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OCT 0 6 1 9 8 8 For release on d e l i v e r y 1 0 : 0 0 a.m., E . D . T . September 9, 1968 /?•. / / • S t a t e m e n t by H . Robert H e l l e r Board of G o v e r n o r s of the F e d e r a l R e s e r v e before System the S u b c o m m i t t e e o n C o m m e r c e , C o n s u m e r P r o t e c t i o n and C o m p e t i t i v e n e s s of the C o m m i t t e e on E n e r g y and C o m m e r c e U . S . H o u s e of R e p r e s e n t a t i v e s S e p t e m b e r 9, 1 9 8 8 MINUTES^ SEP 7 1988 / I Mr. Chairman, members of the Committee, I am pleased to be here position on today the to present insurance the Federal provisions Depository Institutions Act of 1988. of Reserve H.R. During Board's 5094, the consideration of the bill by the House Banking Committee, the Board recommended deletion of the insurance provisions as unnecessarily restrictive of competition to the detriment of consumers. The Board maintains that view, with the exception that it supports the bill's intent to authorize bank holding companies to offer financial guaranty insurance. My remarks will amplify on these general statements. The Need for Financial Restructuring Legislation The Board has strongly supported Congressional efforts to enact legislation to update and to create institutions competition a framework to adapt which to the nation's banking which the will changes are transforming our allow in statutes depository technology and financial markets. We are encouraged by efforts undertaken first in the Senate, and now in the financial House, system to begin by the process of modernizing establishing arrangements for activities. Important appropriate the structural bank holding companies to conduct securities goals of these efforts include the promotion of competition and consumer service by broadening the array of financial services providers and enhancing the flexibility and safety of banking organizations and the banking system generally. - 2 - To the extent that the bill's measured insurance provisions are against these standards, they fall short. offering consumers a broader services providers, the Rather than choice of products and financial insurance title restricts the number of market participants and opportunities for price competition constructive depository products product institutions and unnecessary insurance enhance of arbitrarily of consumer be risk, cut bank imposed back on the than a more choices, barriers but Rather develop activities. restrictions would powers to additional agency questions innovation. to in a manner already line the provisions these that and in limited of impose participation Importantly, ownership, allowing flexible bank and in new focuses not on so doing would insurance holding companies as well as their agency subsidiary banks .• Bank Holding Company Experience With Insurance Activities The Board has consistently insurance agency companies. Company Act, activities Acting the under Board by the supported banks and provisions has authorized of recognized authorizing, in the Act itself, the holding Bank Holding companies. In the the appropriateness and benefits of permitting bank holding companies by bank the careful expansion of insurance agency activities for bank holding original 1956 Act, Congress the provision of to sell holding insurance company - 3 participation nature. in activities of a financial or insurance Pursuant to this standard, the Board from 1956 to 1970 approved a variety of insurance agency activities for companies, well as including selling operating general credit-related life, holding insurance agencies, as accident and health insurance, the development of which, I might add, was pioneered by banks. After the 1970 amendments added the closely related to banking standard continued holding to the Bank to authorize companies, Holding insurance including Company Act, the Board agency activities particularly the credit-related property and casualty insurance. for bank sale of In authorizing this activity, the Board determined that its conduct by bank holding companies could be expected to produce public benefits in the form of increased competition and customer that outweighed potential adverse effects. below, the Board against the also adopted potential for convenience As I will discuss various precautions conflicts of interest to guard in the combination of banking and insurance. The Board's decision with credit-related property and casualty respect to the sale of insurance was challenged, and, in a series of court cases, upheld by the federal courts as an appropriate activity for bank holding companies under closely related the to banking standard and as meeting the safety - 4 and soundness, conflict of interest and other prudential standards in the Act. Subsequently, Holding Company generally from Act in to engaging seven exceptions. 