown
extraordinarily rapidly in the last few years. And if something
isn't done, it'll grow even more rapidly in the future.
So, yes, this is about a potential problem.
Mr. Bachus. Okay.
Mr. Kohn. And the potential problem is the inadequate
supervision and regulation of the companies that own ILCs.
Mr. Bachus. All right. There's a notion that if commercial
companies own ILCs, the deposit insurance fund is at risk if
the company encounters financial difficulties. Is that true?
And I guess as the assets grow, it becomes--
Mr. Kohn. I think there's a history of problems spilling
from one part of a holding company to another, even when--say,
the insured entity in the holding company has been well-
regulated. There are reputational risks. There are legal risks.
Many of these ILCs and banks, for that matter, are managed on a
very closely integrated basis with their affiliate companies.
The companies that manage depository institutions and
holding companies don't really differentiate between the
depository institution, many of them, and the other entities.
The public is looking at the consolidated entity. Therefore, it
doesn't really differentiate, and many of the depository
institutions rely on the affiliates for many of the services
they use.
So, I think there is a history of problems occurring
outside the depository that impugn and reflect on the
reputation of the depository itself. That's why Congress itself
in 1957, 1970, 1987, and 1999 decided that consolidated
regulation was the way to protect--
Mr. Bachus. Okay. Let me--Mr. Leary, let me ask you. Has
there ever been a case when an ILC owned by a commercial firm
has had financial difficulty that affected the ILC?
Mr. Leary. In our case, the two cases which you could cite,
which would be Conseco and Tyco, both--one case, the ultimate
parent filed bankruptcy. In the second one, the parent had
difficulties in both case. The industrial bank component within
that entity in one case was sold off. In the other case, they
spun it off in an IPO and actually incurred a premium from
that.
So, I would not want to represent that it was not without
lots of concerns, blood, sweat, and tears. It successfully
passed the test, and those examples are in my testimony.
Mr. Bachus. Okay.
Mr. Leary. May I respond to your question on commercial
entities?
Mr. Bachus. Yes.
Mr. Leary. Because I don't believe the lines are as solid
as some would like to believe. Two of our nine nonfinancial
entities, one of which is BMW, have already been cited. The
other is Volkswagen. Both of those, while they are perceived in
the United States as being commercial entities, have very large
banking operations in Europe. So, I believe the line is not as
strict as it is.
And if I can beg your indulgence one step further, one of
the others, Transportation Alliance Bank, is the one cited, I
believe by Chairman Bair in her testimony, which has
specifically targeted long-haul truckers and the trucking
industry, which they believe is underserved by existing
financial services companies. And they have targeted that
business line and tried to provide financial services to that
industry.
Mr. Bachus. You know, you're talking about BMW and
Volkswagen, I guess, are both German companies--
Mr. Leary. Correct.
Mr. Bachus. So they have a strong banking regulator in
their home country. But what if it were, say, they were
headquartered in a country that didn't have a--where they
weren't subject to consolidated supervision in their home
country? Would that concern you?
Mr. Leary. We would require them to establish U.S.
operations. And before we'd even consider the applications, it
would be strictly reviewed. I think as we looked at, for
example, UBS, we relied on the FDIC to look at the home country
supervisor and supervision at that level, but we also required
strong measures and prudential standards when we chartered UBS
Bank in Utah.
Mr. Bachus. I know Mr. Kohn mentioned that the ILC
exception, however, allows a foreign bank that is not subject
to consolidated supervision in its home country to evade this
requirement and acquire an FDIC-insured bank with broad deposit
taking and lending power. This gap in current law needs to be
addressed. Would the two of you comment on that?
Mr. Kohn. I think my testimony speaks for itself, Mr.
Bachus. Congress passed that requirement after BCCI, which was
a case in which there were regulated entities in the United
States but problems overseas in a vast network of unregulated
entities or inadequately regulated entities, that ended up
spilling over into and onto the U.S. entities.
So, just having a regulated entity in the United States, in
Congress's view, and I agree with it, was not sufficient to
protect.
Mr. Bachus. Does this legislation set up such a protection,
or would it still be--
Mr. Kohn. Not as currently submitted. It does not have the
requirement for consolidated supervision of a foreign entity.
Mr. Bachus. So a foreign bank in a country where it doesn't
have consolidated supervision could obtain a--
Mr. Kohn. Could establish an ILC under the law, under the
act as proposed, bill as proposed.
Mr. Bachus. Okay. Thank you.
Mrs. Maloney. [presiding] Thank you. The Chair recognizes
herself for 5 minutes, and I raised the question with--the same
question with Chairman Frank earlier, and he says that they are
working with language that would require the consolidated
supervision. So that is a positive step forward coming out of
this hearing.
I heard in some of the testimony that the current
regulatory structure of the ILCs creates an uneven playing
field within the banking industry. Could you please explain
this further and what we can do to level this playing field?
Ms. Bair. Well, I think the argument is that ILCs chartered
in the States specified in CEBA are exempt from Bank Holding
Company Act regulation. I think that is at the core of the
regulatory playing field argument.
It has also been argued, especially by community banks,
that it doesn't work both ways. The commercial entities under
the ILC exception can own banks, but banks can't do commercial
activities, so I think those are the arguments.
Mrs. Maloney. You outlined in your testimony, Ms. Bair, the
regulatory tools for ILC parents being the same as for bank
holding companies. If that was legislated into law, would that
address this challenge?
Ms. Bair. Yes. There are a variety of holding company
regimes. The Fed obviously is the leading bank holding company
regulator. The OTS has also long been involved in holding
company supervision, and the SEC has recently crafted its own
system of consolidated supervision, so you have a variety of
different approaches.
We think, as my written testimony indicates, that we would
like powers comparable to the Fed. If you're going to make us a
holding company supervisor, we think all three are certainly
very good supervisors, but the Fed's authorities under the Bank
Holding Company Act would be most desirable.
Mr. Kohn. Congresswoman, may I comment?
Mrs. Maloney. Surely.
Mr. Kohn. There's another aspect of the competitive
inequality, and that's the mixing of banking and commerce. So
even under the bill as proposed, the ILCs would be able to have
15 percent commerce activities, and that is not permitted to
financial holding companies and bank holding companies.
So the supervision, the consolidated supervision, is an
extremely important point, clearing up the foreign bank issue
is an extremely important point, but it doesn't go all the way
to leveling the playing field. And the way to level the playing
field is to simply close the loophole and make insured ILCs
subject to the same regulations every other insured bank is
subject to.
Mrs. Maloney. Under Gramm-Leach-Bliley, doesn't that allow
a 15 percent--
Mr. Kohn. No, ma'am, it does not. In Gramm-Leach-Bliley,
there was a transition provision such that a financial holding
company that had commercial activities would have some time to
get rid of those commercial activities, but it must divest
itself of those commercial activities.
There is no commercial basket in Gramm-Leach-Bliley. And
the Federal Reserve gives banks--or financial holding
companies--2 years, which can be extended for a couple of
years, up to 5 years, to divest themselves of all their
commercial activities. There are no commercial activities,
except as might be incidental to a financial activity, allowed
in Gramm-Leach-Bliley. There is no 15 percent basket there.
Mrs. Maloney. Would you elaborate further on the risks of
mixing banking and commerce? You seem tremendously concerned
about this. What are the conflicts of interest that arise
between the bank and the commercial transactions of a business?
Could you elaborate further why you feel this so-called
loophole should be closed?
Mr. Kohn. I think mixing banking and commerce raises a
number of very difficult issues that the Congress needs to
consider thoroughly before allowing even a limited exception to
this.
There is the potential for conflicts of interest. Is the
bank making loans on more favorable terms to its affiliates--
there are restrictions here--or to customers of its affiliates,
than it would to a customer of an unaffiliated institution? If
a commercial firm owns a bank, can competitors of that
commercial firm have the same access to credit on the same
terms as the commercial firm itself?
There are issues about the potential for spreading the
safety net. Banks are special. They have deposit insurance.
They have access to the discount window. Congress has
recognized that this carries the risk that there will be a
perception that they have specific protections. They have
access to the safety net.
I think because, as I noted before, banks and their
affiliates often operate on a very consolidated basis, there's
a risk that when a commercial affiliate is connected with a
bank, the perception will be that the authorities wouldn't let
problems in that commercial affiliate sort of cascade into the
bank, that the commercial affiliate would have a special access
to the safety net.
And finally, as I think Mr. Marshall pointed out in his
opening comments, I think the consolidated regulation that
we're talking about imposing would be much more difficult if
there is a commercial component to the holding company. Working
with the SEC, the thrift regulators, and insurance regulators,
I think we have a better handle on the safety and soundness of
non-bank financial affiliates of banks.
I think this would be very, very difficult to really do
effective consolidated regulation if there is a commercial
affiliate of the regulated institution.
Mrs. Maloney. Well, this is--just very briefly, could we
just go down the line and see how people feel? Do they feel
that this is--that the 15 percent commercial activity is a
challenge? Ms. Bair?
Ms. Bair. We think the 15 percent is workable. We're being
agnostic about where you want to draw the line. I would say,
again, in the past, there already has been some experimentation
with commercial ownership with the ILC charter to date. We have
a good safety and soundness record to date. It certainly would
also be within the prerogative of the committee to allow some
limited mixing using this 15 percent criterion.
