Full text of Statements and Speeches of Alan Greenspan : Testimony before the Committee on Banking, Housing, and Urban Affairs, United States Senate

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For release on delivery
10:00 a.m. E.D.T.
April 23, 1991

Testimony by

Alan Greenspan

Chairman, Board of Governors of the Federal Reserve System

before the

Committee on Banking, Housing, and Urban Affairs

United States Senate

April 23, 1991

I am pleased to appear before this Committee to
discuss two important banking reform bills.

The first,

S.543, the Comprehensive Deposit Insurance Reform and
Taxpayer Protection Act of 1991, was introduced by Chairman
Riegle.

The second, S.713, is the Treasury's proposed

Financial Institutions Safety and Consumer Choice Act of
1991.

These two bills have a significant degree of overlap

and agreement about modifications to our deposit insurance
system and our supervisory procedures.
Both bills propose similar reforms to reverse one
of the fundamental causes of the problems facing our banking
system today:

an expansive safety net that creates

incentives for our banks to take excessive risk with
insufficient capital.

The Treasury bill also addresses two

other root causes of the present difficulties of the U.S.
banking system:

(1) the reduction in the value of the bank

franchise associated with the ongoing technological
revolution that has dramatically lowered the cost of
financial transactions and expanded the scope of financial
activities of bank rivals; and (2) a statutory and
regulatory structure that impairs the competitiveness of
U.S. banks by increasing their operating costs, discouraging
geographic diversification, and limiting their ability to
respond to financial innovations and the challenges posed by
nonbank providers of financial services.

-2The coupling of the Riegle bill with the provisions
of the Treasury bill on interstate branching and expanded
activities for banking organizations would address these
basic problems facing U.S. banks, and establish a
particularly useful framework for congressional action.
These broader reforms would make our banking system more
efficient, better able to serve the public, and create an
environment for a safe, sound, and profitable banking
system.
Mr. Chairman, both bills contain a large number of
detailed provisions.

In the interests of both time and

space, I have limited my comments to those portions of each
bill that represent the core proposals relevant to basic
reform, to those for which the Board may have a view
contrary to others that you may have heard, and to those
with which the Board has relatively strong reservations.

I

will, of course, respond to questions about those provisions
on which I have not commented.
With so many provisions, it is not surprising that
no Federal Reserve Board member supports all of them.
Nonetheless, all members of the Board support a significant
number of them, and a few provisions are opposed by some or
all of us. Thus, when I say the Board supports or opposes
any particular provision, I will be suggesting a majority or
sometimes a unanimous position.

In this sense, I can say

that the Board strongly supports both bills in their

-3approach to deposit insurance and supervisory procedures,
and similarly strongly supports the thrust of the Treasury
bill to authorize new activities and interstate branching.
Prompt Corrective Action
The centerpiece of both bills is a capital-based
prompt corrective action mechanism, under which entities
with capital ratios below certain standards would be placed
under prompt and progressively greater pressure to limit
their dividends and their growth, and to modify management
practices.

As the degree of undercapitalization increases,

the supervisory pressure would intensify.

The principal

objective of prompt corrective action is to change the
behavior of bank management by modifying its risk-benefit
calculations through the establishment of a presumption that
supervisors will take specified corrective action as capital
deteriorates.

Moreover, by acting promptly, it is possible

for the franchise values of the going concern to be
maintained and to avoid the rapid declines in value that
normally occur for insolvent banks.

For the same reason, at

some low, but still positive, critical level of bank
capital, the bank would be placed in conservatorship or
receivership and the stockholders provided only with
residual values, if any.

If the bank could not be

recapitalized, it would be sold, merged, or liquidated;
larger banks might be reduced in size over time before sale
or liquidation.

-4Thus, prompt corrective action is designed to
decrease the probability of failures, and, when they do
occur, to minimize their cost to the FDIC.

It thus would

reduce the need to draw on the insurance fund and to limit
that draw when resort to insurance funds is necessary.

The

Board strongly supports this approach and believes that it
is an idea whose time has come for enactment.

In this

regard, we are struck by the many similarities between the
specifics of the two bills.

The Treasury proposal clearly

draws heavily on the provisions of the earlier version of
the Riegle bill, and likewise the Riegle bill has been
adjusted in reflection of Treasury proposals.
Our suggestions do not call for significant
modifications, but we nonetheless urge their
consideration.

For example, both bills, correctly in our

view, base prompt corrective action on capital.

Generally,

capital is a leading indicator of the financial condition
and future performance and solvency of a bank.

It should

thus be a major determinant in prompt corrective action.
However, supervisory experience and economic research
indicates that sometimes capital ratios alone do not always
differentiate between banks posing high and low risk to the
deposit insurance system.

That is why the Treasury's

proposal includes reference to "unsafe and unsound"
conditions or operations in placing banks into zones lower
than might be indicated by capital alone. We believe more

-5general language —

such as "other supervisory criteria" —

would be more useful.

Operationally, this would mean that

supervisors would be able also to consider asset quality,
liquidity, earnings, risk concentrations, and judgmental
information based on recent examinations, such as classified
assets data.

In short, a reduction in a bank's capital

ratio requires that a close review for significant problems
is required, but other variables should be considered as
well.
These other indicators of the financial condition
of a bank should not prevent categorization based on
capital.

They would, however, permit supervisors to act

even if the criteria for bank capital were met.

Indeed, we

would suggest the proposed provisions for prompt corrective
action be revised to indicate that supervisors could use
other supervisory information to downgrade institutions
relative to zones implied by capital alone.

We believe this

approach would greatly improve the overall effectiveness and
fairness of a policy of prompt corrective action without
jeopardizing the presumption that regulators would be
required to act quickly, forcefully, and consistently in
dealing with capital-impaired institutions.

Nor would it

eliminate the rigor that its supporters hope prompt
corrective action policies would bring to the supervisory
framework.

In our view, noncapital considerations should

only be allowed to reduce the category that capital alone

-6would call for, and never either to neutralize or raise the
categorization of a bank based on capital.
Indeed, even with the supplemental authority
provided by the Treasury and Riegle prompt corrective action
proposals, the bank regulators must remain vigilant in
detecting problems that do not immediately show up in
capital ratios of banks, and must be aggressive in using
existing enforcement authority to address these problems.
Both bills would permit a systemic program of progressive
restraint based on the capital of the institution, instead
of requiring the regulator to determine on a case-by-case
basis, as a precondition for remedial action, that an unsafe
or unsound practice exists.

This would provide a powerful

and useful tool for addressing problems at banks, but would
not replace the need for active supervision of other factors
at banks.
The proposed Treasury legislation would authorize
expedited judicial review to ensure that the supervisor had
not acted in an arbitrary and capricious way, but would
allow the supervisory responses to go forward without delay
while the court was reviewing the process of capital
measurement.

Such a procedure is a necessary precondition

for the "prompt" in prompt corrective action, but should be
modified to include the other supervisory standards referred
to above.

We urge the incorporation of this concept of

expedited judicial review in S.543.

-7The Riegle proposal has three categories of
classification for prompt corrective action and the Treasury
proposal has five.

The Board prefers the larger number of

categories because of the additional flexibility it
provides.

Both approaches require certain actions and

permit supervisory discretion when deemed appropriate.

In

the Treasury approach, the number of required and the range
of permissible actions expand as the capital ratio declines,
but procedures are specified —

requiring explicit

determination of public benefits —

that permit the

supervisor to delay taking required actions.

The Riegle

approach permits no deviations from a small number of
required actions, but has a wide range of permissible
responses, a procedure that also provides flexibility to the
supervisor.

Both approaches thus blend flexibility with a

mandate for prompt action.

Both avoid inflexible, cookbook

supervisory rules, while establishing a presumption of rapid
supervisory action.
The adoption of prompt corrective action policies
would represent a significant change in the supervisory
framework for a large number of institutions.

In order to

avoid unintended impacts in credit markets and to provide
banks with time to rebuild their capital positions and
modify their policies, we would urge a delayed effective
date.

The Treasury legislation calls for a three-year delay

and the Riegle bill for a nine-month lag after enactment.

-8We prefer the longer interval.

Putting banks on clear

notice of the coming supervisory framework at a certain date
should provide for a smooth transition with minimal
disruption.
A final technical note.

Both bills call for the

regulators to establish the specific capital ratios for each
zone or category.

The Treasury bill requires the agencies

to set the critical capital level —

which would call for

putting the bank in conservatorship or receivership —

at a

point that generally permits resolution of troubled banks
without significant financial loss to the FDIC.

The

Treasury bill provides that this measure may be no lower
than 1.5 percent of the bank's assets.

The Riegle bill

indicates that the critical capital ratio should be set high
enough that "with only rare exceptions" resolution would
involve no cost to the FDIC, but does not specify a minimum
critical capital level.
The very act of placing a bank into receivership or
conservatorship significantly lowers its franchise value,
thereby increasing FDIC resolution costs.

It is

unreasonable to impose such a haircut on operating banks.
We would suggest, therefore, that the criterion be to
"minimize" resolution costs.

It is worth emphasizing that

prompt corrective action will tend to reduce losses to the
insurance fund, but a genuine fail-safe, no-losses-to-theFDIC policy would require unrealistically high capital

-9levels.

We also believe that it is appropriate for Congress

to set a floor on the critical capital level that indicates
that Congress recognizes the positive subsidy resulting from
the federal safety net.
Deposit Insurance Reform
As I noted, prompt corrective action will
ultimately make deposit insurance reform less pressing.
Nevertheless, both bills propose a reasonable reining in of
the safety net that the Board supports.

Both bills call for

limiting insurance coverage to $100,000 per individual per
insured institution (plus $100,000 for retirement savings)
and for eliminating coverage for all —
S.543, most —

or in the case of

pass-through and brokered accounts. We

believe this basic proposal would be consistent with the
original intent of deposit insurance to protect the smallerbalance depositor.
It is worth noting that 1989 survey data suggest
that only about 3-1/2 percent of households held accounts
that, when combined for all household members, exceeded
$100,000 at a single depository institution.

However, 60

percent of these combined accounts were both less than
$200,000 and held by households with husband and wife, each
of whom could, under the provisions of both bills, open fully
insured accounts at the same institution.

With this

adjustment, which excludes the additional coverage for
retirement accounts proposed in both bills, only 1-1/2

-10percent of households would have held accounts with
uninsured balances.

These households had median net worth

in excess of $2 million, hardly a family for which the
safety net was designed.
Some observers would prefer a rollback in coverage.
If we were rewriting history, few now would call for
insurance coverage as high as $100,000 per individual per
institution.

But, as I noted last summer before this

Committee, such insurance levels are now capitalized in bank
stock values, in loan and deposit rates, and in the
technology and scale of bank operations.

A rollback could

thus create disruptions that may well exceed its benefits.
The Treasury also proposes a study of longer-run
efforts to limit coverage to $100,000 per individual across
all institutions.

The Board endorses the concept of a study

in order to understand better the potential cost and
intrusiveness of such a fundamental change in the scope of
deposit insurance coverage.
Both bills would require the FDIC to establish a
risk-based deposit premium assessment system.

In principle,

such a system has several attractive characteristics:

it

would link the cost of insurance to the risk that a bank
poses to the insurance fund; it would reduce the subsidy to
risky banks; and it would spread the cost of insurance more
fairly across depository institutions.

It could also be

coupled with capital, reducing the premium for those banks

-11that held capital above the minimum levels adjusted for
their risk profiles. Whatever these attractions might be in
principle, the Board would urge caution at a time when
premiums are already high, BIF resources are low, and the
range of premiums necessary to reflect risk differences
accurately, and to induce genuine behavioral changes, might
be much wider than feasible.

Risk-based premiums also would

have to be designed with some degree of complexity if they
were to be fair, and if unintended incentives were to be
avoided.

Moreover, the extent of potential benefits when

risk-based premiums are imposed on top of the risk-based
capital system, while likely positive, requires further
evaluation.
Both bills would require the FDIC to resolve failed
banks in the least costly manner, which generally means that
uninsured depositors would receive only pro rata shares of
residual values, if any.

The Riegle bill, however, has no

provision permitting consideration of systemic risks, and,
after 1994, prohibits outright any financial assistance by
the FDIC to an insured bank that would have the effect of
preventing loss to uninsured depositors or creditors.

To

minimize the impact of a bank failure on other banks, this
bill would require the Federal Reserve to develop and apply
rules that limit interbank deposits and credits, including a
prohibition on interbank deposits by banks not in capital
compliance.

-12While the Board understands the desire to limit
systemic risks through controlling interbank credit
relationships, we strongly oppose this proposal because of
the substantial disruption that could occur in the
correspondent bank network from its implementation.

We are,

for example, concerned with the inducement to rapid
withdrawals that would be associated with the message that a
bank, whose capital has declined to just below minimum
levels, was suddenly prohibited from taking interbank
deposits.

The payments system depends importantly on the

interbank network, with large cross-border interbank
balances held for payments purposes.

Sudden changes in the

ability to offer such balances would be associated with
sudden shifts in payment patterns that could be quite
disruptive.
The Treasury's bill is silent on interbank deposits
and credits.

However, it calls for an exception to the

least costly resolution of failed banks in those situations
in which the Treasury and the Federal Reserve Board, on a
case-by-case basis, jointly determine that there would be
bona fide systemic risk.
Like you, Mr. Chairman, no one —
Federal Reserve Board —

including the

is comfortable with the exception

procedures for addressing systemic risk, even though the
Treasury proposal would tighten up the way such cases are
handled.

While, in principle, systemic risk could develop

-13if a number of smaller or regional banks were to fail,
systemic risks are more likely to derive from the failure of
one or more large institutions.

Thus, the need to handle

systemic risk has come to be associated with the too-big-tofail doctrine.

The disproportionate degree of systemic risk

at larger banks highlights the tension between one of the
main purposes of deposit insurance —
balance depositors —

protecting smaller-

and the concern that the rapid

withdrawals by uninsured depositors from larger banks
perceived to be in a weakened condition could cause and
spread significant disruptions that could, in turn, affect
credit availability and macroeconomic stability.

Whatever

its macro benefits might be, too-big-to-fail has
increasingly offended observers and policymakers alike
because of its inequitable treatment of depositors and
borrowers at banks of different sizes, and its tendency both
to broaden the safety net and to undermine depositor and
creditor discipline on bank risk-taking.
Despite the substantial concerns, the Board, like
the Treasury, has reluctantly concluded that there may be
circumstances in which all of the depositors of failing
institutions will have to be protected in the interests of
macroeconomic stability.

In evaluating our conclusion, it

is important to underline that we anticipate that there will
also be circumstances in which large banks can fail with
losses to uninsured depositors but without undue disruption

-14to financial markets.

The Treasury's proposal in fact

contemplates that the large-balance depositors of these
banks will not be protected.

Moreover, since the exception

proposal is designed to maintain the confidence of
depositors in the system, its implementation does not call
for protection of non-deposit creditors of the bank, its
holding company, or its nonbank affiliates, and especially
protection of the stockholders and senior management.

These

claimants and employees need not be protected to serve the
objectives of the exception proposals.
In addition, I would emphasize again that other
provisions of both bills should ultimately make the
exception or too-big-to-fail issue less relevant.

The

greater emphasis on capital maintenance, more frequent onsite examinations, and policies of prompt corrective action
can be expected to modify bank behavior and attitudes toward
risk-taking.

Indeed, the ultimate solution to the too-big-

to-fail problem is to ensure that our policies minimize
the probability of large banks becoming weak, and that when
banks experience distress that regulators act promptly to
limit FDIC costs.

