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Attachment to testimony of Chairman Alan Greenspan
H.R. 10, the Financial Services Act of 1998
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
June 17, 1998

Attachment 1
Summaries of Prior Financial Modernization Legislation Considered and Passed by the Senate Banking Committee Since 1984

I. S. 2851, 98th Congress, 2d Session (1984)
After lengthy hearings in the 97th and 98th Congresses, on June 27, 1984, the Senate Banking Committee marked-up and reported legislation designed to revise significantly the statutory framework under which financial institutions compete. The bill, numbered S. 2851 and entitled the "Financial Services Competitive Equity Act," passed the full Senate three months later, on September 13, 1984, by an 89 to 5 margin. No action was taken on the bill by the House of Representatives, however.

Among other things, the Financial Services Competitive Equity Act revised the Glass-Steagall and Bank Holding Company Acts to authorize banking holding companies to underwrite and deal in certain securities. Specifically, S. 2851 permitted a bank holding company, or a depository institution securities affiliate ("DISA") of a holding company, to engage in certain securities underwriting and dealing activities in which a national bank is prohibited from engaging, including underwriting and dealing in revenue bonds, commercial paper, and mortgage-backed securities. S. 2851 did not, however, authorize new insurance activities. The bill also did not authorize any mixture of banking and commerce.

The Senate bill specified that the newly authorized securities activities could only be conducted within the holding company framework. The DISA had to be a subsidiary of a bank holding company and not a subsidiary of a bank. To this end, the Banking Committee's Report emphasized that "the bill would amend the Glass-Steagall Act to permit the DISA to be affiliated with (but not to be owned by) a depository institution." S. Rep. No. 560, 98th Cong., 2d Sess. 19 (1984) (emphasis added). The Committee Report noted that the requirement of separate incorporation and holding company affiliation would help to prevent the DISA from drawing on the depository institution's favorable funding and possible tax advantages and would avoid potential conflicts of interests. See id.

Under S. 2851, the Board remained umbrella supervisor for bank holding companies, and a bank holding company could engage in the newly permitted securities activities only after giving prior notice to the Board. Any DISA also was required to register as a broker-dealer with the Securities and Exchange Commission ("SEC") and was made subject to regulation and supervision by the SEC.

II. S. 1886, 100th Congress, 2d Session (1988)
After 14 days of hearings on financial modernization, on March 2, 1988, the Senate Banking Committee for the 100th Congress marked up another bill to modernize regulation of financial services S. 1886, entitled the "Proxmire Financial Modernization Act of 1988," authorized more extensive securities activities for banking organizations than had been permitted by S. 2851 in the 98th Congress. S. 1886 was reported to the Senate and within the same month, on March 30, 1998, the bill passed the full Senate by a resounding 94-2 margin. The House Banking Committee also approved revision of Glass-Steagall restrictions, but the full House took no action.

S. 1886 repealed sections 20 and 32 of the Glass-Steagall Act and authorized affiliations between banks and securities companies, which were permitted to underwrite, distribute, and deal in most types of securities, including shares of mutual funds and corporate debt securities. Permission for securities affiliates of banks to underwrite, distribute and deal in corporate equity securities was made contingent on a separate Congressional action, to be taken no later than April 1991. S. 1886 did not authorize the mixing of banking and commerce.

S. 1886, like S. 2851 in the 98th Congress, built on the framework of the Bank Holding Company Act: securities underwriting and dealing activities were required to be conducted through a separately incorporated nonbank subsidiary of a bank holding company that was "carefully insulated" from the bank. S. Rep. No. 305, 100th Cong., 2d Sess. 15-16 (1988). The Senate specifically prohibited any affiliations between FDIC-insured banks and securities companies other than through the holding company structure because, as noted in the Banking Committee Report, conducting such activities through holding company affiliates "is a much sounder alternative" than engaging in the activities through subsidiaries of a bank. In addition, the Report noted that the Secretary of Treasury, as well as several academic observers, emphatically supported the use of the holding company framework as "the only acceptable means of expanding nonbanking activities." Id. at 15-16, 21 (emphasis added).

