Federal Deposit Insurance Reform Act of 2003

Mr. Chairman, I thank the gentleman for yielding me this time, and I rise today to bring some more facts to the debate over industrial loan companies.

ILCs are well regulated, both at the State and Federal levels. They have played an important part in our country's financial system for over 100 years. I have a letter from the chairman, Donald Powell, of the Federal Deposit Insurance Corporation, and I will provide it for the Record, but I also thought I would just read some of the observations that Chairman Powell makes about ILCs.

Chairman Powell says that industrial loan companies and industrial banks have existed since the early 1900s, and overall it is the FDIC's view that ILC charters pose no greater safety and soundness risk than other charter types. As with any other insured institution, ILCs are subject to examinations and other supervisory activities. The FDIC's authority to pursue formal or informal enforcement actions against an ILC is the same as the FDIC authority with respect to any other State nonmember bank, with limited exceptions. In short, the FDIC does not believe that there are any compelling safety and soundness reasons to impose constraints on this charter type that are not imposed on other charter types.

Chairman Powell of the FDIC goes on to say that the FDIC and the State chartering authorities directly supervise insured ILCs, which must comply with the FDIC's rules and regulations, including those requirements for capital standards, safe and sound operations, and consumer compliance and community reinvestment. Further, as he says, the FDIC has the authority to examine any affiliate of an ILC, including its parent company, as may be necessary, to determine the relationship between the ILC and the affiliate, and to determine the effect of such relationship on the ILC.

I thought I would bring those facts to light. I know that some competitors of ILCs worry because they do not want more competition in the banking marketplace, but we all know that competition is good for consumers, it is good for businesses, and it is good for our economy as a whole. And since I have heard other companies make the argument that ILCs are not safe and sound, I wanted to respond by saying that ILCs are heavily regulated financial institutions, ILCs are regulated by the FDIC and by State banking regulators in every State in which they operate, and I think we should judge ILCs on the facts.

To that end, Mr. Chairman, I submit the letter of Chairman Donald Powell for the Record herewith:

Federal Deposit

Insurance Corporation,

Washington, DC, April 30, 2003.

Hon. Edward R. Royce,

House of Representatives,

Washington, DC.

Dear Congressman Royce: Thank you for your recent letter

concerning industrial loan companies. We are closely

monitoring the recent attention that industrial loan

companies are receiving and appreciate your questions.

Industrial loan companies and industrial banks

(collectively, ILCs) have existed since the early 1900s.

States with existing insured ILCs include California,

Colorado, Indiana, Minnesota, Nevada, and Utah. There are 51

insured ILCs, with the vast majority operated from Utah (24)

and California (17). The charters are unique in that, as long

as they meet certain criteria (typically, not accepting

demand deposits), they are not considered ``banks'' under the

Bank Holding Company Act. As a result, an ILC's parent

company is not subject to supervision by the Federal Reserve.

Just as is true of unitary thrift holding companies and

parent companies of limited-purpose credit card banks,

the parent companies of ILCs include a diverse group of

financial and commercial firms.

Overall, it is the FDIC's view that ILC charters pose no

greater safety and soundness risk than other charter types.

As with any other insured institution, ILCs are subject to

examinations and other supervisory activities. The FDIC's

authority to pursue formal or informal enforcement actions

against an ILC is the same as the FDIC's authority with

respect to any other state nonmember bank, with limited

exceptions. Those exceptions pertain to cross-guaranty

authority and golden parachute payments, and legislative

changes to eliminate those exceptions are being pursued in

H.R. 1375, the proposed Financial Services Regulatory Relief

Act of 2003. In short, the FDIC does not believe there are

compelling safety and soundness reasons to impose constraints

on this charter type that are not imposed on other charter

types.

The risk posed by any insured depository institution

depends on the appropriateness of the business plan and

model, management's competency in administering the

institution's affairs, and the quality and implementation of

risk management programs. Similar to institutions with other

charter types, an ILC's capital adequacy and overall safety

and soundness is driven by the composition and stability of

its lending, investing and funding activities and the

competence of management.

The FDIC and the state chartering authorities directly

supervise insured ILCs, which must comply with the FDIC's

Rules and Regulations, including, but not limited to, those

requirements for capital standards, safe and sound

operations, and consumer compliance and community

reinvestment. ILCs also are subject to Sections 23A and 23B

of the Federal Reserve Act, which restrict or limit

transactions with a bank's affiliates and the Federal Reserve

Board's Regulation O, which governs credit to insiders and

their related interests. Further, the FDIC has the authority

to examine any affiliate of an ILC, including its parent

company, as may be necessary to determine the relationship

between the ILC and the affiliate and to determine the effect

of such relationship on the ILC.

Answers to your specific questions are enclosed. If you

would like additional information, please do not hesitate to

contact me or Alice Goodman, Director of our Office of

Legislative Affairs, at (202) 898-8730.

Sincerely,

Donald E. Powell,

Chairman.

Enclosure.

Response of the Federal Deposit Insurance Corporation's Division of Supervision and Consumer Protection to Questions Concerning Industrial

Loan Companies

In what banking activities are these institutions engaged? Do

they have the authority to provide services that may not

be offered by full-service commercial banks?

Generally, the authority of industrial loan companies and

industrial banks (collectively, ILCs) to engage in activities

is determined by the laws of the chartering state. The

authority granted to an ILC may vary from one state to

another and may be different from the authority granted to

commercial banks. Except for offering demand deposits, an ILC

generally may engage in all types of consumer and commercial

lending activities and all other banking activities

permissible for banks in general.

Core ILC functions are traditional financial activities

that can generally be engaged in by institutions of all

charter types. The exception would be institutions organized

and chartered as limited-purpose institutions, which

generally focus on credit card or trust activities.

Existing ILCs can generally be grouped according to one of

four broadly defined business models:

Institutions that are operated as community-focused

institutions, including stand-alone institutions and those

serving a community niche within a larger organization. These

institutions often provide credit to consumers and small- to

medium-sized businesses. In addition to retail deposits (many

ILCs offer NOW accounts), funding sources may include

commercial and wholesale deposits, as well as borrowings.

Institutions that operate within a larger corporate

organization may also obtain funding through the parent

organization.

Independent institutions that focus on specialty lending

programs, including leasing, factoring, and real estate

activities. Funding sources for this relatively small number

of institutions may include retail and commercial deposits,

wholesale deposits, and borrowings.

Institutions that are embedded in organizations whose

activities are predominantly financial in nature, or within

the financial services units of larger corporate

organizations. These institutions may serve a particular

lending, funding, or processing function within the

organization. Lending strategies can carry greatly, but,

within a specific institutions, are often focused on a

limited range of products, such as credit cards, real estate

mortgages, or commercial loans. Corporate strategies play a

larger role in determing funding strategies in these cases,

with some institutions periodically selling some or all

outstanding loans to the parent organization. Parent

assessments of funding options across all business units

frequently determine the specific tactics at the ILC level. A

few institutions restrict themselves to facilitating

corporate access to the payment system or supporting cash

management functions, such as administering escrowed funds.

Institutions that directly support the parent

organizations' distinctly commercial activities. These

institutions largely finance retail purchases of parent

company products, ranging from general merchandise to

automobiles, truck stop activities, fuel for rental car

operations, and heating and air conditioning installations.

Loan products might include credit cards, lines of credit,

and term loans. Funding is generally limited to wholesale or

money center operations, borrowings, or other options from

within the parent organization.

From a federal law perspective, one of the primary

differences between an ILC charter and other depository

institution charters is that certain ILCs have a

grandfathered exemption from the requirements and

restrictions of the Bank Holding Company Act (BHCA).

Generally, an LIC can maintain its exemption so long as it

meets at least one of the following conditions: (1) the

institution does not accept demand deposits, (2) the

institution's total assets are less than $100,000,000, or (3)

control of the institution has not been acquired by any

company after August 10, 1987.

How does the FDIC go about regulating ILCs? What authority

does the FDIC have to examine ILC parent companies? Does

the FDIC feel it has the tools necessary to adequately

and comprehensively regulate ILCs and their relationship

to their owners?

The FDIC regulates ILCs in the same manner as other state

nonmember institutions. ILCs are subject to the FDIC's safety

and soundness regulations (with two exceptions discussed

below), as well as federal consumer protection regulations.

Like all insured depository institutions, ILCs receive

regular examinations, during which compliance with the

regulations is reviewed and overall performance and condition

are analyzed. For FDIC-insured, state-chartered institutions

that are not members of the Federal Reserve System, the FDIC

and/or the state authority will conduct the examination. The

FDIC has agreements with most states to conduct examinations

under alternating schedules, although in the case of a

troubled institution, the FDIC and the estate authority

generally conduct joint or concurrent examinations.

Transactions with affiliates are reviewed during each

examination. An ILC's transactions with its affiliates are

restricted by Sections 23A and 23B of the Federal Reserve

Act, which are made applicable to state nonmember banks in

general by section 18(j) of the FDI Act, 12 U.S.C.

