OFFICE OF THE COMPTROLLER OF THE CURRENCY'S RECENT REGULATORY ACTIONS THURSDAY, MAY 1, 1997 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, REGULATORY RELIEF, The Subcommittee met at 10:05 a.m., in room SD-538 of the Dirksen Senate Office Building, Senator Lauch Faircloth (Chairman of the Subcommittee) presiding. OPENING STATEMENT OF SENATOR LAUCH FAIRCLOTH Senator FAIRCLOTH. The hearing will come to order. First, I want to thank the Comptroller of the Currency, Eugene Ludwig, for being with us today. I am also delighted to see the other Senators that have joined us, and especially our Chairman, Senator D'Amato. I called this hearing today because last November, the Office of the Comptroller of the Currency unveiled a major policy change known as "Part 5." This new proposal would allow banks to engage in a potentially new range of activities in a direct subsidiary of the bank. This represents a significant new step in financial modernization. I think it is the duty of Congress to take a close look at the Office of the Comptroller of the Currency's proposal. One thing is certain. Whether you agree or disagree with the OCC's proposal, Congress has not acted in this area and this has created a vacuum for the regulators. The OCC and the Federal Reserve have moved ahead with financial modernization because commercial banks have every right to be an integral part of the financial services system. If they had not acted, I do not think our banking system would be as strong as it is today. Let me outline just two concerns that I want to explore. First is to the safety and soundness of the deposit insurance fund and to the banking industry with the OCC's Part 5 proposal. New activity expansion through subsidiaries of banks and not the holding company is a new aspect of this proposal that has to be looked at carefully. Second, this concept of a level playing field for the sale of insurance, Senators have heard a lot about this issue on both sides. Banks clearly have the right to sell insurance. Now the debate has shifted to the right of a State to regulate the manner of those sales through the State insurance commissioner. (1) We do not want banks discriminated against by State insurance commissioners. We in Congress also have a right to keep a balance in the system so that one industry does not get an upper hand in the insurance sales business, and that we maintain a level playing field. This is an issue we have to explore today. I want to turn to our Ranking Member, Senator Bryan, for any statement he might have. OPENING STATEMENT OF SENATOR RICHARD H. BRYAN Senator BRYAN. Mr. Chairman, I appreciate that, but I would be pleased to defer to the Chairman of the Full Committee, Senator D'Amato, before speaking. The CHAIRMAN. Thank you. Please go ahead. Senator BRYAN. Thank you very much, Mr. Chairman. I appreciate your calling this hearing this morning, and I look forward to hearing the testimony of our distinguished witness. In recent years the OCC has undertaken a number of actions which are dramatically changing the way financial services will be delivered in this country, effectively letting banks and the insurance and securities industries, possibly into the real estate development business. It is very important that we understand the significance of these changes, and get a handle on where the Comptroller anticipates taking us in the future. From the outset, I must confess that my preference would have been for the financial services to remain much as it was, each particular function and expertise regulated by an individual regulator with expertise in the field of regulation for that particular industry. I freely acknowledge that that is no longer possible; the changes that have occurred in the marketplace make that impractical and the genie is out of the bottle, so to speak. Given that we have started down the road toward a financial supermarket method of providing financial services, my predisposition is that we should proceed cautiously. My preference would be that these changes be made by Congress, not unelected banking regulators. There is a growing perception that banking regulators are engaged in a competition with each other to see who can provide the most favorable charter terms. While the banks are availing themselves of this opportunity-and understandably so, and enjoying expanded powers-the insurance and securities industries have no such financial guardian angels. What we seem to have is a one-way street that benefits banks while the insurance and banking industries are largely handcuffed. This argues for a comprehensive approach to financial modernization, and I am eagerly awaiting the long-anticipated Treasury recommendations. I would add that I do not mean to imply any criticism of efforts to reduce unnecessary Government red tape and paperwork. I cannot think of another industry in America which has benefited as much from Congressional and Administrative efforts to reduce regulatory burdens on the banking industry. The Committee, under our Chairman, has taken a leading role. I am proud to have been part of those efforts. However, there is a distinction in my view between regulatory relief and expanded bank powers. While Congress has enacted legislation to grant regulatory relief, expanding bank powers has come about as a result of a series of legal interpretations. As a former Governor, one area that gives me particular concern is the preemption of State laws. I must say that I am somewhat mystified by the ability of unelected bank regulators to tell a State the laws or regulations it has enacted or promulgated cannot be enforced. Something seems to be wrong with this picture, in my view. Insurance has been regulated at the State level for decades, and by and large States have