Statements to Congress - Transcript

Federal Reserve Bulletin, Sept, 1997

But the fact is that we do not -- and the Board's view is that we need not -- have to make today as sweeping a banking and commerce decision as the Competition Act proposes. That bill would permit both banks and nonfinancial corporations each to originate up to 15 percent of their revenue from the other's activities. While there is some limit on the original size of each nonfinancial firm acquired by a bank holding company and on the original size of the one bank that a nonfinancial company could purchase, the subsequent growth is only constrained by the 15 percent revenue limit. This constraint may be more apparent than real, given the ongoing growth and consolidation of the financial services industry. In our judgment, these baskets are far larger than what is needed either as a controlled experiment or to permit unfettered consolidation with banks of those financial firms that have commercial affiliates. Moreover, the Banking Committee bill would permit additional bank and commercial affiliations beyond these holding company affiliate baskets and permit some affiliation within the bank or a bank subsidiary. Any commercial (or financial) activity that had been authorized by the Office of Thrift Supervision for thrift institutions or by the Federal Reserve Board's regulation for overseas operations of U.S. banks would be permitted to banks in the United States by the Banking Committee bill. Thus, over and above the basket, U.S. banks could create subsidiaries that invest up to 3 percent of the bank's assets in the equity of OTS-approved commercial enterprises. In addition, applying the Board's foreign market rule to domestic operations would mean that banks themselves could invest in the equity of individual nonfinancial firms. The Board's foreign market rule, authorized by statute, was promulgated to assist U.S. banks to achieve a level playing field with their foreign competitors in foreign markets. We see no compelling need to apply that rule to U.S. banks' domestic operations. We are also concerned that the grandfather date for savings and loan holding companies continues to shift with the date of enactment of the bill, thereby encouraging an increase in the number of commercial firms that seek to affiliate with insured savings associations before new rules come into effect.

The Competition Act, in the Board's view, goes well beyond what both commercial banks and nonfinancial firms need to meet the requirements of today as well as in the foreseeable future. The Board believes it would be virtually impossible to reverse such a change in the legal framework without major damage to established business relationships. Thus, any errors from larger-than-needed initial authorizations could result in significant problems. Moreover, the authorization of commercial activities through banks and their subsidiaries directly extends the subsidy of the safety net over a much wider range of activities, not to mention potentially undermining the safety and soundness of insured banks.