In our view, it's the committee's decision. It's a policy
call to make.
Mrs. Maloney. Okay.
Mr. Reich. I would agree with Chairman Bair. It certainly
is the committee's policy call. I think there are other
examples, particularly in the tax code, where 15 percent has
been used sort of as a de minimis level of unrelated income.
Mr. Colby. This is not an area of core expertise for the
Commission. We really think it's an area for the Congress to
decide.
Mrs. Maloney. Okay. Commissioner?
Mr. Leary. I would endorse it, yes. I believe what we have
attempted to do in Utah is to very effectively work within this
core threat of having a commercial parent and allowing a
basket, whatever the committee establishes, I think we would be
very comfortable with.
We are currently working with General Electric, that has an
OTS bank and a Utah Industrial Bank, and I think we are working
very carefully at ensuring that safety net does not extend to
the whole GE operation, that we isolate that--those insured
entities very carefully.
Mrs. Maloney. Okay. My time has expired. Mr. Gillmor, the
co-sponsor of the legislation.
Mr. Gillmor. Thank you, Madam Chairwoman. A couple of
questions, Commissioner Leary. You stated a number of times
that the legislation would restrict banks and would make State
banking irrelevant.
I don't think that's an accurate description of the
legislation. The legislation doesn't do anything to affect the
operation of the bank. Nothing. The only thing the legislation
deals with--well, I'll ask you. Maybe you could point out
specifically what it does to restrict, because mainly what
we're talking about is ownership at a holding company.
Mr. Leary. I would answer it this way, sir. In our case,
we've approved three charters that the FDIC, under its
moratorium, has not been able to successfully approve. We would
not have approved those charters if we did not believe they
warrant the granting of the charter and warrant the granting of
deposit insurance from the entities.
I believe that what we have developed is a safe and sound
model.
Mr. Gillmor. Well, I guess the other thing I'd like you to
do, since other state-chartered banks and other banks are
subject to these same rules, do you think those rules restrict
them? I mean, why would it only restrict ILCs?
Mr. Leary. I would probably take a tack that I've developed
in my own logic trail over the years.
What I believe we're doing with a number of these companies
is when they've been identified as commercial entity, I do not
see it much differently than the majority of my community banks
that are primarily owned by businesspeople in the community,
whether it's the lumber operator, the gas station owner, or
whatever. So, they bring with them a specific commercial
expertise and a commercial perspective. I think that's very
similar to what we're doing with some of these companies.
Do we want to isolate that and provide safety and soundness
mechanisms? I believe Regulation 23A and B does that, and for
the ILCs, we religiously enforce that upon them. So, my answer
is, I think there is conceptually, it's not far to go from
businesspeople owning a community bank to an entity that is
large that has a small component which is an insured bank.
I hope I've answered your question.
Mr. Gillmor. I think we just have a different philosophy.
For example, when you said that restricting commercial
ownership of ILCs would be anticompetitive, do you think the
Bank Holding Company Act is anticompetitive?
Mr. Leary. No. But I think I've already gone on record as
saying I think there are some areas that could be worked on. Do
I endorse repealing? No.
Mr. Gillmor. You don't endorse repealing that?
Mr. Leary. I do not.
Mr. Gillmor. But you don't want ILCs subject to comparable
type of provisions?
Mr. Leary. I think they are. Everybody keeps talking about
the one side, but the ILCs are limited. They cannot have demand
deposits if they exceed $100 million. I brought up in my
remarks that at one point, the committee passed a bill that
would allow commercial NOW accounts for ILCs, somewhat leveling
the offerings that the industrial banks can offer to their
customers.
So, I think it's a very delicate balance, but I do not have
a problem with what we're doing here, provided it's safe, and
provided it's sound.
Mr. Gillmor. Okay. Thank you. Let me ask the SEC, because
there's a possibility under this legislation that you're going
to be a consolidated regulator. If you were given the power to
regulate industrial bank parents, depending on what kind of
parent it is, do you think the SEC would have to request
additional powers to provide for safety and soundness, or are
you equipped now to do that?
Mr. Colby. I believe that the program that we're currently
operating can take into account the needs of the ILC because
the possibility that what happens in the holding company could
affect the ILC, so I don't think you'd need more safety and
soundness power.
Mr. Gillmor. Okay.
Mr. Colby. But if the Congress decides that's something
that's appropriate for the bank regulators to have, we wouldn't
oppose it.
Mr. Gillmor. Let me ask Mr. Kohn. Mr. Leary said that it
would be okay, in his view, to repeal the Bank Holding Company
Act. Would you like to make the other case?
Mr. Kohn. I think I already did, Mr. Gillmor. And I will
just repeat that I think the mixing of banking and commerce
would be a very major step. The U.S.--Mr. Bachus cited two
German firms that operate in a country in which banking and
commerce have been closely integrated over the years. I think
the U.S. financial system has benefitted considerably by having
these two separate. We have a much more resilient financial
system in which commercial firms have many avenues for raising
funds that are not tied to their banks. And as a consequence, I
would tread very, very lightly on moving away from a formula
that has given us, I think, a very safe banking system, a
resilient financial system, one in which of course there are
always difficulties and conflicts of interest, but have stayed
away from some of the difficulties that could arise if we mixed
banking and commerce.
I don't know that the answer is zero banking and commerce,
but I think I would be very cautious about moving away from
what Congress just looked at 8 years ago and made a very
conscious decision that zero was the right number.
Mr. Gillmor. Thank you very much. I was going to throw a
softball to Chairman Bair, but my time has expired, so I yield
back.
The Chairman. I thank the gentleman for his restraint. And
I now recognize the gentleman from New York who has been very
interested in this and has an issue that we're going to pursue.
I guarantee him that at some point, it's going to get resolved;
we're just not sure when. The gentleman from New York.
Mr. Meeks. I was going to ask their opinion on that
particular issue just to see what their interpretation would be
on a hypothetical situation that I've been working with the
chairman on. And that is, say there's a company that is
primarily financial in nature. It receives its approval for an
ILC to finance a particular service industry after October 1,
2003, but before 2007. The parent company receives some
commercial revenue of less than 10 percent. In the years
following 2007, the commercial revenue of the parent company
exceeds 15 percent. Are there any restrictions upon the ILC
once that 15 percent commercial revenue threshold has been
reached or exceeded? What's your opinion?
Ms. Bair. Well, this is a question about the construction
of the legislation. As I understand it, if it's chartered
between October 2003 and January 2007, it is not subject to the
15 percent. However, its business plan is frozen and it is
prohibited from additional branching. So, even though the 15
percent commercial revenue limitation would not apply, it could
not undertake new activities beyond what is already in its
business plan, nor could it establish new branches.
Mr. Meeks. Do you agree?
Mr. Kohn. Yes, I agree.
Mr. Meeks. Okay. Let me ask Ms. Bair, do you believe that
the FDIC currently has the authority that it needs to fully
deny an ILC any future powers that it may request?
Ms. Bair. Well, in terms of the activities of the ILC, yes.
That is subject to exactly the same activity restrictions that
other depository institutions are subject to. We're finding
that most of the issues relate to commercial entities owning an
ILC. But in terms of the ILC's activities itself, those are
subject to the same restrictions.
Mr. Meeks. And, Mr. Kohn, I know that you believe that we
should separate--that commercial entities shouldn't own ILCs,
etc. But say if, in fact, they continue to own them, who do you
think should regulate them? Should it be the FDIC which
currently regulates, or the Federal Reserve Bank, which has
more experience with consolidation regulation?
Mr. Kohn. I think the most important thing is that someone
should regulate the consolidated entity. That's my first point.
Mr. Meeks. You should be up here. That's a political
answer.
Mr. Kohn. Secondly, I think that if Congress were to give
this authority to the FDIC, it would be creating another
parallel regulatory environment. We already have both the Fed
and the OTS regulating financial holding companies, depending
on the nature of the subsidiary depository institution. This
would create a third line of regulation, one that could define
financial in a different way than the Federal Reserve defines
financial.
So I would think Congress should think very carefully
before creating another line of parallel regulation for
consolidated entities.
Mr. Meeks. Ms. Bair, do you agree?
Ms. Bair. We are not seeking to become a holding company
supervisor. We're happy to have the authorities should Congress
decide to grant those to us. We have tremendous respect for the
Fed. If we were given those authorities, we would consult with
them closely. I agree. We would not want differentiations in
how financial is defined.
I would also have to say that if you let the SEC in, you're
going to have four. But, you know, I think the argument for
allowing the FDIC to become holding company supervisor is that
we do have the longest history with this industry, with these
individual institutions. Also, the Fed already has two ILCs in
holding companies subject to Fed supervision. Eight are under
the OTS. And I believe four more would be under the SEC if you
recognize them. So it would only be with regard to the
remaining institutions where we would be having that role.
Mr. Meeks. Thank you. I yield back.
The Chairman. The gentleman from Texas, Mr. Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman. Ms. Bair, in your
testimony you specified that there are four categories of ILCs,
and the fourth one is those that directly support the parent
companies' or organizations' commercial activities and that
they can maintain those entities by funding them, the parent,
through forms of deposits, borrowings, and equity and so forth.