Sec. 1828(j). Section 23A essentially limits the total amount

of loans to affiliates and limits other transactions between

a bank and its affiliates. These restrictions also apply to

loans to third parties to pay debts to or purchase goods and

services from an affiliate. Section 23B generally prohibits

any transaction with an affiliate on terms or conditions less

favorable to the bank than a transaction with an unrelated

third party.

While the FDIC does not have statutory authority to

supervise the parent companies of ILCs, the FDIC does have

the authority, in examining any insured depository

institution, to examine any affiliate of the institution

(under 12 U.S.C. Sec. 1820(b)(4)), including its parent

company, as may be necessary to determine the relationship

between the institution and the affiliate and to determine

the effect of such relationship on the institution. In the

case of a parent subject to the reporting requirements of

another regulatory body covered under the Gramm-Leach-

Bliley Act of 1999, such as the Securities and Exchange

Commission or a state insurance commissioner, the FDIC has

agreements in place to share information with the

functional regulator.

In determining whether to grant deposit insurance to an

ILC, the FDIC must consider the same statutory factors of

section 6 of the FDI Act, 12 U.S.C. Sec. 1816, that it

considers for all other applications for deposit insurance.

These factors are:

The financial history and condition of the depository

institution;

The adequacy of its capital structure;

Its future earnings prospects;

The general character and fitness of its management;

The risk presented by such depository institution to the

deposit insurance fund;

The convenience and needs of the community to be served by

the depository institution; and

Whether its corporate powers are consistent with the

purposes of the Act.

The FDIC has determined that there are two limitations in

our authority regarding ILCs as compared to other

institutions. These two limitations would be addressed by

remedies included in the Financial Services Regulatory Relief

Act of 2003, as proposed. These are:

Amendment to clarify the FDIC's cross-guarantee authority:

As part of the Federal Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (FIRREA), Congress

established a system that generally permits the FDIC to

assess liability across commonly controlled institutions for

FDIC losses caused by the default of one of the institutions.

Currently, cross-guarantee liability is limited to insured

depository institutions that are commonly controlled as

defined in the statute. The definition of ``commonly

controlled'' limits liability to insured

depository institutions that are controlled by the same

depository institution holding company, i.e., either a bank

holding company or a savings and loan holding company. Since

the parent company of an ILC is neither a bank holding

company nor a savings and loan holding company, ILCs that are

owned by the same parent company would not be ``commonly

controlled.'' As a result, cross-guarantee liability may not

attach to ILCs that are owned by the same parent company. The

Financial Services regulatory Relief Act of 2003 contains

language that would enhance the FDIC's efforts to protect the

deposit insurance funds by establishing parity with other

charter types. This discretionary authority would extend only

against an insured depository institution under common

control with the defaulting institution.

Amendment to clarify the FDIC's Golden Parachute

authority: As part of H.R. 1375, there also is an amendment

to section 18(k) of the FDI Act, 12 U.S.C. Sec. 1828(k), to

clarify that the FDIC could prohibit or limit a nonbank

holding company's golden parachute payment or indemnification

payment. In 1990 Congress authorized the FDIC to prohibit or

limit prepayment of salaries or any liabilities or legal

expenses of an institution-affiliated party by an insured

depository institution or a depository institution holding

company. Such payments are prohibited if they are made in

contemplation of the insolvency of such institution or

holding company or if they prevent the proper application of

assets to creditors or create a preference for creditors of

the institution. Due to the existing statutory definition of

a depository institution holding company, it is not clear

that the FDIC is authorized to prohibit these types of

payments made by nonbank holding companies (such as ILC

parent companies).

What differences, if any, exist between the manner in which

the FDIC regulates industrial loan banks compared with

commercial banks?

As indicated above, the FDIC regulates ILCs in the same

manner as all other state nonmember institutions.

In your view, would ILCs pose a greater risk to the safety

and soundness of the banking system than traditional

banks if both received enhanced de novo interstate

branching authority?

We do not believe that ILCs would pose a greater risk to

the safety and soundness of the banking system than

traditional banks if both received enhanced de novo

interstate branching authority. As described above, insured

ILCs are subject to the same Federal supervisory regime that

applies to other insured institutions. ILC transactions with

their parent companies are subject to the same restrictions

that apply to transactions between other insured institutions

and their parent companies.

Can you comment generally on the capital adequacy and safety

and soundness record of the ILCs and compare these to the

performance of commercial banks?

ILCs currently have an examination rating distribution

that is similar to the insured banking universe. Similar to

institutions with other charter types, an ILC's capital

adequacy and overall safety and soundness is driven by the

composition and stability of its lending, investing and

funding activities as well as competence of management.

For troubled ILCs, several common issues have generally

been evident, each reflecting faulty strategic or tactical

decisions rather than issues of permissible activities,

commercial affiliations, or the regulatory regime over the

larger corporate organization:

Poorly conceived lending strategies, characterized by

concentrations in relatively higher-risk loan problems,

economic sectors, or borrowers, have resulted in an excessive

volume of poor quality credits.

Less than satisfactory internal processes have hampered

institutions' ability to identify and respond to changing

circumstances, including deterioration in credit quality,

which have thwarted timely corrective actions or collection

efforts.

Reliance on potentially volatile funds management

strategies, including wholesale deposit solicitations,

borrowings, and large-scale loan sales, have placed

additional strain on the institutions' earnings performance

and liquidity posture.

If any institution is identified as troubled, the FDIC

modifies its supervisory strategy. In addition, these

institutions are generally subject to formal and informal

enforcement actions. As a rule, the FDIC's supervisory

strategies and specific actions are coordinated with those

of the chartering state authority. Further, in those

situations in which the parent organization controls

multiple insured institutions, the FDIC also coordinates

with the other state authorities or primary federal

regulators to ensure that a comprehensive strategy is

implemented.

Given the concerns some observers have raised about the

ILCs' ability to affiliate with a commercial entity, it is

important to note that the current group of troubled ILCs

have problems that are not unique to the ILC charter, nor do

the troubled ILCs have a history of unusual influence from

parent companies or affiliates. As described above, the

issues facing the troubled institutions are not dissimilar to

those encountered under all charter types, including those in

a traditional bank holding company framework.

Can you describe the regulatory framework that addresses

safety and soundness concerns, or potential conflicts of

interest, that may arise from the relationship of ILCs to

their parent companies?

In general, the regulatory framework used to address safety

and soundness concerns and potential conflicts of interest

regarding an ILC and its parent is the same as that

applicable to any insured state bank. For example, with

regard to safety and soundness, section 8 of the FDI Act, 12

U.S.C. Sec. 1818, generally provides the FDIC with the

authority to (i) terminate or suspend the insurance of an ILC

for unsafe or unsound practices or unsafe or unsound

condition, and (ii) order the ILC to cease and desist from

engaging in an unsafe or unsound practice, or from the

violation of any law, rule, regulation, written condition

imposed in connection with the granting of any application,

or any written agreement with the FDIC.

We do not believe that the potential for conflicts of

interest is any greater for ILCs than for other FDIC-insured

institutions operating in a holding company structure. For

example, an ILC and its parent company are subject to the

tying restrictions of section 106 of the Bank Holding Company

Act Amendments of 1970 to the same extent as if the ILC were

a ``bank'' and the parent company were a ``bank holding

company.'' Generally, the tying restrictions provide that a

bank may not extend credit, sell or lease property, or

furnish any service, or fix or vary the consideration for any

of the foregoing based upon any of five specific conditions.

Those conditions include, for example, that the customer

obtain some additional credit, property or service from the

holding company or an affiliate.

In order to ensure sufficient autonomy and insulation of

the bank from the parent, the state authority or the FDIC

typically imposes some or all of the following controls:

Executive ILC management is onsite at the ILC, as opposed

to the sometimes distant location of the parent and

affiliates;

The ILC Board of Directors consists of local

representatives who are capable of providing strong oversight

over the operations of the bank and establishing prudent

policies and procedures;

Lending files, credit documentation and ILC policies are

maintained at the institution and not the parent;

Lending policies and authorities are established and

enforced by the ILC;

The bank's policies, processes and activities are

consistent with regulatory laws, regulations, policy

statements and other regulatory guidance;

Definitive bank-level business plans are established and

followed by the bank;

All transactions with the parent or affiliate pass the

strictest arms-length scrutiny; and

Sufficient resources are available at the ILC to carry out

ILC activities.

With the above-noted prudential factors in place and

experienced bankers at the helm of ILCs, we have not noted

problems or issues unique to the ILC charter.

Mr. Chairman, I thank the gentleman for yielding me this time and for his leadership, and I rise in support of the Ose- Maloney amendment, a compromise approach to deposit insurance coverage that holds standard account coverage at $100,000 while offering increased protection for retirees.

