Financial Update (April-June 1997)
Treasury Official Urges Modernizing Financial System Laws
he laws that govern the U.S. financial system are outmoded, and it is time to bring those laws "into line with reality," said John D. Hawke Jr., U.S. Treasury Undersecretary for Domestic Finance, addressing a group of business and civic leaders recently at the Atlanta Fed.
Hawke is optimistic that there will be legislation enacted to update the financial services industry, if not this year, then in the term of the current Congress. The past 10 years of U.S. economic history have been noteworthy, Hawke said, because of the failure of the savings and loan system (whose bailout ultimately cost taxpayers $150 billion), the record number of bank failures, and the sharp acceleration in the rate of bank consolidations.
John D. Hawke Jr.
U.S. Treasury Undersecretary for Domestic Finance
"Partly because consolidation has continued," he stated, "it is possible to predict with more accuracy what the structure of our banking systems will be like as we enter the 21st century."
The previous 10 years also saw increased homogenization of financial institutions, Hawke said. Rapid changes that have been introduced include a host of new financial products, technological innovations, and new methods of supervising and regulating financial institutions.
All of these changes, Hawke believes, mean that it is time to look at the legislative structure that governs the financial services industry in the United States. Financial activities are governed largely by the Glass-Steagall Act of 1933 and the Bank Holding Company Act, both passed during the Great Depression. Two more recent laws—the Federal Deposit Insurance Corporation Improvement Act, passed in 1991, and the Economic Growth and Regulatory Paper Reduction Act of 1996—were heavily influenced by the failure of the savings and loan industry.
The recent legislation requires that the insurance funds for banks and savings and loans—the Bank Insurance Fund and the Savings Association Insurance Fund—be merged into one fund, Hawke noted. And Sen. Bill Frist's, R-Tenn., amendment to last year's legislation essentially requires as a precondition to the merger of the funds that the thrift charter be eliminated.
This process of merging the two insurance funds, Hawke stated, "will convert the thrift industry into a component of the banking industry over a few years by eliminating the federal thrift charter and merging the Office of Thrift Supervision with the Office of the Comptroller of the Currency—and then merging the two insurance funds."
Once the merger is accomplished, the question remains of what to do with the disparity in powers between the two types of institutions—thrifts and banks—and the powers of the bank holding companies, Hawke noted.
"There has been a fundamental schizophrenia in the regulation of depository institutions at the holding company level," he continued. "Ever since 1970, a company that owns a bank has been severely limited in the nonbanking activities that it can engage in; yet ever since thrifts have existed, any company can own a thrift, no matter what its activities are.
"How do we rationalize that," Hawke queried, "in a way that doesn't take anything away from the thrift charter but that doesn't bring down a political hailstorm as we try to deal with the issue of bank holding company powers?
"Our basic objective is to break down the barriers that limit competition among financial services firms," Hawke stated. "That means allowing banks into the insurance and securities business and allowing insurance and securities firms to affiliate with banks. In order to do that, we have to take account of the fact that many of the insurance and securities firms have activities that are not financial—either investment activities or business activities that they're in for one reason or another that conventionally would not be thought to be financial."
Such prohibitions have long been part of the fabric of bank supervision and regulation in the United States. Some people believe that "we shouldn't breach that wall at all," Hawke stated. "As a matter of fact, that is not true."
Hawke believes that there is a way to accommodate the diversified financial services firms who have some degree of nonbanking, nonfinancial activities. These are the groups, he said, that we want to bring onto a common playing field with conventional depository institutions using a two-way-street approach to affiliations.
Without satisfying those needs, Hawke stated, "there simply isn't going to be any legislation; and those who say that we shouldn't have any breach in the wall that separates banking and commerce are essentially saying they want the status quo and don't want to see any change at all that works towards a more competitive, more efficient system of financial services."
Hawke concluded by saying that the current alignment of the securities, insurance and bank and thrift industries on this issue is unprecedented. If the alliance holds together, Hawke believes that there will be much congressional support for what he terms reasonable legislation—laws that will "bring the system into the 21st century, with a capacity to deal with the problems of the future effectively, and . . . bring the benefits of competition to all the users of the system."