How does your regulatory or oversight of those ILCs differ from
the other ILCs that you oversee?
Ms. Bair. Well, those types of applications obviously go
through a very stringent Section 23A and 23B review. This is an
area where we very closely consult with the Fed in terms of how
to interpret and apply those provisions, and our supervisory
program also heavily scrutinizes those relationships to make
sure there is full compliance with 23A and 23B.
Mr. Neugebauer. And have you ever experienced any problems
with those relationships?
Ms. Bair. There is one institution that comes to mind,
though I don't like to talk publicly about individual cases. If
you'd like to submit a question in writing, we can have our
general counsel put something together to respond to that.
Mr. Neugebauer. All right. Thank you. I guess this is a
question to the panel as a whole. If we go forward with this
legislation, we are going to, in fact, grandfather some
institutions that came in under the previous regulation, and,
therefore, if there are other organizations that would be, you
know, competing with those organizations, in fact they are now
going to maybe have a competitive advantage because they were
grandfathered.
Is that good, fair, consistent policy for this country? And
I'll just go down the--
Ms. Bair. Well, I don't know how else to do it. You had to
do it when you closed the non-bank bank loophole. You had to do
it when you closed the unitary thrift loophole, and inevitably,
there are going to be some winners and some losers.
Mr. Kohn. I agree with Chairman Bair. I think the problem,
as she notes, is that you can't make everybody happy here. I
think the most important thing is to cut things off. And there
are people who have been operating under this charter for a
while, and they should be allowed to continue operating under
the charter.
But it would give them at least some competitive advantage
against others, as I think Commissioner Leary was pointing out
about the auto companies. But I think that's kind of the lesser
of the evils. I'd rather have the loophole closed, people
grandfathered in, and have no more going forward.
Mr. Reich. It would not be a perfect solution by any means,
but it would--it is about the only option you have if you were
to move in that direction.
Mr. Colby. I have nothing to add to that.
Mr. Leary. From my perspective, I don't believe the cutoff
is needed.
Mr. Neugebauer. Mr. Leary, if this legislation--because
your State is one of the States that still allows that kind of
activity--what do you see the impact moving forward with future
ILC applications and activity in your State?
Mr. Leary. With the commercial activity restricted? I would
hope it would continue. I cannot predict how it would continue.
I would simply indicate that while Utah may be an anomaly in
that our commercial bankers and our industrial bankers are in
the same association and work well together thus far in all of
these operations, I would hope that it would continue.
Mr. Bachus. Would the gentleman yield?
Mr. Neugebauer. Yes, I would.
Mr. Bachus. In the conversation about our automobile
manufacturers, you said the only option would be to close the
loophole and leave some in and some out. Obviously, what
concerns many of us is that Ford and Chrysler are the two that
do not have ILCs are our domestic producers, two of our three
domestic producers. And our domestic automobile manufacturers,
I think, are very important in a bipartisan way.
I guess there would be another solution, and that's as only
to automobile manufacturers to allow a continuing or to allow a
certain space of time to those that had made application. Any
comment on that?
Mr. Kohn. I think I'd be a little concerned that once you
crack the door, people would be pushing against it, and more
would want to come in. So I do think the--
Mr. Bachus. Of course if it were narrowly drawn and in that
one regard. But I understand, it is a quandary.
The Chairman. If the gentleman would yield. My sense is,
and I know the gentleman from Ohio and I have talked about
this, my impression is that's an issue we will be dealing with
when the bill comes out of the Senate. And sufficient unto the
day is the evil thereof is, I think, the appropriate model
there.
But I do think being realistic, there will be some Senate
negotiations, and I think there will be some distinction drawn
ultimately--this is a prediction--between those entities that
are very limited to a kind of a self-financing situation in
which they are processing some of their own paper, and entities
that might seek a broader kind of franchise. But I do believe
that's something we will be dealing with at that time.
Mr. Bachus. Thank you. Because as you know, many members
are concerned about that.
The Chairman. The gentleman from Georgia.
Mr. Scott. Thank you very much, Mr. Chairman. Let me start
if I may by looking at this from a concept of what is in the
best interests of the consumer. Because in the final analysis,
that's really what we're here for. And that begs the question
as to what is in the best interest of the consumer is the fact
that the genie is sort of out of the bottle, because there are
some companies who are already doing this.
What empirical data do we have that these companies
provided a threat to our way of life, to the banking system?
There has been none. You have Target; you have GE; you have
Sears; and a number of others. But in fact, in some cases, the
consumer has benefitted through added consumer convenience and
lower costs in some areas. But in each of your testimonies,
there has been consistent woe, but there has been no evidence,
no empirical evidence that those who have the charter have been
threatening to the system in any way. And I was wondering. And
by that, Ms. Bair, I mean, wouldn't the FDIC, don't you think
that they have the current oversight to make sure that these
safeguards are there? And again, what evidence do we have
that--
Ms. Bair. Well, Congressman, you're right. To date, the
commercially owned ILCs have a good safety and soundness
record. They have been the source of product innovations and
expansion of financial services to certain segments of the
population.
I think what we're really talking about is prospectively
how far you want to go with this. The current ILC exception is
quite broad, and I think a lot of the concern about some of the
pending applications that have gotten so much press and
controversy has been not so much about what's currently being
proposed, but what might happen in the future, where do we draw
the line? Do you want major retailers being able to provide the
full panoply of financial services?
We're being agnostic. Those are the kinds of policy issues
that Congress needs to make. But, you know, I think they are
good questions to be asking, and I think perhaps going forward,
you do want to consider providing some limited ability to
experiment with a very limited mixing of banking and commerce.
Those are the right questions to be asking, but, again, we
think it's a policy call for Congress to make.
Mr. Scott. Mr. Kohn, let me get to a point that you talked
about in terms of some issues and complexities you said,
conflicts of interest. Let us take an example. In the
provision, isn't it true that the ILCs have what we call an
anti-tying prohibition that is a safeguard?
Under this provision, an ILC could not condition a loan on
a requirement that the borrower obtain services from an
affiliate, and the affiliate could not tie a product sale to a
requirement that the customer obtain banking services from the
ILC. So, if the Home Depot, for example--it's a good example
here, which I think as we move this process along, I think the
bill will move forward. And when it gets to the Senate, there's
going to be some deliberation. I agree with your point, but I
do think that we ought not to sort of throw the baby out with
the bath water here. But maybe to look at some of these
situations on an individual basis.
So, for example, if the Home Depot were to operate an ILC,
they could not require contractors to finance their supplies
through the ILC, nor could the ILC require loan applicants to
use the loan proceeds to buy supplies from the Home Depot. And
I point this out because the anti-tying requirement for
traditional banks, on the other hand, are applicable only to
the bank itself.
So my--the point I want to make is that in some cases, for
example, we take again the Home Depot case where this is going
on now. I mean, it's basically a design to have a major
consumer benefit. Now a consumer comes in, and they want to
expand their line of credit. We're talking about a very small
amount here that is certainly nonthreatening, but would be a
major help to the consumer, to be able to transact his
transaction there.
Now this same process happens, but in this case, Home Depot
has to go and farm this out to, say, a CitiGroup or a bank like
that, when you could have it here. And I think with the anti-
tying provisions in here, there should be safeguards in and of
itself.
Mr. Kohn. I think there are regulations in place and that
could be put in place which help protect against this sort of
thing. Now, whether they would really protect a consumer or a
contractor who felt somewhat dependent on Home Depot, that
consumer or contractor really felt that they had a fully
panoply of choice and weren't being pushed into the financial
offering that Home Depot was tying to its transaction, I think
is an open question.
We've talked a lot about competition here, and the
consumer. You've framed our question in terms of the consumer.
There is a lot of competition in the financial services
industry. There is relatively free entry into banking and
thrifts. We charter hundreds of new institutions a year. I
think if there is a need for financial services, there are
people out there willing to start institutions or expand what
they're doing--
The Chairman. Mr. Kohn, you have to wrap this up, please.
Mr. Kohn. Okay. That concludes my response.
The Chairman. Thank you. The gentleman from California,
then the gentleman from Ohio. The gentleman from California.
Mr. Sherman. Thank you. I got a button yesterday, ``Don't
Mix Banking and Commerce.'' I got it from the Independent
Community Bankers Association and I'd put in the record, but
the pin would stick people.
And I've been interested to see the development of the
whole idea of mixing banking and commerce. Because I've seen
many bank regulators, particularly the Fed, be opposed to
commercial institutions entering banking, and not nearly as
opposed to banking institutions entering commerce. That is to
say, when Wal-Mart wants to enter banking, the banking world
says, Oh my God, look at Japan. Look at what happens when you
mix banking and commerce.''
But when banks want to go into real estate sales, auto
sales, whatever, the bank regulators have been helping them,
and we in Congress have stopped the presumed train wreck
described by the community bankers when you mix banking and
commerce. So perhaps you could comment, is it as bad an idea
for bankers to get into commerce as for commercial
organizations to get into banking?
Mr. Kohn. I think it would be a bad idea for bankers to get
into commerce in a major way. What we allow now are commercial
activities that are incidental to the basic financial
activities of the banks. This is under the guidelines put out
by Congress.