But reality requires that we recognize

that substantial increases in capital and substantial
reversals of policies cannot occur in the short run.
Moreover, it would be taking a significant risk, we believe,
to eliminate the long-run option to respond in a flexible
way to unexpected and unusual situations.

The Federal

-15Reserve alone cannot address this problem.

We can add

liquidity to the economy and we can direct liquidity to
individual institutions in appropriate circumstances.

But

we cannot, under the Federal Reserve Act, nor should we,
provide capital to any institution.
Bank Insurance Fund (BIF) Recapitalization
While prompt corrective action and deposit
insurance limits will reduce future exposure of the Bank
Insurance Fund, the chairman of the FDIC has warned of the
unfolding insolvency of BIF.

In response, the Treasury

has developed a proposal that would authorize the Federal
Reserve Banks to lend up to $25 billion to the FDIC to
absorb losses sustained by the BIF in resolving failed
banks.

While the liabilities of the BIF would be full faith

and credit obligations of the U.S. Treasury, it is
anticipated that they would be repaid from increased
insurance premiums.

Premiums could be increased to as high

as 30 cents per $100 of assessed deposits —

7 cents higher

than the premium the FDIC has proposed to impose at midyear.
In addition, the BIF could borrow from other sources up to
$45 billion for "working-capital" purposes, i.e., to carry
assets of failed banks pending their sale or liquidation.
These loans would thus be self-liquidating.

Total premium

income would be used to pay interest on borrowings from the
Federal Reserve and the Federal Financing Bank, cover

-16ongoing insurance losses, repay Federal Reserve loans, and
rebuild the BIF fund.
In the current environment of intense competition
and weak earnings, the Federal Reserve Board is concerned
about the potential costs of further premium increases in
terms of the soundness and competitiveness of our banking,
financial, and economic system.

It is extremely difficult

to judge how high the premium could be raised before the
costs outweigh the benefits in terms of added revenues for
BIF.

What is clear is that in reaching a judgment about the

appropriate premium level we cannot ignore these potential
costs simply because they cannot easily be measured.

The

premium level that maximizes BIF's premium revenues, or even
the premium level that maximizes the net worth of BIF, could
be substantially higher than the level that would be optimal
if the potential adverse impact of higher premiums on our
financial system and our economy could be precisely
quantified.

In light of these considerations, the Board

supports the imposition of a 30 basis point premium cap, and
urges caution in considering increases in premium costs
beyond an amount equal to a 23 basis point on the current
base.
The Board believes that any plan to recapitalize
BIF must provide sufficient resources without imposing
excessive burdens on the banking industry in the near term.
The Board also believes that loans to BIF that would be

-17repaid with future premium revenues are the best means of
striking this difficult balance.
However, an element of the Treasury's proposal that
has troubled the Board is the use of the Federal Reserve
Banks as the source of these loans.

To prevent such loans

from affecting monetary policy, the loans would need to be
matched by sales from the Federal Reserve's portfolio of
Treasury securities.

Thus, in either case, the public would

be required to absorb an amount of Treasury securities equal
to the amount of loans to BIF.
The Board can discover no economic purpose that
would be served by this indirect financing route.

The

implications for financial markets, the economy, and the
federal budget would be identical if the Treasury made the
proposed loans to BIF rather than the Federal Reserve Banks.
Because the Federal Reserve would offset the loans with open
market sales, there would be no impact on reserves, the
federal funds rate, or the money supply.

With respect to

budgetary implications, neither FDIC outlays, net interest
payments by the U.S. government, nor the budget deficit,
would be any different.

Finally, use of the Treasury rather

than the Reserve Banks would have no implications for the
Budget Enforcement Act.
Not only would use of the Reserve Banks for funding
BIF serve no apparent economic purpose, it could create
potential problems of precedent and perception for the

-18Federal Reserve.

In particular, the proposal involves the

Federal Reserve directly funding the government.

Congress

has always severely limited and, more recently, has
forbidden the direct placement of Treasury debt with the
Federal Reserve, apparently out of concern that such a
practice could compromise the independent conduct of
monetary policy and would allow the Treasury to escape the
discipline of selling its debt directly to the market.
Implementation of the proposal could create perceptions,
both in the United States and abroad, that the nature or
function of our central bank had been altered.

In addition,

if implementation of the proposal created a precedent for
further loans to BIF or to other entities, the liquidity of
the Federal Reserve's portfolio could be reduced
sufficiently to create concerns about the ability of the
Federal Reserve to control the supply of reserves and,
thereby, to achieve its monetary policy objectives.
Mr. Chairman, BIF must be granted unquestioned
access to the financial resources necessary to meet its
obligations.

And, the public must be reassured that,

regardless of the solvency or insolvency of BIF, the U.S.
government will make available whatever funds are necessary
to protect federally insured deposits.
Whatever financial arrangements accomplish this
objective, however, it is of critical importance that we
adopt policies now to minimize the risk that such losses to

-19the insurance fund will ever occur again.

The Board

believes that both the Riegle and Treasury bills establish
an approach that would accomplish that objective through
prompt corrective action.

But the Riegle bill does not

address other issues that would strengthen banking
organizations, issues that I would now like to discuss.
Expanded Activities and Interstate Branching
As the Committee knows, the Board believes that a
significant part of the longer-run solution to the subsidy
provided by the safety net is an increase in minimum capital
standards.

However, the condition of many banks suggests

that a shorter-run restoration process must precede the
increase in capital minimums.

In the interim, the Board

supports the Treasury proposal that would immediately reward
those financial services holding companies with bank
subsidiaries that have capital significantly above the
minimum standards.

Not only does such an approach create

additional inducements for these organizations to build and
maintain the banks' capital, it also addresses one of the
most significant causes of weaknesses in the banking system
by widening the scope of activities for holding companies
with well-capitalized bank subsidiaries.
It is clear that some members of Congress are
hesitant about authorizing wider activities for banking
organizations at a time when taxpayers are being asked to
pick up the costs for failed S&Ls that have unsuccessfully

-20taken too much risk, and when BIF recapitalization proposals
raise the concern that taxpayer assistance for resolution
costs of banks may also be necessary.
understandable.

Such hesitancy is

However, two crucial differences exist

between the expanded bank activities proposed by the
Treasury and those previously allowed for S&Ls:

the types

of activities in which the institutions could engage, and
the types of institutions that would be allowed to engage in
the activities.
The wider activities proposed by the Treasury are
all financial in nature; they involve the types of risk with
which bankers are familiar, letting them build on their
expertise.

Thus, for example, the bill would not permit

financial services holding companies to engage in real
estate development or other nonfinancial activities.

It is

worth repeating that the new activities that would be
authorized would be restricted to holding companies with
well-capitalized and soundly operated bank subsidiaries.
They are to be conducted in separately capitalized
affiliates that would have limited access to bank funds; and
they must be divested if the capital of the affiliated banks
does not remain significantly above the minimum
international capital standards.

The proposal does not

repeat the thrift experience of authorizing all institutions
—

strong and weak —

to engage in new activities in the

depository, financed by insured deposits.

The proposed

-21approach is unlikely to expose the safety net to additional
risk because it does not reflect a wholesale removal of
restraints.

Based on their current capital positions, we

estimate that only about one-fourth of the largest 25, and
about one-half of the largest 50, of our banking
organizations would be permitted to engage in such
activities if they were authorized today.

Almost all of the

next 50 largest bank holding companies have bank
subsidiaries with capital high enough to permit the holding
company to engage in these new activities.
The best protection for the insurance fund is to be
certain that we have strong banking organizations.
Authorizing wider activities for holding companies with
well-capitalized bank subsidiaries would increase the
efficiency of our financial system by permitting such
organizations to respond more flexibly to the new
competitive environment in banking here and abroad.

It also

would add to the incentives for increasing and maintaining
bank capital, and it would make available better and cheaper
services to customers of U.S. banks around the world.
Similar benefits involving even more banks and a
larger proportion of the public would result from widening
the geographic scope of bank activity.

The Riegle bill

excludes and the Treasury bill includes such provisions.
The Treasury proposal would repeal the Douglas Amendment to
the Bank Holding Company Act, to permit banking companies to

-22operate subsidiary banks in all states, and would amend the
McFadden Act, to permit banks to operate branches of their
banks in all states.

The bill would thus eliminate an

anachronism and permit full interstate banking by any
vehicle that a banking organization chooses.
An interstate banking system has slowly evolved in
this country through the holding company vehicle.

Only

Hawaii and Montana do not now have on the books legislation
that permits —

or is scheduled to permit —

interstate banking.

some form of

But this approach, with separately

capitalized bank subsidiaries, and with less than full
nationwide banking authorized, still does not permit some
banking organizations to enter some attractive markets and,
most important, is unduly costly.

True nationwide

interstate branching would be much more flexible and
efficient, achieving geographic diversification at lower
cost.

Simply by collapsing existing subsidiaries to

branches, banks could eliminate the unnecessary costs of
separate boards and extra management layers, as well as the
costs of separately capitalizing each subsidiary.
Authorization of interstate bank branching is, in effect,
both a more efficient use of capital and a capital-building
step by reducing banking costs.
The evidence from intrastate branching does not
suggest it will be a substantial source of additional
earnings to out-of-market banks. What interstate banking

-23promises is wider consumer choices at better prices and, for
our banking system, increased competition and efficiency,
the elimination of unnecessary costs associated with the
delivery of banking services, and risk reduction through
diversification.

The Board continues to urge its prompt

adoption.
Regulation and Examination
The holding company form is retained in the
Treasury proposal as the best organizational vehicle for
financial modernization.

Under the Treasury proposal, each

holding company subsidiary —

bank and nonbank —

would be

separately capitalized and functionally regulated as if it
were an independent entity:

bank regulatory agencies would

regulate banks, the SEC would regulate broker/dealers and
mutual funds, and the states would regulate insurance
companies.
In order to restrict the safety net to the insured
bank, the proposal would apply Sections 23A and 23B of the
Federal Reserve Act, which limits quantitatively the
financial transactions between banks and their affiliates,
and requires that such transactions be collateralized and
conducted on market terms.

However, to achieve the

synergies that are the purpose of the proposal, the bill
would not impose management, operations, or general
marketing firewalls, though strong disclosure requirements
would be required to protect the consumer.

Among the

-24firewalls that would remain are restrictions on sales of
affiliate liabilities at the bank, where they might be
confused with insured deposits.
In the Treasury bill, the primary regulator of the
largest bank subsidiary would become the umbrella supervisor
of the financial services holding company.

The Treasury

bill contemplates that, with expanded permissible
activities, the insured banking units often would account
for a significantly smaller proportion of the consolidated
assets of the financial services holding company than they
are now of the bank holding company.

As a result, the focus

of the umbrella supervisor in the Treasury bill is to police
and constrain threats to the bank, while limiting bank-like
regulation of the holding company and its uninsured
subsidiaries.

The Riegle bill, in contrast, does not expand

the scope of activities of banking organizations and thus
retains the current bank-like regulatory focus on the
consolidated holding company, whose assets are predominantly
banks and subsidiaries whose activities are closely related
to banking.
In their respective context, each of these
approaches makes sense to the Board because they link
regulation to the type of activity.

Since the Board

strongly supports a wider range of activities for banking
organizations, we would also support the regulatory approach
of the Treasury bill if such activities are authorized.

-25Under that approach, the umbrella supervisor's authority
over the uninsured affiliates of well-capitalized banks
would be limited.

However, the umbrella supervisor would

police financial transactions between the bank and its
affiliates, could assess the risks to the bank posed by the
activities of its nonbank affiliates, and could require
divestiture of a nonbank affiliate posing a threat to the
bank.
In order to assure that the bank is protected, the
Board believes some minor modifications in the language of
the Treasury bill are necessary to further clarify that the
umbrella supervisor could examine the parent anytime it
wishes to assure that it is not creating risk for the bank.
Further clarity is also necessary to assure that, while the
umbrella supervisor would not, as a matter of course,
examine the nonbank affiliates on a regular basis, the
umbrella supervisor would be permitted to examine nonbank
affiliates whenever the supervisor believed the affiliate
posed a risk to the banks, even when the banks' capital was
above minimum levels; otherwise the supervisor's divestiture
authority would be less meaningful.

Balancing protection of

the bank and limits on the spreading of the safety net with
minimal regulation of nonbank affiliates requires careful
legislative language.
The Treasury proposal calls for the imposition of
bank capital standards on, and the application of many of

-26the regulations governing prompt corrective action for banks
to, the consolidated holding company whenever the capital of
the bank falls and remains below the minimum bank capital
standard.

This approach is designed to reinforce the

protection of the banks from contagion by its parent or
affiliates.

While the Treasury bill provides the supervisor

with examination authority over financial affiliates to
determine compliance with these requirements, the Board
believes that additional clarification is required to assure
that the supervisor would have full examination powers over
the consolidated financial services holding company when the
banks' capital declined below minimum levels.
All of these clarifications are necessary to ensure
that the umbrella supervisor would be able to act promptly
and effectively to protect the bank.

But the thrust of the

modified provisions would still be to limit the bank-like
regulation of the holding company and its uninsured
subsidiaries, provided the bank affiliates are well
capitalized.

For example, the traditional consolidated bank

holding company capital regulation would not be imposed,
under the bill, as long as its insured depository
subsidiaries were themselves capitalized above minimum
levels.

There are several reasons for this approach:

it

recognizes the practical infeasibility of regulators
determining what the appropriate minimum capital should be
for an organization that is not primarily a banking

-27organization but rather a true financial services company;
it facilitates equitable treatment between holding company
subsidiaries and independent firms; it avoids the
inefficiencies of regulation; it creates an additional
incentive to build and maintain a strong bank capital
position; and it avoids even the appearance of extending the
safety net.
It certainly is true that this would permit holding
companies to rely without regulatory limit on debt markets
to finance equity contributions to their bank and nonbank
subsidiaries —

so-called double leverage.

However, prompt

corrective action would limit dividends and other payments
that bank subsidiaries could make to their parent should the
banks' capital decline.

Such restrictions on dividends, as

well as the strict limitation of the safety net protection
only to the banks, are likely to make financial markets
cautious about the quantity of debt it permits financial
services holding companies to assume.

Moreover, with the

appropriate examination authority, the supervisor could take
remedial corrective action if the holding company poses risk
to the banks.
Our support for limits on bank-like regulation of
holding companies, as I have noted, depends on banks
becoming a less important component of the consolidated
entity.

Should permissible activities of bank holding

companies remain unchanged —

and bank holding companies

-28remain predominantly in the banking business —

the Board

would prefer to see the continuation of consolidated holding
company supervision, regardless of the capital position of
the subsidiary bank.

In such a context, we would support

the extension of the cross-guarantees to nonbank
subsidiaries, as provided in the Riegle bill.
The Riegle bill does not address regulatory
structure, while the Treasury bill makes the Board the
primary regulator of state-chartered banks and a new federal
agency the primary regulator of national banks and thrifts.
Thus, both the Board and the Treasury believe that the
Federal Reserve should have a significant role in the
supervisory process.
The Board is convinced that the information flow
obtained from the supervisory contact is of critical
importance for the conduct of monetary policy and the
maintenance of the stability of the financial system.

In

addition, the Board believes its supervisory policy benefits
from the perspective of its responsibilities for macrostabilization.

Not only is it important that monetary and

supervisory policies not work at cross-purposes, but I
cannot emphasize enough how much we rely on the qualitative
information we now obtain from bankers through our
supervisory process to understand evolving developments in
financial markets. We need a critical mass of coverage of
banking markets to get an immediate sense of what lies

-29behind the data and, just as our responsibilities for macro
stabilization bring a different prospective to our
supervisory efforts, we use this feedback from the
supervisory process both to help us develop our monetary
policy and to evaluate its impact.

