Full text of Statements and Speeches of Emmett John Rice : Framework for Expanded Powers of Bank Holding Companies : Remarks before the Pacific Northwest Bankers Association, Seattle, Washington

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FRAMEWORK FOR EXPANDED POWERS OF
BANK HOLDING COMPANIES

Remarks by
Emmett J. Rice
Member
Board of Governors of the Federal Reserve System




before the
Pacific Northwest Bankers Association

Seattle, Washington
October 30, 1986

FRAM EW ORK FO R E X P A N D E D POWERS
O F B A N K H O L D IN G C O M P A N IE S

It is a pleasure to be with you this evening.

I have

long supported the objectives of your national organization and
that combined with my

fondness

for

the

Pacific

Northwest

was

reason to look forward enthusiastically to being here.
Your invitation to speak this evening was extended,

of

course, some months before you knew I would soon be leaving the
Boara

of

despite

Governors.
my

Thus,

I am

"lame-duck" status,

particularly
you

warmly

pleased

that,

reaffirmed

your

desire to have me come.
Now

that

my

views

on

irrelevant or soon will be,
in a topic

that allows

philosophy:

that

permissible

tor

reasonable

regulatory
perhaps
least

body,

a little

are

I thought you might be

the

scope

holding

of

people

different

to stimulate your

it

or

Clearly,

differ.

I approach

powers

companies

companies affiliated with banks.
which

policy

room for the expression or

is,

bank

monetary

As

a

from

a

that

a personal
should

be

those

this is a subject on

member

of

perspective

(it not

interested

generally

from many of you,

thinking

largely

your

Dut

a

bank

that
I hope

agreement)

is
at
on

some important current issues.
The conventional wisdom ot the day is that changes are
occurring so rapidly in the competitive environment ot banking
that




drastic

action

is

necessary

to

overhaul

the

underlying

statutory
years.

framework

I share

created

by

Congress

this conventional

over

the

view insofar

as

past

50

I recognize

the need for substantial changes in the framework governing the
powers of bank holding companies so that
competitive.

Some

Bank

Company

Holding

example,
of

to

the

artificial

Act

and

the

organizations

the

stability

company with the

without

of

barriers

imposed

Glass-Steagall

could be lifted to increase

banking

risks

of

they may become more
in

Act,

for

the competitive viability

adding

the banking

parallel

system.

additional

Where

I part

"conventional wisdom" of the day is that

not believe that all the walls must come

tumbling down.

not believe in deregulation

at which

alone

would

without

determine

any

to the point

competitive

significant

structure

supervisory

dismantled.

"situation

In

standard"

an
of

era

when

banking

many

and

framework.

supervisory framework needs to be changed,
be

the

the

I do
I do

market

viability
While

the

it does not need

espouse

behavior

-

a

type

of

that

is

any

to

development accepted by the market must be inherently good - I
continue

to

believe

that

there

are

certain

fundamental

principles oased upon public policy concerns that must continue
to be the basis for a regulatory structure.
an

immutable

certain

10

commandments

fundamental

of

principles

banking,
have

While
I do

served

I don't have

believe

this

that

country's

economic and financial structure well and that these principles
should not be discarded lightly.




-3 -

I believe
expanded

that

in a manner

bank

holding

consistent

company

with

these

powers

can

principles,

be

and

I

will suggest what those powers might include by discussing four
topics with you this evening.
the

significant

changes

that

First,
have

afreet the banking ana financial
will

indicate

developments
structure.
feel
the

what
ana

I believe

what

Third,

sorts

of

and

environment

to

have

be

the

meant

the banking and

Finally,

powers

affected

outline

continue

today.

results
for

some

the

of
to

Second,

of

1

these

regulatory

1 will briefly discuss the principles that

remain valid tor
country.

they

I will

that

in

that

I believe

financial

context,
are

structure

I will

suggest

consistent

with

I

of

the

those

p r i n ci ple s.
As individuals

in the

trenches

or

the

front

line

of

banking, you are no doubt more aware than I of the developments
over

the

past

five

years

that

have

had

an

effect

on

the

competitive structure of banking and have necessitated a review
and redefinition of the regulatory structure tor banks and bank
holding

companies.