Mr. Sherman. But we could call anything incidental to
banking. I bought this tie in a tie store, but I financed it on
a credit card, and I hope before it wears out, I will pay off
that bill. So it was a financial institution. In fact, the bank
may make a larger profit on this tie than the haberdasher.
That being the case, is it your position that anytime you
sell something that has to get financed--and I'd like to hear
from your colleague sitting to your left as well.
Mr. Reich. I think we regulators are a pretty conservative
group when it comes to banks expanding into a variety of
commercial activities. We are not the cheerleaders for the
banking industry to expand into commercial activities.
Mr. Sherman. Is there anyone on the panel who thinks that
real estate sales is somehow incidental to real estate
financing or is for some other reason not part of commerce? Let
the record show there were no responses, and I yield back.
The Chairman. I thank the gentleman. The one example he did
give might have been covered by the anti-tying rules.
[Laughter]
The Chairman. The gentleman from Ohio.
Mr. Wilson. No questions.
The Chairman. The gentleman from Colorado.
Mr. Perlmutter. Pass.
The Chairman. The gentleman from Utah probably doesn't want
to pass. I would note again, the gentleman from Utah is not now
a member of the committee, but we did get unanimous consent,
given his interest, for him to participate.
Mr. Matheson. And I would be remiss if I did not open by
thanking both Chairman Frank and Ranking Member Bachus for
their generosity in allowing me to participate today. It is
very nice of you to do that.
I have all kinds of questions in 5 minutes, so we'll see
how this goes. Mr. Leary, if you could just briefly confirm a
couple of things for me. Number one, there were some references
made in opening statements about lack of CRA participation by
ILCs. Could you clarify what's really going on with CRA
participation?
Mr. Leary. I think from the State of Utah, and even from
consumer activist groups, they would tell you CRA activity of
the industrial banks in Utah is outstanding. They have been
noted for proactive work. They are out there doing it the best
they can. And what is unusual, while my background and
experience is in community banking, the CRA group has sat down
and tried to proactively figure out ways that create micro
enterprise loan funds. They've created Utah Community
Reinvestment Corporation. I think they've been very aggressive.
Mr. Matheson. Thank you. I think it's interesting to note
that from the chairman's opening remarks to just about
everybody on the panel, I think everybody here has said that
there's no safety and soundness issue to date in this industry.
And it reminds me of when we had the subcommittee hearing
in the last Congress, and when then-subcommittee Chairman
Bachus concluded the hearing, he said, you know, legislation is
usually a solution to a problem, and it isn't clear where the
problem is. He said that at the time, I'm not sure there is a
problem. And I think that's the underlying question we need to
be talking about today is where is the problem? Since we've all
apparently stipulated there's no safety and soundness issue to
date in this industry.
And yet, Mr. Leary, some people are concerned that only six
States benefit. You've already said you wouldn't care if other
States had access to this charter.
Mr. Leary. I do not.
Mr. Matheson. Is it your understanding that the
beneficiaries of industrial-owned company services, namely,
consumers, that those beneficiaries are in all 50 States, and
in fact people throughout this country benefit from the
industry?
Mr. Leary. Yes they are.
Mr. Matheson. Ms. Bair, I wanted to know, is it true--would
you verify that the FDIC does in fact vigorously enforce
Sections 23A and 23B in the anti-tying provisions applicable to
the banks you regulate?
Ms. Bair. Yes, we do.
Mr. Matheson. You said you were agnostic about what we do.
But you enacted a moratorium, and I don't know that that's
agnostic.
Ms. Bair. Yes.
Mr. Matheson. And you've extended the moratorium, and if
you ask Mr. Leary about what that's meant to people who are
applying for charters, that is not a hold-harmless provision.
That is not agnostic.
Ms. Bair. Yes.
Mr. Matheson. And I'm curious what's happened at the FDIC
to sort of change this position? Because if you look at what
your predecessor said, I quote remarks before State bank
supervisors in 2003, after describing the FDIC's examination of
industrial loan banks, he said, ``These organizations are
rigorously and sufficiently supervised by the state supervisors
and the FDIC on an ongoing basis.''
And then he addressed concerns about oversight of the
parent companies. And he said, ``While I understand these
concerns, the FDIC has, and often uses, a number of tools to
manage both the holding company's involvement with the
financial institution and to manage transactions between the
two entities. We can and do visit the parent companies and
other affiliated entities for that matter, to look over issues
or operations that could impact the insured institution.
Congress has given us the power to protect the integrity of
those relationships. We have exercised that power, and we have
coordinated closely with you, the State regulators, in our
work. We have found parent companies of ILCs to be acutely
conscious of their responsibilities with respect to their ILC
subsidiaries and the consequences of violating applicable laws
and regulations.''
He has also said, ``We at the FDIC must be vigilant in our
supervisory role, but I will reiterate, the FDIC believes the
ILC charter per se poses no greater safety and soundness risk
than other charters.''
Ms. Bair. Yes.
Mr. Matheson. What has changed?
Ms. Bair. Well, I could read excerpts from the GAO report,
from our own IG, from a number of members of this committee and
in the Senate, and from a number of public commentors who would
raise a lot of concerns about the current regulatory structure.
I felt when I came into this situation at the end of June
last year that we needed to take a step back and evaluate all
the issues, given that there were a lot of credible voices
saying that the supervisory regime was not adequate.
And, Congressman, I do honestly think that this controversy
about the ILC charter is not going to go away, because there
are in fact no meaningful limitations on the FDIC's ability,
other than safety and soundness considerations, to prevent
major commercial entities from getting into banking in a very
large way. That has not happened to date.
Mr. Matheson. And you're questioning the FDIC's ability to
adequately regulate, along with the State, those--
Ms. Bair. I'm questioning whether the FDIC should be the
decisionmaker in allowing major commercial retail entities to
get into banking in a major way in this country. I don't think
that's our decision right now.
Mr. Matheson. Let me just ask if Congress did decide to
allow this to happen instead of this legislation that's being
proposed, do you think the FDIC has the adequate capability to
regulate that industry in that context?
Ms. Bair. We will have to evaluate each application on a
case-by-case basis. But any decision we made would have to be
based on safety and soundness considerations. It couldn't be
based on policy considerations relating to commercial
ownership.
Mr. Matheson. Do you think that the commercial ownership
issue has evolved in the last few years due to a particular
application?
Ms. Bair. Our decision wasn't driven by any individual
applications, but there has been a trend and greater interest
in this charter by major retailers, yes.
Mr. Matheson. Do you think that when you look at FDIC and
the bank-centric model that we've had here, do you see areas
that we--or capabilities that you don't have now that would
help you better regulate this industry, or are you satisfied
with the tools you have at your disposal?
Ms. Bair. I think holding company authorities, particularly
the ability to examine affiliates, would be helpful, yes, I do.
Mr. Matheson. And you don't think you have that--
Ms. Bair. We do not have that now, no. We have--
Mr. Matheson. Do you take issue with what your predecessor
said about that?
Ms. Bair. Well, our ability to examine affiliates is only
with regard to determining what the relationship is with the
ILC. So unless there's a relationship, we could be challenged
in our ability to examine affiliates.
Mr. Matheson. Okay. Mr. Chairman, I see my time has
expired, and I do not want to abuse the privilege. Thank you so
much.
The Chairman. I thank the gentleman. And with that, we will
thank the witnesses. Did the gentleman from Illinois wish to
ask questions? Then we thank the witnesses very much, and we
will ask them to leave expeditiously, and we'll empanel the
next panel. And everybody who wants to be polite to each other,
do that in the hall. Just leave quickly.
We ask people to leave quickly. Don't black the aisles, one
panel to the next panel. We'll try to do as much as we can
before we're interrupted for votes. And let us have the next
panel be seated, please.
Would the members of the panel please move up here and be
seated so we can get started? Would the people to the Chair's
left please leave? Thank you.
The second panel will begin. We will ask that those doors
be closed. And the first witness is Ms. Amy Isaacs, who is the
national director of Americans for Democratic Action.
Please just sit down and let us start talking, guys. Come
on, we're in a hurry.
Ms. Isaacs.
Excuse me. Members of the staff, close those doors, please.
People either seated, or on the other side of the door.
Thank you. Please continue.
STATEMENT OF AMY ISAACS, NATIONAL DIRECTOR, AMERICANS FOR
DEMOCRATIC ACTION
Ms. Isaacs. Mr. Chairman, thank you. I appreciate the
opportunity to testify representing our more than 65,000
members. Unlike my colleagues on this panel and the preceding
one, I am not an expert in banking. I am, however, a consumer,
as are the members of my organization. And because we are
concerned about the impact that granting an ILC charter to any
retail enterprise could have on individual consumers and small
business, we endorse H.R. 698, the Industrial Bank Holding
Company Act of 2007.
Although H.R. 698 is not specifically about Wal-Mart, I
will focus on Wal-Mart as perhaps the most pernicious example
of the problems which can arise when banking and commerce are
intertwined. We believe a bright line between the two must be
drawn.
Wal-Mart's recently withdrawn application to enter the
banking business was fraught with risk, which would have been
guaranteed by American taxpayers. A bank tied to one of the
world's largest retailers would face unique commercial and
reputational risks. Regulatory agencies charged with
supervising these risks lack the experience or the capacity to
understand how to evaluate or minimize them.
