# Remarks to the North Carolina Bankers Assembly

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Delivered on 29 March 2004.
Thank you, ladies and gentlemen, for that wonderful, warm welcome. And thank you, Kel, for your very kind words of introduction.
But seriously, it is good to be here among so many friends. Those of you who work in banking institutions are part of the foundation of our communities. I am proud to serve on four committees in the U.S. Senate – Armed Services, Agriculture, Aging and as so many of you know, the Banking Committee. It is an honor to sit on this committee and serve the institutions which really are part of the fabric of North Carolina. The work that you do – enhancing financial stability among consumers, providing investment counsel, and in many cases, educating consumers on something as basic as the need for a savings account – promotes the American dream of opportunity for all our citizens. I thank you for the enormous amount of good work that you do for our communities!
Today we find ourselves at a crossroads that will determine the future of the delivery of financial services in this new century. With the passage of the Gramm-Leach-Bliley Act a few years ago, financial services companies are now beginning to offer new products. Last year I stood with the President as he signed a permanent extension of the Fair Credit Reporting Act to ensure that we keep the lowest possible cost of credit in the world. In addition, I was proud that legislation was enacted to allow banks to create legal digital representations of checks. This will reduce the inefficiency of moving an estimated 37 million paper checks around the nation daily. In this new environment, banks stand in the best position to excel and to serve consumer needs.
I do not say this because of new technology or ideas, but rather, because of older ones. The very word bank tends to mean security, a concept we as consumers are increasingly striving for in our own lives. And banks are clearly established and anchored in our communities, with the equipment in place to deliver services to any town in any part of America. I remember reading an account of Charles Schwab launching his company in the 1970's. He wanted to have a 1-800 number that customers could call to conduct their business. As he implemented the idea, he ran short of money. An uncle offered him a large sum, if Schwab would in turn open a branch in another city, so that his son, Schwab’s cousin, could run. Schwab initially scoffed at the idea, but he was desperate for the funds, and eventually bowed to his uncle’s wishes. When the new office opened, new accounts came flooding in from the area. And Charles Schwab discovered a simple fact: customers relate legitimacy and security to a local presence. It's a concept so obvious that we often take it for granted.
Many people today are understandably excited about banking opportunities on the Internet. New alliances, new products, new markets are all possible through the Internet. But to my mind, the Internet can never totally replace the local bank. Sure, we all witnessed the emergence of Internet banks in the late 1990’s; but these banks never really caught on. When consumers are making major personal financial decisions, the Internet can be a very helpful research tool. The Internet is also very useful for consumers who monitor their bank accounts online. But when consumers want to actually purchase a financial tool or open an account, I believe most people need to feel a local presence, just as Charles Schwab discovered. This is the advantage that banks have over any other provider of financial services. You are already there. People working in a branch probably have kids in the same schools as their customers. The connections are there. The sense of community is there. Sure, there are insurance agents and maybe securities brokers in the town too - but they don't have the vaults and the sense of security that we all associate with banks. All of you, working on the front lines every day, are likely far more familiar with this fact than I. But as I look at where our financial services industry will move in the coming years, the fact that banks have such a presence in our neighborhoods plays a fundamental role.
It is my strong belief that institutions that are fully integrated will be the true winners. In the past few years we have seen a trend of financial institutions seeking the ability to provide consumers all of their monthly financial services information on one statement. It is simplicity and convenience that consumers crave, and the institutions that are able to bundle and discount their services will prosper. And it is for this reason that misguided privacy protections could be truly harmful.
We all watched as the privacy issue caught fire when Gramm-Leach-Bliley was being considered by Congress. Last year during the consideration of the Fair Credit Reporting Act extension, we had a vigorous debate over the new California privacy law, which at that time had been recently signed by then-Governor Davis. In the Senate, we have seen numerous privacy bills introduced. These are complicated issues that too often simplify and neglect the basic operations of financial service companies. I recognize this, and thankfully, our congressional leadership recognizes this and will not allow any ill-thought privacy measures to move forward. Beyond this year - that, of course, will depend on which party wins control of the Congress and the White House in November.
Additionally, there are other issues before us that will have wide implications on the competitiveness of banks and the strength of our economy in the years to come. As an example, I believe we need to reform our deposit insurance system. Unfortunately, the current system is set up in such a way that when our economy hits rough times and bank deposits soar, we have the greatest potential for assessments to be made to banks. The current fixed designated reserve ratio of 1.25 percent brought us too close to this possibility in 2002 – at a time when our economy needed more liquidity in banks, not less. I support legislation to replace the hard 1.25 percent trigger with a flexible trigger, which can postpone assessments until the economy is stronger. As you know, there are many in Congress who are seeking to raise deposit insurance coverage levels. I appreciate their position, but, I don’t support that view, since it will likely result in assessments.