Mr. Chairman, as a whole, this is an outstanding bill. As an original cosponsor of H.R. 522, I am supportive of the overwhelming majority of provisions in the legislation. It is long past time to merge the BIF and SAIF insurance funds. Additionally, eliminating the 23 basis point cliff and providing a new premium system that takes into account the past contributions of institutions are major steps forward.

The bill includes a mechanism for determining credit for past contributions to the insurance funds that is based on an amendment I cosponsored along with the gentleman from Nebraska (Mr. Bereuter) last session. This is a critically important provision as a matter of fairness to institutions that recapitalized the funds, and I thank the gentleman from Alabama (Mr. Bachus) for including this balanced amendment in the legislation.

Despite these many positives, I believe the immediate 30 percent increase in insurance coverage in the bill is a serious mistake. This coverage increase to $130,000 is opposed by all the Federal financial service regulators, including Alan Greenspan, Treasury Secretary Peter Fischer, OCC Comptroller John Hawke and OTS Director James Gilleran.

Proponents of increased coverage argue that it poses no new risk to the insurance system, but the regulators who oppose this increase are the very officials whose job it is to protect the safety and soundness of the financial system. The unanimity of regulator opposition to increased coverage is an extremely powerful message.

Another argument put forth by proponents of coverage increases is that inflation has eroded deposit insurance. I do not believe this argument matches the actual situation of the banking industry. The fact is that only 2 percent

of insured accounts have more than $100,000 according to a study by the Federal Reserve. The same Fed study put the average account balance at merely $6,000. Any way you look at it the increase in coverage will benefit very, very few depositors.

Proponents of increasing coverage also contend that because insurance premiums are paid by banks, increasing coverage does not cost taxpayers. While I concede this point, I think we have to remember that behind the deposit insurance funds is the full faith and credit of the United States Government.

Since I joined the Committee on Financial Services at the close of the savings and loan crisis, I have been committed to protecting the safety and soundness of the financial service system. While the causes of the S&L failures were many, as my friend from Alabama pointed out, the fact is that standing behind the insurance system are our constituent taxpayer dollars. No matter what the reasons are for a future bank failure or string of failures, by raising insurance coverage we increase the potential liability of the government. Additionally, raising coverage may encourage the concept of moral hazard. Institutions will be encouraged to engage in riskier behavior to boost earnings if they know that failure is insured by the Federal Government.

Finally, I urge support for this amendment because it strikes a compromise. It holds the line on coverage for standard accounts while offering retirees additional insurance. I believe that there are many valid policy arguments for offering additional coverage and additional insurance for this special class of banking account. At its core this amendment represents a compromise. It allows Members the opportunity to support the concerns of the regulatory community on standard accounts while offering increased insurance on retirement accounts.

This is a good bill and I will support its passage. I simply think it would be much improved with the adoption of this amendment, and I thank the gentleman from California (Mr. Ose) for his leadership and I thank also the gentleman from Alabama (Mr. Bachus) for crafting a fine underlying bill, along with the chairman, the gentleman from Ohio (Mr. Oxley), and the Democratic leader, the gentleman from Massachusetts (Mr. Frank).

Mr. Chairman, I include for the Record the following testimony from our committee hearing:

Prepared Testimony of the Honorable Peter R. Fischer, Undersecretary for Domestic Finance, Department of the Treasury, 9:30 a.m., Wednesday,

February 26, 2003--Dirksen 538

Mr. Chairman, Senator Sarbanes, and Members of the

Committee, I appreciate the opportunity to provide the

Administration's views on deposit insurance reform. I also

want to commend Chairman Powell and the FDIC staff for their

valuable contributions to the discussion of this important

issue.

The Administration strongly supports reforms to our deposit

insurance system that would, first, merge the bank and thrift

insurance funds, second, allow more flexibility in the

management of fund reserves while maintaining adequate

reserve levels and, third, ensure that all participating

institutions fairly share in the maintenance of FDIC

resources in accordance with the insurance fund's loss

exposure from each institution. The Administration strongly

opposes any increases in deposit insurance coverage limits.

Our current deposit insurance system managed by the Federal

Deposit Insurance Corporation (FDIC) serves to protect

insured depositors from exposure to bank losses and, as a

result, helps to promote public confidence in the U.S.

banking system. I am concerned today that our deposit

insurance system has structural weaknesses that, in the

absence of reform, could deepen over time. I want to

emphasize that there is no crisis in the FDIC; both of its

funds are strong, well managed, with adequate reserves. This

is the right time to act--when we do not face a crisis--and

the Administration supports legislation focused on the repair

of these structural weaknesses.

Increases in FDIC benefits, however, including any increase

in the level of insurance coverage, are not part of the

solution to these problems and should be avoided. When I

testified before this Committee last April, I argued that an

increase in deposit insurance coverage limits would serve no

sound public policy purpose. Nothing has occurred since then

to change that view. The Administration continues to oppose

higher coverage limit in any form. Indeed, we feel that the

entire issue of coverage limits regrettably diverts attention

from the important reforms that are needed.

merging the bank and thrift insurance funds

We support a merger of the Bank Insurance Fund (BIF) and

Savings Association Insurance Fund (SAIF) as soon as

practicable. A larger, combined insurance fund would be

better able to diversify risks, and thus withstand losses,

than would either fund separately. Merging the funds while

the industry is strong and both funds are adequately

capitalized would not burden either BIF or SAIF members. A

merged fund would also end the possibility that similar

institutions could pay significantly different premiums for

the same product, as was the case in the recent past and

could occur again in the near future without this change. A

merger would also recognize changes in the industry. As a

result of mergers and consolidations, each fund now insures

deposits of both commercial banks and thrifts. Indeed,

commercial banks now account for 45 percent of all SAIF-

insured deposits.

Flexibility in the Management of FDIC Reserves

Current law generally requires each insurance fund to

maintain reserves equal to 1.25 percent of estimated insured

deposits, the ``designated reserve ratio.'' When the reserve

ratio falls below this threshold, the FDIC must charge either

a premium sufficient to restore the reserve ratio to 1.25

percent within one year, or a minimum of 23 basis points if

the reserve ratio would remain below 1.25 percent for a

longer period. Since the latter would be expected when the

banking system, and probably the economy as well, were under

stress, such a sharp increase in industry assessments could

have an undesirable pro-cyclical effect, further reducing

liquidity precisely when liquidity is needed. Were FDIC fund

contributions to come from resources that otherwise might be

part of capital, every dollar paid would mean a potential

reduction of 10 or 12 dollars in lending, or as much as $12

billion in reduced lending for a $1 billion FDIC

replenishment.

Reserves should be allowed to grow when conditions are

good. This would enable the fund to better absorb losses

under adverse conditions without sharp increases in premiums.

In order to achieve this objective and also to account for

changing risks to the insurance fund over time, we support

greater latitude for the FDIC to alter the designated reserve

ratio within statutorily prescribed upper and lower bounds.

Within these bounds, the FDIC should provide for public

notice and comment concerning any proposed change to the

designated reserve ratio. The FDIC should also have

discretion in determining how quickly the fund meets the

designated reserve ratio as long as the actual reserve ratio

is within these bounds. If the reserve ratio were to fall

below the lower bound, the FDIC should restore it to within

the statutory range promptly, over a reasonable but limited

timeframe. We would also support some reduction in the

prescribed minimum premium rate--currently 23 basis points--

that would be in effect if more than one year were required

to restore the fund's reserves.

Nevertheless, as we learned from the deposit insurance

experience of the 1980s, flexibility must be tempered by a

clear requirement for prudent and timely fund replenishment.

The statutory range for the designated reserve ratio should

strike an appropriate balance between the burden of pre-

funding future loses and the pro-cyclical costs of

replenishing the insurance fund in a downturn. A key benefit

to giving the FDIC greater flexibility in managing the

reserve ratio within statutorily prescribed bounds is the

ability to achieve low, stable premiums over time, adequate

to meet FDIC needs in bad times, with the least burden on

financial institutions and on the economy. We also believe

that with this reform, the possibility of recourse to

taxpayer resources is even further removed.

Full Risk-Based Shared Funding

Every day that they operate, banks and thrifts benefit from

their access to federal deposit insurance. For several years,

however, the FDIC has been allowed to obtain premiums for

deposit insurance from only a few insured institutions.

Currently, over 90 percent of banks and thrifts pay nothing

to the FDIC. This is an untenable formula for the long-term

stability of the FDIC.

Moreover, current law frustrates one of the most important

reforms enacted in the wake of the collapse of the Federal

Savings and Loan Insurance Corporation (FSLIC) and the

depletion of FDIC reserves: the requirement for risk-based

premiums. When 90 percent of the industry pays no premiums,

there is little opportunity to do what any prudent insurer

would do: adjust premiums for risk. Nearly all banks are

treated the same, and lately they have been treated to free

service.