Giant retailers have been forced into Chapter 11 or have
disappeared because of changes in the commercial environment.
K-Mart, Ames, Woolworth, and Montgomery Ward are examples of
retailers who have reorganized or have disappeared. Business
models change, as do consumer preferences. The Federal
Government is not and should not be in the business of
understanding the risks of large-scale retailing. It should not
have to worry about the safety and soundness of a global retail
business, dependent on complex global supply systems. If the
retail operation faces disaster, so will the bank.
Wal-Mart also faces the risk of social ostracism for its
routine antisocial behavior. Wal-Mart has an established
pattern of irresponsible practices. It shorts employees on
health care, it has flouted hourly wage laws, and it has been
involved in multiple cases of alleged discrimination. The
company has been accused of using undocumented workers and a
senior executive said he padded his expenses to conceal anti-
union expenditures.
Such behavior carries the risk of a damaged reputation, and
with it, a run on the bank. The government cannot be in the
position of insuring against the risk. There are many other
examples of antisocial behavior leading to the demise of
financial institutions. Riggs Bank is a prime example.
We also are deeply concerned that large scale commercial
enterprises could misuse their market power. As state-chartered
ILCs, they would not be subject to the stricter regulations of
bank holding companies. They could use their position in the
marketplace and control of prime real estate for their own
advantage, instead of the interests of the community they
purport to serve.
Had Wal-Mart been granted an ILC charter, it would have
been able to offer anything an ordinary bank could--savings
accounts, checking accounts, mortgages, and a variety of loans
for everything from home improvement to car purchases to small
business loans. The potential for conflict of interest is
obvious.
Would retailers make loans to competitors? Should they have
access to credit information about competitors?
Retailers operate with the goal of dominating markets. They
work to control competition. The result has been the extinction
of long-term community small businesses. There is no reason to
believe that a foray into banking would have a different
outcome.
Retailers are not offering banking services to save
consumers money. They are not charities. They are in business
to make money. They want to use their retail power to muscle
their way into the financial services industry.
Had Wal-Mart been granted a charter, it would have used its
power to muscle past community banks and credit unions, which
do care about their own communities. Among the factors the law
requires be considered in accepting an application for an ILC
charter is the convenience and needs of the community to be
served. Mixing retail commerce and banking makes it impossible
to meet that standard. The conflict of interest and the push
for market dominance argue against a charter serving any need
or convenience other than the retailers'.
Existing institutions leasing space in retail stores serve
customers. Many banks have arrangements with supermarket
chains. These bank branches meet the needs of both consumers
and the community.
Wal-Mart saw the handwriting on the wall when it withdrew
its application. But until and unless H.R. 698 is signed into
law, we cannot guarantee that a similar problem will not recur.
Americans for Democratic Action stands for liberal values. We
see bank regulation as an area where true conservative values
should prevail. By granting a charter and deposit insurance,
the government should not be risking regulating a business it
does not understand. It should not insure depositors against a
corporation's antisocial behavior and the attendant risks.
For these reasons, Americans for Democratic Action urges
passage of H.R. 698. Thank you for your consideration.
[The prepared statement of Ms. Isaacs can be found on page
113 of the appendix.]
The Chairman. Thank you.
And next, testifying on behalf of America's Community
Bankers, for the chairman a familiar face, not to mention
accent, one of our leading bankers in Massachusetts, Arthur
Connelly from South Shore Bank.
STATEMENT OF ARTHUR R. CONNELLY, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, SOUTH SHORE BANCORP MHC, ON BEHALF OF AMERICA'S
COMMUNITY BANKERS
Mr. Connelly. Thank you. Chairman Frank, Ranking Member
Bachus, and members of the committee, thanks for inviting me to
testify before you today on the Industrial Bank Holding Company
Act of 2007.
My name is Art Connelly, as the chairman said. I am the
chairman and CEO of South Shore Bancorp, and I also serve as
the first vice chairman of America's Community Bankers, and I
am here today to testify on their behalf.
The appropriate regulatory structure for industrial loan
companies is incredibly important and should be addressed by
Congress. First, I want to say that ACB strongly supports H.R.
698. We believe that this commonsense legislation is necessary
to improve the safety and soundness of the banking system. ACB
believes that the withdrawal of Wal-Mart's ILC application does
not end the need for comprehensive ILC regulatory reform.
The ILC charter is the only bank charter that can be
obtained by a commercial entity. Furthermore, there is no
holding company oversight for ILCs that are not otherwise
supervised by the OTS or the Federal Reserve.
These structural issues run contrary to legislation passed
by Congress. Consistently throughout the 20th century, Congress
made it clear that it does not want commercial ownership of
banks in the United States and wants insured banks to have
consolidated holding company oversight.
There are good reasons to have concerns about commercial
ownership of banks, especially with ILCs. Commercially owned
banks can face conflict of interest pressures from their
commercial owners. We have seen this problem in other
countries, where a commercially owned bank can be pressured by
its parent to make loans based not on sound underwriting but on
the needs of its commercial parent. Concerns about the payment
system integrity might also exist if a commercial parent
improperly influences the actions of an ILC subsidiary that
processes payments.
Furthermore, these problems are greater for ILCs because
commercially owned ILCs that are not affiliated with a bank or
a savings association have no holding company regulator that
can help oversee risks to the depository institution on a
consolidated basis. While the FDIC has done an admirable job in
regulating ILCs for safety and soundness so far, it does not
have the statutory authority to examine the parent company.
The recent surge in commercial ILC application brings these
concerns to the forefront. Until recently, the majority of ILC
asset growth has been in ILCs that are affiliated with banks or
savings associations and have holding company supervision. If
no regulatory supervision is passed, we could see dramatic
growth in commercially owned ILCs with no holding company
oversight.
That brings me to H.R. 698. On examining the bill, it is
helpful to look at Gramm-Leach-Bliley, where Congress
prohibited any future ownership of unitary thrifts by
commercial companies. However, Congress grandfathered all
unitary thrifts that were commercially owned prior to 1999.
This appears to be the model for the Industrial Bank Holding
Company Act, and we believe it to be a fair one.
H.R. 698 creates an FDIC regulated holding company
structure for ILCs not regulated as a bank or a savings and
loan holding company. Providing the FDIC with the authority to
supervise the parent companies of these ILCs on a consolidated
basis will allow it to ensure the safety and soundness of the
institution. The legislation also utilizes a grandfathering
system similar to the one in Gramm-Leach-Bliley.
In conclusion, Mr. Chairman, we believe H.R. 698 is sound
legislation that will fill a current gap in our financial
regulatory structure. I will gladly take any questions that you
might have. Thank you.
[The prepared statement of Mr. Connelly can be found on
page 82 of the appendix.]
The Chairman. Thank you. Next, from the Independent
Community Bankers of America, Mr. Jim Ghiglieri. Please, Mr.
Ghiglieri.
STATEMENT OF JAMES P. GHIGLIERI, JR., PRESIDENT, ALPHA
COMMUNITY BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS
OF AMERICA
Mr. Ghiglieri. Mr. Chairman, Ranking Member Bachus, and
members of the committee, my name is Jim Ghiglieri, and I am
president of Alpha Community Bank in Toluca, Illinois. I am
also chairman of the Independent Community Bankers of America.
ICBA is pleased to have this opportunity to testify.
The ILC charter threatens our Nation's historic separation
of banking and commerce and undermines our system of holding
company supervision. The fact that Wal-Mart has withdrawn its
ILC application does not diminish the need to act. Other
applications are pending and more could be filed.
ICBA was pleased that the FDIC unanimously adopted the
recommendations of Chairman Frank and Representative Gillmor
and many of their colleagues to impose a 1-year moratorium on
ILC applications by commercial firms. The entire FDIC Board
clearly recognizes that these applications raise broad public
policy issues that Congress must confront. Congress can do that
by enacting H.R. 698.
Like much good legislation, H.R. 698 is a compromise. That
is its strength. Institutions that are already in business
could remain in place. Financial companies could continue to
acquire, establish, and operate ILCs. The legislation addresses
the key concerns without needlessly disrupting ongoing
activity, and it gives the FDIC the basic tools it will need to
be an effective consolidated regulator.
Why do we ask Congress to pass this bill? First, the
loophole threatens the safety and soundness of the financial
system. Second, mixing banking and commerce presents serious
conflicts of interest. Third, ILCs could destabilize local
communities and harm consumers. Fourth, ILCs could jeopardize
the payment system. And, fifth, ILC holding companies need
stronger regulation.
Let me briefly elaborate. First, safety and soundness.
Allowing commercial firms to own federally insured ILCs adds
tremendous new risk to the Deposit Insurance Fund. For example,
Ford Motor Company applied for an ILC charter. Ford's financial
difficulties are well-documented. Banking regulators will not
allow banks to buy Ford bonds. Ford hardly sounds like a source
of strength for an FDIC-insured ILC.
Home Depot and its ILC acquisition target are susceptible
to fluctuations in real estate. According to Bloomberg News on
February 21st, and I quote, ``Home Depot reported its biggest
drop in quarterly profit as the decline in U.S. home sales
sapped demand for building supplies.''
Financial services regulators, no matter how competent, do
not have the expertise to understand each of these economic
areas and protect the safety and soundness of an ILC from
problems that may befall its parent. A financial regulator
should not become involved in market decisions of a major
commercial firm.