From my perspective

at

the

Board,

I can

identify at least five such developments.




1.

Changes in technology - resulting

in the capacity

to move large volumes of funds and financial data over
wide
short

geographic
time,

areas

(indeed

thereby making

the

world)

possible

the

in

a very

national

international integration of financial markets.

and




-4-

2.

The

greater

volatility

of

interest

resulting, from the elimination of
the

Board's

u

Regulation

and

the

the

rates

-

restrictions

authorization

in

for

additional deposit instruments.
3.

A new

array

particularly
development
bank
now

loan

as
ot

financial

a

result

security

products.

accounts

credit

of

in

for

this

represent

a

receivables

growing

has

the

Commercial

over

of

of

halt

of

begun

all

ot

automobile
and

for

paper,

Mortgage

share

and

services/

accelerating

substitutes

country.

Securitization

products

traditional
tor

the

short

backed

and

presumably

term

securities

mortgage

loans

example,

finance.
credit

will

card

gather

momentum.
4.

Internationalization

past

2U years

have

become

banking
acquired

of

financial

markets

increasingly

organizations
banking

competition.

more

have

in

m

holding

subsidiaries

companies
to

accept

have

activity
world

by

- from

the

same

London

New

U.S.

and

Similarly

branch networks

from

and

foreign

and

extend

In the same day banking

institution
to

Foreign

offices

established

deposits

credits to foreign customers.

the

the

countries

integrated.

U.S. banks have developed foreign
bank

major

established

subsidiaries

During

York

may
to

go

around

Tokyo

and

the
Hong

Kong.

This clearly complicates decisions by the Board

on issues

that were

formerly

considered

to be only

national in scope.
b.

Competition

you know,

from non-fma nci al

institutions.

As

the Board has viewed with some concern the

development of
troubling

"non-bank banks".

when

companies,

commercial

investment

It is fundamentally

enterprises,

houses

and

insurance

other

non-bank

institutions can acquire an organization that accepts
checking

deposits

that

are

insured

by

the

federal

government and has access to the payments mechanism of
the

Fed.

Moreover,

acquisitions

in

a

there

variety

nave
of

been

areas

mergers
that

and

present

additional competition for banking organizations

that

are themselves foreclosed from entering similar areas,
thus tilting the playing field even more against the
banks.
The net result or these and other similar developments
has been a justified cry of anguish
organizations

that

are

indeed entire types of

losing

from commercial

customers,

loan transactions

market

banking

share,

to competitors

and
that

are permitted to engage in a much wider range of services than
the banks without at the same time being subject to the same
restrictions

as

banks.

Unfortunately,

the

response

banking organizations has been tar from unified.




of

the

Some banking

groups

have

activities
others

called

for

elimination

of

all

barriers

in which bank holding companies might

have

suggested

stringently

than

competitors.

in

This

that
the

lack

the

lines

past
of

to

be

keep

consensus

drawn

out

to

the

engage
even

while

more

non-f inancial

among

the

banking

organizations and other

interested trade groups has resulted in

failure by

revamp

there

Congress

is a general

recommendations
vary greatly.

to

feeling

the

that

current

structure.

something must be

for precisely what

remedies

While

done,

should

be

the

applied

There is no consensus as there appeared

to have

been in the 1930's for the passage of the Glass-Steagall Act or
in the 1950's for the passage of the Bank Holding Company Act.
Indeed

perhaps

the

consensus

is

motivated

those

There

no

is

the

most

troublesome

feeling

by

some

congressional

agreement

even

aspect

that

actions
on

the

the

of

lack

principles

should

most

this

be

of

that

discarded.

fundamental

of

principles upon which to build a legislative foundation.
This
organizations
structure.

congressional
to exploit

inaction

loopholes

pressures

legal

regulatory structure

designed

in

permitted

individual

existing

regulatory

the

Basic public policy principles

as market
and

has

to

evade

and

its

competitive

basic

that

are being

instincts

play against

is undermined by

tenets.