For example, our

understanding of the recent evolving problems with credit
availability, the constrained flow of credit, and the impact
on economic activity came importantly from our supervisory
contact with banking organizations large and small.
Under the Treasury proposal, however, the Federal
Reserve would have umbrella authority only over statechartered banks, which tend to be significantly smaller, on
average, than national banks. We believe our ability to
accomplish our monetary policy objective successfully would
be seriously damaged without the intimate contacts derived
from our supervisory responsibilities relating to large
banking organizations.

This theme was echoed in the 1984

Bush Task Force report, which assigned umbrella supervision
of large bank holding companies to the Federal Reserve, even
if it did not regulate the lead bank.

We believe that the

Federal Reserve must have hands-on knowledge of the
operations of those large banking organizations, where
potential problems could have systemic effects, if we are to
perform the critical function of ensuring stability in the
financial markets and payments systems. For example, it is
difficult to imagine how we would administer our discount

-30window responsibilities and the associated collateral
evaluations without the practical experience and knowledge
derived from our supervisory responsibilities at the larger
institutions.
Moreover, with the increasing globalization of
banking, in the coming years the central banks of the world
will need more than ever to coordinate responses to
developments that may originate anywhere and impact not only
foreign exchange markets but also the financial markets of
their respective countries.

In a world of electronic

transfers, in which billions of dollars, yen, marks, and
sterling can be transferred in milliseconds, and problems at
a bank or other institution in any country can put such
transfers —

and hence market stability —

at risk, central

bank consultation and coordination on operating details and
procedures are critical.

Thus, in our view, it is essential

that the Federal Reserve —
stabilization policies —

in order to conduct its

have intimate familiarity with all

banking institutions having a substantial cross-border
presence.
Foreign Bank Activities in the United States
The Treasury bill would require a foreign bank that
desires to engage in newly authorized financial activities
to establish a financial services holding company in the
United States through which such activities would have to be
conducted.

The bill also would require any foreign bank

-31that chooses to engage in such activities in the United
States to close its U.S. branches and agencies and to
conduct all of its U.S. banking business through a U.S.
subsidiary bank.

Under the bill, foreign banks would lose

their grandfather rights for U.S. securities affiliates
after three years and would be required to obtain approval
from appropriate authorities to engage in underwriting and
dealing in securities activities in the United States in the
same way that a U.S. banking organization would.

The

Treasury bill would also allow foreign banks to establish
interstate branches at any locations permitted to state or
national banks.

Foreign banks choosing to engage only in

banking in the United States would not be required to form
U.S. subsidiary banks and would be permitted to operate
interstate through branches of the foreign parent bank.
The capital and other supervisory standards that
would be the basis for authorizing affiliates of foreign
banks to engage in newly authorized financial activities and
interstate banking are the same as would apply to affiliates
of U.S. banks.
equitable.

Such a policy appears appropriate and

On the other hand, we question the need for the

requirement that foreign banks close their U.S. branches and
agencies and conduct their U.S. business in a separately
capitalized U.S. subsidiary bank in order to take advantage
of the expanded powers for activities and branching.

-32As the Treasury bill recognizes in advocating
domestic interstate branching, a requirement that a banking
business be conducted through separately incorporated
subsidiaries rather than branches imposes substantial costs
by not permitting a banking organization to use its capital
and managerial resources efficiently.

In most countries,

U.S. banks have been permitted to enjoy the advantages
inherent in competing in foreign markets through branch
offices.

In bilateral and multilateral discussions, U.S.

authorities have correctly argued that a restriction against
branching discourages the involvement of U.S. banks in
foreign markets.

It would be inconsistent not to

acknowledge that foreign banks could also be discouraged
from involvement in U.S. banking markets by requiring
foreign banks to operate only through subsidiaries in order
to engage in new activities. Moreover, by compelling a
switch from branches, whose deposits now are largely
uninsured, to U.S. subsidiaries, whose deposits would be
covered by U.S. deposit insurance, we would be increasing
the extent to which depositors would look to the U.S. safety
net instead of to the foreign parent in the event of
problems.
Foreign banks have made a substantial contribution
to the competitive environment of U.S. financial markets and
the availability of credit to U.S. borrowers.

Currently,

legal lending limits for U.S. branches and agencies of

-33foreign banks are based on the consolidated capital of their
parent banks.

By contrast, requiring a "roll up" of

branches and agencies of a foreign bank into a U.S.
subsidiary bank, whose capital is measured separately from
the parent, might limit the extent to which foreign banks
contribute to the depth and efficiency of markets in the
United States.
We also have some reservations about the purpose
that would be served by requiring a foreign bank to
establish a holding company in the United States to conduct
new financial activities.

In particular, requiring foreign

banks to operate through holding companies is not necessary
to assure competitive equity for U.S. financial services
holding companies or independent U.S. nonbank firms. First,
we see no clear competitive advantages to foreign banks when
they can engage in new activities only if the banks are
well-capitalized.

Second, branches of foreign banks possess

no systemic funding advantages in the United States, and any
cost advantage a foreign bank may have in its own home
market would be available regardless of the structure of its
U.S. operations.

The requirement that a foreign bank

conduct new activities only through a financial services
holding company imposes additional costs on foreign banks
without any obvious benefits.

It also creates an inducement

for foreign banks to conduct their banking operations in
less costly environments outside the United States and for

-34foreign authorities to threaten reciprocal restrictions for
U.S. financial firms abroad.
Commerce and Banking
The Treasury has proposed permitting commercial and
industrial firms to own financial service holding companies.
The Treasury report that preceded its legislative proposals
focused on the need to widen and deepen capital sources,
especially for failing banks, for which nonfinancial
corporations might be willing to provide substantial capital
in exchange for control.

The Treasury proposal also seeks

fairness for those financial firms that operate in markets
banks would be authorized to enter under the proposal, but
that would otherwise be prohibited from purchasing a bank
because of their commercial parents.

The Treasury report

also stressed the desirability of additional management
expertise and strategic direction from commercial firms, as
well as the reduction in regulatory burden in distinguishing
between financial and nonfinancial activities.
Those who hold a contrary view argue that our
capital markets are so well developed that profitable
opportunities in banking can attract capital from sources
other than nonfinancial corporations seeking management
control, provided that banks operate in a regime that
permits them to be fully competitive.

In addition,

opponents are concerned about the implications of permitting

-35commercial and industrial firms to own —

even indirectly —

subsidiaries with access to special government protection.
On balance, the Board supports on a philosophical
level the notion of permitting any institution the right to
go into any business —
safeguards.

including banking —

with the proper

However, the Board believes it would be prudent

to delay enacting the authority to link commerce and banking
until we have gained some actual experience with wider
financial ownership of, and wider activities for, banking
organizations.

We should reflect carefully on such a basic

change in our institutional framework because it is a step
that would be difficult to reverse, and for which a strong
case for immediate enactment has not been made.
The Board would have no difficulty with those
nonbanking financial firms wishing to affiliate with banks
maintaining their de minimis pre-existing holdings in
commercial or industrial firms. But, if banking and
commerce connections remain prohibited, financial firms
already owned by commercial and industrial firms would
likely point out the inequity of their being prohibited from
affiliating with banks, while their independent rivals were
free to do so.

Given the relatively small number of

securities firms, insurance companies, finance companies,
and thrifts that are owned by commercial and industrial
firms, the Congress may wish to address this issue through
appropriate limited grandfather provisions.

-36Accounting Standards
Both bills address accounting standards in banking.
Timely and accurate financial information on depository
institutions is critical to the supervisory process and to
effective market discipline.

Thus, it is important that

financial statements and reports of condition accurately
represent the true economic condition of firms.
The Riegle bill contains a number of provisions
intended to strengthen regulatory accounting standards for
insured depository institutions.

While the Board shares the

basic view that any deficiencies in accounting practices
should be corrected, we are concerned that certain
contemplated reforms may be counter-productive.

In

particular, I am referring to the provisions requiring that
regulatory accounting standards move in the direction of
market-value accounting.
The Riegle bill would direct the SEC, in
consultation with the banking agencies, to "facilitate" the
development of regulatory accounting principles that promote
effective supervision and "accurately reflect —
value, to the extent feasible —

at market

the economic condition of

insured depository institutions."

This provision apparently

is intended to stimulate the development of market valuation
techniques, leading, eventually, to the adoption of marketbased accounting standards for banks and thrifts. A related
provision would mandate that banks with total assets of more

-37than $1 billion disclose the aggregate market value of their
assets and liabilities in Reports of Condition.
The Board recognizes the potential value of
accounting research directed at improving the measurement of
assets and liabilities.

However, we are skeptical whether

such research can successfully resolve fundamental problems
regarding the applicability of market value accounting to
all banking organizations.

Consequently, at this time we

believe that it would be premature to commit, even in
principle, to the adoption of market value accounting either
in whole or in part for banking organizations.
Our concerns are both practical and conceptual.
Because most assets and liabilities of banks are not traded
actively, their market values would have to be estimated.
Inherently, such estimates would be highly subjective.

For

valid reasons, the economic value of an asset or a liability
might differ according to the identity of the holder,
reflecting differences in individual risk preferences, tax
situations, informational and operating costs, and other
idiosyncratic factors.

Indeed, the value added by banks is

partly attributable to their comparative advantage relative
to other investors in evaluating, originating, or servicing
illiquid loans, based on proprietary information, operating
efficiencies, or special monitoring capabilities.
Owing to this subjectivity, market value estimates
would be difficult to verify by auditors and examiners and

-38susceptible to manipulation.

Thus, the adoption of market

value accounting principles for illiquid assets could worsen
rather than enhance the quality of information about the
true condition of depository institutions.

Technologies

that reduce the underlying subjectivity of market value
estimates generally do so by imposing standardized
assumptions that may not be appropriate in all situations
and would precisely fit none.
Even when assets are traded in liquid markets,
market values may not be the best measure of underlying
value.

A growing body of evidence suggests that asset

prices display substantial short-run volatility or noise
that is unrelated to economic fundamentals.

Under market

value accounting, such noise could discourage depository
institutions from making fixed-rate loans, whose market
values would be especially subject to price changes. Market
value accounting also could lead to greater fluctuations in
bank earnings that might generate instability in the supply
of credit to the economy through its impact on the
volatility of capital positions and on public confidence.
The latter problem could arise even if market value
information were disseminated through supplemental
disclosures.
While the adoption of market value accounting for
investment securities may be technically feasible at this
time, the Board strongly recommends against such a partial

-39approach that would mark only part of the balance sheet to
market.

Such a partial approach could create substantial

measurement distortions that artificially distort bank
behavior.

Depository institutions often use investment

securities to hedge interest rate risk present in other
areas of their balance sheet.

Thus, were investment

securities marked to market, offsetting gains or losses on
other assets and liabilities generally would not be
recognized, leading to inaccurate measures of the true net
worth and riskiness of the institution.

Banks and thrifts,

therefore, might be discouraged by accounting treatment from
undertaking hedging transactions that are in their best
interest.

In addition, the partial approach would tend to

undermine incentives to acquire and hold long-term
securities and might encourage a trading mentality that
could increase the overall level of risk in the portfolio.
We believe that the agencies and the SEC could
productively focus on the improvement in supplemental
disclosure and support the provisions of the Treasury bill
that call for such efforts.

However, at present we believe

that there is rather limited scope for expanding
supplemental disclosures by banks of market value
information.

For a number of years, a supplemental schedule

to the Report of Condition has shown both the current book
value and market value of each type of security held by
banks.

While these market values have not been included in

-40reported capital and earnings, they are publicly disclosed.
In addition, assets that are expected to turn over
relatively quickly are carried at market value, in the case
of trading accounts, or at the lower of cost or market
value, in the case of debt securities, mortgages, and other
loans held for sale.

The Report of Condition requires

separate disclosure of the amount of debt securities and
loans held for sale, with the latter going beyond what is
mandated under GAAP.

Perhaps the only significant area

where additional supplemental disclosures of market value
information may be appropriate is residential mortgages that
are not held for resale and mortgage servicing rights. The
active secondary market for these assets and related
mortgage-backed securities could be used as a basis for
disclosure of their market value.
Much can be done to reduce divergences between
accounting and economic measures of financial condition
within the current GAAP framework.

The most important

priority should be to improve the reporting of loan loss
reserves and disclosures about loan quality and asset
concentrations.

Financial analysts typically cite these

areas, rather than the lack of market value information, as
the most problematical under current accounting standards.
In this regard, on March 1, the Federal banking and thrift
agencies recommended voluntary disclosures about the cash
flows and other characteristics of nonaccrual loans held by

-41banking and thrift organizations.

In addition, the Report

of Condition was recently revised to collect detailed data
on the participation by banks in highly leveraged
transactions.

Nevertheless, further disaggregated

disclosures about the characteristics of loans and
borrowers, as would be required under S.543, may be
appropriate.

Such disclosures could exert constructive

market discipline on depository institutions to ensure
adequate provisioning for loan loss reserves.
I would also note that the banking agencies
currently are working to develop more comprehensive and
uniform standards for examining loan loss reserves.
Together with an at least annual full-scope asset quality
examination of every bank, these standards should enhance
the reliability of estimates of the allowance for loan loss
reserves and their comparability across institutions.
Conclusion
Mr. Chairman, the bills before you address critical
issues of fundamental importance.

The Board strongly

supports the provisions of the Riegle and Treasury proposals
to rein in the safety net by limiting deposit insurance
coverage and implementing prompt corrective action
procedures.

We believe, however, that the Riegle bill

should be extended to cover the proposals in the Treasury
bill to expand the range of permissible activities for
organizations with well-capitalized banking subsidiaries and

-42to rescind inefficient restrictions on interstate banking.
These steps would significantly and prudently limit
subsidies to banks, reduce incentives for excessive risktaking, and safely remove constraints that have limited the
ability of banks to deliver wider services at lower costs.
All of these actions, including assured funding for BIF, are
required if we are to have a healthy and strong banking
system capable of financing economic growth and providing
American households and businesses with low cost state-ofthe-art financial services.
Despite the need to develop procedures to assure
that BIF has adequate resources, the Board urges the
Congress to address the issues broadly and to avoid only
partial solutions by separating into component parts the
comprehensive proposals for reform such as those suggested
by the Treasury.

Despite our concerns about some of its

proposals, we strongly support the thrust of the Treasury's
approach because it addresses the issues within a framework
that attacks the major root causes of the problems in our
banking system.
******

GREENSPAN TESTIMONY
DRAFT #3: 4/15/91
I am pleased to appear before this Committee to
discuss two important banking reform bills.

The first,

S.543, the Comprehensive Deposit Insurance Reform and
Taxpayer Protection Act of 1991, was introduced by Chairman
Riegle and by Senators Dodd and Wirth.

The second, S.713,

is the Treasury's proposed Financial Institutions Safety and
Consumer Choice Act of 1991.

These two bills have a

significant degree of overlap and agreement about
modifications to our deposit insurance system and our
supervisory procedures.
Both bills propose similar reforms to reverse one
of the fundamental causes of the problems facing our banking
system today:

an expansive safety net that creates

incentives for our banks to take excessive risk with
insufficient capital.

The Treasury bill also addresses two

other root causes of the present difficulties of the U.S.
banking system:

(1) the reduction in the value of the bank

franchise associated with the ongoing technological
revolution that has lowered the cost of financial
transactions and expanded the scope of financial activities
of bank rivals; and (2) a statutory and regulatory structure
that impairs the competitiveness of U.S. banks by increasing
their operating costs, discouraging geographic
diversification, and limiting their ability to respond to

-2financial innovations and the challenges posed by nonbank
providers of financial services.
The coupling of the Riegle bill with the provisions
of the Treasury bill on interstate branching and expanded
activities for banking organizations would address these
basic problems facing U.S. banks, and establish a
particularly useful framework for congressional action.
These broader reforms would make our banking system more
efficient, better able to serve the public, and create an
environment for a safe, sound, and profitable banking
system.
Mr. Chairman, both bills contain a large number of
detailed provisions.

