Moreover, traditional regulators like the SEC and the state insurance commissioners still regulate the entities engaged in nonbank activities as if they were independent firms. In principle, functional regulation could also be applied to operating subsidiaries of banks, but, as I will discuss in a moment, the safety net would soon create regulatory conflict with that structure. The Senate seems in agreement with the House on this issue. The sponsor of an operating subsidiary amendment in the Senate Banking Committee withdrew a proposed amendment because of lack of support in that Committee. The reasons for preferring the holding company framework to the universal bank approach represented by op sub proposals are numerous and relate to our national policies that provide a safety net for depository institutions.
Banks have a lower cost of funds than other financial entities because of the safety net.
This federal safety net, and the subsidy that goes along with it, is provided by the government in order to buy systemic stability. The last thing we should want is to extend that subsidy over a wider range of activities, which is, I believe, exactly what would happen if bank op subs could engage in wider nonbank financial activities. Because of these concerns, both the House and the Senate versions of H.R. 10 would permit banks to conduct in their own subsidiaries the same activities that they may already conduct in the bank, and would expand those activities to include financial agency activities. This expansion is appropriate because, by their nature, financial agency activities require minimal funding and create minimal risk. The H.R. 10 approach, it seems to me, strikes a reasonable balance between expanding the activities of banks while at the same time preserving the integrity of the federal safety net and ensuring a level competitive playing field for independent competitors.