aries. And now the Comptroller has apparently decided that the sale of insurance by national banks should not be subject to traditional State insurance and consumer protection regulation, and he is threatening to preempt the State insurance regulators. We have the czar of czars. This is a territorial battle.

The default of Congress on its responsibility to modernize the financial system has apparently emboldened the Comptroller to take the reins of reform into his own hands. I regard these attacks on the well-established and historic primacy of State insurance regulators and the dual banking system to be the most extreme example of the OCC's attempts to seize control of regulatory power at the expense of sound public policy and State and Federal legislators and regulators.

I see an unwholesome and dangerous rivalry-Senator Bryan has alluded to that-developing between bank regulators, the Fed, and the OCC. That is a fact. They are like two kids out of control. This is much more important than who is going to win a particular race. I have to deviate from my speech and say that Senator Bryan is absolutely right. Where is your balance? You have tilted this whole thing. There are no even competitive forces of the kind that we want to see.

Now as we have learned from the S&L crisis in the 1980's, good judgment can get clouded when regulators act like cheerleaders for their constituents. Congress created the OCC to regulate the institutions it charters, not to be an advocate or a marketer for the charter to institutions outside its jurisdiction or to establish some competitive equilibrium for these institutions.

Mr. Chairman, normally the regulators are entitled to great deference, especially our financial regulators, and they usually receive it from Congress and the courts. But, in my view, a pattern has been established by the Comptroller of the Currency which makes the presumption of deference inoperative. He has displayed a clear disregard for the limits of his authority, for other State and Federal regulators, and for Congress. We should not sit idly by while the Comptroller of the Currency attempts to unilaterally redesign the financial system and alter the State and Federal regulatory framework established by Congress over the years.

Above all, I am deeply troubled and concerned that the Comptroller of the Currency's aggressive actions may, once again, subject Federally-insured banks to excessive risks and expose the Bank Insurance Fund, and therefore the taxpayers, to unnecessary liability. Congress should never forget the lessons of the savings and loan debacle in the late 1980's.

Mr. Chairman, it is my hope that this Congress will pass a comprehensive financial services bill, and the Comptroller's actions should be considered in that context. At the same time, I believe that the Comptroller's conduct requires legislation to strengthen the dual banking system and to fortify and codify the principle of functional regulation, which I think Mr. Ludwig is attempting to destroy. That functional regulation should be both at the Federal and State levels. And it is for this reason that I will be introducing the "Financial Products Regulatory Improvement Act of 1997."

I am in the process now of submitting this legislative proposal to my colleagues for review, both Democrats and Republicans. The

bill implements a system of a functional regulation. Simply put, under this system-let me give you an example: The SEC will regulate securities activities, not bank regulators; bank regulators will regulate bank products and activities; and State insurance regulators will regulate insurance activities.

In addition, I want to assure my colleagues that the Committee is working closely with our colleagues in the House to preserve the dual banking system by achieving enactment of this legislation by June 1, to remove the disincentive for State chartered banks to branch interstate.

We are not going to have a czar who says you are going to come here and we will give you powers. And if you have a State check, we are going to stop you and put you out of business.

I just think you have gone too far. June 1 is the trigger date for the National Interstate Banking bill. This bill is moving through the House and we will act immediately upon its arrival. I have indicated that to our colleagues in the House, both Democrats and Republicans.

Mr. Chairman, I thank you, and I beg the indulgence of my colleagues here for having extended my remarks. I think that this is important. I think that we have a crisis in the making, and I want to see to it that we avert it, and that we exercise our prerogatives, which are important and should be exercised.

Maybe we owe a debt to the Comptroller for moving in such a manner, and that we will wake up, put aside some of the minor differences that we have, and see to it that we exercise our legislative responsibility.

Thank you, Mr. Chairman.

Senator FAIRCLOTH. Thank you, Mr. Chairman.

Senator Allard.

OPENING STATEMENT OF SENATOR WAYNE ALLARD Senator ALLARD. Thank you, Mr. Chairman.

I would like to thank you for holding this Subcommittee hearing to review this very important issue.