In the interests of both time and

space, I have limited my comments to those portions of each
bill that represent the core proposals relevant to basic
reform, to those for which the Board may have a view
contrary to others that you may have heard, and to those
with which the Board has relatively strong reservations.

I

will, of course, respond to questions about those provisions
on which I have not commented.
With so many provisions, it is not surprising that
all members of the Board support a significant number of
them, no member supports all of them, and a few provisions
are opposed by some or all of us.

Thus, when I say the

Board supports or opposes any particular provision, I will
be suggesting either a unanimous or majority position.

In

-3this sense, I can say that the Board strongly supports both
bills in their approach to deposit insurance and supervisory
procedures, and similarly strongly supports the thrust of
the Treasury bill to authorize new activities and interstate
branching.
Deposit Insurance Reform
Both bills would rein in the safety net by limiting
insurance coverage to $100,000 per individual per insured
institution (plus $100,000 for retirement savings) and by
eliminating coverage for all —
most —

or in the case of S.543,

pass-through and brokered accounts.

The Board

supports the basic proposal to limit insurance coverage.

We

believe such a step would be consistent with the original
intent of deposit insurance to protect the smaller-balance
depositor.
It is worth noting that 1989 survey data suggest
that only about 3-1/2 percent of households held accounts
that, when combined for all household members, exceeded
$100,000 at a single depository institution.

However, 60

percent of these combined accounts were both less than
$200,000 and held by households with two spouses, each of
whom could, under the provisions of both bills, open fully
insured accounts at the same institution.

With this

adjustment, only 1-1/2 percent of households would have held
accounts with uninsured balances.

These households had

-4median net worth in excess of $2 million, hardly a family
for which the safety net wad designed.
Some observers would prefer a rollback in coverage.
If we were rewriting history, few now would call for
insurance coverage of $100,000 per individual per
institution.

But, as I noted last summer before this

Committee, such insurance levels are now capitalized in bank
stock values, in loan and deposit rates, and in the
technology and scale of bank operations.

A rollback could

thus create disruptions that may well exceed its benefits.
However, drawing explicit limits and requiring the least
costly method for resolving the financial problems of banks
-- another common provision of both bills -- would bring
additional discipline to bear on bank management and limit
the taxpayer's exposure for the safety net guarantees.
The Treasury also proposes a study of longer-run
efforts to limit coverage to $100,000 per individual across
all institutions.

The Board endorses the concept of a study

in order to understand better the potential cost and
intrusiveness of such a fundamental change in the scope of
deposit insurance coverage.
Both bills would require the FDIC to establish a
risk-based deposit premium assessment system.

In principle,

such a system has several attractive characteristics:

it

would link the cost of insurance to the risk that a bank
poses to the insurance fund; it would reduce the subsidy to

-5risky banks; and it would spread the cost of insurance more
fairly across depository institutions.

It could also be

coupled with risk-based capital, reducing the premium for
those banks that held capital above minimum levels.
Whatever these attractions might be in principle, the Board
would urge caution at a time when premiums are already high,
BIF resources are low, and the range of premiums necessary
to reflect risk differences accurately, and induce genuine
behavioral changes, might be much wider than feasible.
Risk-based premiums also would have to be designed with some
degree of complexity if they were to be fair, and if
unintended incentives were to be avoided.

Moreover, the

extent of potential benefits when risk-based premiums are
imposed on top of the risk-based capital system, while
likely positive, require further evaluation.
[The Riegle bill incorporates a proposal of Senator
Dixon that would permit the FDIC to rely more on private
deposit insurers to establish premiums and to assume part of
the liability for coverage.

The Treasury bill proposes a

demonstration project along the same lines.

The Board

believes there are significant practical and conceptual
difficulties with private deposit insurance, and initiatives
in this area should be taken with care.

To be willing to

participate, private insurers would likely require that all
relevant supervisory information —
confidential —

most of which is now

be shared with them.

The provision of such

-6information would create a substantial potential for
conflicts of interest.

For while private insurers might be

placed under obligation to use the information only to
evaluate risk in providing depositor insurance, there would
be an obvious opportunity to use the information for other
purposes, such as deciding how to allocate their own
portfolio assets.

Moreover, with closure decisions

presumably remaining in the hands of FDIC, the private
insurers would likely adjust their premium upward to reflect
the risk associated with the uncertainty regarding when the
FDIC might close a troubled institution.
Private insurance and public responsibility
unfortunately are not always compatible.

It is clearly

unreasonable to impose on private insurers any macrostability responsibilities in their commercial underwriting
of deposit insurance.

Nonetheless, private insurers'

withdrawal of coverage in a weakening economy, or their
unwillingness to forebear in such circumstances, while
understandable, would probably be counterproductive to
broader national interests.

Moreover, an inability of

private insurers to meet their obligations would be
disruptive at best and potentially necessitate a backstop
role for the Treasury and taxpayers.]
Both bills require the FDIC to resolve failed banks
in the least costly manner, which generally means no funds
to cover uninsured deposits.

The Riegle bill, however, has

-7no provision permitting consideration of systemic risks,
and, after 1994, prohibits outright any financial assistance
by the FDIC to an insured entity that would have the effect
of preventing loss to uninsured depositors or creditors.

To

minimize the impact of a bank failure on other banks, this
bill would require the Federal Reserve to develop and apply
rules that limit interbank deposits and credits, including a
prohibition on interbank deposits by banks not in capital
compliance.
While the Board understands the desire to limit
systemic risks through controlling interbank credit
relationships, we believe that the Committee and the
Congress should be sensitive to the substantial disruption
that could occur in the correspondent bank network from such
a proposal.

We are particularly concerned with the

inducement to rapid withdrawals that would be associated
with the message that a bank, whose capital has declined to
just below minimum levels, was suddenly prohibited from
taking interbank deposits.
The Treasury's bill is silent on interbank deposits
and credits.

However, it calls for an exception to the

least costly resolution of failed banks in those situations
in which the Treasury and the Federal Reserve Board, on a
case-by-case basis, jointly determine that there would be
bona fide systemic risk.

While depositors would be

protected in such cases, it is important to emphasize that

-8stockholders and nondeposit creditors of these large
insolvent banks and their holding companies would not be,
and their senior management could be replaced.

For the

purpose of controlling systemic risk, it is only necessary
to ensure that depositors retain confidence in the banking
system, and for this purpose other claimants need not be
protected.
Nevertheless, like you, Mr. Chairman, no one -including the Federal Reserve Board —

is comfortable with

the exception procedures for addressing systemic risk, even
though the Treasury proposal would tighten up the way such
cases are handled.

While, in principle, systemic risk could

develop if a number of smaller or regional banks were to
fail, systemic risks are more likely to derive from the
failure of one or more large institutions.

Thus, the need

to handle systemic risk has come to be associated with the
too-big-to-fail doctrine.

The disproportionate degree of

systemic risk at larger banks highlights the tension between
one of the main purposes of deposit insurance —
smaller-balance depositors —

protecting

and the concern that the rapid

withdrawals by uninsured depositors of weak larger banks
could cause and spread significant disruptions that could,
in turn, affect credit availability and macroeconomic
stability.

Whatever its macro benefits might be, too-big-

to-fail has increasingly offended observers and policymakers
alike because of its inequitable treatment of depositors and

-9borrowers at banks of different sizes, and its tendency both
to broaden the safety net and to undermine depositor and
creditor discipline on bank risk-taking.

Despite the

substantial concerns, the Board, like the Treasury, has
reluctantly concluded that there may be circumstances in
which all of the depositors of failing institutions will
have to be protected in the interests of macroeconomic
stability.
I would emphasize that other provisions of both
bills should ultimately make this issue less relevant.

The

greater emphasis on capital maintenance, more frequent onsite examinations, and policies of prompt corrective action
can be expected to modify bank behavior and attitudes toward
risk-taking.

Indeed, the ultimate solution to the too-big-

to-fail problem is to ensure that our policies reduce the
probability of large banks becoming weak, and that when
banks experience distress that regulators act promptly to
limit FDIC costs.

But reality requires that we recognize

that substantial increases in capital and substantial
reversals of policies cannot occur in the short run.
Moreover, it would be taking a significant risk, we believe,
to eliminate the long-run option to respond in a flexible
way to unexpected and unusual situations.

The Federal

Reserve alone cannot address this problem.

We can add

liquidity to the economy and we can direct liquidity to
individual institutions as long as they remain solvent.

But

-10we cannot, under the Federal Reserve Act, nor should we,
provide either capital or liquidity to insolvent
institutions.
Prompt Corrective Action
The centerpiece of both bills is a capital-based
prompt corrective action mechanism, under which entities
with capital ratios below certain standards would be placed
under prompt and progressively greater pressure to limit
their dividends and their growth.

As the degree of

undercapitalization increases, the supervisory pressure
would intensify.

The principal objective of prompt

corrective action is to change the behavior of bank
management by modifying its risk-benefit calculations
through the establishment of a presumption that supervisors
will take specified corrective action as capital
deteriorates.

Moreover, by acting promptly, it is possible

for the franchise values of the going concern to be
maintained and to avoid the rapid declines in value that
normally occur for insolvent banks.

For the same reason, at

some low, but still positive, critical level of bank
capital, the bank would be placed in conservatorship or
receivership and the stockholders provided only with
residual values, if any.

If the bank could not be

recapitalized, it would be sold, merged, or liquidated;
larger banks might be reduced in size over time before sale
or liquidation.

-11The Board strongly supports this approach and
believes that it is an idea whose time has come for
enactment.

In this regard, we are struck by the many

similarities between the specifics of the two bills.

The

Treasury proposal clearly draws heavily on the provisions of
the earlier version of the Riegle bill.

Our suggestions do

not call for significant modifications, but we nonetheless
urge their consideration.
In both bills it would be desirable, we believe, to
make clear that supervisory standards other than capital may
also be used to categorize depository institutions.

Our

supervisory experience and the economic research conducted
at the Board and elsewhere strongly indicate that capital
ratios alone do not always adequately differentiate between
banks posing high and low risk to the deposit insurance
system.

Capital clearly is a key factor —

single most important factor —

indeed the

indicating the financial

condition and future performance and solvency of a bank.

It

should thus be the major determinant in prompt corrective
action.

Nonetheless, other information reflecting asset

quality, liquidity, earnings, and risk concentrations is
also relevant.

Practical experience and research also

suggest that judgmental information based on recent
examinations, such as classified assets data, would enhance
the accuracy and timeliness with which high-risk banks are
identified.

In short, the flexibility to use other

-12supervisory information is needed because circumstances can
and do arise where other factors —
increasing concentration of assets —

such as rapid growth or
are better indicators

of a bank' s current and future financial condition than its
current GAAP capital ratio.

A reduction in a bank's capital

ratio requires that a close review for significant problems
is required.

But, we believe that it should be recognized

that a system based on capital alone may sometimes be
unacceptably tardy in its reaction time and, as a result,
other variables should be considered as well.
These other indicators of the financial condition
of a bank should not prevent categorization based on
capital.

They would, however, permit supervisors to act

even if the criteria for bank capital were met.

Indeed, we

would suggest the proposed provisions for prompt corrective
action be revised to indicate that supervisors could
use other supervisory information to downgrade institutions
relative to zones implied by capital alone.

We believe this

approach would greatly improve the overall effectiveness and
fairness of a policy of prompt corrective action without
jeopardizing the presumption that regulators would be
required to act quickly, forcefully, and consistently in
dealing with capital-impaired institutions.

In our view,

noncapital considerations should only be allowed to reduce
the category that capital alone would call for, and never
either to neutralize or raise the categorization of a bank

-13based on capital.

The Treasury's proposal includes

reference to unaafe and unsound conditions or operations in
placing banks into lower zones, but more general language
would, we believe, be useful.
Indeed, even with the supplemental authority
provided by the Treasury and Riegle prompt corrective action
proposals, the bank regulators must remain vigilant in
detecting problems that do not immediately show up in
capital ratios of banks, and must be aggressive in using
existing enforcement authority to address these problems.
Both bills would permit a systemic program of progressive
restraint based on the capital of the institution, instead
of requiring the regulator to determine on a case-by-case
basis, as a precondition for remedial action, that an unsafe
or unsound practice exists.

This would provide a powerful

and useful tool for addressing problems at banks, but would
not replace the need for active supervision of other factors
at banks.
The proposed Treasury legislation would permit
expedited judicial review to ensure that the supervisor had
not acted in an arbitrary and capricious way, but would
allow the supervisory responses to go forward without delay
while the court was reviewing the process of capital
measurement.

Such a procedure is a necessary precondition

for the "prompt" in prompt corrective action, but should be
modified to include the other supervisory standards referred

-14to above.

We urge the incorporation of this concept in

S.543.
The Riegle proposal has three categories of
classification for prompt corrective action and the Treasury
proposal has five.

The Board prefers the larger number

of categories because of the additional flexibility it
provides.

Both approaches require certain actions and

permit supervisory discretion when deemed appropriate.

In

the Treasury approach, the number of required and the range
of permissible actions expand as the capital ratio declines,
but procedures are specified —

requiring explicit

determination of public benefits —

that permit the

supervisor to delay taking required actions.

The Riegle

approach permits no deviations from a small number of
required actions, but has a wide range of permissible
responses, a procedure that also provides flexibility to the
supervisor.

Both approaches thus blend flexibility with a

mandate for prompt action.

Both avoid inflexible, cookbook

supervisory rules, while establishing a presumption of rapid
supervisory action.
A final technical note.

Both bills call for the

regulators to establish the specific capital ratios for each
zone or category.

The Treasury bill requires the

agencies to set the critical capital level —

which would

call for putting the bank in conservatorship or receivership
—

at a point that generally permits resolution of troubled

-15banks without significant financial loss to the FDIC.

The

Treasury bill provides that this measure may be no lower
than 1.5 percent of the bank's assets.

The Riegle bill

indicates that the critical capital ratio should be set high
enough that "with only rare exceptions" resolution would
involve no cost to the FDIC.

The Riegle bill does not set

any minimum critical capital level itself.
The very act of placing a bank into receivership or
conservatorship significantly lowers its franchise value,
thereby increasing FDIC resolution costs.

It is

unreasonable to impose such a haircut on operating banks.
In both bills, therefore, we would suggest that the
criterion be to "minimize" resolution costs.

It is worth

emphasizing that prompt corrective action will tend to
reduce losses to the insurance fund, but a genuine failsafe, no-losses-to-the-FDIC policy would require
unrealistically high capital levels.

We also believe that

it is appropriate for Congress to set a floor on the
critical capital level that indicates that Congress
recognizes the positive subsidy resulting from the federal
safety net.
Bank Insurance Fund (BID Recapitalization
The Treasury proposal would authorize the Federal
Reserve Banks to lend up to $25 billion to the FDIC to
absorb losses sustained by the BIF in resolving failed
banks.

While the liabilities of the BIF would be full faith

-16and credit obligations of the U.S. Treasury, it is
anticipated that they would be repaid from increased
insurance premiums.

Premiums could be increased to as high

as 30 cents per $100 of assessed deposits —

7 cents higher

than the premium the FDIC has proposed to impose at midyear.
In addition, the BIF could borrow from other sources up to
$45 billion for "working-capital" purposes, i.e., to carry
assets of failed banks pending their sale or liquidation.
These loans would thus be self-liquidating.

