Date: 1984-02-29
Speaker: ST GERMAIN (democrat)
Chamber: H

Mr. Speaker. as long as most of us can remember. there has been a steady drumbeat by banks and other depository institutions demanding an opportunity to reshape and expand their spheres of influence in the U.S. economy. The effort has taken many forms. In the 1960s. the brirhtest of the bright lawyers in the industry urged their clients to make creative use of the exemption in the Bank Holding Company Act for those companies with only one bankan exemption thought to be limited to relatively small. passive holding companies. But. in the expansive mood of the late 1960s. the big banks started leaping through loopholes and suddenly we found heretofore staid institutions owning everything from pizza parlors to manufacturing and oil concerns. The longstanding separation of commerce and banking was about to crumble. Alarmed about these shotgun marriages of commerce and banking and the potential for a greater concentration of economic power. Congress plugged the loophole in a bitter legislative battle that extended over 1969 and 1970. No longer could holding companies mix the vast credit powers of a bank with the control of nonbanking businesses. Like all legislative loophole closings. it was less than airtight. but it did sharply limit the activity and essentially maintained the banking commerce separation * * * in some cases by actually requiring a divestiture of nonbanking acquisitions. This setback did not stop the expanslonist element in the financial community. Their appetite was growing. amendments to the holding company act and congressional intent notwithstanding. Not only was the GlassSteagall fence being probed for weaknesses. but the laws limiting geographical expansion were under constant attack. A loan production office here. an industrial bank there. or. where all else fails. an emergency acquisition or an appeal to a friendly State legislature as Mr. McFadden turns over in his grave. Deregulation. a phrase that didnt even appear in popular dictionaries two decades ago. suddenly became the buzzword of the 1980s. With an almost fundamentalist religious fervor. we are told to accept it. to support it. to bask in it. Like the oldtime patent medicine salesmen. the proponents of deregulation peddle the deregulation tonic as a cureall for everything from ingrown toenails to sagging balance sheets. No one defines it. no one seems able to talk about the bottom line. no one can draw a clear picture of the shape of the financial community once the last drop of the deregulation tonic has been drained from the bottle. Certainly. some of the early swigs make the patient seem awfully lively. and thoughts of tomorrow mornings hangover are pushed aside. The party is going full blast and talk of moderation is not popular. The worst question that can be asked is "What does this Deregulation Party do for the uninvitedthe American public?" As the deregulation bottle gets passed one more time. we are simply told "Oh. its good for the people if we like it. theyll like it." When the euphoria wears off. and the din of the party becomes a dull roar. the public may well demand a fuller. more specific explanation of its benefits before it pays for and sends in another supply of the deregulation tonic. The partygoers should realize that. It is true that the deregulation party began under the friendliest of circumstances. The depository institutions. anxious to get the party underway. could point to their nonbank competitors that had already launched ad hoc parties of their own. They could point to rapid change. new demands and a fast moving technology in the marketplace. And they could point to the gurus of an administration that believes that the marketplace is a holy place. Many think the climate for deregulation was never better. The organizers of the party know they had better move rapidly before someone sends the deregulation tonic to the laboratory for analysis. Too much of the planning for the deregulation party has been in terms of how the elixir would be divided up among the participants. the financial community. The party is billed as an exclusive affair by invitation only. The idea that the public should be consulted or its needs examined has not been a mainstream thought. Deregulation cannot be for the industry alone. Someone must begin to look at the requirements of the economy. and to shape changes so that the needs of every segment of the society can be metindustry. small business. farmers. consumers. communities. But. deregulation is an empty wordit has no meaningunless it does meet the basic needs for financial servicesneeds of those segments of the population that may be less affluent. less able to muscle their way to the front of the line for deregulated services. The Congress of the United States has a responsibility to provide a forum and an atmosphere in which rational decisions can be made on the shape and future of the financial system. The needs of the economy and the people must be paramount. And then we must look at the industry and determine how it can be shaped to meet those needs. Ask not what deregulation can do for the banking industry. Ask what a deregulated financial industry can do for the public--for the Nation as a whole. The answer to the question must go beyond Fourth of July platitudes about the wisdom of the marketplace. Honeycombed with decades of Government assistance to protect them against the vagaries of the marketplace. depository institutions are probably the last with a legitimate claim to Adam Smith. What much of the industry is talking