Second, conflicts of interest. Home Depot could be tempted
to direct its bank to offer unsound loan terms to its customers
provided they agree to purchase products from Home Depot. Or
Home Depot could offer discounts on its product if a customer
takes out a loan from its bank. The idea that a bank should be
an objective credit grantor gets thrown out the window either
way.
Third, harm to consumers and communities. An ILC owned by a
retail firm is unlikely to make loans to its local competitors.
An ILC with a nationwide deposit taking network could draw
funds out of local communities, sending them to corporate
headquarters. Major commercial firms have the size and
resources to engage in predatory pricing for as long as it
takes to drive local competitors out of the market, both
locally owned small businesses and community banks.
Fourth, the payment system. The Wal-Mart application
highlighted potential risk to the objectivity and security of
the payment system. If retailers control the payment system,
they will seek competitive advantage rather than control risk.
Consumers, small businesses and banks of all sizes would be the
victims.
And finally, lack of regulatory authority. The FDIC
currently lacks clear statutory authority to consider all of
the broad policy implications when considering ILC applications
and to regulate ILC holding companies.
While ICBA believes that the FDIC has ample grounds under
current law to deny several of the pending applications,
especially Home Depot's, it may eventually be compelled to
grant a disturbing number of them. Senator Garn told the FDIC
that the ILC charter was grandfathered in 1987 and exempted
from the Bank Holding Company Act to serve narrow purposes. But
that is rapidly changing. A GAO report highlighted the need for
enhanced supervision of ILCs, especially the need for
consolidated supervision over both the ILCs and their holding
companies. Successive Federal Reserve chairmen have repeatedly
made similar points.
Congress has ample precedent for closing the ILC loophole.
You closed the non-bank bank loophole in 1987 and closed the
unitary thrift loophole in 1999. Now it is time to close the
ILC loophole.
Thank you very much.
[The prepared statement of Mr. Ghiglieri can be found on
page 95 of the appendix.]
The Chairman. Thank you.
Next, Mr. McVicker, who is the chairman and CEO of the
Central Bank and Trust Company, and he is testifying on behalf
of the ABA, the American Bankers Association.
Mr. McVicker.
STATEMENT OF EARL D. McVICKER, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, CENTRAL BANK & TRUST COMPANY, ON BEHALF OF THE
AMERICAN BANKERS ASSOCIATION
Mr. McVicker. Mr. Chairman, and members of the committee,
my name is Earl McVicker. I am chairman and CEO of Central Bank
and Trust Company in Hutchinson, Kansas, and chairman of the
American Bankers Association. Thank you for the opportunity to
present ABA's views on the regulation of ILCs.
Since Congress last enacted legislation concerning the
ownership of ILCs nearly 20 years ago, the ILC industry has
changed dramatically. Unfortunately, these changes now threaten
to undermine the separation of banking and nonfinancial
commerce that has long been a feature of U.S. law. In fact,
over the last 50 years, Congress has repeatedly curtailed the
ability of nonfinancial commercial firms to engage in banking
activities.
In each of these instances, the legislation was a reaction
to nonfinancial firms that were taking advantage of statutory
provisions to engage in banking. Moreover, in each instance,
Congress was consistent in enacting legislation to maintain the
separation between banking and nonfinancial commerce.
Today, unintended use of the ILC charter has made it
necessary for Congress to act once again to maintain this
separation. When the term bank was redefined in 1987, ILCs were
specifically excluded from the definition. At that time, most
ILCs were small. And the few States that were able to charter
ILCs were not promoting the charter. Simply put, there was no
significant risk that problems caused by mixing banking and
nonfinancial commerce would arise at the time the exemption was
codified.
That is not the case today. By the end of 2006, aggregate
ILC assets totaled almost $213 billion, an increase of more
than 5,500 percent since 1987. The average ILC now holds close
to $3.7 billion in assets.
Recent ILC asset growth is no accident. When Congress cut
off the ability of nonfinancial commercial firms to engage in
banking through unitary thrifts in 1999, these firms were
forced to look for other means of doing so. It is no
coincidence that total aggregate ILC assets more than doubled
from $44 billion in 1999 to over $90 billion in 2000. Clearly,
with the closure of one avenue into the banking world,
nonfinancial commercial entities began to exploit another.
It is fair to assume that Congress did not anticipate that
the ILC exemption would be used for this purpose. There is a
significant risk if the separation is not maintained. A
nonfinancial parent, seeking to further its commercial
pursuits, could put depositors' funds, the capital of the bank
and the deposit insurance fund at risk.
Congress has recognized these risks and should once again
act to preserve the separation of banking and nonfinancial
commerce by closing this exemption. Thus the ABA supports the
Frank-Gillmor bill, H.R. 698, which would create a general rule
that commercial firms may not own an ILC. The bill would
grandfather commercial firms that currently own an ILC, and we
support bringing grandfathered institutions within the
jurisdiction of a Federal bank regulator, and vesting that
regulator with the full range of supervisory and enforcement
tools.
We stand ready to work with Congress to maintain the
important separation between banking and commerce. Thank you.
[The prepared statement of Mr. McVicker can be found on
page 172 of the appendix.]
The Chairman. Thank you very much, Mr. McVicker.
Next, John Douglas from Alston and Bird, who is testifying
on behalf of the American Financial Services Association.
STATEMENT OF JOHN L. DOUGLAS, ALSTON & BIRD LLP, ON BEHALF OF
THE AMERICAN FINANCIAL SERVICES ASSOCIATION
Mr. Douglas. Mr. Chairman, and members of the committee,
thank you very much for allowing us to present testimony on
this important bill.
American Financial Services Association is the national
trade association representing many of the Nation's most
important lenders, providing access to credit for millions of
consumers and small businesses. AFSA strongly believes that the
industrial bank option represents a safe and sound and
appropriate means to deliver financial services to the public.
Congress established a framework within which commercial
companies can provide deposit, loan, and other banking products
to their customers. This framework is highlighted by stringent
and appropriate supervision, by strong enforcement powers, and
by a structure of laws and regulations that mitigate the
consequences of the hypothetical and unproven evils raised by
the opponents of commercial ownership of industrial banks.
I testified on this issue last year and don't intend to
repeat my testimony. Since that time, we've endured a lengthy
moratorium by the FDIC and a long comment period where the FDIC
sought guidance on how to deal with this important issue. There
were thousands of comments, most in opposition.
It is important to recognize, however, that nothing, no
event, no failure, no fact, lends any substance to the
allegation of the great dangers to our economy that would
result from commercial ownership of industrial banks. Indeed,
all we have is speculation.
There are three main allegations. First, that there is some
gap in our supervisory framework that poses danger to our
economy and banking system. Second, that if commercial
companies are allowed to own industrial banks, rampant tying or
other unseemly activities would occur and the FDIC couldn't
stop them. And, third, there is something fundamentally un-
American and dangerous about mixing banking and commerce. I
respectfully submit that these allegations are not true.
First, industrial banks are subject to the same
comprehensive framework of supervision and examination as
normal commercial banks. They have no special powers, no
special authorities, and are exempt from no statute or
regulation. They comply with 23A and B, regulation O, capital
requirements, prompt corrective action, anti-tying provisions,
and the Community Reinvestment Act.
Second, the FDIC has been given full and ample authority to
supervise and regulate these institutions and can exercise the
full range of enforcement powers. I was a participant in the
political process that led to a rewrite of these provisions in
1989 as part of FIRREA and it was our intention to give the
FDIC and the other regulators all the enforcement powers they
needed, which they exercised.
Third, I can attest from experience that the FDIC does
exercise these powers. It requires an independent board,
adequate capital, safe and sound operations, and effective
internal audit. It examines, it scrutinizes, and it exercises
its powers to protect our system.
And finally, the FDIC's experienced with industrial banks,
similar to the experience of the OTS with respect to
diversified owners of savings associations, belies any
fundamental concerns to threats to our banking system. This is
a well-capitalized, well-managed segment of the industry,
making important contributions to consumers and small
businesses. The FDIC's experience has been good.
Finally, I want to address once more this myth of
separation in banking and commerce. The Gramm-Leach-Bliley Act,
to say that it was designed to make permanent that separation,
is to ignore important provisions of that Act. There have
always been affiliations and relationships between banking and
commercial firms. These relationships have been carefully
reviewed by Congress.
If we were serious about eliminating it, we would preclude
our banks from being affiliated with any entity. We wouldn't
let Bank of America be affiliated with Bank of America
securities, lest it favor its customers over those of Merrill
Lynch. We would more closely scrutinize the propriety of a
small business owner, a real estate developer, a car dealer
owning a commercial bank in a small community, where sources of
credit are lax.
If we were really concerned, we would repeal the merchant
banking powers in Gramm-Leach-Bliley and repeal the FDIC's
power to grant commercial activity--permit commercial banks to
engage in commercial activities in FDICIA. It is anomalous at
best to be asserting that there is something wrong with a
commercial entity engaging in banking when we have opened the
door broadly and widely for banks to engage in and invest in
commercial activities.