haphazard and inequitable developments

The

bypassed

result

has

a

conduct
been

in the structure of the

financial system in which even those who have sought to exploit




-7 -

loopholes have recognized that their
fraught
even

with

from

political

a

business

and

legal

efforts

and decisions

uncertainty

viewpoint,

the

and

second

or

are

are

often,

third

best

strategies to achieve their goals.
The lack of action by Congress and the exploitation of
loopholes
changes

have

in

forced

the

undermined

bank

banking

legal

and

regulatory

environment

regulatory

agencies

in

the

to

deal

context

structure.

The

with

of

an

challenge

to

the agencies is to preserve the public policy objectives of the
existing structure while at the same time allowing reasoned and
measured

innovation

financial

in

the powers

institutions.

and

Needless

to

opportunities
say,

afforded

this

has

become

powers

for

banking

increasingly difficult.
As

we

organizations,
these

powers

framework

ahead

to

expand

the

I believe that it is important to emphasize that
must

for

principles

look

that

be

consistent

banking

with

a

carefully

organizations.

I believe continue

reaffirmed by the Congress

There

to be

valid

measured
again,
to be.




over

the

fashion,

past

five

years

or

so

the
to

the powers of bank holding

let me indicate what

and

certain
should

in granting additional powers.

of these principles have been emphasized by
decisions

are

designed

I believe

Board

expand,

be
Some

in

its

in

a

companies.

Once

these guiding principles

-8First,
the puolic
system

interest

ana

recognize

I believe

the

to protect the stability

payments

that

that it is absolutely essential

banks

mechanism.

play

a

unique

ot

We

must

role

m

in

the banking

continue
the

to

economy.

Commercial banks, and increasingly thritts as they have gained
banking powers, are operators of the payments system;

they are

custodians for the bulk ot liquid savings in the economy;
are still by far

the most

important suppliers

they

of credit and

they are the link between monetary policy ana the economy.

Ail

of these functions are involved with the public interest,

ana

in combination account tor the explicit public concern over the
years

with

institutions.
system —

the

strength
Take

for

the clearing

of

and

stability

example,

the

checks,

wire

of

depository

nation's

payments

transfers,

automated

payment arrangements, and securities transactions clearances —
which

collectively

transactions

each

processes
day.

The

over
role

a
ot

trillion
the

banks

dollars

in

in ensuring

orderly, quick, ana assured operation ot the payments system is
essential to the efficient operation of markets and the economy
as

a

whole.

The

sudden

failure

of

one

institution,

particularly ot substantial size, can interrupt a long chain of
payments
unrelated
business

and

dramatically

institutions,

and

some of

unexpectedly
which

may

relationship with the institution

affect

not

even

other
have

in difficulty

which may have themselves been well-managea and sound.
secondary




a
and

While

-9 -

and tertiary effects are of course present
the

failure

of any business

potentially contagious

firm,

the

to

some

effects

degree

are

or disruptive as when the

never

in
so

stability

of

the banking system or the payments mechanism is suddenly called
into question.
employment,

Then,

serious

and prices

implications

- indeed,

for

for overall output,

the entire

fabric of

the

economy - are present.
My
banking

second

principle

is

that

the

system and the unique role of

stability

depository

of

the

institutions

have long been protected and must continue to be protected by
official

supervision

"safety net".
this

can

apparatus.

an essential

only

be

oversight

the

Public

element

maintained

and

insurance,

regulation

and

by

a

governmental

Normal market incentives must be supplemented by

support

system,

and

use

confidence

the

banking

to the stability of that system,

through
of

in

a

such

system

tools

as

of

governmental

federal

deposit

the discount window and necessary powers

to

rescue

or assist troubled institutions.
The

market

alone

cannot

be

relied

upon

to

assure

banking stability and the stability of the economy as a whole.
Indeed,
and

reliance solely on the market would

flow

widely

of

performance

through

confidence.
oversight,




the

and

system

in

with

failures
a

a

system

of

that

resultant

At a minimum, therefore,
protections

result

in an

could

loss

in

ebb

spread
public

there must be a system of
or

preemptive

measures

-1 0 -

designed

to

instill

public

confidence

and

an

equitable

procedure tor dealing with troubled institutions.
The third principle,

that

1 believe

flows

from

the

previous two, is the need for appropriate limits on the types
of risks that banking organizations can assume.
legislatively

circumscribe

the

activities

Congress must

or

banking

organizations in order to preclude the sorts of activities that
present
and

to

signiricant
the

risks

stability

to individual

of

the

banking

system.