about is selective deregulation with the tether line to the Government kept intact. The proponents of instant deregulation hang their arguments on a questionable promise- that banks and other depository Institutions are just. like other htiesses. If a dereginated environmniit is good for the corner yr oevry store. wkhy should not banks he given the- same freedom in the narket.. Is ithe simplistic argument put forward by t he dereg ulI ion now crowd. Hanks depository imAtitutionsare not like any other business. They have a unique place in the economy and their nony and ciedit powers give them Ieveurage ot matchied by any (ither industry. Crdlt.. like air and water. is an itlem of survival In todays e(onomy. Other serviecs provided by d(eo)(Jdtoryn ist it III ions ale only slightly li.s s.iitIdl. uchi vast pow(r. if lisuised. could make a mockery of a competitive free iitpripLis systemin. low this power Is used is soiuct hing that every Aniericai has a st ake in the economic future of the Nation Is tied. to a very large extent. oni how well and how equitably Ihese powers are ut ilired. Pr(sident Woodlow Wilsons words. nearly three quartis of a century ago. Nt Ill serve as the st arting point for any debate about derlegulation of (lhe fiHnalial comiinit y: A grnt industrial nation Is controlled by its systen of credit. Our syst em of credit is concentrated. hlie growth of lie nation. therefore. and fill our activities are In the hands of a few men who. even if their actions i honiest and Inteinded for the public interest. are nicessarily concent rted upon the groat Iiuiiitkings In which their own money Is involved and who. necessarily. by veury reason of their own linittaltions. chill and chek an(d destroy tgenuine ecoonic fredoin. This is the grnatedSt question of all. and to this stat.tinin nist address tihemaIes withIi an earnest determination to s e I te long future and tie true liberties of men . . . Despite these Wilsonian concerns. (hoed by ot hers through history. and deslite a distinct populist trend in inuch of the Nation. banks and other deposit ory inst itut ions have enjoyed the bencvoleice of their Governnient in a maonner not equaled by other seg. niuits of society. Despite increases in- competition. depository inst itutions are still chartered by State and Federal Governments. Territoris. to a degree. remain proteeted. you simply do not decide suddenly to compete w ith your local bank- you do that at the sufferance of some governientral entity. At best. we have quatsimioriopolics maintained by Govelinntiit. new forms of competition from outside the depository structure notwithstanding. Most prized by the depository institutions. however. is the massive Federal insurance program that encases all their operations hi a warm secure cocoon. Those FDIC and FSLIC shields are proudly displayed on the front windows in every institution and seldom is there a piece of bank literature that does not mention that the Federal Governmentand the American taxpayerstands foursquare behind the insurance fund. Those expensive primetime television shows are often interrupted- to tell us how Federal insurance makes banks differentand. of course. better--than their competitors that are outside this Federal largesse. No one really knows what this protective cocoon of Federal insurance mniris in dollars and cents. but the actions and trumpetings of the industry. Itself. suggest the benefits are infinite. Going hand In hand with the $100.000 per account insurance--courtisy of your Federal Governientgoes an essentially failsafe regulatory system. Faced with the massive contingent liabilities of this insurance prograi. lederal regulators must avoid closing down any institution of any size. The resulta nursemaid type regulat ion that at worst provides for a swallowing ofbad loans by the Government and skimming of the creani hy some otlir insured institutionall arranged. of course. by Federal regulators. at. Pederal expense. and usually in the most subtle and least disturbing way possible to the industry. Would that a small businessman could go Into that good night of bankruptey in such a genteel fashion. Some of the socelled risky areas of lending engaged by depository institutions have been protected up front. by the Federal Government. Housing. small business. student loans. export loans. farm loans. community developmentto name just a fewhave been guaranteed to the tune of hundreds of billions of dollars by the Federal taxpayers. The ledeial Government has taken the risk. The profit goes to the depository institutions. In some cases these Federal guarantees have opened new markets and provided profitable customers for depository institutionsbusiness that has continued well past that initial guarantee by the GovernIment. in some cases the guarantees and sweerteners have been ex post facto when banks fell into difficult situations with loans to such ailing giants as Lockheed. Chrysler. and New York City. And for those depository institutions facing what is so politely called a temporary liquidity crisis. the Federal Government has provided a network of lowcost loans. guarantees. or advances to tide them over. On the tax side. there are still such benefits as bad debt reserves--albeit reducedwhich depository institutions can deductlosses or notfrom their taxesanother billiondollar cushion which helps make life a little more comfortable each year. Admittedly. much of this Governnient assistance is in place as essentially quid pro quo fot the public. Government guarantees are provided because it is national policy to move credit into housing. small