The bill retained the Board's role as umbrella supervisor of bank holding companies, and it mandated that bank holding companies obtain Board approval under section 4 of the Bank Holding Company Act prior to acquiring or forming a securities affiliate. S. 1886 also made the securities affiliate subject to functional regulation by the SEC.

The Proxmire Financial Modernization Act generally retained the prohibition on bank holding companies engaging in insurance activities, and it limited national banks to acting as principal, agent, or broker for credit life insurance. Finally, S. 1886 allowed state bank subsidiaries of bank holding companies, and subsidiaries of such state banks, that are located in the same "home" state as the parent holding company to underwrite and broker insurance products if (1) such activity is authorized by state law, and (2) the insurance products are provided only to natural persons within the "home" state.

III. S. 543, 102d Congress, 1st Session (1991)
Like the Proxmire Financial Modernization Act, S. 543 in the 102d Congress repealed sections 20 and 32 of the Glass-Steagall Act and allowed banking organizations to affiliate with securities firms. S. 543 was reported out of the Senate Banking Committee on August 2, 1991, after a series of 22 hearings on financial modernization issues. This bill, entitled the "Comprehensive Deposit Insurance Reform and Taxpayer Protection Act of 1991," was eventually enacted as the Federal Deposit Insurance Corporation Improvement Act of 1991 (commonly known as "FDICIA"), a law that considerably strengthened the supervisory and enforcement authority of the federal banking agencies but did not restructure the financial services industry as the Senate Banking Committee had originally envisioned.

As reported out of the Senate Banking Committee, S. 543 permitted banks and securities firms to affiliate through holding companies in a manner that was substantially similar to that which was permitted in S. 1886 in the 100th Congress and S. 2851 in the 98th Congress. Citing the same concerns as had been noted in the 98th and 100th Congress, the Committee required securities underwriting and dealing activities to be conducted in a subsidiary of a bank holding company and not in an insured depository institution or a subsidiary of an insured depository institution. The Committee noted, for example, the substantial dangers of allowing a bank to engage in a full range of securities activities: "The temptation for the bank to support an ailing subsidiary would be very strong given that the bank's consolidated balance sheet would directly reflect the securities activity." S. Rep. No. 167, 102d Cong., 1st Sess. 157 (1991).

The Banking Committee's version of S. 543 authorized a bank holding company's securities affiliate to engage in any securities activity that is permissible for SEC-registered broker-dealers, including underwriting and dealing in securities of any type. The Board remained the holding company supervisor, and the SEC supervised the securities affiliate.

S. 543 did not permit the mixing of banking and commerce. The Senate Banking Committee examined the issue carefully and, as noted in the Committee Report, found no convincing arguments to support the combination of banking and nonfinancial activities. Rather, the Committee Report noted at length the potential undesirable concentration of resources, conflicts of interest, unfair competition, and unsafe and unsound practices that could arise from the affiliation of banks and industrial companies. See id. at 151-57.

S. 543 made several amendments to provisions of current law governing insurance activities of banking organizations. Expressing concerns about the risk to the deposit insurance funds arising out of insurance underwriting, the Senate Banking Committee generally prohibited state banks, and subsidiaries of state banks, from engaging in insurance underwriting activities (to the same extent as national banks are generally prohibited from engaging in insurance underwriting activities). S. 543 also gave parallel treatment to state and national banks with respect to insurance agency activities: the bill granted national banks the same powers to sell insurance as agent as are provided under state law to state banks operating in the same state. The bill also narrowed the authority of banks to sell insurance from towns of 5,000 or fewer. Finally, the bill generally prohibited any bank holding company from allowing a subsidiary bank, or subsidiary of such bank, to sell insurance beyond the borders of the state in which the bank is chartered.

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