For example, today a bank can rapidly increase its insured

deposits without paying anything into the insurance fund. As

is now well known, some large financial companies have

greatly augmented their insured deposits in the past few

years by sweeping uninsured funds into their affiliated

depository institutions--without compensating the FDIC at

all. Other major financial companies might be expected to do

the same in the future. In addition, most of the over 1,100

banks and thrifts chartered after 1996 have never paid a

penny in deposit insurance premiums. Yet if insured deposit

growth by a relatively few institutions were to cause the

reserve ratio to decline below the designated reserve ratio,

all banks would be required to pay premiums to raise

reserves.

To rectify this ``free rider'' problem and ensure that

institutions appropriately compensate the FDIC commensurate

with their risk, Congress should remove the current

restrictions on FDIC premium-setting. In order to recognize

past payments to build up current reserves, we support the

proposal to apply temporary transition credits against future

premiums that would be distributed based on a measure of each

institution's contribution to the build-up of insurance fund

reserves in the early-to-mid 1990s. In addition to transition

credits, allowing the FDIC to provide assessment credits on

an on-going basis would permit the FDIC to collect payments

from institutions more closely in relation to their deposit

growth.

We strongly oppose rebates, which would drain the insurance

fund of cash. Over much of its history, the FDIC insurance

fund reserve ratio remained well above the current target,

only to drop into deficit conditions by the beginning of the

1990s. Therefore, it is vital that funds collected in good

times, and the earnings on those collections, be available

for times when they will be needed.

There are other important structural issues that need to be

addressed sooner than later. It would be appropriate to

evaluate whether there are changes to the National Credit

Union Share Insurance Fund (NCUSIF) that would be suitable in

light of the proposed reforms made of FDIC insurance so as to

avoid unintended disparities between the two programs.

Perhaps even more important is the need to address the long-

term funding of supervision by the National Credit Union

Administration, particularly in view of recent trends toward

conversions from federal to state charters and growing

consolidation of credit unions. Similarly, there are

structural problems in the funding of the Office of the

Comptroller of the Currency and the Office of Thrift

Supervision, the resolution of which should not be delayed.

Deposit Insurance Coverage Limits

The improvements to the deposit insurance system that I

have just outlined are vital to the system's long-term

health. Other proposals, however, would not contribute to the

strength of the taxpayer-backed deposit insurance system and

may actually weaken it.

Increasing the general coverage limit up front or through

indexation, or raising coverage limits for particular

categories of deposits, is unnecessary. Savers do not need an

increase in coverage limits and would receive no real

financial benefit. Unlike other government benefit programs,

there is no need for indexation of deposit insurance coverage

because savers can now obtain all the coverage that they

desire by using multiple banks and through other means.

Higher coverage limits would not predictably advantage any

particular size of banks, would increase all banks' insurance

premium costs, and would mean greater taxpayer exposure by

adding to the contingent liabilities of the government and

weakening market discipline. An increase in coverage limits

would reduce--not enhance--competition among banks in general

as the efficient and inefficient offer the same investment

risk to depositors; in fact, perversely, investors would be

drawn at no risk to the worst banks, which usually offer the

highest interest rates.

Higher Coverage Limits Not Sought by Savers

First of all, the clamor for raising coverage limits does

not come from savers. The evidence that current coverage

limits constitute a burden to savers is scant; there has been

little demand from depositors for higher maximum levels. The

recent consumer finance survey data released by the Federal

Reserve confirm what we found in the previous survey, namely

that raising the coverage limit would do little, if anything,

for most savers. Median family deposit balances are only

$4,000 for transaction account deposits and $15,000 for

certificates of deposit, far below the current $100,000

ceiling. The same holds true even when considering only older

Americans, a segment of the population with higher bank

account usage: median transaction account balances and

certificates of deposit total $8,000 and $20,000,

respectively, for those households headed by individuals

between the ages of 65 and 74.

Examining the Federal Reserve data for retirement accounts

shows present maximum deposit insurance coverage to be more

than adequate. The median balance across age groups held in

IRA/Keogh accounts at insured depository institutions is only

$15,000. For the 65 to 69 age group, median household IRA/

Keogh deposits total $30,000.

A small group of relatively affluent savers might find

greater convenience from increased maximum coverage levels.

But it is a tiny group. Only 3.4 percent of households with

bank accounts held any uninsured deposits, and the median

income of these households was more than double the median

income of all depositors in the survey.

Under current rules, these savers have plenty of options,

with the market place presenting new options for unlimited

deposit insurance coverage without changing federal coverage

limits. At little inconvenience, savers with substantial bank

deposits--including retirees and those with large bank

savings for retirement--may place deposits at any number of

banks to obtain as much FDIC coverage as desired. They may

also establish accounts within the same bank under different

legal capacities, qualifying for several multiples of current

maximum coverage limits. Firms are now developing programs

for exchanging depositor accounts that could offer seamless

means of providing unlimited coverage for depositors without

any change in current limits.

One of the fundamental rules of prudent retirement planning

is to diversify investment vehicles. Many individuals,

including those who are retired or planning for retirement,

feel comfortable putting substantial amounts into uninsured

mutual funds, money market accounts, and a variety of other

investment instruments. Just 21 percent of all IRA/Keogh

funds are in insured depository institutions. There is simply

no widespread consumer concern about existing coverage limits

that would justify extending taxpayer exposure by creating a

new government-insured retirement program under the FDIC.

Coverage Limits and Bank Competition

Banks, regardless of size, continue to have little trouble

attracting deposits under the existing coverage limits.

Federal Reserve data have shown that smaller banks have grown

more rapidly and experienced higher rates of growth in both

insured and uninsured deposits than have larger banks over

the past several years. After adjusting for the effects of

mergers, domestic assets of the largest 1,000 commercial

banks grew 5.5 percent per year on average from 1994 to 2002;

all other banks grew 13.8 percent per year on average. Nor

are smaller banks losing the competition for uninsured

deposits. Uninsured deposits of the top 1,000 banks grew 9.9

percent annually on average over this period, while such

deposits at smaller banks grew on average by 21.4 percent

annually.

Higher Coverage Limits for Municipal Funds Erode Discipline

Proposals for substantially higher levels of protection of

municipal deposits than of other classes of deposits would

exacerbate the inherent moral hazard problems of deposit

insurance. Rather than keep funds in local institutions,

state and municipal treasurers would have powerful incentives

to seek out not the safest institutions in which to place

taxpayer funds but rather those offering the highest interest

rates. Since these are usually riskier institutions, state

and municipal treasurers would be drawn into funding the more

trouble banks. Local, well run, healthy banks might have to

pay a premium in increased deposit rates to retain municipal

business. Today there are incentives for state and local

government treasurers to monitor risks taken with large

volumes of public sector deposits. Should the FDIC largely

protect these funds, an important source of credit judgment

on the lending and investment decisions of local banks would

be lost.

conclusion

In conclusion, I reaffirm the Administration's support for

the three-part general framework that I have outlined to

correct the structural flaws in the deposit insurance system.

I encourage Congress to pursue these improvements with a

steady focus on the important work that needs to be done. The

Administration does not support legislation that raises

deposit insurance coverage limits in any form, and we urge

that Congress avoid such an unneeded and counterproductive

diversion from real and necessary reform.

Mr. Chairman, I yield myself 7 minutes.

Mr. Chairman, I rise in support of H.R. 522, the Federal Deposit Insurance Reform Act of 2003. I want to begin by thanking the gentleman from Ohio (Mr. Oxley), the chairman of the committee, for his tremendous leadership in steering what is a complex bill through the legislative process. I also want to thank the ranking member of the committee, the gentleman from Massachusetts (Mr. Frank), for his support of this important piece of legislation. The committee and the Congress in its votes on this legislation in the past, legislation very similar, has shown that it can work together in a very bipartisan manner.

Deposit insurance reform has been thoroughly discussed and debated over the past several years. During the 107th Congress, I introduced comprehensive deposit insurance reform, H.R. 3717. The legislation was a by-product of recommendations by the FDIC in early 2001, industry representatives coming together urging that we take action. The American Banking Association, The Credit Union National Association, Independent Bankers and Financial Services Roundtable, all urging the Federal Reserve, the administration, urging us to take action to reform Federal deposit insurance. We did take action, and the 107th Congress passed H.R. 3717 by a vote of 408 to 18.

Unfortunately, that bill died in the other body.

Earlier this year, I introduced the same legislation. This time it is H.R. 522, the Deposit Insurance Reform Act of 2003. The gentleman from Ohio (Mr. Oxley) and the gentleman from Massachusetts (Mr. Frank) joined me in introducing this legislation, along with 57 other cosponsors on both sides of the aisle. It was approved by the Committee on Financial Services by a unanimous voice vote. I am pleased that the Senate now plans to act on similar legislation in the very near future, and that the President's budget for fiscal year 2004 outlines a proposal similar to our legislation.

The legislation is supported not only by American bankers, the Financial Services Roundtable made up of the 100 largest financial corporations in America, but also by the credit unions, the thrift associations, the community bankers, the securities industry, and also by groups that we sometimes do not find on the same side; the American Association of Retired Persons has recently endorsed this legislation.