Total premium

income would be used to pay interest on borrowings from the
Federal Reserve and the Federal Financing Bank, cover BIF
fund losses, repay Federal Reserve loans, and rebuild the
BIF fund.
In the current environment of intense competition
and weak earnings, the Board is concerned about the
potential costs of further premium increases in terms of the
soundness and competitiveness of our banking, financial, and
economic system.

No one can be certain how high the premium

could be raised before the costs outweigh the benefits in
terms of added revenues for BIF.

What is clear is that in

reaching a judgment about the appropriate premium level we
cannot ignore these potential costs simply because they
cannot easily be measured.

The premium level that maximizes

BIF's premium revenues, or even the premium level that
maximizes the net worth of BIF, could be substantially
higher than the level that would be optimal if the potential

-17adverse impact of higher premiums on our financial system
and our economy could be precisely quantified.

[In light of

these considerations, the Board supports the imposition of a
30 basis point premium cap, and urges caution in considering
increases in premium costs beyond an amount equal to a 23
basis point on the current base.]
Irrespective of the premium rate, the Board has
some difficulty understanding the value and purpose of using
the Federal Reserve Banks as financial intermediaries in
funding BIF losses.

The implications for the financial

markets, for the economy, and for budget scoring all would
be the same whether the Treasury —
Bank
Banks.

—

or the Federal Financing

directly financed the BIF, rather than the Reserve
In both cases, the public must absorb more Treasury

securities, since, for monetary policy purposes, the Federal
Reserve would have to offset the impact on reserves of its
BIF note purchases by selling Treasury securities from its
portfolio.

Recorded FDIC outlays, net interest payments of

the U.S. government, the measured deficit, and the level of
interest rates would all be the same regardless of whether
the Reserve Banks are, or are not, used as intermediaries in
this process.

The only difference between the two

approaches is that the Federal Reserve portfolio becomes
more illiquid if the Federal Reserve Banks are participants,
perhaps causing some changes in perceptions around the world

-18about the ability of the U.S. central bank to achieve its
policy objectives.
Mr. Chairman, the BIF fund needs to be either
recapitalized or to have unquestioned access to resources to
meet its obligations, obligations that have cumulated from
decisions and policies of the past that cannot be shirked.
We should be careful, however, that we are not misleading
ourselves into thinking that anything is being accomplished
by using Reserve Banks in the process.

The financing

mechanism does not change the nature of the financial flows
required and, under present law, cannot change the impact on
the measured federal deficit.
The losses to BIF that have already occurred or
will be booked in the period immediately ahead reflect
credit decisions and portfolio and funding choices already
made by banks.

They cannot be changed.

Regardless of the

current or anticipated state of the deposit insurance fund,
[the Congress in 1987 reaffirmed, in the Competitive
Equality Banking Act, that the deposit insurance guarantee
is backed by] the full faith and credit of the U.S.
government [up to] [will back] the statutory $100,000 limit
on federal deposit insurance.

And, it is imperative that

whatever decision the Congress reaches on the funding
mechanism must credibly eliminate any vestigial uncertainty
about how the funding will be arranged and its costs
allocated.

These issues need to be resolved, and the

-19publicity surrounding them eliminated, so that depositors
can be confident that the government's guarantee will be
implemented, and banks -- and the suppliers of capital —
will be able rationally to plan the costs and profit
opportunities in banking.
However the costs incurred in the past and the
immediate future are allocated, what is fundamental is that
we must adopt policies now to minimize the risk that such
losses to the insurance fund will ever occur again.

The

Board believes that both the Riegle and Treasury bills
establish an approach that would accomplish that objective
through prompt corrective action.

But the Riegle bill does

not address other issues that would strengthen banking
organizations, issues that I would now like to discuss.
Expanded Activities and Interstate Branching
The Treasury proposal does not call for an increase
in the minimum international capital standards that would be
fully phased-in by the end of next year.

The Board still

believes that a significant part of the longer-run solution
to the subsidy provided by the safety net is an increase in
minimum capital standards, but it understands the shorterrun restoration process that must precede it.

In the

interim, the Board supports the Treasury proposal that would
immediately reward those financial services holding
companies with bank subsidiaries that have capital
significantly above the minimum standards. Not only does

-20such an approach create additional inducements for these
organizations to build and maintain the banks' capital, it
also addresses one of the most significant causes of
weaknesses in the banking system by widening the scope of
activities for holding companies with well-capitalized bank
subsidiaries.
It is clear that some members of Congress are
hesitant about authorizing wider activities for banking
organizations at a time when taxpayers are being asked to
pick up the costs for failed S&Ls that have unsuccessfully
taken too much risk, and when BIF recapitalization proposals
raise the concern that taxpayer assistance for resolution
costs of banks may also be necessary.
understandable.

Such hesitancy is

However, two crucial differences exist

between the expanded bank activities proposed by the
Treasury and those previously allowed for S&Ls: the types
of activities in which the institutions could engage, and
the types of institutions that would be allowed to engage in
the activities.
The wider activities proposed by the Treasury are
all financial in nature; they involve the types of risk with
which bankers are familiar, letting them build on their
expertise.

Thus, for example, the bill would not permit

financial services holding companies to engage in real
estate development or other nonfinancial activities.
worth repeating that the new activities that would be

It is

-21authorized would be restricted to holding companies with
well-capitalized and soundly operated bank subsidiaries.
They are to be conducted in separately capitalized
affiliates that would have limited access to bank funds; and
they must be divested if the capital of the affiliated banks
does not remain significantly above the minimum
international capital standards.

The proposal does not

repeat the thrift experience of authorizing all institutions
—

strong and weak —

to engage in new activities in the

depository, financed by insured deposits.

The proposed

approach is unlikely to expose the safety net to additional
risk because it does not reflect a wholesale removal of
restraints.

Based on their current capital positions, only

about one-fourth of the largest 25, and about one-half of
the largest 50, of our banking organizations would be
permitted to engage in such activities if they were
authorized today.

Almost all of the next 50 largest bank

holding companies have bank subsidiaries with capital high
enough to permit the holding company to engage in these new
activities.
The best protection for the insurance fund is to be
certain that we have strong banking organizations.
Authorizing wider activities for holding companies with
well-capitalized bank subsidiaries would increase the
efficiency of our financial system by permitting such
organizations to respond more flexibly to the new

-22competitive environment in banking here and abroad.

It also

would add to the incentives fee increasing and maintaining
bank capital, and it would make available better and cheaper
services to customers of U.S. banks around the world.
Similar benefits involving even more banks and a
larger proportion of the public would result from widening
the geographic scope of bank activity.

The Riegle bill

excludes and the Treasury bill includes such provisions.
The Treasury proposal would repeal the Douglas Amendment to
the Bank Holding Company Act, to permit banking companies to
operate subsidiary banks in all states, and would amend the
McFadden Act, to permit banks to operate branches of their
banks in all states.

The bill would thus eliminate an

anachronism and permit full interstate banking by any
vehicle that a banking organization chooses.
An interstate banking system has slowly evolved in
this country through the holding company vehicle.

Only

Hawaii and Montana do not now have on the books legislation
that permits —

or is scheduled to permit —

interstate banking.

some form of

But this approach, with separately

capitalized bank subsidiaries, and with less than full
nationwide banking authorized, still does not permit some
banking organizations to enter some attractive markets and,
most important, is unduly costly.

True nationwide

interstate branching would be much more flexible and
efficient, achieving geographic diversification at lower

-23cost.

Simply by collapsing existing subsidiaries to

branches, banks could eliminate the unnecessary costs of
separate boards and extra management layers, as well as the
costs of separately capitalizing each subsidiary.
Authorization of interstate bank branching is, in effect,
both a more efficient use of capital and a capital-building
step by reducing banking costs.
The evidence from intrastate branching does not
suggest it will be a substantial source of additional
earnings to out-of-market banks.

What interstate banking

promises is wider consumer choices at better prices and, for
our banking system, increased competition and efficiency,
the elimination of unnecessary costs associated with the
delivery of banking services, and risk reduction through
diversification.

The Board continues to urge its prompt

adoption.
Regulation and Examination
The holding company form is retained in the
Treasury proposal as the best organizational vehicle for
financial modernization.

Under the Treasury proposal, each

holding company subsidiary —

bank and nonbank —

would be

separately capitalized and functionally regulated as if it
were an independent entity:

bank regulatory agencies would

regulate banks, the SEC would regulate broker/dealers and
mutual funds, and the states would regulate insurance
companies.

-24In order to restrict the safety net to the insured
bank, the proposal would apply Sections 23A and 23B of the
Federal Reserve Act, which limits quantitatively the
financial transactions between banks and their affiliates,
and requires that such transactions be coilateralized and
conducted on market terms.

However, to achieve the

synergies that are the purpose of the proposal, the bill
would not impose management, operations, or general
marketing firewalls, though strong disclosure requirements
would be required to protect the consumer.

Among the

firewalls that would remain are restrictions on sales of
affiliate liabilities at the bank, where they might be
confused with insured deposits.
In the Treasury bill, the primary regulator of the
largest bank subsidiary would become the umbrella supervisor
of the financial services holding company.

The Treasury

bill contemplates that, with expanded permissible
activities, the insured banking units would account for a
significantly smaller proportion of the consolidated assets
of the financial services holding company than they are now
of the bank holding company.

As a result, the focus of the

umbrella supervisor in the Treasury bill is to police and
constrain threats to the bank, while limiting bank-like
regulation of the holding company and its uninsured
subsidiaries.

The Riegle bill, in contrast, does not expand

the scope of activities of banking organizations and thus

-25retains the current bank-like regulatory focus on the
consolidated holding company, whose assets are predominantly
banks and subsidiaries whose activities are closely related
to banking.
[In their respective context, each of these
approaches makes sense to the Board because they link
regulation to the type of activity.

Since the Board

strongly supports a wider range of activities for banking
organizations, we would also support the regulatory approach
of the Treasury bill if such activities are authorized.]
Under [that] [the Treasury bill's] approach, the umbrella
supervisor's authority over the uninsured affiliates of
well-capitalized banks would be limited.

However, the

umbrella supervisor would police financial transactions
between the bank and its affiliates, could assess the risks
to the bank posed by the activities of its nonbank
affiliates, and could require divestiture of a nonbank
affiliate posing a threat to the bank.

In order to assure

that the bank is protected, the Board believes some minor
modification in the language of the Treasury bill are
necessary to make clear and explicit that the umbrella
supervisor could examine the parent anytime it wishes to
assure that it is not creating risk for the bank.

Clarity

is also necessary to assure that, while the umbrella
supervisor would not, as a matter of course, examine the
nonbank affiliates on a regular basis, the umbrella

-26supervisor would be permitted to examine nonbank affiliates
whenever the supervisor believed the affiliate posed a risk
to the banks, even when the banks' capital were above
minimum levels; otherwise the supervisor's divestiture
authority would be less meaningful.

In addition, it should

be clarified that the supervisor would have full examination
powers over the consolidated entity when the banks' capital
declined below minimum levels.

Balancing protection of the

bank and limits on the spreading of the safety net with
minimal regulation of nonbank affiliates requires careful
legislative language.
[All of these clarifications are necessary to
ensure that the umbrella supervisor would be able to act
promptly and effectively to protect the bank.

But the trust

of the modified provisions would still be to limit the banklike regulation of the holding company and its uninsured
subsidiaries, provided the bank affiliates are well
capitalized.

For example, the traditional consolidated bank

holding company capital regulation would not be imposed,
under the bill, as long as its insured depository
subsidiaries were themselves capitalized above minimum
levels.

There are several reasons for this approach:

it

recognizes the practical infeasibility of regulators
determining what the appropriate minimum capital should be
for an organization that is not primarily a banking
organization but rather a true financial services company;

-27it facilitates equitable treatment between holding company
subsidiaries and independent firms; it avoids the
inefficiencies of regulation; it creates an additional
incentive to build and maintain a strong bank capital
position; and it avoids even the appearance of extending the
safety net.
It certainly is true that this would permit holding
companies to rely without regulatory limit on debt markets
to finance equity contributions to their bank and nonbank
subsidiaries —

so-called double leverage.

However, prompt

corrective action would limit dividends and other payments
that bank subsidiaries could make to their parent should the
banks' capital decline.

Such restrictions on dividends, as

well as the strict limitation of the safety net protection
only to the banks, are likely to make financial markets
cautious about the quantity of debt it permits financial
services holding companies to assume. Moreover, with the
appropriate examination authority, the supervisor could take
remedial corrective action if the holding company poses risk
to the banks.]
It is worth underlining that if the capital of the
banks falls and remains below minimum standards, the
Treasury proposal calls for the imposition of bank capital
standards on, and the application of many of the regulations
governing prompt corrective action for banks to, the holding
company on a consolidated basis.

This approach is designed

-28to reinforce the protection of the banks from contagion by
its parent or affiliates.
Should permissible activities of bank holding
companies remain unchanged —

and bank holding companies

remain predominantly in the banking business —

all of us at

the Board would prefer to see the continuation of
consolidated holding company supervision, regardless of the
capital position of the subsidiary bank.

In such a context,

we would support the extension of the cross-guarantees to
nonbank subsidiaries, as provided in the Riegle bill.
The Riegle bill does not address regulatory
structure, while the Treasury bill makes the Board the
primary regulator of state-chartered banks and a new federal
agency the primary regulator of national banks and thrifts.
Thus, both the Board and the Treasury believe that the
Federal Reserve should have a significant role in the
supervisory process.
The Board is convinced that the information flow
obtained from the supervisory contact is of critical
importance for the conduct of monetary policy and the
maintenance of the stability of the financial system.

In

addition, the Board believes its supervisory policy benefits
from the perspective of its responsibilities for macrostabilization.

Not only is it important that monetary and

supervisory policies not work at cross-purposes, but I
cannot emphasize enough how much we rely on the qualitative

-29information we now obtain from bankers through our
supervisory process to understand evolving developments in
financial markets.

We need a critical mass of coverage of

banking markets to get an immediate sense of what lies
behind the data and, just as our responsibilities for macro
stabilization bring a different prospective to our
supervisory efforts, we use this feedback from the
supervisory process both to help us develop our monetary
policy and to evaluate its impact.

For example, our

understanding of the recent evolving problems with credit
availability, the constrained flow of credit, and the impact
on economic activity came importantly from our supervisory
contact with banking organizations large and small.
Under the Treasury proposal, however, the Federal
Reserve would have umbrella authority only over statechartered banks, which tend to be significantly smaller, on
average, than national banks. We believe our ability to
accomplish our monetary policy objective successfully would
be seriously damaged without the intimate contacts derived
from our supervisory responsibilities relating to large
banking organizations.

This theme was echoed in the 1984

Bush Task Force report, which assigned umbrella supervision
of large bank holding companies to the Federal Reserve, even
if it did not regulate the lead bank.

We believe that the

Federal Reserve must have hands-on knowledge of the
operations of those large banking organizations where

-30potential problems could have systemic effects if we are to
perform the critical function of ensuring stability in the
financial markets and payments systems.

For example, it is

difficult to imagine how we would administer our discount
window responsibilities and the associated collateral
evaluations without the practical experience and knowledge
derived from our supervisory responsibilities at the larger
institutions.
Moreover, with the increasing globalization of
banking, in the coming years the central banks of the world
will need more than ever to coordinate responses to
developments that may originate anywhere and impact not only
foreign exchange markets but also the payments system and
financial markets of the United States.

Thus, in our view,

it is essential that the Federal Reserve —
conduct its stabilization policies —

in order to

have intimate

familiarity with all banking institutions having a
substantial cross-border presence.
Both the Bush Task Force and the current Treasury
proposal have noted the needless complexity for banking
organizations that now have an umbrella supervisor for
holding companies that is often different from the primary
bank regulator of the bank subsidiaries.