I want to emphasize this last point. It is permissible
under current law for any one of a number of banking
organizations to use their powers granted under Gramm-Leach-
Bliley to acquire any commercial entity. This bill would
preclude any commercial entity from establishing a bank to
facilitate the needs of meeting its customers, regardless of
the size of the bank, the needs of its customers, or any other
factor that might benefit our economy or our communities.
I would submit that the breadth of our markets and the
strength of competition in our financial services industry has
served us well and submit that it would be unwise to roll back
the clock by taking steps to limit competition in this area.
Thank you very much.
[The prepared statement of Mr. Douglas can be found on page
87 of the appendix.]
The Chairman. Thank you, Mr. Douglas.
And next, Mr. Marc Lackritz, who is the chief executive
officer of SIFMA.
STATEMENT OF MARC E. LACKRITZ, CHIEF EXECUTIVE OFFICER,
SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION
Mr. Lackritz. Thank you, Mr. Chairman. I appreciate the
opportunity to testify today before the committee, because the
SIFMA members own a vast majority of the industrial bank assets
in the United States. And as you know, Mr. Chairman, Congress
passed Gramm-Leach-Bliley back in 1999 to allow affiliations
between and among securities firms, banks, and insurance
companies, combined with functional regulation.
This ability to structure their operations optimally within
existing law has really been critical to the success of
industrial banks and their owners. Many of these companies are
among the most advanced, sophisticated, and competent providers
of financial services anywhere. And we support the ability of
regulated securities firms to continue to own industrial banks
the way they do under existing law.
Federally insured industrial banks are subject to State
banking supervision, FDIC oversight, and all the banking laws
that govern relevant banking activities. Most importantly, the
FDIC has the authority to examine the affairs of any affiliate
of any depository institution, including its parent company.
The FDIC's regulation of industrial banks has proven safe
and effective. Industrial banks do not pose any greater safety
and soundness risks than any other charter types and should not
be subject to additional constraints beyond those imposed on
other FDIC insured institutions.
H.R. 698 would create a new holding company regime for the
owners of industrial banks by expanding the existing authority
of the FDIC over the owners of these institutions. Bank and
thrift holding companies that own industrial banks would be
exempted from this regime, presumably because they are already
subject to holding company oversight by the Fed or the Office
of Thrift Supervision. However, the bill fails to provide an
exemption for industrial bank owners who are regulated as
consolidated, supervised entities by the SEC.
We believe it is critical that H.R. 698 be amended to
recognize the SEC's CSE regime. The Commission established its
CSE framework in 2004 in part to allow major securities firms
doing business in the European Union to comply with its
financial conglomerates directive. That directive requires that
non-European firms doing business in Europe demonstrate that
they are subject to a form of consolidated supervision by their
home regulator that is equivalent to that required of their
European counterparts.
The GAO found in its recently released report on CSEs that
the Federal Reserve, OTS, and the SEC were generally meeting
criteria for comprehensive consolidated supervision. We agree
that the CSE regime is both robust and comprehensive.
Importantly, the Commission's CSE oversight, just like the
Federal Reserve's oversight of bank holding companies, meets
the EU's equivalency standard. In addition, the SEC's
consolidated regulation standards closely parallel the Fed's
standards to assess whether a foreign regulatory regime
qualifies as consolidated regulation for a foreign bank
operating in the United States.
We therefore strongly urge the committee, Mr. Chairman, to
recognize the SEC as a consolidated regulator along with the
Federal Reserve and the OTS in H.R. 698. The SEC is recognized
worldwide as a consolidated regulator and its regulatory
requirements and procedures were very carefully designed to
comply with all standards for effective consolidated regulation
in the United States and abroad. That stature should be
reflected in this bill, in order to ensure that global
securities firms are not damaged inadvertently.
Over the last 2 decades, capital markets and the financial
services industry have become truly global, integrated, and
interconnected. As capital markets and financial products
continue to evolve, so too must our Nation's regulatory
structure. We need a regulatory regime that is capable of
keeping pace with rapid globalization, technological
transformations, and dynamic market changes. That is why our
new board of directors unanimously agreed that we will develop
a long term strategy of seeking to modernize financial services
regulation and deal with inconsistencies in the current
regulatory system.
We look forward to working with financial market
participants, regulators, and legislators, and you, Mr.
Chairman, to ensure that our financial services industry
retains its preeminent status in the world. Thank you very
much, Mr. Chairman.
[The prepared statement of Mr. Lackritz can be found on
page 138 of the appendix.]
The Chairman. Thank you. And next is Mr. Thomas Stevens,
who is the immediate past president of the National Association
of Realtors.
STATEMENT OF THOMAS M. STEVENS, IMMEDIATE PAST PRESIDENT OF THE
NATIONAL ASSOCIATION OF REALTORS
Mr. Stevens. Thank you, Mr. Chairman, and committee
members. Thanks for allowing us to do the soft shoe there.
My name is Tom Stevens. As the 2007 immediate past
president of the National Association of Realtors, and former
president of Coldwell Banker Stevens, I am here today on behalf
of the more than 1.3 million Realtors who work in all fields of
commercial and residential real estate.
The National Association of Realtors wholeheartedly
supports H.R. 698 as it closes a loophole that allows
commercial companies such as Home Depot to own state-chartered,
federally insured banks. Perhaps more importantly, the
Industrial Bank Holding Company Act of 2007 would restore one
of our Nation's most fundamental economic principles, the
separation of banking and commerce.
I also thank Representative Gillmor for his dedication to
pursuing a legislative solution to this important issue, which
was raised more than 4 years ago.
Let me be clear. Realtors have long supported the national
policy against the mixing of banking and commerce. We oppose
any efforts to weaken this policy, either by allowing
commercial firms to engage in banking, or by permitting large
national banks to engage in commercial activities, such as real
estate brokerage and management.
Realtors believe banking and commerce should remain
separate for three key reasons. First, we strongly believe that
allowing commercial firms to engage in banking would create
inherent and irreconcilable conflicts of interest.
Second, Realtors believe that giving large commercial firms
the benefits associated with owning a federally insured bank
would stifle competition in the marketplace. For example, if an
ILC owned by a commercial firm provided loans on more favorable
terms to suppliers or customers of its parent, it could put
other commercial firms at a disadvantage. Likewise, allowing
national banks to engage in commercial activities such as real
estate would stifle competition from nonbank firms that do not
share such benefits.
Third, we believe that mixing banking and commerce poses
substantial risks to the financial system. Over the last few
years, regulators at the Federal Reserve, the OCC, and the FDIC
have considered giving banks the green light to engage in
commercial activities. We believe such activities markedly
increase the risk exposure of national banks and could threaten
the safety and soundness of the entire banking system.
Banks should be in the business of banking, not selling
cars, home improvement supplies, or real estate brokerage. When
banking activities and commercial activities and commercial
activities mix, it can be a recipe for disaster, bad for the
economy, bad for businesses, and bad for consumers.
Realtors applaud Representative Gillmor and Chairman Frank
for taking the lead in this important issue. And we urge the
House Financial Services Committee to pass H.R. 698, the
Industrial Bank Holding Company Act of 2007.
We also encourage Congress to pass H.R. 111, the Community
Choice in Real Estate Act, which would similarly prevent large
banks from entering the real estate business.
And I want to thank you for your time and would be more
than happy to answer any questions.
[The prepared statement of Mr. Stevens can be found on page
200 of the appendix.]
The Chairman. Thank you, Mr. Stevens.
I am not, myself, going to ask questions. I want to assure
the panel it is not for lack of interest in what they say. Some
of us have been working on this for some time. There are newer
members who have concerns. I think we have had some serious
conversations.
So with that, I am going to turn to the gentleman from
Illinois, Mr. Manzullo.
Mr. Manzullo. Thank you. I--maybe the arguments here should
be centered not on safety and soundness which, Mr. Douglas, you
were talking about and Mr. Ghiglieri, among others. The issue
here is how big are you going to get before you smash the
little guys?
Mr. Ghiglieri, do you want to take a stab at that question?
Isn't that the issue?
Mr. Ghiglieri. This is not an issue of competition. We are
not and never have been afraid of competition. We compete with
every financial services provider out there, from the big banks
to the ILCs to credit unions to payday lenders.
This is really about two issues, and that is maintaining
the separation of banking and commerce, and providing a
consolidated regulator at the holding company level for ILCs.
But it is not about competition; we are not afraid of
competition.
Mr. Manzullo. Okay. Some have called this the bank of Wal-
Mart. And some of the bankers that I have talked to have
expressed a concern that when you get commerce on that level,
that indeed will hurt competition, or if not competition, the
ability to discern on the type of loan that should be given.
Anybody want to take a stab at that?
Mr. McVicker. It is really not about competition; it is
about the issue that has been addressed from numerous panelists
and the concern there is some safety and soundness risk, we
believe, to the industry and to the FDIC fund.
What Wal-Mart would be doing if they were approved remains
to be seen. But our position was the same before Wal-Mart filed
their application and remains the same after it has been
withdrawn. And that is the concerns, the safety and soundness
both of the regulatory system and the deposit insurance fund.
Mr. Manzullo. Mr. Douglas?
Mr. Douglas. I would say that if we're concerned about
threats to the deposit insurance fund, there is certainly no
evidence that industrial banks pose that threat. And if we look
historically back the same 20-year period we've been looking at
for commercial banks, one would say that consolidated
supervision might pose a greater threat to our safety and
soundness than an industrial bank.
