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Let me start by congratulating Women in Housing and Finance on reaching its 20th anniversary. I gather that this was celebrated with quite a magnificent gala two weeks ago. I was also pleased to see that among the outstanding women honored were Ellen Seidman and Julie Williams from Treasury. Your organization has contributed to making accomplishments like theirs possible.

I would like to take the opportunity today to talk about legislation that, if it is done right , could make an important contribution to strengthening our financial system for the 21 st century.

The American financial system is today stronger and more competitive than it has ever been and our financial institutions the most sophisticated and advanced in the world. The financial system serves like the central nervous system of the human body, ensuring that all the other parts of the system respond appropriately. We are fortunate that ours is functioning well.

There is, however, no cause for complacency. And as policymakers, we must keep our laws in sync with rapid changes occurring in the financial services industry: notably, the emergence of new instruments and new market actors; increasing globalization; and the growing trend toward greater consolidation, both within the financial services sector and across borders.

As we have watched financial trends at work around the world, we have learned the difficult balance that governments must strike in regulating their financial services system:

  • We have learned that financial systems work best when they are competitive and where market forces are channeled to produce greater choice and lower costs for consumers.


  • And they work least well when market participants are encouraged to maximize their access to governmental benefits, at the expense of their business and their customers.


Our challenge is much the same as that which other nations face. We must allow competition to work. In the context of the current legislative debate, that primarily means allowing common ownership of banking, securities and insurance firms.

The greatest benefit of the financial modernization bill now in conference would be the repeal of archaic restrictions in our current laws that prevent this and thereby prevent any one financial services firm from offering a full range of products. The walls created by these restrictions were sustainable when the banking, securities, and insurance industries were more static. In today's more fluid environment, those walls need to come down for financial services firms to serve their customers efficiently.

If it can be done without compromising other critical objectives, repeal of the common ownership restrictions of current law would be an important boost to our financial system. Our leadership of the world's financial markets would be enhanced. And consumers would see the benefits in the form of greater innovation and lower prices. For example, we estimate that every one percentage point decline in the costs of financial intermediation could save consumers $3.5 billion per year.

That is why we want a financial modernization bill to pass. But it must be the right bill. This will be the primary focus of my remarks today.

I. Key Aspects of the Current Financial Modernization Bills

We are at an important juncture in the life of financial modernization legislation. On the one hand, our experience with the House bill has taught us that by working together in a bipartisan manner, Congressional Democrats and Republicans and the Administration can produce legislation. On the other hand, the conference procedure announced last week -- with the bill to be written by three Committee chairmen and amended only with bicameral committee approval -- appears likely to lead to partisanship and division.

While we share the leadership's desire to see this legislation move forward, we think that any partisan approach will not ultimately serve our shared interest in passing a bill. We stand ready to work with all interested parties, as we have been doing with great vigor for some time. But we must all recognize that this highly complex legislation which many before us have tried and failed to achieve requires the participation of all the interested parties if it is to survive.

I want a financial modernization bill that the President can sign - and I believe such a bill can be produced only on a bipartisan basis. I remain hopeful that we can achieve such a bill -- and achieve it this year. That said, the President has made clear that there are some principles that he will not sacrifice in order to pass legislation.

In particular, he has stated the he would veto a bill that:


  • Prohibits banking organizations from choosing the structure that is right for them.



  • Erodes the relevance of the Community Reinvestment Act.



  • Fails to include adequate protections for consumers.



  • Or breaks down the walls separating banking and commerce.


Let me consider each of these four principles in greater detail.

1. Organizational Choice

We have learned over the years that drawing arbitrary lines hurts competition. We have also learned that once those lines are drawn, it takes decades to redraw them. That is why we believe that banks should have the flexibility to establish a subsidiary to engage in new financial activities. They should not be forced to divert business opportunities to an affiliate, reduce capital by funding the new activity through dividends, and lose the earnings from their own innovation and customer base.

At the same time, we believe that a modernized financial system should retain some separation between banking and other financial activities. The alternative, universal banking, is popular around the world, but I believe is the wrong choice for this country at this time. Thus, although the House bill allows common ownership of banking, securities, and insurance firms through subsidiaries or affiliates, both bills still require those activities to be conducted separately within an organization, subject to functional regulation and funding limitations.

With symmetric restrictions in place, we believe that the House bill strikes an appropriate balance between organizational choice, on the one hand, and providing adequate protections of taxpayers on the other. And so, too do the FDIC and many independents analysts and economists: from the American Enterprise Institute to the Brookings Institution.

This is an important issue, and one that we will continue to pursue and I hope resolve. As most of you already know, we have been asked by the Congressional leadership to discuss this issue with the Federal Reserve Board, and those discussions are ongoing.

2. Effective Protection for Communities

We have made clear from the start of these debates that a bill dedicated to expanding bank powers must also ensure that all communities reap the benefits: and, more specifically, that as we create a new financial system, we preserve the relevance of the Community Reinvestment Act (CRA).

As with any law, regulators should always be vigilant in ensuring that the law is applied effectively and burdens are minimized to the greatest extent possible. But CRA is working.

In 1998 alone, banks and thrifts made more than $33 billion in small business loans in low and moderate-income areas, and more than $16 billion in other community development loans. Home Mortgage Disclosure Act data shows that from 1993 to 1998, home loans to low and moderate income borrowers by 64 percent, well above the rate of growth of the total market.