Federal deposit insurance has been the hallmark of our Nation's banking system for almost 70 years. The reforms made by this legislation will ensure that the system that serves savers and depositors so well for so long will continue for future generations.

What does the legislation do? First, it merges separate insurance funds that currently apply to deposits held by banks on the one hand and savings associations on the other, creating a stronger, more stable fund that benefits banks and thrifts alike.

Second, it changes the ``pro-cyclical'' bias of the current system. In other words, it spreads out over time the assessments to the institutions which results in, by doing this, a more uniform assessment. Presently we have sharply higher premiums served during recessionary times and much lower premiums during good times. Banks can least afford to pay a higher premium during recessions, and we found that out, and this corrects that.

Third, the legislation includes modest increases in the amount of coverage available. The system has gone from 1980 without an increase in coverage. If we took 1980 as our basis and we increased coverage based on inflation, we would go to $200,000. If we went back to 1980, the $100,000, and we increased it based on per capita income, it would actually go to $300,000. So we are proposing $130,000, a very modest increase.

If we went back to 1974, because some have said they should not have raised it in 1980, they should have kept it at the 1974 level, and we increased it for inflation, it would go to $140,000.

Mr. Chairman, there are some who will offer amendments who have actually publicly stated that they do not believe in Federal deposit insurance, one of the gentlemen offering an amendment later on. So there are Members of the body who do not believe that our deposits in banks should be federally insured.

I understand that; but I, for one, disagree with that. I think Americans have come to rely and have a sense of security in knowing that when they put their retirement funds in a bank or thrift that it is federally insured. Particularly in light of the recent volatility on Wall Street, people have, I think, come to rely more and value more the fact that they can put their money in a federally insured financial institution and not lose that money.

All of us have heard from community bankers in our districts about the challenges that they face in competing for deposits with large- money center banks that are perceived by the market, rightly or wrongly, as being too big to fail. By strengthening the deposit insurance system, our legislation will help small neighborhood-based financial institutions across the country, especially in rural areas, continue to play an important role in financing economic development.

The independent bankers have actually said that this legislation is key to maintaining local home-owned banking institutions. The deposits that community banks are able to attract through Federal deposit insurance guarantees are cycled back into local communities in the form of consumer and small business loans. One reason for this legislation is we value the right of every American to go down to his corner financial institution.

My thanks go to the chairman of the committee.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield 2 minutes to the gentleman from Ohio (Mr. Tiberi).

Mr. Chairman, I yield 2 minutes to the gentleman from Kansas (Mr. Moran).

Mr. Chairman, I yield 2 minutes to the gentleman from Texas (Mr. Hensarling).

Mr. Chairman, I yield 2 minutes to the gentlewoman from Florida (Ms. Ginny Brown-Waite).

Mr. Chairman, I yield 2 minutes to the gentleman from Colorado (Mr. Beauprez).

Mr. Chairman, I yield 4 minutes to the gentleman from Ohio (Mr. Oxley), the chairman of the Committee on Financial Services.

(Mr. OXLEY asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 3 minutes to the gentleman from Texas (Mr. Burgess).

(Mr. BURGESS asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 3 minutes to the gentleman from Alabama (Mr. Aderholt).

Mr. Chairman, I yield myself such time as remains.

Mr. Chairman, there are opponents to this legislation. Those opponents give several reasons, and we may hear those during the amendments; but I think the most honest opponent of this legislation is the gentleman from California (Mr. Rohrabacher), who will offer an amendment or who may not offer an amendment but who has filed an amendment to strike the increases in coverage.

The gentleman from California (Mr. Rohrabacher) said in the American Banker, and I quote him, in today's edition, ``I don't believe in Federal deposit insurance.'' I think that pretty much sums up the opposition because if a person does not believe in it, then a person does not want it to increase to allow for inflation or for increase in per capita income. If a person does believe in it, then they want it to remain current. They want it to remain current with per capita income and inflation.

As I said, we last increased the levels in 1980. If we adjusted them for per capita income, they would actually go to $300,000. If we increased them for inflation, they would go to $200,000. We, to build a consensus, only increased them to $130,000; but we did increase retirement funds to $260,000, but we felt that there were people other than retirees who deserve the protection to keep up with per capita income and inflation.

So we increased everyone's coverage to 130, including small businesses and depositors, many of whom we found in testimony sell their house, deposit the entire proceeds in a financial institution and assume, sometimes tragically, that there is sufficient coverage.

There are additional reasons why people are opposing this legislation. There is a question of cost. The CBO scored the same bill last year as a savings of $750 million. This year they say it has a cost of $1 billion.

Chairman Powell of the FDIC responded to the CBO estimate and said this, because it conclusively rebuts any CBO estimate that this will cost the taxpayers and any argument that may be made on the floor today about the budgetary impact of the legislation, and he says, ``H.R. 522 provides the FDIC with the tools to achieve revenue neutrality in the management of the deposit insurance system. Because any analysis that determines 522 will result in an increase in net government spending must necessarily rely on assumptions regarding how the FDIC Board will exercise the discretion provided in the legislation.'' And here is the most pertinent part: ``I can assure Congress that the leadership of the FDIC has no intention of managing the deposit insurance system in a way that increases the cost to the government or increases the burden on insured institutions. The costs of the deposit insurance system will continue to be borne by the banking industry, but in a manner that establishes a strong risk-based premium system and avoids the procyclical risks inherent in current law.'' I do stress there are risks in the current law if we do not amend it.

He also in a letter to this body on March 31 says, ``No analysis of the `costs' of legislation is complete without a full consideration of the benefits provided by the bill,'' and he goes on to list many benefits to the economy, to savers and to strengthening our banking institution.

Another rabbit that has been turned loose by opponents of this bill is that the increase in coverage, the last increase was what precipitated the savings and loan crisis. That is simply not a fact. There were many causes. In fact, let me read from a report from this own body as to the reason for the savings and loan crisis. The causes of the thrift crisis can be traced to a number of factors: poorly timed deregulation, the dismal performance of some thrift management, inadequate oversight supervision and regulation.

Mr. Chairman, I was standing to claim the time in opposition.

Mr. Chairman, I yield myself such time as I may consume.

I speak in opposition to this amendment. One of the statements by the proponent of this amendment has been that the former increase in coverage was the primary reason for the savings and loan crisis, and let me say in that regard that the cause of the savings and loan collapse, crisis in this country, has been well examined and well documented. The FDIC, in fact, issued a report called ``History of the Eighties, Lessons for the Future and Examination of the Banking Crisis of the 1980s.''

Here is their reasoning. The rise in the number of bank failures in the 1980s had no single cause or short list of causes. Rather, it resulted from a concurrence of various forces working together to produce a decade of banking crises.

First, broad national forces, economic, financial, legislative and regulatory established the preconditions for the increased number of bank failures. Second, a series of severe regional and sectional recessions hit banks in a number of banking markets and led to the majority of the failures. Third, some of the banks in these markets assumed excessive risk and were insufficiently restrained by supervisory authorities with the result that they failed in disproportionate numbers.

As a result of that, Mr. Chairman, we have made several changes in the law in this body in an attempt, and I think a successful attempt thus far, to make these institutions subject to more oversight and to stronger capital requirements.

One Member of our body's father served as the FBI director during the savings and loan crisis. He was asked in a congressional hearing for his comment on the savings and loan crisis, and he said that criminal activity, fraud and looting were the primary causes of the crisis. In fact, the committee staff has made a fairly exhaustive study of the various articles written concerning the collapse of the savings and loans, and these were the reasons given at the time.

My colleagues can see we have a basic laundry list of reasons, but there is actually evidence that the increase in coverage at the time gave savers some degree of security and actually prevented a panic at many institutions, and some of that body of evidence supports that it actually helped in a contagion of that crisis.

Mr. Chairman, the final argument is a moral-hazard argument. The offerer of this amendment has argued that increasing coverage will create a greater moral hazard in the system; but then, surprisingly, his amendment does not raise the level from $100,000 to $130,000. It does away with that, but then he raises retirement accounts to $260,000, and he raises municipal deposits; and by doing that, they have managed in the subcommittee to basically arouse everyone's opposition to the amendment because if we raise the coverage for retirements in municipal deposits, then one is, in fact, arguing against the reason for offering his own amendment.

I will close simply by saying that this moral-hazard argument has been looked at by the FDIC. They asked two respected economists to make a report, and they were Federal Reserve Governor Alan Blinder, and this is what he said. The point is made that if the FDIC is given the authority to charge risk-based premiums, and that is what H.R. 522 does, then ``most objections based on moral hazard should evaporate.'' He goes on to state, ``In a world of properly priced deposit insurance, it seems more appropriate to ask the opposite question: Why have any coverage limits at all?''