Thus, both would

make the umbrella supervisor the same agency as the primary
regulator of the largest bank in the holding company.

Both

nevertheless would still permit different regulators of

-31different parts of the same banking organization if there
were state and federally chartered bank subsidiaries of
multibank holding companies.
The Board sees no relevance in charter class for
the economic issues related to regulation.

It is difficult

to understand why two similar banks — be they small banks
in a rural community or global giants in New York City -should be subject to different regulators solely because of
the level of government that granted their charter.

The

Board, thus, urges that, if the regulatory structure is
modified, each banking organization should have the same
regulator of the holding company and all of its bank
subsidiaries, regardless of charter class.
Foreign Bank Activities in the United States
The Treasury bill would require a foreign bank that
desires to engage in newly authorized financial activities
to establish a financial services holding company in the
United States through which such activities would have to be
conducted.

The bill also would require any foreign bank

that chooses to engage in such activities in the United
States to close its U.S. branches and agencies and to
conduct all of its U.S. banking business through a U.S.
subsidiary bank.

Under the bill, foreign banks would lose

their grandfather rights for U.S. securities affiliates
after three years and would be required to obtain approval
from appropriate authorities to engage in underwriting and

-32dealing in securities activities in the United States in the
same way that a U.S. banking organization would.

The

Treasury bill would also allow foreign banks to establish
interstate branches at any locations permitted to state or
national banks.

Foreign banks choosing to engage only in

banking in the United States would not be required to form
U.S. subsidiary banks and would be permitted to operate
interstate through branches of the foreign parent bank.
The capital and other supervisory standards that
would be the basis for authorizing affiliates of foreign
banks to engage in newly authorized financial activities and
interstate banking are the same as would apply to affiliates
of U.S. banks.
equitable.

Such a policy appears appropriate and

On the other hand, we question the need for the

requirement that foreign banks close their U.S. branches and
agencies and conduct their U.S. business in a separately
capitalized U.S. subsidiary bank in order to take advantage
of the expanded powers for activities and branching.
As the Treasury bill recognizes in advocating
domestic interstate branching, a requirement that a banking
business be conducted through separately incorporated
subsidiaries rather than branches imposes substantial costs
by not permitting a banking organization to use its capital
and managerial resources efficiently.

In most countries,

U.S. banks have been permitted to enjoy the advantages
inherent in competing in foreign markets through branch

-33offices.

In bilateral and multilateral discussions, U.S.

authorities have correctly argued that a restriction against
branching discourages the involvement of U.S, banks in
foreign markets.

It would be inconsistent not to

acknowledge that foreign banks could also be discouraged
from involvement in U.S. banking markets by requiring
foreign banks to operate only through subsidiaries in order
to engage in new activities. Moreover, by compelling a
switch from branches, whose deposits now are largely
uninsured, to U.S. subsidiaries, whose deposits would be
covered by U.S. deposit insurance, we would be increasing
the extent to which depositors would look to the U.S. safety
net instead of to the the foreign parent in the event of
problems.
Foreign banks have made a substantial contribution
to the competitive environment of U.S. financial markets and
the availability of credit to U.S. borrowers.

Currently,

legal lending limits for U.S. branches and agencies of
foreign banks are based on the consolidated capital of their
parent banks.

By contrast, requiring a "roll up" of

branches and agencies of a foreign bank into a U.S.
subsidiary bank, whose capital is measured separately from
the parent, might limit the extent to which foreign banks
contribute to the depth and efficiency of markets in the
United States.

-34We also have some reservations about the purpose
that would be served by requiring a foreign bank to
establish a holding company in the United States to conduct
new financial activities.

In particular, requiring foreign

banks to operate through holding companies is not necessary
to assure competitive equity for U.S. financial services
holding companies or independent U.S. nonbank firms. First,
we see no clear competitive advantages to foreign banks when
they can engage in new activities only if the banks are
well-capitalized.

Second, branches of foreign banks possess

no systemic funding advantages in the United States, and any
cost advantage a foreign bank may have in its own home
market would be available regardless of the structure of its
U.S. operations.

The requirement that a foreign bank

conduct new activities only through a financial services
holding company imposes additional costs on foreign banks
without any obvious benefits.

It also creates an inducement

for foreign banks to conduct their banking operations in
less costly environments outside the United States and for
foreign authorities to threaten reciprocal restrictions for
U.S. financial firms abroad.
Commerce and Banking
The Treasury has proposed permitting commercial and
industrial firms to own financial service holding companies.
The Treasury report that preceded its legislative proposals
focused on the need to widen and deepen capital sources,

-35especially for failing banks, for which nonfinancial
corporations might be willing to provide substantial capital
in exchange for control.

The Treasury proposal also seeks

fairness for those financial firms that operate in markets
banks would be authorized to enter under the proposal, but
that would otherwise be prohibited from purchasing a bank
because of their commercial parents.

The Treasury report

also stressed the desirability of additional management
expertise and strategic direction from commercial firms, as
well as the reduction in regulatory burden in distinguishing
between financial and nonfinancial activities.
Those that hold a contrary view argue that our
capital markets are so well developed that profitable
opportunities in banking can attract capital from sources
other than nonfinancial corporations seeking management
control, provided that banks operate in a regime that
permits them to be fully competitive.

In addition,

opponents are concerned about the implications of permitting
commercial and industrial firms to own —

even indirectly —

subsidiaries with access to special government protection.
[On balance, the Board supports on a philosophical
level the notion of permitting any institution the right to
go into any business —
safeguards.

including banking —

with the proper

However], the Board believes it would be

prudent to delay enacting the authority to link commerce and
banking until we have gained some actual experience with

-36wider financial ownership of, and wider activities for,
banking organizations.

We should reflect carefully on such

a basic change in our institutional framework because it is
a step that would be diffficult to reverse, and for which a
strong case for immediate enactment has not been made.
The Board would have no difficulty with those
nonbanking financial firms wishing to affiliate with banks
maintaining their de minimis pre-existing holdings in
commercial or industrial firms.

But, if banking and

commerce connections remain prohibited, financial firms
already owned by commercial and industrial firms would
likely point out the inequity of their being prohibited from
affiliating with banks, while their independent rivals were
free to do so.

Given the relatively small number of

securities firms, insurance companies, finance companies,
and thrifts that are owned by commercial and industrial
firms, the Congress may wish to consider grandfathering
these entities for a time, permitting them limited entry
into banking through their financial affiliates as a
controlled experiment, after which Congress could review the
issue.
Accounting Standards
Both bills address accounting standards in banking.
Timely and accurate financial information on depository
institutions is critical to the supervisory process and to
effective market discipline.

Thus, it is important that

-37financial statements and reports of condition accurately
represent the true economic condition of firms.
The Riegle bill contains a number of provisions
intended to strengthen regulatory accounting standards for
insured depository institutions.

While the Board shares the

basic view that any deficiencies in accounting practices
should be corrected, we are concerned that certain
contemplated reforms may be premature and counterproductive.

In particular, I am referring to the provisions

requiring that regulatory accounting standards move in the
direction of market-value accounting.
The Riegle bill would direct the SEC, in
consultation with the banking agencies, to "facilitate" the
development of regulatory accounting principles that promote
effective supervision and "accurately reflect —
value, to the extent feasible —

at market

the economic condition of

insured depository institutions."

This provision apparently

is intended to stimulate the development of market valuation
techniques, leading, eventually, to the adoption of marketbased accounting standards for banks and thrifts. A related
provision would mandate that banks with total assets of more
than $1 billion disclose the aggregate market value of their
assets and liabilities in Reports of Condition.
The Board recognizes the potential value of
accounting research directed at improving the measurement of
assets and liabilities.

However, we are skeptical whether

-38such research can successfully resolve fundamental problems
regarding the applicability of market value accounting to
all banking organizations.

Consequently, at this time we

believe that it would be premature to commit, even in
principle, to the adoption of market value accounting either
in whole or in part for banking organizations.
Our concerns are both practical and conceptual.
Because most assets and liabilities of banks are not traded
actively, their market values would have to be estimated.
Inherently, such estimates would be highly subjective. For
valid reasons, the economic value of an asset or a liability
might differ according to the identity of the holder,
reflecting differences in individual risk preferences, tax
situations, informational and operating costs, and other
idiosyncratic factors.

Indeed, the value added by banks is

partly attributable to their comparative advantage relative
to other investors in evaluating, originating, or servicing
illiquid loans, based on proprietary information, operating
efficiencies, or special monitoring capabilities.
Owing to this subjectivity, market value estimates
would be difficult to verify by auditors and examiners and
susceptible to manipulation.

Thus, the adoption of market

value accounting principles for illiquid assets could worsen
rather than enhance the quality of information about the
true condition of depository institutions.

Technologies

that reduce the underlying subjectivity of market value

-39estimates generally do so by imposing standardized
assumptions that may not be appropriate in all
circumstances.
Even when assets are traded in liquid markets,
market values may not be the best measure of underlying
value.

A growing body of evidence suggests that asset

prices display substantial short-run volatility or noise
that is unrelated to economic fundamentals.

Under market

value accounting, such noise could generate instability in
the supply of credit to the economy through its impact on
the volatility of capital positions and on public
confidence.

The latter problem could arise even if market

value information were disseminated through supplemental
disclosures.
While the adoption of market value accounting for
investment securities may be technically feasible at this
time, the Board strongly recommends against such a partial
approach.

By exempting from market value accounting major

categories of assets and liabilities, this action could
create substantial measurement distortions that could
artificially distort bank behavior.

Depository institutions

often use investment securities to hedge interest rate risk
present in other areas of their balance sheet.

Thus, were

investment securities marked to market, offsetting gains or
losses on other assets and liabilities generally would not
be recognized, leading to inaccurate measures of the true

-40net worth and riskiness of the institution.

Banks and

thrifts, therefore, might be discouraged by accounting
treatment from undertaking hedging transactions that are in
their best interest.
We believe that the agencies and the SEC could
productively focus on the improvement in supplemental
disclosure and support the provisions of the Treasury bill
that call for such efforts.

However, at present we believe

that there is rather limited scope for expanding
supplemental disclosures by banks of market value
information.

For a number of years, a supplemental schedule

to the Report of Condition has shown both the current book
value and market value of each type of security held by
banks.

While these market values have not been included in

reported capital and earnings, they are publicly disclosed.
In addition, assets that are expected to turn over
relatively quickly are carried at market value, in the case
of trading accounts, or at the lower of cost or market
value, in the case of debt securities, mortgages, and other
loans held for sale.

The Report of Condition requires

separate disclosure of the amount of debt securities and
loans held for sale, with the latter going beyond what is
mandated under GAAP.

Perhaps the only significant area

where additional supplemental disclosures of market value
information may be appropriate is residential mortgages that
are not held for resale and mortgage servicing rights.

The

-41active secondary market for these assets and related
mortgage-backed securities could be used as a basis for
disclosure of their market value.
Much can be done to reduce divergences between
accounting and economic measures of financial condition
within the current GAAP framework.

The most important

priority should be to improve the reporting of loan loss
reserves and disclosures about loan quality and asset
concentrations.

Financial analysts typically cite these

areas, rather than the lack of market value information, as
the most problematical under current accounting standards.
this regard, on March 1, the Federal banking and thrift
agencies recommended voluntary disclosures about the cash
flows and other characteristics of nonaccrual loans held by
banking and thrift organizations.

In addition, the Report

of Condition was recently revised to collect detailed data
on the participation by banks in highly leveraged
transactions.

Nevertheless, further disaggregated

disclosures about the characteristics of loans and
borrowers, as would be required under S.543, may be
appropriate.

Such disclosures could exert constructive

market discipline on depository institutions to ensure
adequate provisioning for loan loss reserves.
I would also note that the banking agencies
currently are working to develop more comprehensive and
uniform standards for examining loan loss reserves.

In

-42Together with an at least annual full-scope asset quality
examination of every bank, these standards should enhance
the reliability of estimates of the allowance for loan loss
reserves and their comparability across institutions.
Conclusion
Mr. Chairman, the bills before you address critical
issues of fundamental importance.

The Board strongly

supports the provisions of the Riegle and Treasury proposals
to rein in the safety net by limiting deposit insurance
coverage and implementing prompt corrective action
procedures.

We believe, however, that the Riegle bill

should be extended to cover the proposals in the Treasury
bill to expand the range of permissible activities for
organizations with well-capitalized banking subsidiaries and
to rescind inefficient restrictions on interstate banking.
These steps would significantly and prudently limit
subsidies to banks, reduce incentives for excessive risktaking, and safely remove constraints that have limited the
ability of banks to deliver wider services at lower costs.
All of these actions, including assured funding for BIF, are
required if we are to have a healthy and strong banking
system capable of financing economic growth and providing
American households and businesses with low cost state-ofthe-art financial services.

Despite the pressing need to

assess BIF-funding questions, the Board urges the Congress
to address the issues broadly and to avoid only partial

-43solutions by separating the components of the broad
proposals for reform such as those suggested by the
Treasury.

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D.

C.20551
ALAN GREENSPAN

March 2 9 , 1 9 9 1

CHAIRMAN

The Honorable Donald W. Riegle, Jr.
Chairman
Committee on Banking, Housing, and
Urban Affairs
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
Thank you for your letter of March 18,
inviting me to testify before the Senate Banking
Committee at a hearing on current banking legislation,
including deposit insurance reform, recapitalizing the
Bank Insurance Fund, regulatory restructuring, interstate banking, and permitting banks to be affiliated
with other financial companies or with commercial
companies.
I will be pleased to appear before the
Committee on Tuesday, April 23, 1991, at 10:00 a.m.

DONALD W. RIEGLE, JR, MICHIGAN. CHAIRMAN
ALAN CRANSTON, CALIFORNIA
PAUL S. SARBANES. MARYLAND
CHRISTOPHER J. DODD, CONNECTICUT
ALAN J. DIXON, ILLINOIS
JIM SASSER, TENNESSEE
TERRY SANFORD, NORTH CAROLINA
RICHARD C. SHELBY, ALABAMA
BOB GRAHAM. FLORIDA
TIMOTHY E. WIRTH. COLORADO
JOHN F. KERRY, MASSACHUSETTS
RICHARD H. BRYAN, NEVADA

JAKE GARN, UTAH
JOHN HEINZ, PENNSYLVANIA
ALFONSE M. D'AMATO, NEW YORK
PHIL GRAMM, TEXAS
CHRISTOPHER S. BOND, MISSOURI
CONNIE MACK, FLORIDA
WILLIAM V. ROTH, JR., DELAWARE
PETE V. DOMENICI. NEW MEXICO
NANCY LANDON KASSEBAUM, KANSAS

STEVEN B. HARRIS, STAFF DIRECTOR AND CHIEF COUNSEL
LAMAR SMITH, REPUBLICAN STAFF DIRECTOR AND ECONOMIST

United States Senate
COMMITTEE ON BANKING, HOUSING, AND
URBAN AFFAIRS
WASHINGTON, DC 2 0 5 1 0 - 6 0 7 5

Chairman Alan Greenspan
Chairman, Board of Governors
of the Federal Reserve System
Federal Reserve Board
20th and C. Streets, N.W.
Washington, D.C. 20551
March 18, 1991
Dear Chairman Greenspan:
Thank you for agreeing to testify at the Committee's April 23 hearing
on current banking legislation, including S. 543 and the Administration's
proposal. We would appreciate hearing your views on deposit insurance
reform, recapitalizing the Bank Insurance Fund, regulatory restructuring,
interstate banking, and permitting banks to be affiliated with other
financial companies or with commercial companies.
The hearing will be held in Room 538 of the Dirksen Building,
beginning at 10:00 a.m.
The Committee's rules require you to deliver at least 150 copies of
your written statement to Room 534 of the Dirksen Building at least 24
hours before the hearing. You should also submit a brief summary of your
statement. Early submission of your statement and the summary will
enable Committee Members and staff to review your statement before the
hearing.
Your full written statement will be included in the record. If you have
any questions about the hearing, please have your staff contact Richard S.
Carnell (224-5787).
Sincerely,
Donald
Chairma

:le, Jr.