I ordinarily do not go into the fundamentals of this Government and whatnot, but I think that at a time like this, we ought to remind ourselves that basically we are a representative democracy. Whether we like it or not, we were set up with certain powers delegated to the Judicial branch, and certain powers delegated to the Legislative branch, and certain powers delegated to the Executive branch.

Our forefathers, I think, had in mind that it is Congress' responsibility to pass and make new laws, and that it was the Executive branch's responsibility to enforce what we do pass, and to make sure that you do not go beyond that, that you stay within the parameters of that legislation. I think that we have a disturbing trend with the Executive branch now to go and bypass Congress. Maybe it is frustration because we are deliberating these issues more than they think that we should. But the fact remains that whether we like it or not, that is fundamentally what our forefathers had in mind when they established the Constitution.

I get disturbed with this attitude of, well, we will go ahead and pass the rules and regulations and then if Congress does not like

it, then they can go ahead and pass laws to keep us from doing that. That shifts the burden. The burden should be, first of all, passing the law. The burden should not be getting the law off the books because of some Executive action.

So today, I am interested in continuing my study of whether the recent actions by the OCC with regard to granting national banks additional powers related to insurance sales and any additional activities that may be allowed under the provisions of Part 5 are permissible by current law. As such, I will be anxious to hear what you, Mr. Ludwig, have to say is your function and role under the Glass-Steagall provisions of the Bank Holding Company Act and the Federal Reserve Act. I am looking forward to your comments on this issue.

Thank you, Mr. Chairman.

Senator FAIRCLOTH. Thank you, Senator Allard.

Senator Enzi.

OPENING STATEMENT OF SENATOR MICHAEL B. ENZI Senator ENZI. Thank you, Mr. Chairman.

I also appreciate that you are holding this hearing. I would ask unanimous consent that my entire remarks be a part of the record. A lot of my remarks reiterate things that have already been said before. I do appreciate Mr. Ludwig being here this morning and representing the Office.

This is a little different kind of a hearing than I have been a part of since I have been in the Senate. I almost feel like Mr. Ludwig ought to be able to ask us some clarifying questions after we do our presentations.

The message that we are giving is kind of as though we were a unified panel, all saying the same sort of thing, and we might feel that he has some clarification that he needs in a few small areas.

But I would add to the remarks that I am very concerned about States' rights, particular in the insurance area. I hope that the Federal Government does not build a bureaucracy now within the Office of the Comptroller of the Currency to regulate insurance. I do not think it is necessary; I do not think it is proper. I hope that we will continue to allow that to be done on the local level.

As an accountant, sometimes my vision of a possible purgatory is having to do a cost comparison between different insurance proposals and have to sit down with insurance agents for hour after hour to listen to the little minute differences they have in what they are trying to do. It is probably what ought to be wished on us accountants.

I hope that we do not build a bureaucracy that has the capability of doing that sort of thing. We have a country that is very diverse. It has different needs, and obviously insurance has evolved along the lines of looking at insurance from a State aspect.

I am also concerned about some of the infringement on Congressional legislation. Quite frankly, in the case of a lot of agencies, I would prefer that the ideas that they have be brought to us for legislation, rather than put into rules and regulations and then see if it fits within our regulation.

Thank you, Mr. Chairman. I yield back the balance of my time. Senator FAIRCLOTH. Senator Shelby.

OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

Senator SHELBY. Thank you, Mr. Chairman.

I, too, want to commend you for calling this hearing. I believe it is very timely because of what has been going on. I believe, Mr. Chairman, that fair and open exchange on Title XII, the Code of Federal Regulations, Part 5, is very appropriate, given all the interest in financial modernization.

Mr. Chairman, I must share my concern that unilateral action by a single regulator is not the proper way, I believe, to address the issue of modernization. Indeed, if the OCC would put as much effort into assisting the Treasury Department in a comprehensive proposal as it has in the Part 5 review project, we would not be having a hearing on full-fledged modernization today-we would be having a hearing on that instead of just Part 5.

At this time it appears that the actions of the OCC, headed by you, Mr. Ludwig, are undermining in a big way legislative efforts to address modernization which many of us here, including Chairman D'Amato, have talked about.