1982, Congress prohibit in bank amended holding the Bank companies insurance activities subject to This statute thereby prohibited bank holding companies from operating general insurance agencies or selling credit-related property and casualty insurance, except in small towns or by small holding companies or where the bank holding company had been authorized to do so before the new statute's enactment. Risk and Conflict of Interests Concerns Nevertheless, over the more . than 30 years since passage of the Bank Holding Company Act, bank holding companies either directly or through bank subsidiaries have substantial providers of insurance agency products. this record, the Board's view has been that become Based upon increased bank participation in insurance agency activities may be expected to enhance consumer convenience, lower promote product innovation. the cost of insurance, and Significantly, the Board has found no evidence that these activities have adversely affected bank safety and soundness created the potential adverse effects. or the for Today's banking conflicts highly system of generally, interest competitive or market or other for consumer credit, the against the insurance, tying and Bank of Board Holding bank and Company Act's nonbank regulations prohibitions products, requiring such disclosure as when insurance is sold by lenders, substantially mitigate concerns regarding the potential credit decisions. for I might tying of insurance purchases to add that as a result of the Bank Holding Company Act's anti-tying provisions, bank customers are offered more protection in this area than customers of their nonbank competitors, such as finance companies, which are not subject to these tying prohibitions and, of course, may sell all types of insurance. In light of these safeguards, the Board does not believe that a general prohibition on the conduct of insurance by bank holding companies and their subsidiaries is necessary or warranted. Board Reservations Regarding Title III of H.R. 5094 The insurance provisions the already limited of H.R. 5094 further insurance agency activities permitted under the 1982 Garn-St Germain Act in two principal respects: the bill extends limit the Garn-St Germain Act subsidiaries of bank holding companies. banks may not engage in state authorized to state First, bank Under the bill, state insurance activities if they are acquired by an out-of-state bank holding company. Further, state banks owned by in-state bank holding companies must limit their insurance activities to persons present in the state. S e c o n d , the bill e l i m i n a t e s protected bank by the holding another grandfather company insurance provisions providing the of agency activities the 1 9 8 2 A c t insurance is if the acquired by bank h o l d i n g c o m p a n y . I n s u r a n c e A g e n c y A c t i v i t i e s of S t a t e B a n k s With regard to the insurance s t a t e b a n k s , the B o a r d is o p p o s e d contained for in the bill to several agency the activities additional reasons. of limitations First, as noted, the Board b e l i e v e s that t h e r e is n o c o m p e t i t i v e or risk rationale to c o n d u c t of justify insurance agency particularly further activities the case by a holding holding their holding concerns, the equity company lenders, such have federally Board weigh the the organizations. bill imposes these s o l e l y on the o w n e r s h i p This is further of the bank companies restrictions on banks, and a number companies insured c o m m e r c i a l b a n k s or bank and nonbank mortgage banking of our have of institutions, a u t h o r i t y to o p e r a t e g e n e r a l Moreover, underwriting considerations Thrift independent finance unlimited that further insurance. companies, as believes against s a l e s of agency a c t i v i t i e s . insurance banking on company. Second, competitive by since r e s t r i c t i o n s u n e v e n l y based restrictions related nation's recently thrifts. and insurance leading acquired . - 7 Thirdly, the provisions of H.R. 5094, which insurance activities on the basis of ownership out-of-state entity, run directly counter of banking services on an interstate basis. a rapid banking. and needed Currently, all providing for out-of-state but acquisition holding anticompetitive and require movement of the elimination in We an the provision This decade full five states have companies. not toward banks by to both marketplace developments and policy determinations regarding seen restrict these believe has interstate enacted states it laws by is in the best interest of consumers to of bank insurance competitors as a penalty for the benefits of interstate banking. Finally, the bill goes far beyond merely closing South Dakota loophole. the As drafted, the bill would require a state bank acquired by an out-of-state bank holding company to cease selling insurance even in the bank's own state. The Board sees no economic justification for this uneven treatment for state banks owned by out-of-state bank holding companies. Loss of Exemption D Rights Under Exemption D of the Garn-St holding companies may continue to engage activities date. in insurance agency that they conducted on the May 2, 1982 grandfather The exemption actively Germain Act, bank conducting applies only to the particular company insurance activities on that date. Other - 8 - affiliates within the same holding company are not allowed to engage in grandfathered activities and there are geographic and product limitations purpose of imposed this exemption on an Exemption was to avoid D company. the The disruption of established customer relationships or the forced divestiture of insurance activities lawfully authorized under the BHC Act and conducted, in many cases, for a number of years. H.R. 5094 would terminate these