For
S. Russell

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
To

Board of Governors

From

Date
Subject:

March 1.1991
Testimony on Treasury

Ed Ettin

Reform Proposals.

While we do not yet have a date, Chairman Greenspan
is expected to be asked to testify in a week or two on the
Treasury proposals. Attached is a draft of that testimony on
which I would appreciate your comments. Among other things,
your views on inclusion or exclusion of bracketed material and
the options on pages 14-18 would be appreciated.

The last two

pages provide—for the Board's information—some statistics on
various regulatory proposals.
Could you please send your comments to me by close of
business Monday.

Thanks.

Attachment
Similar testimony subsequently
requested by the Senate (rather
than House) Banking Committee.
Testimony was redrafted and
referred to 4/17/91 Board
agenda.

DRAFT #5: 3/1/91
ETTIN/KWAST
Testimony
Chairman Alan Greenspan
before the
Financial Institutions Subcommittee
of the House Committee on Banking
March ?, 1991
[NOTE:

BRACKETED MATERIAL OPTIONAL]

I am pleased to appear before this subcommittee
today to discuss the wide ranging proposals of the U.S.
Treasury for modifications to our nation's deposit insurance
system, to the structure and regulation of the banking
system, and to that system's scope for delivering financial
services to the public.

The Congress showed great wisdom in

asking for the study that led to these proposals.

The Board

hopes that the Congress will now consider these and the
other proposals before it and proceed promptly to enact
legislation to ensure a strong, safe, flexible, and
competitive banking system to take us into the 21st century.
Discussions of these reform proposals might best be
conducted within a framework that focuses on the fundamental
causes of the problems that face our banking system.

In

brief, they are (1) an expansive safety net that induces our
banks to take excessive risk with insufficient capital; (2)
a technological revolution that has lowered the cost of
financial transactions and expanded the scope of financial
activities of bank rivals, undermining the economic value of
the bank franchise; and (3) a regulatory structure that

-2impairs the competitiveness of U.S. banks by increasing
their operating costs, discouraging geographic
diversification, and limiting their ability to respond to
financial innovations and the challenges posed by nonbank
providers of financial services.

Despite these factors, the

vast majority of our banks remain strong, safe, profitable,
and well capitalized.

Nevertheless, too many of them are

under considerable stress, and the positions of the others
are likely to erode over time unless the underlying causes
are addressed.

The Treasury proposals, the Board believes,

are a useful road map for the Congress to follow in
developing reforms, and we strongly support their thrust,
with certain reservations I'll note later.
An important Treasury recommendation is the reining
in of the safety net.

Expanding deposit insurance has been

among the major factors underlying the willingness of
depositors to allow banks to operate with lower capital
ratios.

At the same time, they have induced banks to take

portfolio risks that the market would not have permitted
without the government guarantee of bank deposits.

The

Board concurs with the Treasury proposal to limit individual
coverage to $100,000 per insured institution (plus $100,000
for retirement savings), and to eliminate coverage for
brokered and pass-through accounts.

These would be

appropriate steps that are consistent with the original

-3intent of deposit insurance to protect the unsophisticated
depositor.
Some observers would prefer a rollback in coverage.
If we were writing on a blank sheet of paper, few now would
call for insurance coverage of $100,000 per individual per
institution.

But, as I noted last summer before the full

Committee, such insurance levels are now capitalized in bank
stock values, in loan and deposit rates, and in the
technology and scale of bank operations.

A rollback would

thus create disruptions that may well exceed its benefits.
However, drawing explicit limits at current levels and
requiring the least costly method for resolving the
financial problems of banks would put larger depositors at
risk, bring additional discipline to bear on bank
management, and limit the taxpayers' exposure for the safety
net guarantees.
While a study of longer-run efforts to limit
coverage to $100,000 per individual across all institutions
is desirable, the Board is hesitant to endorse such
limitations at this time.

We feel the need to understand

better the potential cost and intrusiveness of such an
effort.
There will always be a tension between the goals of
protecting only unsophisticated small depositors and
maintaining a degree of market discipline by adhering
rigidly to insurance limits, on the one hand, and the

-4concern about the systemic risks that would result from
rapid withdrawals of balances by uninsured depositors and
creditors at weak banks, on the other.

These latter

concerns have led to the so-called too-big-to-fail policy,
which seeks, through purchase and assumption transactions,
to protect all depositors at some institutions in order to
protect financial markets and the economy.

Like most

others, the Board has become increasingly uncomfortable with
this policy because of its inequitable treatment of
depositors and borrowers at banks of different sizes, its
tendency to broaden the safety net, and its undermining of
depositor and creditor discipline for bank risk-taking.
But, like the Treasury, we reluctantly conclude that there
may be circumstances in which all of the depositors of
failing institutions will have to be protected in the
interests of macroeconomic stabilization.
The Treasury proposal, which we support, calls for
the Treasury and the Federal Reserve to determine jointly
those special cases of bona fide systemic risk in which more
flexibility should be permitted for resolving problem banks.
While depositors would be protected in such cases, it is
important to emphasize that stockholders and nondeposit
creditors of these large insolvent banks and their holding
companies would not be, and their senior management could be
replaced.

The Treasury proposal suggests that the extra costs
of resolving these special cases be funded in the short run
by the Federal Reserve, with the advance ultimately repaid
from industry insurance assessments.

Of course, the

Congress is aware that Federal Reserve funding is, in
effect, an appropriation of public funds that results,
regardless of the accounting, in more Treasury securities
being held by the public.

Since such appropriations are

currently the responsibility of the Congress, the Board
suggests that the Congress should review the proposal in
this light.

In addition, the Board finds considerable merit

in recent arguments by the banking industry that the cost of
the public benefit from avoiding systemic risk should be
borne by the public, not the industry.

In an environment of

large federal deficits this conclusion is unlikely to be
popular with the Congress, but the Board is receptive to
shifting the costs of avoiding systemic risk from the
industry to the Treasury.
The Board is driven to this conclusion in part by
the appeal of linking public benefits with public costs, and
in part by a realistic appraisal of the limits on the
additional costs that the banking industry can effectively
absorb.

More generally, our support for public funding of

the benefits of avoiding systemic risk, as well as retention
of deposit insurance limits of $100,000, reflects other
facets of the Treasury proposal that should make insurance

-6coverage an increasingly less important and less relevant
issue.

The greater emphasis on capital maintenance, more

frequent on-site examinations, and policies of prompt
corrective action can be expected to modify bank behavior
and attitudes toward risk taking.

Indeed, the ultimate

solution to the too-big-to-fail doctrine in the end, perhaps
the only one, is to assure that our policies reduce the
probability of large banks becoming weak.
The Board is strongly in favor of the Treasury
report's emphasis on capital-based supervision.

Entities

with capital ratios below certain standards would be placed
under prompt and progressively greater pressure to limit
their dividends and their growth.

As the degree of

undercapitalization increased, the supervisory pressure
would intensify.

The principal objective of prompt

corrective action is to change the behavior of bank
management by modifying its risk-benefit calculations.
Moreover, by acting promptly, it is possible for the
franchise values of the going concern to be maintained and
to avoid the rapid declines in value that normally occurs
for insolvent banks. For the same reason, at some low, but
still positive, critical level of capital, the bank would be
placed in conservatorship and the stockholders provided only
with residual values, if any.

If the bank could not be

recapitalized, it would be sold, merged, or liquidated;
larger banks might be reduced in size over time before sale

-7or liquidation.

No bank, it is worth noting, would be too

large for prompt corrective action, including ultimate sale
or liquidation.
Prompt corrective action properly places limits on
the discretion of supervisors.

However, some proposals

before the Congress would legislate the specific responses
that must be taken.

The Board believes it important to

underline the real risks of inflexible rules; bank
supervision should not be applied in cookbook fashion.

The

Treasury proposal strikes an appropriate balance by
providing procedures for supervisors to deviate from
mandatory steps when such deviations are deemed to be in the
public interest.

But it should be emphasized that, under

prompt corrective action, the presumption would be shifted
toward rapid supervisory action, with delay requiring
affirmative steps by the regulatory agency.

Indeed, a

decision by the supervisor to delay at the low critical
capital level would, under the Treasury proposal, call for
concurrence by the chairman of the FDIC. [?]
[The proposed legislation would blend flexibility
with a mandate for prompt response.

Under current law, the

supervisors' actions are discretionary and conditional on a
showing of unsafe or unsound conditions or a violation of
law.

Implementation of remedial action can be delayed and

extended over a protracted period when the bank contests the
regulator's determination.

The Treasury legislation would

-8permit a systematic program of progressive action based on
the capital of the institution, instead of requiring the
regulator to determine on a case-by-case basis, as a
precondition of remedial action, that an unsafe or unsound
practice exists.

The proposed legislation permits judicial

review of the supervisor's capital measurement, but would
allow the supervisory responses to go forward without delay,
even while the court was reviewing the process of capital
measurement.]
The Treasury proposal does not call for an increase
in the minimum international capital standards that would be
fully phased-in by the end of next year.

The Board still

believes that the longer-run solution to the subsidy
provided by the safety net is an increase in the minimum
capital standard, but understands the shorter-run
restoration process that must precede it.

In the interim,

the Board applauds the Treasury proposal that would
immediately reward those banking organizations whose bank
subsidiaries have capital significantly above the minimum
standards. Not only does such an approach create additional
inducements for higher bank capital, it also addresses one
of the most significant causes of the weakness in banking by
widening the scope of activities for holding companies with
well-capitalized bank subsidiaries.
It is clear that some members of Congress are
hesitant about authorizing wider activities for banking

-9organizations at a time when taxpayers are being asked
to pick up the failure costs for entities that have
unsuccessfully taken too much risk.
understandable.

Such hesitancy is

However, the proposed wider activities are

all financial in nature; they involve the types of risk with
which bankers are familiar—letting them build on their
expertise; they are to be conducted in separately
capitalized affiliates that would have limited access to
bank funds; and they must be divested if the capital of the
affiliated banks declines to--not below, but to--the minimum
international capital standards.
It is worth repeating that these new activities can
be conducted only by holding companies with well capitalized
bank subsidiaries and that they would be required to be
conducted outside the bank.

The proposal does not repeat

the thrift experience of authorizing all institutions-strong and weak--to engage in new activities in the
depository, financed by insured deposits.

The proposed

approach is unlikely to expose the safety net to additional
risk because it does not reflect a wholesale removal of
restraints.

Based on their current capital positions, only

about one-fourth of the largest 25, and about half of the
largest 50, of our banking organizations would be permitted
to engage in such activities if they were authorized today.
Almost all of the next 50 largest bank holding companies

-10have bank subsidiaries with capital high enough to permit
the holding company to engage in these new activities.
The best protection for the insurance fund is to be
certain that we have strong banking organizations.
Authorizing wider activities for holding companies with
well-capitalized bank subsidiaries would strengthen the
long-run viability of healthy banks by permitting them to
respond to the new competitive environment in banking here
and abroad.

It also would add to the incentives for

increasing and maintaining bank capital, and, it is often
forgotten, it would make available better and cheaper
services to customers of U.S. banks around the world.
Similar benefits involving even more banks and a
larger proportion of the public would result from widening
the geographic scope of bank activity.

An interstate

banking system has slowly evolved in this country through
the holding company vehicle.

Thirty-three states now permit

full interstate banking through holding company
subsidiaries, and another fourteen permit some form of
interstate holdings in this way.

But this approach, with

separately capitalized bank subsidiaries, is unduly costly.
Interstate branching would be much more flexible and
efficient.

Simply by collapsing subsidiaries to branches,

banks could reduce their costs and increase their profits
and achieve geographic diversification at lower cost.
Authorization of interstate bank branching is, in effect, a

-11capital-building step and the Board continues to urge its
prompt adoption.
The holding company form is retained in the
Treasury proposal as the best organizational vehicle for
financial modernization.

Under the Treasury proposal, each

holding company subsidiary—bank and nonbank—would be
separately capitalized and functionally regulated as if it
were an independent entity:

bank regulatory agencies would

regulate banks, the SEC would regulate broker/dealers and
mutual funds, and the states would regulate insurance
companies.

Financial transactions between banks and their

affiliates would be limited quantitatively, would have to be
collateralized, and would be conducted on market terms as
called for by Sections 23A and 23B of the Federal Reserve
Act.

To achieve the synergies that are the purpose of the

proposal, management, operations, and most marketing
firewalls, however, would be eliminated.
The primary regulator of the largest bank
subsidiary would be the umbrella supervisor of the holding
company.

That supervisor would examine the parent, police

the financial transactions between the bank and its
affiliates, and could examine any affiliate posing a risk to
the bank.

If the umbrella supervisor concluded that the

activities of a nonbank affiliate were posing a threat to
the bank, it could require the holding company to divest the
affiliate or the banks.

It is worth emphasizing that the

-12umbrella supervisor of the holding company has only one
function:

to police and constrain threats to the bank.

While the umbrella supervisor would be authorized
to act to protect the bank, the oversight mechanism is
designed to limit as much as possible the bank-like
regulation of the holding company and its uninsured
subsidiaries.

nonbank subsidiaries of the holding company

would be examined only if the umbrella supervisor had reason
to believe they were operating in a way that posed a risk to
their bank affiliates.

In addition, the holding company

would be exempt from capital regulation as long as its
insured depository institution subsidiaries were themselves
capitalized above minimum levels.
for the exemption:

There are several reasons

it facilitates equitable treatment

between holding company subsidiaries and independent firms;
it avoids the inefficiencies of regulation; it avoids even
the appearance of extending the safety net; and recognizes
the practical infeasibility of regulators determining what
the minimum capital should be for an organization that moves
away from being primarily a banking organization to a true
financial services company.

It certainly is true that this

would permit holding companies to rely without regulatory
limit on debt markets to finance equity contributions to
their bank and nonbank subsidiaries—so-called double
leverage.

However, with the limit on dividends and other

payments that undercapitalized bank subsidiaries can make

-13under the prompt corrective action proposal, as well as the
general thrust of bank and only bank coverage of the safety
net, the market is likely to be cautious about the quantity
of debt taken on by financial services holding companies.
While a holding company with well capitalized bank
subsidiaries is free of capital regulation, if the capital
of the banks falls and remains below minimum standards, the
bank capital standards and bank prompt corrective
regulations would become applicable to the holding company
on a consolidated basis.

This approach is designed to

reinforce the protection of the banks from contagion by
their parent or affiliates.
A majority of the Board supports the Treasury
approach to holding company supervision, but some members
are concerned about the holding company exemption from
capital regulation, even when the bank subsidiaries are
well-capitalized.

These members are not convinced that the

market will enforce reasonable minimum capital standards on
these banking organizations with insured subsidiaries, and
believe that a low-equity parent can quickly endanger even
its well-capitalized bank subsidiaries.

They also believe

that if the capital of the bank subsidiary declines
substantially, it may be very difficult for a highly levered
parent to raise equity promptly to meet its suddenly imposed
regulatory requirement.