Congress has accomplished this objective
separating banking and commerce.

banking

institutions
Historically

through the policy of

In this manner

Congress

has

limited tne types of risks banking organizations can assume and
has

promoted

conflicts
power.
the

of

other

public

interest

policy

and

undue

objectives

of

concentration

avoiding

of

economic

This traditional separation of banking and commerce m

United

stability

states
and

has

proven

integrity

of

invaluable

the

banking

in maintaining
system

and

the

public

confidence in that system.
I take issue with those who argue that the separation
of banking and commerce

is no longer

needed

—

that banking

organizations should be free to engage in any activity because,
on

a

case-by-case

prepared

to deal

individual

basis,
with

institution.

the

any

banking

problems

supervisors

that

may

Banking supervisors

arise

will
in

be
the

have neither

the

resources nor the expertise to monitor and forestall problems




-11from arising

in a completely unregulated

environment.

not sufficient merely to provide the tools
to

provide

certain

standards,
believer

debt

in

financial

levels

the old

time

of

religion,

is

for supervision and

benchmarks

and measures

It

such

asset

I think

as

capital

quality.

that,

As

a

along with

specified powers, there must be rules that specify what may not
be

done.

In

short,

there

must

be

limits

on

the

types

of

activities in which a bank or bank holding company may engage.
In my judgement,
present
too

too great a risk

large

a potential

there are simply some activities
for banking

for

organizations

conflicts

ot

interest.

example,

as some estimates have suggested,

thrifts

that

difficulties

are

in

danger

precisely

of

because

failing
of

real

activities or direct equity investments,
that there should not be some sort

of

nearly
have

situations

of

depository

institutions

tor

90% of

those

it is hard to believe

examples

are

placed

upon

I believe that

occur when the speculative and risky activities
affiliates

If,

development

limitation

are

create

encountered

estate

such activities by bank holding companies.
Maryland and Ohio thrift

or

that

not

of what
of owners

the
can
and

appropriately

curtailed by legislation or regulation.
Let me move on to the types of activities in which
appears

appropriate

for

bank

holding

companies

believe that the standard contained in Section
Bank




Holding Company Act

that

the activities

to engage.
4(c)(8)

must be

of

it
I

the

closely

-12related

to banking and that their performance by bank holding

companies must serve the public

interest

has

proven

over

the

years since it was enacted in 197U to be a workable standard one which permits bank holding companies

to expand their powers

in a reasonable and measured way while maintaining some nexus
to

their

underlying

services

areas.

expertise

in

the

banking

The standard has proven

and

flexible

financial
enough

that

the Board has been able to add to the so called laundry list of
permissible
ordinarily
197U.

activities
provided

a variety of activities

by

banks

In other words,

or

bank

holding

are

developed

services

that

are

companies

not
in

the standard seems sufficiently flexible

to permit the Board to examine new activities
they

that were

to

decide

whether

sufficiently

they

related

and services as

are

to

the

type

banking

to

of
be

prudently provided by banks or bank holding companies.

%
As recently as June
the

Board

voted

activities
these
case

six

to
new

activities
basis

add

this

year,

laundry

list

financially

related

activities.

in various

of

for

the

had

to

25th of

previously been permitted
orders

of

the

Board,

but

example,

permissible

on

a

all

Some

of

case

by

are

now

available to bank holding companies as ordinary activities that
may

even

be

approved

Reserve Banks.




on

a delegated

basis

These activities include:

by

our

regional

-131.

Consumer financial counseling

2.

Tax planning and preparation

3.