In addition, I believe it is important for Congress to take up and pass strong bankruptcy reform, which would ensure that more Americans who have the money, pay off their debts before being given bankruptcy protection. This is simply a matter of personal responsibility. I am very distressed to read that bankruptcy filings hit a new record in 2003 – the fourth year in a row that a new record was set. The stigma that once was attached to declaring bankruptcy seems no longer to be a factor for many Americans. Our laws must be updated to take this changed attitude into account. Bankruptcy must be a safety net for those Americans who have given it their best shot and failed, not for those who simply see it as a way to get out of paying their bills! Thirty Senators and I have joined together on a letter to Majority Leader Bill Frist requesting that he bring up the bankruptcy bill before the U.S. Senate, so that we can pass it this year. However, with the limited number of days left on our calendar this election year, we have a tough fight before us.
I also believe we need to strengthen the regulation of Fannie Mae and Freddie Mac. As you are all aware, Fannie and Freddie play a critical role in the secondary mortgage market. Congress created them to provide needed liquidity to the mortgage market at a time when banks were limited in the number of loans they could make by the assets they held. As the market grew, Congress decided, that in exchange for the duopoly control, Fannie and Freddie should also fulfill a public mission: creating greater affordable housing opportunities for low-income Americans. This effort has been critical to minorities—less than half of minorities own their own home, compared to three-quarters of white Americans.
Since then, Fannie and Freddie have grown to incredible proportions. Today, Fannie Mae is the fourth-largest financial services firm in the United States. Freddie Mac is the ninth. Their outstanding securities now exceed $4 trillion – or more than the entire U.S. public debt! They hold 40 percent of their own securities, and to protect against their interest rate risk, they hold more than a trillion dollars of derivatives hedges. Clearly, as Chairman Greenspan has stated, a great deal rides upon the ability of Fannie and Freddie to do everything perfectly. That is why I was distressed to learn that Freddie Mac had hidden more than $5 billion in earnings over the past few years and had used these earnings to cover up a billion dollar loss in 2001. Because of the scandal, the three top executives were dismissed last June. To me, the case is clear: we need a stronger regulator for these two companies. Last July, Senators Hagel, Sununu and I introduced legislation to ensure that Fannie and Freddie are given a world-class regulator that is independently funded and has strong powers similar to bank regulators.
Folks, this has not been an easy fight. Fannie and Freddie spent $9.7 million to lobby Congress last year. They have 46 lobbying firms on retainer to supplement their in-house staff. Forty-six! Sometimes it feels like David and Goliath! Fannie’s charitable foundation spends tens of millions of dollars to constantly run television ads touting what a wonderful job they do in reaching out to new homebuyers. However, we learn from a Federal Reserve Board study that most of their implicit government subsidy, estimated to be valued up to $164 billion, goes to their shareholders and does not seem to result in either a substantial reduction in mortgage rates or an increase in homeownership.
Fannie and Freddie talk a good game about helping low-income individuals. But their definitions of low-income are much higher than the requirements all of you must fulfill in your Community Reinvestment Activities (CRA). This must change. They need a strong world-class regulator. They need a better definition of low-income. They need to use their implicit subsidy to truly lower the costs of homeownership for all Americans. And they need to purchase your CRA loans so you can bring more capital into North Carolina’s low-income neighborhoods. We are close to action on this legislation, and I hope my efforts have your support.
There are many other issues of importance before the Senate that I know you have an interest in. And I invite you to visit my office. I’m anxious to hear your thoughts and concerns. But let me end today by describing where my heart is, in my work as a member of the Banking Committee. I believe we have a responsibility to create new opportunities for those in our society who have lacked the tools to prosper. For our economy, reliable access to credit and capital is essential to growth and prosperity. For individuals, a chance to get ahead and make a better life often depends on building credit. Buying a home, financing a car, or owning a small business all are made easier by good credit. We must do everything in our power to lower the cost of credit so that all Americans have the ability to establish good credit records and benefit from services. The opportunities our banking system can provide are not entitlements; they are responsibilities that everyone deserves a chance to undertake. Those who prove they can manage that responsibility can gain the tools necessary to climb the economic ladder of success. Banks constantly seek to improve their services and reach new populations. It is my responsibility to make sure our nation adopts laws that lower the cost of credit and that allow financial institutions to benefit from new technology. These are the things that will allow you to continue to reach out to those who previously could not afford your services or who had to rely on costly alternatives. I believe that we have made some good progress in my first year in the Senate, and I look forward to continuing this fight with you in the years to come. We have our work cut out for us.
I want to close with one of my favorite quotations. In the words of Teddy Roosevelt, “We are face to face with our destiny, and we must meet it with a high and resolute courage. For ours is the life of action, of strenuous performance of duty. Let us live in the harness, striving mightily. Let us run the risk of wearing out, rather than rusting out.” I am so looking forward to working with you all!
God bless each and every one of you, God bless this great state, and this land of the free America.
This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
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