In fact, I think that ought to be the question we are debating: Why have any coverage limits at all? Even the CBO says that this bill will result in an increase of insured deposits in our institutions. Is that not something that we have all argued for? Do we not want an increase in the deposits in our financial institutions? Does that not strengthen our economy? Is that not good for America? They say that some institutions will fail and some people in that institution will lose 200 or $220,000 worth of retirement funds. Do we not want them to have federally insured coverage? Do we want them to lose this money? I do not think so.

Finally, do we believe in insurance? I think that is the essence of this whole argument. I mean, do we believe in insurance? Do we believe in insuring for losses? If we do, and I for one think that insurance is a good thing, I believe that insurance is a prudent thing, and I believe that in order for our Federal deposit insurance system to survive and have any relevance then that insurance protection, which I believe in, I believe in insuring against risk, I believe it is a prudent thing to do, then why would we want the Federal deposit insurance system to wither on the vine?

Why would we not want it to stay current with inflationary rates and per capita income? And the only way to do that is to vote ``yes'' on this bill. A vote against this bill basically would be like going back to 1980 and reducing the coverage from $100,000 to $30,000 if you went on per capita income, or $47,000 if you went on inflation.

How many in our body would do that? How many in our body would vote today to take those levels back to the 1980 level? I do not think any of us would. A few of us would because, as the gentleman from California (Mr. Rohrabacher) says, I do not believe in Federal deposit insurance. I do not believe in the Federal Government supplying insurance. Well, it is the depositors, for one thing. The Federal Government does not. If he would look, he would see it is the banks through their premiums.

I yield to the gentleman from Massachusetts.

Mr. Chairman, I yield myself such time as I may consume and simply close by doing two things. One is responding to the gentleman from California when he uses the analogy that if someone wants to deposit or wants over $100,000 in their account they can simply take part of that money out of one account and place it in another account or they can drive down the street.

Now, Americans today are a highly mobile society, and we know that Americans sell their homes and we know that in almost every case, when they do that, they deposit that money in their bank. They do not take that check and split it. They do not ask for two checks. We know that the average cost of a house is well in excess of $100,000 and we know that they deposit that money in a bank. And if that bank fails, they lose all but $100,000. We do not think that is right.

The authors of this amendment also do a strange thing. They say we are increasing the coverage and that is a bad thing; but then they increase the coverage for retirement accounts to $260,000 and municipal accounts to $2 million. So they basically argue against their own amendment.

Mr. Chairman, may I inquire into the amount of time remaining?

Mr. Chairman, I yield 30 seconds to the gentleman from Alabama (Mr. Davis).

Mr. Speaker, on that I demand the yeas and nays.

Mr. Chairman, I thank the chairman for yielding me this time.

Mr. Chairman, the financial services industry spends a great deal of time and a great deal of money every year complying with outdated and ineffective regulations. That is money that could be loaned to consumers and industries to buy new cars, new homes, new factories, new businesses, and that is what this bill is all about. It is also, as the chairman correctly said, delivering on a promise that this Congress made these same institutions, when we imposed title III of the PATRIOT Act, and also the Sarbanes-Oxley accountability measures. We told them that we would come and follow that with legislation to compensate them for that cost.

And in that regard, as the chairman so well put, I want to commend the financial institutions in this country for helping starve al Qaeda and other terrorist organizations. They have done an excellent job of cutting off the flow, not only to the terrorist organizations but also to narcotics traffickers and other criminal organizations, which is another benefit of these new money laundering legislations that this Congress put on the financial institutions. So it has had a very positive effect even on some areas that we might not have anticipated.

Secondly, I would like to commend the ranking member, the gentleman from Massachusetts (Mr. Frank). I would like to commend him for working closely on this legislation. We talk about bipartisanship in this body. This committee, under the chairman, the gentleman from Ohio (Mr. Oxley) and the ranking member, the gentleman from Massachusetts (Mr. Frank), has achieved on more than one occasion, on many occasions, a bipartisan spirit of cooperation which I think ought to be the model for other committees in the Congress as a whole. So I commend both these gentlemen.

I would like to commend the two sponsors of this bill, the gentlewoman from West Virginia (Mrs. Capito). She has done an excellent job. I would also like to commend the Democratic member of the committee who offered this legislation, and that is the gentleman from Arkansas (Mr. Ross).

Finally, I would like to call special attention to the legislation of the gentleman from Oklahoma (Mr. Lucas), the provisions within this legislation which will greatly improve the coordination between home and host State supervisors of State-chartered banks. When State- chartered banks branch beyond State lines, there is a great need for the bank supervisors to coordinate in the supervision. And I think this is a long overdue provision.

I would also like to commend the gentleman from Massachusetts (Mr. Frank) and the gentleman from Ohio (Mr. Gillmor) for working out, I think,

an excellent compromise on this ILC provision, their compromise, the widespread almost unanimous support of the committee. There are Members who this morning have protested it.

The gentleman from Iowa (Mr. Leach) had offered on another bill the way he wanted to address this. The committee on the bank interest bill actually rejected that idea, competing idea, by a vote of 50 to 8. So this has been an issue that has been debated on prior occasions.

Finally, I would like to say that this is a regulatory relief bill, not a regulatory burden bill. For that reason, I will be offering an amendment to take and strike section 614 which equates independent contractors who do business with the bank, whether they be attorneys, whether they be accountants, whether they be appraisers, whether they be real estate agents, all sorts of independent contractors, which equates them with having the same knowledge of banking operation as insiders. That is simply not the case. And, in fact, I believe strongly that in these cases they ought to have the right to a jury trial, to a full hearing.

But if we do not strike section 614, any accountants, any attorney, any realtor, any appraiser who does business with the bank, will be subjected to having the same knowledge as an insider. Simply not the case. I think we all agree they do not have that same knowledge. And I oppose the Weiner amendment which is a regulatory burden amendment.

Mr. Chairman, I rise in strong support of H.R. 522, the Financial Services Regulatory Relief Act of 2003.

I want to begin by thanking Chairman Oxley for the tremendous leadership he has shown in steering this complex bill through the legislative process. I also want to thank the ranking member of the committee, Mr. Frank, for his support of this important piece of legislation.

This bipartisan legislation, introduced by our colleagues on the subcommittee, Mrs. Capito and Mr. Ross, reflects a commonsense approach to easing regulatory burdens imposed on our nation's depository institutions. H.R. 1375 is largely a product of recommendations that the committee has received over the last several years from the Federal and State financial regulators.

The legislation has strong bipartisan support and was approved by the Financial Services Committee by a unanimous voice vote. It is supported by a host of interested parties, including the Financial Services Roundtable, America's Community Bankers, the National Association of Federal Credit Unions, and the Credit Union National Association.

The banking industry estimates that it spends somewhere in the neighborhood of $25 billion annually to comply with regulatory requirements imposed at the Federal and State levels. A large portion of that regulatory burden is justified by the need to ensure the safety and soundness of our banking institutions; enforce compliance with various consumer protection statutes; and combat laundering and other financial crimes.

However, not all regulatory mandates that emanate from Washington, DC, or other State capitals across the country are created equal. Some are overly burdensome, unnecessarily costly, or largely duplicative of other legal requirements. Where examples of such regulatory overkill can be identified, Congress should act to eliminate them.

The bill that Congresswoman Capito and Congressman Ross have introduced--and that I am proud to cosponsor along with Chairman Oxley--contains a broad range of constructive provisions that, taken as a whole, will allow banks and other depository institutions to devote more resources to the business of lending to consumers and less to the bureaucratic maze of compliance with outdated and unneeded regulations. Reducing the regulatory burden on financial institutions will also lower the cost of credit for consumers.

In closing, let me once again commend Mrs. Capito and Mr. Ross for this important legislative as well as the full committee chairman, Mr. Oxley. The chairman has demonstrated a strong commitment to getting regulatory relief legislation enacted this year. I look forward to working with him to help accomplish that objective.

Mr. Chairman, I offer an amendment.

The Chairman pro tempore. The Clerk will designate the amendment.

Mr. Chairman, I yield myself 3 minutes.

Mr. Chairman, my amendment simply strikes section 614, and what 614 does is, in a read relief bill, it actually shifts a burden to any independent contractor that deals with the banks, and it creates a presumption or a burden of proof on any independent contractor dealing with a bank in an enforcement provision by one of the regulatory agents. It puts a burden of proof on them in an administrative court hearing to basically prove their innocence. And they have no right to a trial by jury. They have no right to an appeal and trial de novo. Their assets can be frozen while these hearings are going on. And I think that that is a tremendous hammer to give to the regulatory bodies, one that we certainly do not need to do in this bill.

What section 614 would do, and I will be brief in this, is it simply equates and says that an independent contractor dealing with a bank will be treated as having the same knowledge or an equivalent knowledge as a bank insider, a director or a board member of that bank. So if they are an attorney, if they are an accountant, if they are an appraiser, if they are a Realtor, or if they are any of these affiliated parties, they are treated as if they have the inside knowledge of a bank insider; and that is simply not the case.