Futures and options advisory services

4.

Check guarantee services

5.

Operating a collection agency and credit bureau

6

.

Personal property appraisal

In addition

to the

24 activities

that

regulation on the laundry list of permissible
Board

has

recently

approved

case-by-case basis.
evaluate

the

applicant.
particular

of

is sometimes

the

activities

the

activity
type

of

by

been

b

activities,

The Board uses this approach

performance
It

additional

have

an

a

in order

to

individual

activity

applicant may have some expertise or

on

the

in which

a

it may be

an

activity that the Board feels is just not clearly defined or on
the fringes so that it should be added to the laundry list for
all bank

holding companies

at

that

time.

the activities that are approved by order
to the laundry

list.

On many occasions,
are eventually added

The new activities approved by order

in

1985 and 1986 include the following:




1.

The Board has allowed the provision of securities

brokerage services and investment advice on a combined
basis to "institutional customers."
2.

In

holding

a

recent

company

case
to

the

acquire

Board
a

employee benefits consulting.

permitted

firm

that

a

bank

engages

in




-143.

The Board has also allowed a bank holding company

to

engage

including

in

student

providing

loan

servicing

advisory

activities

services

to

the

state

student loan authority.
4.

In another case the Board approved the offering of

real

estate

basis,

consulting

services

including appraisals,

on

a

non-fiduciary

cash flow projections and

cost benefit analysis that resulted in recommendations
as

to

the

acquisition

and/or

disposition

of

real

property.
5.

The Board has continued to allow

dealing

in gold and silver

the sale of and

bullion and coins

for

the

account of customers.
6.

The Board has approved

services

and

lost

or

credit

stolen

card

credit

authorization

card

reporting

services.
7.

In

another

company's
types

of

case,

acquisition
data

the

Board

ot

a firm

processing

providing price quotations
mutual

funds,

commodities

approved
that

holding

engaged

activities,
on stocks,
and

a

other

in new

including

bonds,

options,

financial

instruments.
8.

Most

recently

the Board permitted a bank

company to engage in the printing of c h e c k s .

holding

-15I

believe

that

this

extensive

list

of

activities

permitted by order and regulation during the last two years

is

an indication that the Boara has shown considerable flexibility
in interpreting

the

"closely

related

the Bank Holding Company Act.

to banking"

It has

shown

standard

in

a willingness

to

examine new activities on a case-by-case basis
they

are

financial

in nature

and have

to determine

a sufficient

nexus

if

to

traditional banking services such that they should be permitted
to bank holding companies.
The Board has gone a step further
Congress

and

supported

changes

in

the

in testimony before

closely

related

to

banking standard in the Bank Holding Company Act

to a broader

"financially related"

bank

standard that would

permit

holding

companies to engage in a wider

range of nonbanking activities.

Under

standard,

a

"financially

related"

permitted to approve,
activities

that

standard.

The

standard

could

are
Board

tor example,
more
has

Board

a range of broker

questionable
testified

authorize

the

that

insurance

under

the

a broader

agency,

real

brokerage and perhaps even travel agency activities.
the sorts

of activities

that would

provide

service

would

be

or agency
present
financial
estate
These are
income

to

the bank holding company with little accompanying risk.
There

are,

insurance activities

in my

judgement,

three

specific

types

in which bank holding companies should be

permitted to engage, but which are foreclosed to them under




of

the

-16existing

law.

First,

permitted to engage
insurance.

The

bank

holding

companies

should

be

in the sale and the underwriting of

Board

recently

decided

that,

since

title

title

insurance was not

included as one of the exemptions under

existing

bank

statute,

holding

companies

were

the sale or underwriting of title insurance.
institutions,

those

engaged

in mortgage

precluded

the
from

Certainly lending

lending,

are

or

easily become familiar with the requirements of a clear

can
title.

They often conduct the closings at which the title insurance is
purchased.

In

short,

I

see

no

reason

why

bank

holding

companies should not be permitted to engage in this activity.
Bank
engage

holding

in unlimited

financial
preclude

reason
this

insurance raises

should

also

be

permitted

insurance agency activities.

or

type

companies

risk
of

far

factor

activity

fewer

that
and

questions

I can

see

the

sale

than

the

insurance which is already permitted.