grandfather rights if the grandfathered company were acquired by another bank holding company. The grandfather Board rights believes is that unnecessary this view, the intent of of in view of the substantial limitations already placed on Exemption Board's termination D companies. Exemption D is In the that the grandfathered subsidiary should continue to be able to engage in the activity, even if acquired by another bank holding company, so long as the grandfathered subsidiary complies with the geographic the insurance company. and functional limitations in Exemption D and activity Under these is not transferred limitations, to the acquiring already contained statute, the acquisition would not add an additional in the insurance competitor or permit the grandfathered subsidiary to expand its activities other than as limited under Exemption D. For example, under current law, if a California bank holding company were to acquire a Texas bank with grandfathered holding company insurance activities, these activities could - 9 not be exported holding Board of company. sees the of no California With public insurance attendant loss to such gain in of the activities in offered limitations policy disruption or settled by already requiring Texas customer a m a r k e t c o m p e t i t o r , and the California in p l a c e , the the termination company with the relationships, the the p o s s i b i l i t y of s u b s t a n t i a l financial loss. Accordingly, consistent with the the Board intent E x e m p t i o n D not be revised of would the strongly 1982 urge Garn-St that, Germain Act, as p r o p o s e d . Financial Guaranty insurance changes The Board that are p r o v i s i o n s of We supports underway believe, powers preferable for this subsidiary of the subsidiary bank. to o f f e r insurance activity risk in our and financial bank that under holding presently this p r o d u c t , financial with as in the drafted, unlike the of the would be through a s e p a r a t e rather the the insurance. case it the than bill by would a permit the o p e r a t i o n of a g e n e r a l guaranty company markets bill, company organizations the reflecting financial guaranty i n s u r a n c e to be p r o v i d e d banking associated however, authorized As agency, for constructive the b i l l p e r m i t t i n g securities banks as and acting insurance poses as the is a new additional a principal rather - than as in an large agent. part providing similar letters general philosophy net placing rather to them than activities of the and securities be insurance supported the bank between company, activities are any in in such keeping from the the the as with the our federal bank holding by company to deposit As and financial likely and, other of noted, H.R. 5094 it favor by an approach lie are and is that activities authorized of the authorizing recommend which in separation as insurance discount from be activities, bank Act's strongly such bank recommendation nonbanking company. the less We that might System's holding manageable, experience protect of Board's sections for banking federal and activities banking, activities. Reserve firewalls holding of banks Glass-Steagall advantages by the other underwriting separation is, h o w e v e r , insulating to utilized The Federal of the in long as guarantees, subsidiaries investment embodied framework of of had risks itself. integral repeal approach bank approach is commercial bank the It nonbank separate these financial safeguard separate in have of credit. to - views banks types of in The Board because standby safety The 10 such such a as the C o n g r e s s . in the ultimately access to the window, from other activities long there adequate other as subsidiaries problems to b e c o m e are of the of the nonbank the p r o b l e m s of e i t h e r the bank or the activity banking in firewalls, a system. separate helps to Similarly, subsidiary, ensure that s a f e t y net are not e x t e n d e d the location along with of the new appropriate p r o t e c t i o n s of the federal to the s u b s i d i a r y ' s a c t i v i t i e s . Conclusion To conclude, our analysis the Depository Institutions Act the provisions would further organizations to products services, and eliminating the services, and, other sources compete satisfied. Based upon safety bank agency and support agency activities. insurance adjunct also these to subject bank of to holding that record on improved represent an firewalls, to o f f e r r a n g e of The to turn to long and in i n s u r a n c e regulatory the bank the agency prudence eguity, activities. companies and is appropriate i n s u r a n c e a s w e l l as a b r o a d e r it banking have banks have statutory contrary, of of options, and banks of many insurance costs restrictions banking of consumer competitive activities traditional support, authorizing agency needs c o m p a n i e s and the ability of title that bank c u s t o m e r s established further On the limiting existing concepts cannot that the suggests of- d e c r e a s e d the insurance the p r o v i s i o n insurance holding activities, safeguards, 1988 in m a n y c a s e s , forcing meet the restrict thereby prospect to that in of of Board insurance Board's view appropriate Board a would provision financial guaranty insurance p r o d u c t s .
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