business. and other sectors. The insurance fund does protect depositorsas well as institutionsand facilitates the necessary public functions of a banking and payments mechanism. Despite these public benefits. this Government assistance has and does provide great advantages to depository institutionsin many cases these institutions are afloat only because of the Federal Government. Any way that it is analyzed. there is a special ongoing relationship between the Federal Goveminent and the financial communitya relationship that tips heavily in favor of the depository institutions. In 1980 and 1982 tre Congressfaced with severe economic crises in the industry and some glaring inequilties for consumersdipped into the deregulation pie. In return for a phaseout of the regulation Q restrictions that had k.ept small savers subsidizing the more affluent. the Congress did broaden some of the financial powers in the 1980 act. In 1982. in an effort to keep the tinancial system Intact for the Nation. the Congress provided a series of new safety nets and. once again. added powers for financial institutions. The 1980 and 1982 acts. I fear. have been misread by much of the financial community and some of the financial press. They have interpreted it as rewriting of national policy. rather than essentially as a response to emergencies. as an effort to shore up the necessary elements of a financial system required by the Nation and its people. Press by the exigencies of an economy gone hinywire. the Congress had to act and act quickly and definitely. Some have suggested that the 1980 and 182 acts imply the controls are off and it was only a matter of time before the Congress completed the dismantling of the entire financial regulatory system. The result has been a flurry of let us deregulate now activity. A crazy quilt of ideas has sprung up from financial institutions. their competitors. the administration and Members of Congress. with the financial press standing on the sidelines chanting deregulate. deregulate like some overanxious high school cheerleaders. Any day now I expect to see graffiti sprayed on the wall proclaiming a new crusade. "fice your local banker." If there is a direction to all of this. the packagers have failed to include the road maps and the compasses. The arguments in support of the frenzy are many and varied. Some just suggest. In keeping with this administrations philosophy. that deregulation is a good thing. that it can not be overdone and that. therefore. we cannot be too fast in deregulating the banks. Others suggest that the heavy hand of competition emanating from nondepository institutions is bearing down on the brow of our insured institutions and that we must free them up for a battle royal in the marketplace. Hand in hand with this argument is the belief of some banks that they must keep up with the Joneses. the Merrills. the Lynches. the Sears. and the Roebucks despite what their profit figures or share of the market might show. Their arguments suffer substantially from the fact that the numbers simply do not support the idea that there has been a sharp diminution of the banks share of the financial pie despite all this fierce competit ion. By any measure bank profits have maintained a most acceptable level over time. Faintly in the background we hear some halfhearted 0uggestions that all this deregulation is based on public demand. Exactly what public this is has not been revealed. we do know. however. the public. as we normally define it in terms of congressional districts. hasnt been beating down the doors on the issue. Watching the competing deregulaLion claims and counterclaims from various industry groups. it becomes apparent that much of the financial community is 4s confused as some of the administrations proponents of deregulation about what the financial system should be in the future. Much of the financial communityand the interest groups tied to that communityseem more concerned with how to fix the industrys flat tires than with the broader question of how the system can be structured to meet the Nations needs from now through the year 2000. Some financial institutions have decided that deregulation means that they have the freedom to select their customers and not just take anyone who might wander in asking for banking services. The selection naturally trends toward the peopl who are wearing $500 suits. have $50.000 savings accounts. $100.000 trust accounts for their children. vacation homes. boats. and country club memberships. With the right kind of customers. who needs a regulation Q? Some banks have unabashedly decided that banking is for the affluent. Some banks are closing their branches in the inner city and less affluent areas. and others are opening special by invitation only clubs for their affluent customers. A senior official for a New York bank. which has sold all its nonaffluent branches. brags that the institution will be the first totally dedicated distribution system just for the affluent. A major bank marketing firm advises clients: As you cater to the affluent. do not forget about dollars and cents. especially when determining the best type of facility for servIng them. Branches should not be closed in affluent parts of town because the highIncome customer enjoys the convenience of having his or her bank nearby. You can save money. however. by using limited service facilities such as driveins or ATMs instead of branches to accommodate your younger. less affluent customer segments. Highincome customers want convenience. Highbalance customers prefer dealing with people. With