As we work to modernize our financial system, we need to make sure that CRA keeps working for our communities. That is why we have insisted that:

Modernization legislation include a provision that banks and thrifts have and maintain an adequate CRA record in order to engage in newly authorized financial activities.

There should be no weakening of existing CRA provisions in the bill.

The Senate bill not only fails to include a requirement with respect to newly authorized activities, but also contains provisions that would seriously weaken the CRA. The House bill meets this test and preserves CRA's relevance for the future.

3. Protections for Consumers

Financial privacy has gained much greater prominence as an issue since the last Congress. Much of the benefit of financial modernization is synergy, and part of that synergy is derived from the sharing of information B from developing innovative products to relieving customers of the burden of reintroducing themselves to an institution each time they do business.

Nonetheless, revelations about financial service industry practices have come as a shock to policy makers and many consumers, who thought that financial services firms preserved the confidentiality of personal customer information. Our challenge is to protect the privacy of consumers while preserving the benefits of competition and innovation.

Americans should have the opportunity to participate in the modern means of electronic payments and receipts without subjecting themselves to behavioral profiling. Just as they would not expect a letter carrier to read their mail or record their correspondence, they do not expect a bank processing a check to record, store and evaluate their personal behavior. Consumers applying for mortgage loans should not have to worry that their bank is mining their checks to determine how many are written out to doctors or pharmacies.

Providing consumers with notice and choice on the use of their financial information represents an important counterbalance to the increased breadth of financial institutions permitted under the bills. Consumer privacy safeguards should apply to sharing or sale of information both outside and within financial organizations.

4. A Bright Line Between Commerce and Banking

As I noted earlier, both bills allow common ownership of all types of financial firms, albeit in functionally regulated units. We believe that when it comes to non-financial firms, even greater separation is appropriate, and that common ownership should be prohibited. One of the lessons of the Asian experience of the past few years is that financial institutions tend to make bad decisions when it comes to lending to their corporate owners or siblings. The synergy gains of combining financial and non-financial firms are not great and the potential downside is considerable.

Thus, I believe that the United States economy has been well served by preserving a clear separation between those who allocate capital and the majority of those competing for it. That is why we oppose provisions in the Senate bill that would allow banking and commerce to be mixed together under the guise of merchant banking. And it is why we oppose a provision in the House bill that would allow the transfer of unitary thrifts to non-financial firms. Surely, this is an area where we need to move cautiously, at least until we gain experience with the effects of broader financial firms.

The issues I have just discussed are particularly critical to the Administration. But there are a number of other provisions in the bill that will have an important impact on the success of our financial regulatory system in the next millennium. For a bill to redeem the promise of the many years that we have waited, it must reach reasonable outcomes on issues such as Federal Home Loan Bank reform, securities regulation, and insurance sales, among other issues.

II. Continuing Financial Modernization

Passing the right legislation is important for our financial system and for the American people. But modernization is an ongoing process, not a single event or a journey with a single destination. This legislation would not address all of the issues that are involved in building a modern financial system. Even in the near term, many important further questions remain:

How do we protect the system as a whole from the failure of one institution, and make sure that all, in the public and private sectors, understand that no institution is too big to fail?

With respect to banking, Congress and regulators have taken significant steps to reduce creditors' expectations that the government would protect them from loss, but new measures need to be studied. More broadly, the President's Working Group on Financial Markets has now supported new requirements that public companies include in their financial statements their exposure to highly leveraged institutions, including banks and hedge funds. Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly. For all types of institution, we need to explore further ways to enhance transparency and market discipline and reduce systemic risk.

How do we build a system of capital regulation that is as modern as the markets?

The system of capital standards upon which our supervisory system increasingly relies needs to be able to capture market risk, credit risk, liquidity risks, and other forms of risk if it is to serve the purpose for which it was intended. Value-at-risk models represent an important step toward capturing some of these. But they lead to further questions as to how best to capture the model risk that is inherent in such techniques. With the leadership of Bill McDonough the Basle Committee has proposed significant changes to the capital regulations applied to banks around the world. This debate is as an important one, and I urge you all to be part of it.

How do we ensure that the benefits of modern financial services are more widely felt?

The new technologies that are revolutionizing the financial services industry have the potential to create a so-called digital divide, but they also have the potential to make banking more accessible for consumers currently outside the system. In establishing the electronic transfer accounts and implementing EFT 1999, the Treasury has taken some first steps toward this. But we can and must think of ways to go further.

How can we ensure that our consumer protection laws keep up with the growth of electronic commerce and electronic banking?

The President took an important first step in this area when in May he announced a series of initiatives on financial consumer protection. We need to pursue those initiatives. We also need to make certain that the disclosures required by our consumer protection laws have the same meaning and force when contracting on line that they do when the contract is more traditional. And we must do more to prevent fraud and abusive practices from spreading through electronic commerce.

How do we best respond to the greater risk to the insurance funds posed by a much more consolidated banking industry?

A recent FDIC study found that banking industry consolidation has increased the insolvency risk of the insurance fund by tying its health more than ever to that of the largest banking organizations. Better, more market-based, supervisory tools would help reduce this risk. And so would merging the thrifts and bank deposit insurance funds, since this would eliminate the needless harm to public confidence that would result when funds were available in one, but could not be used to support the other.

III. Concluding Remarks

Let me end my remarks where I began: our financial industry is stronger and more competitive than ever. To help ensure that it remains competitive, we want a financial modernization bill -- but we want the right bill. After so many years of waiting, we now have an historic opportunity for lasting and important reform. But that same long wait also gives us a responsibility to do it right. Thank you.

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