Thus, some Board members believe

that, to maintain the financial integrity of the bank and

-14the banking system, at least minimum bank tier 1 capital
standards should apply to the holding company at all times.
These members believe that the parent should have at least a
plan, acceptable to the umbrella supervisor, that
demonstrates how the holding company would meet its
regulatory capital requirement if the capital of its bank
subsidiaries fell below their regulatory minima.
NOTE:

AT THIS POINT WE PRESENT TWO OPTIONS FOR THE

BOARD POSITION ON THE REGULATORY STRUCTURE.

BOTH OPTIONS

CALL FOR MORE CENTRAL BANK SUPERVISION OF LARGE BANKS THAN
THE TREASURY PROPOSED.

OPTION A ALSO IMPLIES OUR INTEREST

IN EITHER ALL STATE BANKS OR SOME SMALL BANKS TO SUPPLEMENT
OUR LARGE BANK INTEREST.

OPTION B IMPLIES THE LARGE BANK

CARVE OUT DISCUSSED EARLIER THIS YEAR.
[OPTION A:

Both the Board and the Treasury believe

that the Federal Reserve should have a significant role in
the supervisory process.

We believe that the information

flow obtained from the supervisory contact is of critical
importance for the conduct of monetary policy and the
maintenance of financial system stability.

The qualitative

information we now obtain from bankers through the
supervision of organization of all sizes is critical in our
understanding of evolving developments in financial markets.
Not only does it give us an immediate sense of what lies
behind the data, but we use the feedback from our
supervisory contact to help us develop our monetary policy

-15and to evaluate its impact.

For example, our earliest

indication of the recent evolving problems with credit
availability, the constrained flow of credit, and the impact
on economic activity came from our supervisory contact with
banking organizations large and small.
However, information from just the small statechartered banks, which tend to be significantly smaller, on
average, than national banks would, we fear, be insufficient
for these purposes. As a central bank...END OF OPTION A.
NOW SKIP TO LINE 3 OF PAGE 17]
[Option B: Both the Board and the Treasury believe
that the Federal Reserve should have a significant role in
the supervisory process.

But most Board members have some

difficulty with the Treasury's proposed allocation of bank
regulatory responsibilities at the federal level. We view
the proposed criteria for allocating such responsibility
between the Federal Reserve and a new Federal Banking Agency
as being based on legalistic rather than economic grounds:
their charter class rather than the size or the nature of
their activity.

Banking is not the same business at all

entities and can be roughly divided into community,
regional, national, and internationally active banks.

To a

substantial degree, banks in each of these groups face
different markets and different rivals, and have different
problems, but, within groups, the economic issues are very
similar.

It is difficult to rationalize why two similar

-16banks—be they community banks in the same town, or world
class banks headquartered in New York City—should be
regulated by two different federal agencies only because
they have different charters. Nor is it desirable that a
bank be able to shift from what it perceives to be the more
stringent of two regulators by the simple act of changing
its charter.
Under the Treasury proposal, the Federal Reserve
would significantly increase its direct regulatory authority
over banks from about 1,000 to almost 8,300 banks.

But, the

Board believes, its access to the information flow needed
for the conduct of monetary policy and the maintenance of
financial system stability would decline as our supervisory
contact with the larger banking organizations were sharply
curtailed.

I cannot emphasize enough how much we rely on

the qualitative information we now obtain from bankers
through the supervisory process to understand what is
evolving in financial markets. We need a critical mass of
coverage of banking markets to get an immediate sense of
what lies behind the data and we use this feedback from the
supervisory process both to help us develop our monetary
policy and to evaluate its impact.

For example, our

earliest indication of the recent evolving problems with
credit availability, the constrained flow of credit, and its
impact on economic activity came from the large banking

-17organizations with which we have had long-term supervisory
relations.

END OF OPTION B]

As a central bank charged with anticipating or
dealing with financial disturbances and crises, the Federal
Reserve requires intimate familiarity with the operations of
significant banking organizations of the kind that can be
derived only from direct, substantial involvement in bank
supervision.

To perform the critical function of ensuring

stability in the financial markets and payments systems, the
central bank must have hands-on knowledge of the operations
of those large depository institutions where potential
problems could have systemic effects. For example, it is
difficult to imagine how we would administer our discount
window responsibilities without the practical experience
derived from our supervisory responsibilities at the larger
institutions. Moreover, with the increasing globalization of
banking, in the coming years the central banks of the world
will need more than ever to coordinate responses to
developments that may occur anywhere.

The U.S. bank

supervisor that deals with international supervisory
problems should be one with established expertise and
experience in a full range of related fields, from the
connection between financial markets and economic activity
to operations in domestic financial and foreign exchange
markets to the payments system.

-18In short, the central bank is responsible for
contributing to macroeconomic stability through its actions
in domestic and international financial markets.

We

believe our ability successfully to accomplish this
objective would be seriously damaged without the intimate
contact with [both small and]large banking organizations
that come from supervisory responsibilities.
Both the Bush Task Force and the Treasury have
noted the needless complexity for banking organizations that
now have an umbrella supervisor for holding companies that
is often different from the primary bank regulator of the
bank subsidiaries.

Thus, both would make the umbrella

supervisor the same agency as the primary regulator of the
largest bank in the holding company.

Both nevertheless

would still permit different regulators of the same banking
organization if there were state and federally-chartered
bank subsidiaries of multibank holding companies, and the
Bush Task Force assigned umbrella supervision of large bank
holding companies to the Federal Reserve, even if it did not
regulate the lead bank.

The Board sees no relevance in

charter class for the economic issues related to regulation.
It therefore urges that, if the regulatory structure is
modified, each banking organization should have the same
regulator of the holding company and all of its bank
subsidiaries, regardless of charter class.

-19The Treasury has proposed permitting commercial
and industrial firms to own financial service holding
companies.

The Treasury report focuses on the need to widen

and deepen capital sources, especially for failing banks,
for which corporations might be willing to provide
substantial capital in exchange for control.

It also seeks

fairness for financial firms in businesses that banks may
enter under the proposal but that would otherwise be
prohibited from purchasing a bank because of their
commercial parents. And it asserts the desirability of
additional management expertise and strategic direction from
commercial firms.

Those that hold a contrary view argue

that our capital markets are so well developed that
profitable opportunities in banking can attract capital from
other sources, and,

if there are no profitable

opportunities in banking, investment by commercial firms is
unlikely to occur.

There is also concern about the

implications of permitting commercial and industrial firms
to own—even indirectly—protected subsidiaries with access
to special government protection. [Conflicts of interest
might be controlled by firewalls and regulations, and
concentration of power by anti-trust laws, but both of these
issues remain unsettled.]
On balance, the Board supports on a philosophical
level the notion of permitting any institution the right to
go into any business—including banking—with the proper

-20safeguards.

However, we believe it would be prudent to

delay enacting the commerce-banking authority until we have
gained some actual experience with wider financial ownership
of, and wider activities for, banking organizations.

We

should reflect carefully on such a basic change in our
institutional structure that would be difficult to reverse,
and for which a strong case for immediate enactment has not
been made. However, the Congress will have to consider
whether [the two] securities and the other financial firms
already owned by commercial and industrial firms [mostly
captive finance companies and xx thrifts] should be
prohibited from affiliating with banks while their
independent rivals are free to do so, or whether, perhaps,
they should be grandfathered, at least for a time.

The

latter approach may give us a controlled experiment for a
few years, after which Congress could review the issue.

[We

would have no difficulty with those nonbanking financial
firms wishing to affiliate with banks maintaining any prior
de minimus holdings in commercial or industrial firms.]
Mr. Chairman, although I have spent some time on
those areas where the Board has difficulties with the
Treasury's proposals, it is important to underscore that we
agree with most of what the Treasury advocates and certainly
with the broad thrust of their reforms.

Their proposal

would begin to pull back the safety net, develop a capitalbased supervisory process, widen the range of activities for

-21organizations with well-capitalized banking subsidiaries,
and above all rescind costly restrictions on interstate
branching.

These steps would significantly and safely limit

subsidies to banks and incentives for excessive risk-taking
and safely remove constraints that have limited the ability
of banks to deliver wider services at lower costs. All of
these actions are required if we are to have a healthy and
strong banking system capable of financing economic growth
and providing American households and businesses with low
cost state-of-the-art financial services.

However, we have

suggested some important modifications that we think would
improve the proposals which we also urge for your
consideration.

3/1/91

FR Coverage
Bush Task Force Proposal*
Number regulated by
FR

BHCs

Banks

Assets regulated by
FR(Bil.of$)

BHCs1

Banks 2

1,102.9

1,317.4

Percent of Assets
Banking
assets in
BHCs regulated by
FR to total
banking
assets in
BHCs 1

Banks regulated by
FR 2

1. Lead bank is state-chartered
(Treasury Plan)

3,943

8,278

35.62

39.96

—

2. Others with foreign nonshell
branches or subs abroad

24

1,070.5

34.58

a. 1/2% of all BHC assets 3 - 4

15

348.2

11.25

b. 3/4% of all BHC assets 3 - 4

10

~

274.6

—

8.87

—

3

—

111.6

--

3.60

—

10

—

20.5

~

0.66

—

3. Other large entities
accounting for

c. 1 % of all BHC assets 3 - 4

4. Others that are U.S. subs of
foreign banks
TOTALS
l + 2 + 3a + 4*

3,992

8,278

2,542.1

1,317.4

82.11

39.96

l + 2 + 3b + 4

3,987

8,278

2,468.5

1,317.4

79.73

39.96

l + 2 + 3c + 4

3,980

8,278

2,305.5

1,317.4

74.46

39.96

1. Assets are banking assets only. (U.S. assets for foreign bank holding companies)
2. Consolidated domestic and foreign assets of U.S. banks (including subs of foreign banks but excluding
U.S. branches and agencies of foreign banks).
3. For purposes of grouping bank bolding companies by share of aggregate bank holding company assets, asset
totals inclulde both banking and nonbanking assets.
4. Bush Task Force suggested 1/2 percent.
• Bush Task Force Proposal:
(1) FR supervises all state-chartered banks and their holding companies if a state-chartered bank is
the lead bank.
(2) FR supervises holding company only if:
• Subsidiary bank has nonshell branch or subsidiary bank abroad
• Subsidiary bank is U.S. sub of a foreign bank.
• The holding company accounts for V2 percent or more of all BHC assets.

3/1/91

FR Coverage
Summary of Proposals
June 30,1990
Share of assets regulated by
FR
(percent)

Number regulated
byFR

Banking assets
regulated by FR

(Bil.of$)

Banking assets in
FR regulated
holding
companies1
Ratio to
toal
Ratio to
bank
total
assets in bank
all HCs assets

Banks
directly
regula
ted2

BHCs

Banks

BHCs1

Banks2

Current3

5,818

1,013

3,096.2

563.6

100.00

93.9

17.10

Treasury4

3,943

8,278

1,102.9

1,317.4

35.62

33.4

39.96

Bush Task Force5

3,992

8,278

2,542.1

1,317.4

82.11

77.1

39.96

FR proposal 12/906

87

347

1,561.3

1,561.3

50.40

47.4

47.40

FR proposal 11/907

111

651

2,031.0

2,031.0

65.60

61.6

61.60

1.

Assets are banking assets only (U.S. assets for foreign bank holding companies).

2. Consolidated domestic and foreign assets of U.S. banks (excludes $348 billion of U.S. branch and agency of
foreign bank assets that are affiliated with banks under FR coverage).
3.

FR has all BHCs and state member banks.

4.

FR has all state banks and those BHCs where lead bank is state chartered.

5. FR has all state banks, and the BHCs of those organizations where the lead bank is state chartered, the
subsidiary banks have nonshell foreign branches or subs abroad, the subsidiary banks are subs of foreign banks, and
the BHCs total bank and nonbank assets account for V2 percent or more of total BHC assets.
6. FR has BHC and all bank subs of those BHCs with a bank sub that is "internationally active" (i.e., bank has
foreign offices other than shell Caribbean office that on a consolidated basis have more than $500 million in
international loans or have gross futures, forward, and derivative f/x contracts outstanding greater than $5 billion).
Includes U.S. subs of foreign banks.
7. FR has BHC and all bank subs of those BHCs with (1) lead bank sub in the largest 50 by assets; (2) any foreign
assets and total assets of $15 billion or more; and (3) nonshell branches abroad. Includes U.S. subs of foreign banks.
NOTE: All totals exclude 224 foreign banks with $227 billion of U.S.assets that are represented in U.S. only by
branches and agencies. These would, however, be under FR jurisdiction in all FR proposals.

Board Circulation Tally Sheet

Memorandumcirculated for:
vote
___ review
r^L comment
other

From

MONTH: March 1991
2

NUMBER:

Data 3/1/91

Ed Ettin

Subject Deposit insurance system — proposed statement by Chairman Greenspan before the
Financial Institutions Subcommittee of the House Banking Committee.
Distribution Board + Mr. Wiles,

, Miss Jones,

(all staff copies distributed by Mr. Ettin's office, per J. Johnson)
Date:

Friday, Mar 1, 1991
DUE DATE M o n '

M a r4

Time:
Change

Response:

Date

Comments discussed orally

3/5/91

Angell.

Comments submitted

3/5/91

Kelley.

Comments submitted

3/4/91

LaWare.

Comments submitted

3/4/91

Mullins.

Comments submitted

3/4/91

Greenspan.

Remarks

Manson
Seger_

Final Disposition

On.

Vote Results

Data

Action and vote

Similar testimony subsequently

Review cycle completed on
Comment cycle completed on

March 5 , 1991

requested by the Senate (rather

Date

than HOUSE) Banking Committee,

Other.
without Governor(s).

Seger

Testimony was redrafted and
referred to 4/17/91 Board
agenda,

Referred to Board by Governor(s).

FR 1347a (5/00)

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
To

Board of Governors

From

EdEttin

Date March 1.1991
Subject;

Testimony on Treasury
Reform Proposals

While we do not yet have a date, Chairman Greenspan
is expected to be asked to testify in a week or two on the
Treasury proposals. Attached is a draft of that testimony on
which I would appreciate your comments. Among other things,
your views on inclusion or exclusion of bracketed material and
the options on pages 14-18 would be appreciated.

The last two

pages provide—for the Board's information—some statistics on
various regulatory proposals.
Could you please send your comments to me by close of
business Monday. Thanks.

Attachment

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
To

Board of Governors

From

Date March 1.1991
Subject;

Ed Ettin

Testimony on Treasury
Reform Proposals

While we do not yet have a date, Chairman Greenspan
is expected to be asked to testify in a week or two on the
Treasury proposals. Attached is a draft of that testimony on
which I would appreciate your comments. Among other things,
your views on inclusion or exclusion of bracketed material and
the options on pages 14-18 would be appreciated.

The last two

pages provide—for the Board's information—some statistics on
various regulatory proposals.
Could you please send your comments to me by close of

—

—

business Monday.
Attachment

GOVERNOR ANGELL
For^wiflW!~l~H!iP^ ' " " • • ' • • I W w

by MflR 4 1991

v

BOARD OF GOVERNORS

'

OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
To

Board of Governors

From

Date March 1.1991
Subject:

Ed Ettin

Testimony on Treasury
Reform Proposals

While we do not yet have a date, Chairman Greenspan
is expected to be asked to testify in a week or two on the
Treasury proposals.

Attached is a draft of that testimony on

which I would appreciate your comments.

Among other things,

your views on inclusion or exclusion of bracketed material and
the options on pages 14-18 would be appreciated.

The last two

pages provide—for the Board's information—some statistics on
various regulatory proposals.
Could you please send your comments to me by close of
business Monday.

Thanks.

Attachment
Governors Kelley and LaWare - Comments submitted 3/4/91

/

*

•

•

•