Virtually every financial institution that has failed in
the last 20 years has been subject to consolidated supervision.
The point is not that the Fed is a bad regulator or that the
FDIC is a better regulator. The point here with industrial
banks is that the FDIC and the States with their bank centric
level of supervision has proven to be a pretty effective way of
protecting our financial system.
Mr. Manzullo. Do you agree with that Mr. Ghiglieri?
Mr. Ghiglieri. Yes. I just think that it is a mistake to
look backwards at the ILC industry and say that the system is
necessarily sound because there have been no failures. I think
we can all shudder to think what would have happened if
WorldCom or Enron would have had an ILC. Or, going forward, if
the ILC industry continues to expand like I think all of us
think would happen. And I think that is where the threat to the
deposit insurance comes in.
Mr. Manzullo. Give us the worst possible scenario, if ILCs
were allowed. I mean, it is obvious that you oppose them.
Obviously, you oppose them.
Mr. Ghiglieri. Well, I think you can look at the Japanese
or the German model. In Japan, I remember as a young banker
back in the 1970's listening to expert after expert and report
after report talking about this wonderful Japanese economic
model in this, you know, incredible Japanese banking model that
was really built on commercial firms owning banks. It was
projected to be the greatest economy the world would ever know
and they were going to come to the United States and buy New
York City brick-by-brick.
And as we reflect back on that model, I think we can all
agree that it has been a complete disaster. They've been stuck
in a 20-year recession and really have no hope of getting out
of it. The banking system is, in effect, insolvent. And I
just--I can't imagine that is the system that we want for this
industry that I love and am so passionate about.
Mr. Manzullo. What is the difference between an independent
bank having a presence in a Wal-Mart store and, for example,
the Wal-Mart store owning the bank itself?
Mr. Ghiglieri. In a concept like that, it is--you know, a
lot of us have members that lease out space in Wal-Mart--it
doesn't have to be Wal-Mart, it is a grocery store. There are
all kinds of those operations. But those are just strictly bank
branches. They lease out space and they sell their products and
services. So it is much different than those commercial firms
owning those branches.
Mr. Manzullo. Mr. Douglas? I am trying to get a fight going
here, but you guys won't put the gloves on.
Mr. Douglas. Well, the truth of the matter is, Wal-Mart is
attempting to meet the needs of its customers, were Wal-Mart to
do this, the same way a commercial bank is trying to meet the
needs of its customers, by finding locations where people can
access products and services in a way that is convenient to
them.
One might say that one is better or worse than the other,
but they are both subject to the same framework of laws and
regulations. I find no fundamental unfairness or difference
associated with one over the other.
Mr. Manzullo. Mr. Lackritz?
Mr. Lackritz. I would just say that I think the challenge
you have is, and I think someone said it earlier on the earlier
panel, that this thing, it is getting big and business is
getting larger daily and moving at a faster pace. And I think
the challenge you have is when you have a Wal-Mart that now
owns a bank and you have conflicting interests, everything is
great when things are going along well. You know, so was the
real estate industry last year when things were going along
well, and now there are challenges. And then the little things,
subprime lending, those kinds of things start to crop up.
But when you start to have that major corporation have some
challenges and conflict, then there is a conflict with its
subsidiary company or the bank that it owns, and you could have
diverse decisions being made or decisions being made that
aren't in the best interests of the bank or the bank's
customers, versus the consumer of the goods out there.
So I think it is an inherent conflict that you face.
Mr. Manzullo. Thank you.
The Chairman. I am going to recognize Mr. Matheson. I would
just say that, in response to what Mr. Douglas said, the
difference to me is in the incentives to which the economic
entity responds, and that is the question, whether or not the
incentive is that you make money off the loan and also off the
product that is going to be bought with the loan and the extent
to which that is going to alter that decision. That is the
difference. And obviously, people keep talking about Wal-Mart,
and it is true that Wal-Mart has withdrawn its application, but
that does not change our view.
I would note, however, in legal terms, Wal-Mart has
withdrawn its application without prejudice. I think it is very
clear that the reason Wal-Mart withdrew its application is that
friends of the ILC industry said to Wal-Mart, will you please
stop screwing up our industry because you are making everybody
mad and would you go away. And they have withdrawn but they
have not disappeared. And if we were, in fact, I think, finally
to announce that there would be no such legislation and no
moratorium, Wal-Mart would have every right in the world to
come back in again.
Mr. Matheson.
Mr. Matheson. Thank you, Mr. Chairman.
I just wanted to clear up one issue that came up in the
subcommittee hearing last year as well, and that was comparing
the Japanese model to ILC regulation. And I asked the panel of
regulators in the subcommittee hearing last year if it's
comparable and they said, no. So it is not exactly the same
type of regulation. Would you agree with that, Mr. Ghiglieri?
Mr. Ghiglieri. That may be the case. I mean, I am not a
regulator.
One thing that I do take issue with is this concept that
ILCs and all of the rest of us are regulated the same way. We
are regulated the same way at the bank level. But we have
tremendous regulation at the holding company level and for a
bank our size, it is a tremendous cost.
Mr. Matheson. I think everyone stipulates to that, that
there is a different model of regulation. It is called bottom-
up for ILCs; it is top-down for other banks. And again, I don't
think anybody on this committee disagrees with that. The
question is, is one right and one wrong, or is there more than
one right way to do something? And I think you know where I am
coming from on that.
But I think it is just important that we note the ILC model
and the way we regulate in this country, I would not say that
is the Japanese model. I just think we ought to have that for
the record.
You mentioned in your written testimony and your verbal
comments, Mr. Ghiglieri, imagine if WorldCom and Enron had
banks. And I would submit that instead of coming up with
imaginary scenarios that sound pretty bad, let us look at the
real scenario of when Tyco and Conseco had banks, as Mr. Leary
mentioned in the previous panel. Are you familiar with that
experience, where the parent companies had financial
difficulties, one went into bankruptcy, and in both cases the
ILC was separated from all those financial troubles? Actually,
one sold as a premium after the fact?
Mr. Ghiglieri. Yes.
Mr. Matheson. Okay, so that's a real world example,
compared to imagining scenarios. And I think that's important
to point out, that the bottom-up regulation worked in those
circumstances.
Are you familiar with regulations 23A and 23B?
Mr. Ghiglieri. Yes, I am.
Mr. Matheson. Because in your testimony where you talk
about how Home Depot may pressure people and that, do you
recognize that would be a violation of existing law?
Mr. Ghiglieri. Correct.
Mr. Matheson. Okay. I just wanted to confirm that.
Mr. Ghiglieri. And if I could just add to that? I think it
is one thing to have a corporate decision that there would be
no violation of 23A. But, you know, I think when you get down
to the store level, when you get an entity that has thousands
of stores, and you have people within those stores who are paid
on the volume of transactions that are processed, I think it is
natural, and I am very dubious about the fact that they would
comply with that. And there has to be someone who complains in
order to have the issue raised.
Mr. Matheson. I understand your concern.
Mr. Ghiglieri. But you do acknowledge that the way you
describe it would be in violation of law, what is in your
testimony?
Mr. Matheson. I want to make sure of that.
Just one quick observation for Mr. Connelly and Mr.
Ghiglieri. I have been in this job now for 6 years and 4 months
and I have had Utah community bankers come and meet with me on
a periodic basis. Not one has ever mentioned the ILC issue.
They live in the State where ILCs are based, we have all heard
that. And they have never expressed concern to me.
I am sure you can probably find somebody in your membership
who has written me a letter. That may be. I am just saying, in
my face-to-face meetings, they are far more concerned about
issues--and I am not getting into this issue, Mr. Chairman--
they are far more concerned about credit unions and whatnot
than they are--
The Chairman. If the gentleman would yield, we are very
glad to accommodate the gentleman. But to have left the
committee and then introduce the credit union issue is
certainly a violation of the norm of--
Mr. Matheson. That is the benefit of leaving the committee,
Mr. Chairman.
The Chairman. The gentleman, I assume, would like to be
welcomed back?
Mr. Matheson. I am done. And I just again want to
reiterate, thank you for your generosity in letting me
participate today, Mr. Frank.
The Chairman. I am just going to recognize myself for 1
minute, just to make a comment on the point we talked about,
and it has to do with conflict of interest laws. And this is,
in effect, the distinction between banking and commerce is a
variant of a conflict of interest law.
You do not pass conflict of interest laws to prohibit bad
things. You pass substantive laws to prohibit bad things. The
reason for laws prohibiting conflict of interest is that you
want to reduce the number of occasions in which the temptation
to do those things arises, in which incentives to violate the
substantive laws are magnified, and in which the difficulty of
enforcing the substantive law becomes more--greater. In other
words, conflict of interest laws are to prevent you from--they
are anti-temptation laws; they are not anti-act laws.
Now that may or may not be right in this case, but that is
the framework. So the fact that there are substantive laws that
prevent things doesn't, in a number of other areas, tell us not
to pass laws that diminish the incentive and opportunity for
those things to happen.
I thank the panel, I thank the members, and the hearing is
concluded.
[Whereupon, at 12:46 p.m., the hearing was adjourned.]
A P P E N D I X
April 25, 2007
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