There
that

of

is no

would

general

sale of

Finally,

to

credit

I believe

that

there are limited types of insurance underwriting that could be
permitted

to bank

underwriting
redemption

of

holding

credit

insurance.

life
It

general life insurance,
actuarially predictable,
bank

holding

underwriting




companies.
insurance

appears

already

allow

ana

home

the

underwriting

the

mortgage
of

insurance in which the loss ratios are
would not present

companies.

On

of

types

various

that

We

the

other
ot

an

hand,

property

undue

risk

I believe
and

for
the

casualty

-17insurance present
bank
and

serious

holding companies.
casualty

issues

and

I believe

underwriters

and

should

the

the

blanket

insurance,

bond,

crisis

in your

directors',

precluded

to

record of the property

insurance

have resulted in serious difficulties
obtaining

be

and

and even premises coverage,

that

may

own institutions

officers'

liability

are indications

of

the

riskiness of these types of activities.
The
encounters
companies

final

statutory

prohibition

banking

activities

Act

which

that

may

commercial banking organizations.
has

not

the

Board

in attempting to expand the powers of bank holding
is the Glass-Steagall

investment

that

been

entirely

successful

limits
be

the

type

conducted

of

by

The Board has attempted but
in permitting

bank

holding

companies to engage in a wider range of securities activities,
including

the

recommend

the

repeal

of

the

unlimited

involvement

of

commercial

securities
merit

sale

of

activities.

to proposals

commercial

paper.

Glass-Steagall
banking

I do believe,

that would

I am

permit

Act

one

and

to

the

organizations

however,
a

not

wider

that
range

there
of

in
is

such

activities by bank holding companies.
The Board has long supported an approach

that, within

the scope of appropriate rules to limit potential conflicts of
interest and to assure safe and sound operation of securities
affiliates, would permit subsidiaries of bank holding companies
to engage




in underwriting

and

distributing

commercial

paper.

-18-

The

Board

has

underwriting
mutual
U.S.

supported

mortgage

backed

The

of

funds.

banks

similarly

do

area

participate

authorization

securities,

corporate
abroad,

revenue

for

bonds,

underwriting,

is

much

more

in

and

which

difficult.

While the international integration of capital markets and

the

growth of U.S. bank participation in the Euro markets make

the

present

difference

markets

stand

of

out,

treatment

I

must

between

continue

reservation about permitting bank
in corporate
believe

stock

there

are

or

bond

and

express

my

to

holding

companies

underwriting.

substantial

could be made available

domestic

additional

to bank holding

foreign
own

to engage

Nevertheless,

I do

opportunities

that

companies

in the area

of securities activities.
Having outlined the sorts of activities that I believe
bank holding companies should be permitted to engage in,
end on a note
savings

and

loan

development,
lending,

the

caution.

I believe

industry
taking

of

limitations
limits

development

to engage

experience
that

equity positions

real

rather

holding

to exposure.

amount

of

I believe

issue

first

investment,
the
of

issue

all,

but

of

the

estate
than

mere

companies should

in - at least not without

in terms of

is a risk

the

demonstrates

is not an activity that bank

be permitted

and

of

I must

very

severe

capitalization,
of

real

that

it

estate
also

begins to blur the distinctions between banking and commerce.




-19I hope

that

my

thoughts

on

these

they do from the perspective of a banking
banking

some

upon which

consensus

address

coining as

regulator

—

but

a

regulator with a background as a commercial banker

will encourage you to probe further
element

issues,

the

I think we can

that will

fundamental

motivate
issues

into these issues.
all

agree

Congress

facing

the

The one

is the need
to

take

banking

—

action

for
to

industry.

There is too much at stake here tor us simply to pursue our own
parochial interests.

We have reached a critical stage when the

approach

of

in

thinking

along

Thank you.




"what
the

is

lines

it for
of

me"

should

"we are all

give way

in this

to more

together."