Not only are they equated with that knowledge, but when these charges are brought against them, as I said a minute ago, they have no right to a jury trial, and the administrative judge that makes a determination on whether they are guilty or innocent is appointed by the regulatory agent. And right now the burden of proof is on the regulatory agent to prove that the insider knew, had knowledge, or was reckless. And I think that standard proved to be the right standard during the savings and loan crisis during the mid-1980s. There has been no shortage of enforcement action by the regulators. So I simply say, let us strike section 614. The gentlewoman from Oregon (Ms. Hooley), the gentleman from Alabama (Mr. Davis), and the gentleman from Virginia (Mr. Cantor) are supporting me in this amendment, as are the American Bar Association, the appraisers, the accounting organizations, all of which simply are aghast that we would put some provision like this in a bill which would give the regulators such ominous authority.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield back the balance of my time.

Mr. Chairman, I rise in opposition to the Weiner amendment, and I yield myself such time as I may consume.

Mr. Chairman, what this amendment does is it says, when a customer accepts a bad check from a third party and deposits that check into his account and the bank takes a hit, and it does take a hit anywhere from, according to the Massachusetts Division of Banks, which is one of the more liberal supervisors, it says that cost can be as much as $15, $14.46. It can be as little as $1 or $2. But this is not a pro-consumer bill; this is, in my mind, a pro-either customer who accepts a bad check, or a pro-person who issues worthless checks. I mean, the only person that is rewarded by this provision is someone who issues a bad check.

As drafted, it is not even clear whether the fee prohibition will apply only to the customer who accepts a bad check but, apparently, the prohibition will also pass through to the person who wrote the bad check.

So we have the perverse situation here where banks cannot charge for worthless checks. This provision is actually going to discourage responsibility by customers. It is going to prohibit the bank from passing that charge on to the customer who writes the check. In fact, what it could do is, if this thing passes, a fraudulent attempt could simply be to write a bunch of bad checks, deposit them in my account or deposit them in a friend's account, and we could swap and we could start inundating the bank with worthless checks.

Who would be saddled with that? Well, according to the gentleman from New York (Mr. Weiner), the bank, because the bank cannot pass it on to the customer, so what would the bank do? It would raise its fees to everyone. The end result would be that those customers, those of us who are diligent in determining who we are dealing with and accepting checks from other parties, would end up with the burden.

This really creates an unfair situation where customers who do not deposit bad checks or high-risk checks subsidize those who do on the cost of handling those items. In my mind, it is just the American system; banks are no different from you and I. When they incur costs, they ought to be able to charge the party responsible for causing that cost. Depository institutions should be allowed to charge those customers who cause the institution to incur the cost. It is just simply the way we have done business in this country since the start. We are simply absolving people of responsibility who are the people in the position to take responsibility. A customer who deposits a bad check has the opportunity, he often has the opportunity to pass any fees that are assessed back to the person who wrote the check.

So even if this is drafted, and I believe it is drafted where it is just a prohibition, it does not say that they can put it on anybody. They cannot put it on their customer. They certainly do not have any connection or relationship with the third party who wrote the bad check, so it is going to be almost very impractical, if not illegal under this provision, for them to charge the person who wrote the bad check.

Right now, I think it works very well. A landlord gets a bad check from a renter, the landlord takes that check down and deposits it to the bank, the bank gets stiffed with a bad check, it passes it back to the landlord, the landlord turns around and charges it to the renter. That is the way it ought to be. The bank, and all of the customers of the bank, should not have to pay for a renter who writes a worthless check to the landlord. That ought to be charged to the landlord, and then they can pass that back to the renter.

Let me simply close by saying this is a regulatory relief bill that we promised to the financial institutions because of all of the costs they were incurring as a result of the PATRIOT Act. It is not a regulatory burden bill. We do not reward someone with more punishment. We have imposed all of these money-laundering requirements on them, and we told them we would come back in this legislation and help them recover some of the costs, and thrifts are going to be stuck with this, credit unions cannot charge. It is going to really hurt a lot of institutions and a lot of customers.

Mr. Chairman, I rise in opposition to the amendment, and claim that time, and I yield myself such time as I may consume.

Mr. Chairman, I believe that the gentlewoman's concerns are already fully addressed in this legislation. I believe that because the current law requires Federal financial regulators to closely examine the impact of any mergers, not only on the financial system, but also on the communities involved. If my colleagues will look at 12 USC 1842, it says: ``A Federal financial regulator may not approve any merger where the proposed acquisition merger or consolidation may substantially lessen competition, tend to create a monopoly, or restrain trade, unless it finds that the anti-competitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the communities to be served.''

This section of the U.S. Code goes on to state that in every acquisition, merger, or consolidation the regulator shall take into consideration the financial and managerial resources and future prospects of the company or companies and bank concerns and the convenience and needs of the community. Let me stress that: and the convenience and needs of the communities.

All mergers, acquisitions, and consolidations are subject to antitrust review by the Department of Justice to ensure that there is not a negative impact on the financial system or on the communities that the financial institutions serve.

So we have all of these tests, all of these hurdles that must be gone through.

Finally, not only that, but notice must be given that a merger is being considered, and under the Community Reinvestment Act, members of the affected communities have the ability to comment on the impact of the merger to the banking agency. So we have all of this. Nothing in this regulation relief bill changes that.

These same protections and considerations apply when a financial institution is participating in an expedited merger process.

Accordingly, this amendment simply is not necessary. It will add additional cost. And I must urge its defeat on the grounds I have just stated and on the further grounds, as I have said in opposing the last amendment, that we promised the financial institutions, the credit unions, the thrifts, and the small banks, those that have the greatest regulatory burden, the greatest percentage of cost in complying with

these new money laundering provisions, that we would take the burdens off of them, not put more burdens on them.

So I would urge the defeat of this amendment.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, we are concerned about many of the same things the gentlewoman from Texas (Ms. Jackson-Lee) is concerned about. We simply think that existing law addresses these concerns. And I have reiterated those.

Mr. Chairman, I yield back the balance of my time.

Mr. Speaker, on that I demand the yeas and nays.

Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, I want to express my appreciation to the chairman of the committee and the chairman of the subcommittee, because this is another example of where we have been able to work in a cooperative way. We do not agree on everything, but our method of operation allows us to refine our disagreements and to present to the House some legitimate policy disagreements, but in a form and in a context that does not interfere with our ability to go forward where there is consensus.

There will be two amendments that we will be debating. The gentleman from Alabama will offer one, which I plan to oppose, that would reject a request from the FDIC to make it easier for them to proceed against people in the banking area that they think have been negligent. The gentleman from New York (Mr. Weiner) will be offering an amendment that I think protects consumers. I feel strongly in favor of that one. Other than that, I believe we have agreement at the committee level. I want to emphasize, and I must say I am very hopeful that the Weiner amendment will be adopted, but we will have to see what happens.

I just want to reiterate my view that this reflects what I think ought to be our approach; namely, we start with respect for the market and an understanding that the free market is the best way to make our economy prosper. Particularly in the financial area that our committee has jurisdiction over, the role of the institutions as intermediaries in garnering the financial resources that are then made available to the people who do the production of goods and services, that is very important; and it is our obligation to make sure that that can be done with the maximum efficiency.

At the same time we recognize, many of us, that the market is not perfect. It does well what it is supposed to do, but there are areas of importance in our life that the market does not deal with. There are also inevitable tendencies in any institution, government, the private sector, the nonprofit sector, to do things that if there were constraints, it should not do. That does not mean that they are evil or that they are dysfunctional; it just means that human nature being what it is, no entity ought to be able to function without some restraints.

So our job is to provide for consumer protection in particular, which the market itself would not automatically do. Let me check that. In some areas I think we can rely on the market in the consumer area. There is a major merger, or a major sale in New England going on now where Fleet Boston is being bought by Bank of America. I have worked very closely with a number of entities that are advocates for low- and moderate-income people in the area of housing and in the area of small business and community development, because I do not think the market itself will take care of those. In other areas, in customer service, I think you can rely more on the market. There are competing institutions that will try to steal customers away. That is a good thing because, in the area of customer service, there will be competition. In areas where we are talking about lower-income people, competition does not do it, and we have to try to intervene.

What we need to do is to recognize the importance of regulation but, at the same time, make sure that we do not regulate unnecessarily, because there are regulatory costs. I do not object to regulatory costs if they are essential to achieving an important public purpose. Where they can be shown not to have that relationship, they ought to be removed. We ought to also try to pick among various regulatory approaches until we get the one that gives us the most benefit for the least cost. This bill is, on the whole, an effort to do that.

The chairman mentioned that in the controversial area of industrial loan corporations, we heard the forceful statements of the gentleman from Iowa who thinks that we should be more restrictive. We have Members who represent particularly States where the ILCs have played a major role, California and Utah in particular, who are represented in our committee, who think we have been too restrictive. The gentleman from Iowa (Mr. Gillmor) took the lead, and I was glad to work with him, in using a formula we had previously adopted in the Congress; namely, that to be a financial institution you should be 85 percent financial in your revenues, and we have used that as a screen for the additional entities that might be entering the ILC field. I think that is a reasonable compromise. I think that will protect the public interests, while continuing to allow consumer choice, and I congratulate the chairman and others for creating the context in which we could work that out.