regard to banking. bluecollar customers make comparatively few visila to anyone or anything. Youth cares most about convenience and prompt service. A headline in the Washington Post proclaims: "Banks Spurn Small Accounts. Favor the Rich." A consultant for banks writes: Banks across the nation are falling all over each other trying to devise an assetbased relationship that is geared especially for the welltodo. highbalance customer. The move to affluent markets. and away from the blue collar. the elderly and the less well to do. is being accomplished through an elaborate fee system. that effectively prices the undesirables out of the banks. Some banks clearly do not like to deal with senior citizens. One solution Is to charge fees of $2 to $3 per social security check or in some cases a full 1 percent of the check. Small amounts for many people. but if you are living on a few hundred dollars a month. the fees are fclt. In some cases. the banks now simply refuse to cash checks. even if issued by Government entities. Military personnel. home on leave and with full identification. have been turned away. their Government check refused. In New York. a major bank stopped cashing cityissued welfare checks despite the fact that the city maintained substantial noninterestbearing accounts to compensate the bank for the service. The fees have become a virtual blizzard. Fees for deposits. Fees for lowbalance savings accounts with the low balance arbitrarily defined by the bank. Fees for transfer of funds. Fees for closing accounts. In some cases. the fees virtually wipe out the interest on the accounts. negating congressional efforts to give small savers a break to end the unfair restrictions of the old regulation Q. The list is long and growing. In fact. Federal Reserve statistics suggest fee income increased 82 percent from 1979 to 1982 at commercial bankssomething that makes other inflation figures for the period look pale. Some of these fees are imposed simply as a means of increasing incomethe profit line. Others appear designed to exludeto discotragethe elderly. less affluent and to provide fewer and less attractive services based on income and bank balances. Since the committee began its inquiry into the fees. their costs. and the general manner in which services are dispensed. there have been some strong suggestions that Congress ought to stay out of the banks business. The clear suggestion is that banks should be allowed to run their own operations. set their fees. decide what services are to be provided. and if they want to close a branch that is their decision. In a free enterprise society. there may be a ring of logic to such a philosophy. Frankly. I do not think the Congress wants to take on the job of setII 1033 ting fees or attempting to make operating decisions for financial institutions. But. as a public servants. Members of Congress do have to look at the realities of the marketplace. not at AliceinWonderland versions of the economy and its institutions. Today. it is impossible to avoid t he banking system. No longer can the public be told go stuff it in a mattress. The payments system is too complex. too pervasive. Government benefits are dispensed through the banking system. The smallest payroll and the smallest of small businesses must use the. banking system. Even the poor. who do not maintain bank accounts. cannot totally escape the financial system. The advent of a fullblown electronic funds transfer system will only intensify the publics dependence on financial institutions. Under our system banks are expected to perform. to a degree. as public utilities. The electric utility is required to serve everyone in its area. It cannot discriminate and decide it wants to serve only the big office buildings and the big users. Yet banks. in increasing numbers In this age of deregulation. are ignoring the utility side of their charters. charters issued for the convenience and needs of the community. This raises very serious questions about the role of financial institutions in the 1980s and just what deregulation holds for the public. Perhaps we expect too much of some of the financial communitytrying to balance the debt crises of Argentina and Zaire and at the same time worrying about the social security checks of the senior citizens. Perhaps it is really not right to expect the institution trying to put together a multibillion dollar oil company merger. to worry about the local florists few thousand doWars in deposits. Perhaps some of these Institutions have outgrown the people who have provided the full faith and credit behind the Federal insurance funds. the endless regulatory safety nets and the protected markets. Grandma Jones may well wonder why she Is providing the backing for all thcse benefits for institutions which are effectively slamming their front doors In her face. Clearly. Grandma Jones needs banking services and maybe we ought to concentrate our efforts on seeing that these services are provided and let the highflyerswho have other concorns- go on about their business sans the paternalistic help of the Federal Governniernt. If these institutions plan to serve only the affluentas some havethere is little reason for working families to support Government assistance for these institutions. Let the affluent pay for these servicesif the banks need insurance. these by invitation only customers are well equipped to ante up the premiums--no need for the Treasury of the United States to stand behind the operation. The Federal Government should become nore selective in the vast servlees it provides and take a hard look