done a good job. In the wake of the Barnett decision, many States have either enacted or are considering enacting laws or regulations that would govern the manner in which banks would engage in the insurance business. These laws and regulations recognize that banks are in a unique position in the marketplace that could result in potential customer coercion, confusion, and privacy invasions. The OCC is considering preempting a recent Rhode Island law which includes provisions prohibiting banks and requiring or implying that the purchase of insurance products from a bank is related to receiving another banking product, a provision requiring separate applications for loans and insurance, and a provision limiting the ability of a bank to use its customer information to solicit and sell insurance. Although I do not profess any expertise in the area of regulation, I must say that these proposals strike me as being reasonable, well within the province of States trying to protect their citizens from any improper conduct or misleading activity. Finally, let me say that I am concerned that these piecemeal changes are creating competitive disparities. When a bank can own an insurance company or securities firm, but the reverse cannot happen, something is amiss. Comprehensive legislation is needed to ensure that we can move into the 21st century with a rational financial services regulatory system that allows all players to compete on a level playing field. I thank you, Mr. Chairman. Senator FAIRCLOTH. Thank you, Senator Bryan. Now, our Chairman of the Full Committee, Senator D'Amato. OPENING STATEMENT OF SENATOR ALFONSE M. D'AMATO The CHAIRMAN. Mr. Chairman, everyone traditionally says thank you for holding these hearings. It is customary. But I want to say that this Subcommittee hearing is something that is long overdue, that it is important for us to take a look and see what is happening and where we are going. I want to commend you for convening this hearing. I will make a lengthy statement. Generally I discard prepared text, but I think this is so important that I am going to stick to the script. I want to underscore Senator Bryan's statement, as he has addressed this situation. I do not want it to become a personal thing, but by virtue of the fact that you hold the position that you do, Comptroller Ludwig, and you acted in the manner that you have, it may appear to be that way. I address the Office and not the per son. I just want you to know that. I have the greatest respect for you individually. I want to emphasize that this is not personal. While the Subcommittee will probably cover many subjects, I want to focus in on the Comptroller's campaign to aggrandize and centralize regulatory power in his agency. It has been alluded to both by yourself and by the Ranking Member of the Subcommittee. These efforts are undermining the dual banking system. Mr. Comptroller, you know this. You are not a novice. These things are not taking place without your careful consideration. Your actions threaten the primacy of State insurance regulations and usurp the prerogatives of Congress. Here is just a partial list of the initiatives by the Office of the Comptroller of the Currency to illustrate some of my concerns, and, I think, the concerns that Senator Bryan, Senator Faircloth, and other Members of the Subcommittee have expressed. One, undermining the dual banking system by actively recruiting State chartered banks to convert to national bank charters. That is what you are doing. The OCC is undermining the dual banking system. I have heard from many colleagues and State banking regulators that the OCC has mounted an unprecedented-this is in their words, and we could give you facts and examples-aggressive marketing effort to convince State chartered banks to flip to a national charter. In addition, late last year, the Comptroller blocked a legislative effort in this Committee to fix a technical problem in the Riegle-Neal Interstate Banking Law that places the State chartered banks desiring to branch into other States at a distinct disadvantage to nationally chartered banks. Mr. Ludwig, that is not your role. Your role is not to try and destroy the ability of State chartered banks and regulators in other areas to do their job and usurp it. The Comptroller is effectively threatening the continuation of the historic and constructive dual banking system. Two, allowing bank operating subsidiaries unlimited powers. The Comptroller has adopted regulations to permit national banks to establish subsidiaries with the express intention of engaging in nonbanking activities-activities that are not permissible for a bank. The first application under these new rules is from a bank actively seeking to enter real estate development. Of all things, real estate development. As if we have not learned anything from the mistaken policies of the S&L regulators in the 1980's. The Comptroller will hear much more about these rules from this Congress, I certainly believe that to be the case. The Comptroller is deliberately consolidating power within his agency by first approving new powers for national banks and then asserting the authority to regulate such activities. Insurance may be the best example of the Comptroller's penchant for seizing jurisdiction without the approval of Congress. Three, preempting State insurance regulation. For example, the OCC has stretched the ability of the national banks to sell insurance far beyond the "small town" provision in the law. In addition, it has divined that certain insurance products are not "insurance" under the National Banking Act. More recently, the OCC has permitted a Missouri-State chartered bank to convert to a national bank and grandfather its interest in two insurance agency subsidi |