I know we will be proceeding to debate on a couple of controversial issues and, as I said, I think this is a good overall bill, but Members may be waiting to see what happens on some of the amendments to make their final judgment.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield such time as he may consume to the gentleman from New York (Mr. Meeks), a very hard working member of this committee.

Mr. Chairman, I yield 5 minutes to the gentlewoman from New York (Mrs. Maloney), a very able member of our subcommittee, the ranking member of the Subcommittee on International and Domestic Monetary Policy.

Mr. Chairman, I yield 5 minutes to the gentleman from Vermont (Mr. Sanders), a member of the committee, who is the ranking member of the subcommittee which has jurisdiction over this bill.

Mr. Chairman, I yield myself such time as I may consume.

Before yielding time to one of the coauthors of the bill, the gentleman from Arkansas, who has done a lot of work on this, I did want to respond to the gentleman from Vermont.

Frankly, I was somewhat surprised to hear him raise some of those issues because he is, as I noted, the ranking member on the minority side of the subcommittee of jurisdiction; and I must say that had he raised some of them when we were considering this bill, he might not now feel they were being ignored.

One of them, of course, is not germane to this bill, the credit card question. That was debated and voted on in the committee last year, but some of the other issues he raised now, I just have to say that it is a little late to come to the floor, when the bill is already before us, and raise issues, particularly when you are the ranking member of the subcommittee and you have hearings and you have markup in subcommittee and you have markup in full committee.

In one case I would note he objected to the fact that this bill reduces the period during which the Federal Government can wait and study a merger for antitrust. Yes, I agree that that is a problem. We debated that one, in fact, in committee. It was the gentlewoman from California (Ms. Waters) who raised that; and I appreciate the fact that because she, having raised it, stuck with it, she has worked with the majority, and an amendment that will put that back up to 15 days, instead of 5, I believe, is going to be accepted.

So I would like to inform the gentleman, he has left the floor, that there was, in fact, an agreement to address one of those issues that he raised.

He also raised the question of executive compensation, and I have been working with the very good staff that we have on our side of the committee to deal particularly with the aspect of executive compensation, top-level executive compensation, that is, the perverse incentive that stock options give to the top people.

So that one I assure him is going to be dealt with. But I do not think it makes sense to deal with it only for financial institutions. I think it should be dealt with across the board.

The committee is going to remain in business, and I have to say to my now absent colleague from Vermont that, as ranking member, he is fully positioned to raise these, and many of the other members would be glad to work with him, as we were able to work with the gentlewoman from California when she took a very serious look at this and accomplished something.

Mr. Chairman, I yield such time as he may consume to the gentleman from Arkansas (Mr. Ross), who is a cosponsor of this bill.

Mr. Chairman, I have a parliamentary inquiry.

I do not see anyone on the floor who is opposed to this amendment. Is it then permissible under the rules for me to request the rest of the time?

Mr. Chairman, if it is appropriate, I will, although I am not in opposition.

Mr. Chairman, I yield myself such time as I may consume.

I just want to address one important issue on this question of the industrial loan companies that the gentleman from Iowa had raised previously. It is clear, as we all agree, that the ILCs are in fact regulated. They are regulated by a Federal bank regulator, the FDIC. The element of unregulation goes with holding companies. Bank holding companies are regulated by the Federal Reserve. Heretofore, these holding companies have not had, in my experience, much independent existence and so the regulation by the FDIC has done it.

I will say to the gentleman from Iowa, while he is not here right now, he has been very conscientious on this bill and is probably following this, that I would be prepared to work with him on the question of whether or not an appropriate form of regulation for the holding companies ought to exist. Perhaps the FDIC or some other entity should have it. I do not think we have a regulatory hole. We have not had one historically. I do not think we are creating one. But I would note the only potential argument is there would not be a regulation of the holding company. All of the bank activities of the ILCs would be regulated by the FDIC.

Having said that, I just would repeat what the gentleman from Ohio essentially said. This is, I think, an effort to fine-tune regulation. I do not believe in any regard it cuts back excessively. I did disagree with the proposal to cut the review time for antitrust to 5 days. We have an amendment that will be coming soon from the gentlewoman from California that will push it back up to 15, not exactly where I would like it. We then will have a couple of other amendments to deal with. But I would note that we are going to correct what I think is one of the flaws in this bill.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield back the balance of my time.

Mr. Chairman, I rise in opposition. Mr. Chairman, I yield myself 3 minutes.

This is one of the two disagreements here. I should note that the section that is in the bill that the gentleman from Alabama seeks to strike was requested by the Federal Deposit Insurance Corporation. What they said was they want to be able to issue their orders. They do not have criminal procedures here. This does not take away one's right to a jury trial for any criminal trial. The FDIC has administrative powers. They can order one to cease and desist from a certain practice; they can debar one from working.

What they are saying is they do not want to be unable to bar people or to order a stop to people who are being grossly negligent. The language that will be governing the FDIC's regulating authority with regard to lawyers and others who work on banking matters, these are people that are hired by banks as professionals; and let me say there was some argument before that, well, these people should not be held to knowing banking law. We are not talking about the guys who install the drywall. We are not talking about the people who do the valet parking at the big soirees. We are talking about lawyers and other professionals. And, yes, I do believe it is reasonable to hold lawyers to a standard of knowing bank law when they do lawyering for banks. And what the FDIC said is we do not want to have to prove that they were reckless or deliberate. If they are grossly negligent, we want to be able to step in.

It is not a criminal proceeding. It is the FDIC. The FDIC wants to be able to hold professionals who are offering their professional services voluntarily to banks and working on bank matters to a knowledge of banking law to the extent if they are negligent, or even grossly negligent, if this amendment said the standard was gross negligence, it would be less of a problem for me, but this says for the FDIC to be able to discipline an attorney or any other professional servicing a bank, it must be a standard of either knowledge or recklessness of the conduct, and I think that is a mistake.

We know that there is not always a great difference between the people who work full-time for the bank and the people who are working as professionals for the bank. There are people who specialize, lawyers who specialize, in serving banks, other professionals who would specialize in serving banks. It seems to me entirely reasonable for them to be held to that standard.

So I do agree that we want to be deregulatory here, and a few minutes ago some of us were saying it was a good thing we have the FDIC. They are the regulators of the ILCs. They are an important regulator. This is a case where the regulators have asked us to keep a standard for them which they use when they are dealing with the banks themselves, and they want to be able to apply it to the independent contractors. I think it would be a mistake to give the FDIC significantly less power to act in enforcement proceedings against lawyers and other professionals than they now have.

Mr. Chairman, I reserve the balance of my time.

Parliamentary Inquiry

Mr. Chairman, do I have the right to close on this amendment?

Mr. Chairman, this is a very proconsumer effort. I do think people ought to be penalized when they can control it. But as the gentleman from New York as pointed out, bank practices today blame the victim. If one is a recipient of a bad check and they in good faith deposit it in their bank, they are penalized. Indeed, I would contrast this with the previous amendment. If one is an attorney now under this bill and they behave with gross negligence, the FDIC cannot do anything about it; but if they are the consumer who gets a bad check, they get whacked. I do not think it is anticapitalist to say that people who are the victims of bad checks once should not be victimized by bad checks twice. People have said, well, we should give them an incentive. As the gentleman from New York had said, I do not know many people who say I do not mind getting a bad check as long as my bank does not hurt me. I think there is already every incentive they have got to say no to it. We are not talking about someone who takes eight bad checks from the same person. The first time someone victimizes someone with a check that has insufficient funds, they are victimized.

This amendment is a good amendment.

Mr. Chairman, in the apparent absence of anyone in opposition, I would ask for the time.

Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, this is, as I think has been made clear, a bill that has already passed the House. Clearly the former reasons for the prohibition on interest on business checking accounts no longer make sense in light of the current economy.

I appreciate the gentlewoman from New York (Mrs. Kelly) alluding to the issue of the ILCs. When we had originally dealt with this, it had been my hope as this bill went forward in the other body, the compromise we had adopted could be considered there. For a variety of reasons this did not go forward in the other body. And the rules prohibit me from commenting on whether or not anyone ought to be surprised by the absence of that progress, so I shall not.

But this, once again, we hope will go forward; because it is, I think, an important thing especially, as has been clear, for the small businesses. Interest on their checking accounts, if you are a smaller business and you have to maintain a large percentage of your funds in checking accounts for a variety of reasons, then the lack of interest could become a significant factor.

So I hope that this will ultimately pass, but I do hope that the ILC issue will get some further attention.

Mr. Chairman, I yield back the balance of my time.

Mr. Chairman, I ask unanimous consent to reclaim my time, and I also yield 1 minute to the gentleman from Pennsylvania (Mr. Toomey).