I do not believe that it is helpful that one of the first applications under Part 5 is from Nations Bank who wishes to engage in residential real estate development, which, as has been said here, is a chilling reminder of the risky real estate activities of the savings and loans in the 1980's that cost the American taxpayers billions and billions of dollars. A lot of us sat on this Committee on many occasions as the numerous bailouts proceeded and the taxpayers took a major hit.

We should be very, very careful in that regard, and I do not believe your leadership has been careful. Interested parties should take note, and I bet they have, of the far-reaching proposal here. The process of modernization has been set back by these kinds of actions, not only because of the application but also the OCC's willingness to entertain something that I believe is, Mr. Comptroller, completely prohibited under the Bank Holding Company Act. It seems that the underwriting and dealing in municipal revenue bonds would have been a much more prudent first step here, not getting into real estate, a risky business as we all know. Indeed, under Section 20, subsidiaries are already allowed to do this and have done so with a lot of success.

I believe the risks, Mr. Comptroller, that NationsBank poses to the process-that their extreme proposal seems to be causing a backlash among many Members in Congress who have not forgotten the savings and loan problem. It was a real catastrophe.

By trying to run around us in Congress, actions like that of NationsBank, I believe, jeopardize the future of financial modernization and what Congress is willing to do in order to prepare for the 21st century.

Instead of working with Congress to alleviate some concerns and move a bill, some have chosen-and it seems that you are in the lead-not to work with Congress and create even more concerns.

I believe we all agree that financial modernization is necessary, but it should come from here and not from you.

Thank you, Mr. Chairman.

Senator FAIRCLOTH. Thank you, Senator Shelby.
Senator Grams.

OPENING STATEMENT OF SENATOR ROD GRAMS

Senator GRAMS. Thank you very much, Mr. Chairman.

Mr. Ludwig, welcome to the Subcommittee.

Mr. Chairman, I want to thank you for holding this hearing. I will just talk a little bit about the OCC. Some of the details are a little boring, but if you give me a couple of minutes I would like to go through them.

Today's hearing is to review the OCC's new Op Sub regulation that became effective in January of this year. This regulation permits a national bank to apply to the OCC to establish an operating subsidiary to engage in activities that a national bank is currently not permitted to do. While the Op Sub regulation does not state which new activities will be permitted, it does specifically intend for Op Subs of banks to conduct new activities as both agent and principal.

Agent activities that are currently prohibited for national banks include travel brokerage, real estate brokerage, and unrestricted full-service insurance brokerage. The prohibited principal activities include the underwriting of municipal revenue bonds, corporate securities, insurance underwriting, real estate development, and merchant banking.

It is clear to me that the OCC has created this regulation for the purpose of permitting operating subsidiaries of banks to get into at least some of these prohibited activities. It should be noted that the OCC's plan to permit banks to conduct expanded activities through subsidiaries is not without precedent.

First, quite a few States currently permit their subsidiaries of their State chartered banks to conduct expanded activities. To date, I think there are 20 States that have permitted their banks to do real estate development; 8 States that have permitted them to do insurance underwriting; and 13 States that have permitted them to do real estate brokerage.

Furthermore, Federal thrifts are currently permitted to conduct real estate development and unrestricted full-service insurance brokerage through subsidiaries that are called service corporations.

Finally, the subsidiaries of U.S. banks operating abroad are currently permitted to engage in unrestricted securities underwriting and insurance underwriting activities.

As the FDIC has determined that the subsidiaries of depository institutions in these instances do not raise safety and soundness concerns, I do not believe that conducting expanded activities through a subsidiary of a bank is, in itself, any riskier than conducting such activities through an affiliate of the bank.

I think the real issue before us today is whether the firewalls that the OCC has set up between the bank and its operating subsidiaries are adequate to buffer the bank from risk, and then also to prevent the insured deposits of the bank from artificially being able to subsidize the activities of its nonbank subsidiary.

The OCC creates a two-tiered firewall structure where operating subsidiaries conducting underwriting activities are subject to more firewalls than those conducting agency activities. I am concerned that the Op Sub regulation in its current form has inadequate firewalls in the instances when the operating subsidiary conducts an agency activity.