at prograns which support affluent insth. Iitions wkhich serve only the affluent. Welfare for the rich is neither good public policy nor viable long range polit ical sI t egy. The banks tell us they know precisely what services they should provide. to whom. and at what costs. They know their business best. they tell us. ongress. perhaps. should apply some .f this smie hardnosed logic to servIces it dispenses to the depository institutions. Surely. bankers would agree that members of Congress. as elected representatives of the people. do indeed have the right and the responsibility to decide what services are provided by the Federal Government and under what circumstances. Maybe. the time has come for two types of financial systems. One thav operates in the more rarified air of the affluent and is allowed greater leeway in the manner in which its services are dispensedminus Government assistance. insurance bailouts and much of the parternal regulatory system. A second type of institution could provide those essential utility functionswithin its communityin return for full Insurance and other Government assistance. In short. Government assistance for the banking communityfor deposttory institutions--would essentially be limited to those serving the public on an equitable. nondiscriminatory basis. those attempting to serve the credit needs of their local communities and neighborhoods. The Issue of maintaining a banking system for the people is something that must be looked at up front before we ever get to the more esoteric questions of deregulation and whose business can invade whose business on any given day. We simply must try to look ahead and determine where we wantwhere the people wantthe financial industry to go in the future. The industry should not draw the only map. It is not enough to simply suggest that the Congress ratify what has happened in the marketplace. In such a critical area. Ihe Congressthe peopleshould make a policy statement that is consistent with the public interest. the grand and glorious happenings In the market notwithstanding. We have had diverstitures before. and no one who leaped forward in the unsettled waters of the past year can come in and claim innocence. We faced the same situation when the bank holding company act amendments were adopted in 1970. On that occasion we did require bank holding companiessome sizeable operationsto divest. So. fair warning to those who think a grandfather clause is an automatic feature of any congressional action. Bankingbyloophole has been a calculated gamble conducted by the most sophisticated of the sophisticated. Gamblers do lose. Last June. I introduced H.R. 3499 to serve notice that we intended to take a hard look. and if the evidence warranted. roll back these crossindustry gaines to January 1. 1983. That legislation called for a flat moratorium. and I have waited to see whether the rational types in the industry and among the various regulators would gain the upper hand and sanity return to the process. With some exceptions. we have seen the financial communitymoving from both the depository and the nonbank side--seek out the soft State legislatures. weak State laws. the more pliable Federal regulators. play semantical high Jinks with the definition of a bank. and other games with none of the players knowing the location of the goal lineor even what it looked like. It is time to blow the whistle. to halt the games long enough to get the publics input. to get a rational understanding of where we are headed with financial services and whether we will have a system that serves the Nations needs or a gerrybuilt series of conglomerates that ultimately stifle competition. concentrate economic resources. and fail to deliver the goods. Therefore it is my intention to begin broad based hearings on the question of the structure and function of financial Institutions in the United States. These hearings will be structured around the central question of how the financial system can best be shaped to meet the needs of the economy and the people on an equitable and nondiscriminatory basis. Much of what has been proposed to date in the name of deregulation is nothing less than a total reworking of the economic fabric of the Nationsomething that the worker. the consumer. the small business person has as much stake in as the banker and the corporate executive. Surely. the Congress owes the American public more than a glancing look at the issue. more than a cut and paste legislative effort and more than a simple stamp of approval for the financial communitys wish list. I know others on the Banking. Finance and Urban Affairs Committee have given serious thought to the questions I have raised here. I have discussed these matters with my colleague and friend. CHALMERS WYLIE. the ranking minority member of the committee. He shares fully my position that there needs to be a complete airing of these issues. That sentiment is widespread on the committee. Many of us may well disagree ultimately on the shape. structure. and proper powers of the financial community. but there is a consensus that this is a serious set of issues that requires the fullest debate. The special interestsbroadly definedhave attempted. with a degree of success. to establish the ground rules and the timing for the dialog. I think it is Important for the House Banking Committee to set its own ground rules for the debate and to make certain that the public is brought into the process in the fullest and most open manner possible. and that issues be fully explored. corporate or other timetables notwithstanding.*